America's CAR-MART Inc (CRMT) 2008 Q2 法說會逐字稿

Good morning, everyone. Thank you for holding and welcome to the America's Car-Mart's second quarter fiscal 2008 conference call.

The topic of this call will be the earning and operating results for the Company's fiscal second quarter ended October 31, 2007.

Before we begin, I would like to remind everyone that this call is being recorded and will be available for replay for the next two days. The dial-in number and access information are included in this morning's press release which can be found on America's Car-Mart Web site at www.car-mart.com.

As you all know, some of management's comments today may include forward-looking statements which inherently involve risks and uncertainties that can cause actual results to differ materially from management's present view. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

The Company cannot guarantee the accuracy of any forecast or estimate nor does it undertake any obligation to update such forward-looking statements. For more information regarding forward-looking information please see Item 1 of Part One of the Company's annual report on Form 10-K for the fiscal year ended April 30, 2007, and its current and quarterly reports furnished to or filed with the Securities and Exchange Commission on Forms 8-K and 10-Q.

Participating on the call this morning are Skip Falgout, Car-Mart's Chairman of the Board, Hank Henderson, the Company's CEO and President, and Jeff Williams, Chief Financial Officer.

And now, I'd like to turn the call over to the Company's Chairman of the Board, Skip Falgout.

Thank you.

Most of you've already seen our press this morning of our second quarter results. This release is posted on our Web site and is available on the usual financial sites as well.

We are pleased to announce that this morning we reported income of $3.5 million, or $0.29 per diluted share versus a net loss of $1.9 million, or $0.16 per diluted share for the prior period second quarter. Revenues were up 14.6%, same-store revenues were up 12.3%, and retail unit sales were also up from the prior year quarter by 7.8%.

Our down payments, credit losses, collections and delinquent accounts all showed significant improvement resulting in strong cash flows for the quarter. Jeff will go into more detail in the numbers in a minute.

Before we do that, I would like to bring a couple of matters to your attention. First, although we're extremely pleased with the results of the first two quarters of this year and, more particularly, the continued improvement we are seeing in the operating metrics by which we measure our business, we have to remember that we view our business as a marathon and not a sprint.

So on a short-term basis these improvements are good but on a long-term basis they are even more important as the basis for future growth and expansion in both our bottom and top line. That's what really excites us here at Car-Mart.

Second, we believe that the turmoil in the national and local credit markets creates a tremendous opportunity for us. Most of our competitors are undercapitalized with limited capacity to fund growth with the tight credit affecting subprime auto finance business as well as most other businesses.

Car-Mart, however, has an extremely strong balance sheet that will allow to us fund our growth both internally and with additional borrowings when necessary and advisable. We intend to take advantage of this strength to grow in our existing markets as well as new markets as we continue to build out and refine our operating infrastructure and systems.

Now I'll turn it over to Jeff to go through the financials.

Thanks, Skip.

As mentioned in the press release, top line revenues increased by 14.6%. The increase was the result of a 7.8% increase in retail unit volume, a 6.8% increase in our average retail selling price, a 2.5% increase in interest income, a $900,000 increase in wholesale sales.

[Our] same-store revenue increased by 12.3% for the quarter as we are beginning to see the benefits of our increased advertising efforts and numerous other sales initiatives.

Down payments were 7% compared to 6% last year and initial loan terms were 25 months compared to 26 months last year. The initial loan term was down even in light of an increase in the average retail selling price of 6.8% to $8,496 compared to $7,957 last year.

It should be noted that we fully expect our average down payments for this upcoming third quarter to be less than what we've experienced during the first six months of this year due to our tax refund anticipation sales. The Car-Mart only counts down payments on sale date and excludes pick up payments which will come after the sale and with the actual tax refunds.

The average retail selling price for the quarter was up 1% from the first quarter's average of $8,407. Sales revenue generated by our new Payment Protection Plan product primarily accounted for the increase in the retail sales price from the first quarter.

Going forward we do expect to see some continuing growth in our average retailing selling price when compared to prior year results, although we do expect to see some continuation of the leveling off of the increases we've seen.

The increase in unit sales for the quarter was due primarily to the fact that management spent a significant amount of time working with our smaller, newer lots and getting their sales levels up to an acceptable range coupled with solid volume increases from most of our larger, most established dealerships. With increased focused on the newer lots we feel that we can continue to see increases at the top line while maintaining the quality of the deals at the same time.

Interest income was up 2.5% for the quarter as our effective interest rate was 12.8% compared to 12.4% for the prior year, offset by a lower average finance receivable balance.

For the second quarter of this year our gross profit margin percentage was 42.1% of sales which is up from 42% in the second quarter of last year and up from 40.3% for the first quarter of this year. The increased gross margin percentage compared to prior year period resulted from lower operating expenses, mostly transport costs, improved results for wholesale sales, which for the most part relate to cash sales of repossessed vehicles at or around breakeven, the gross margin generated from our Payment Protection Plan product offset by the effect of selling a higher priced vehicle and the associated lower retail margin.

The increase in gross margin when compared to our first quarter of this year resulted from lower volumes and improved results for wholesale sales, gross margin generated by our Payment Protection Plan product as well as overall improved retail pricing.

Our purchasing agents continue to work hard to keep our vehicle purchase prices down. We have seen some recent success but demand for our core vehicles remains high especially at this time of year. We will continue to focus efforts on purchasing costs, retail pricing and repair costs and we do expect to see some improvement in future gross profit margin percentages.

Second quarter of this year SG&A as a percentage of sales decreased to 18.7% from 19.5% in the same period last year due to a 15.9% increase in sales for the current quarter. The overall dollar increase related to 4.5% increase in the average number of stores in operation, the associated incremental costs of those stores, increased advertising, increased insurance costs and higher payroll costs.

We are, for the most part, finished with our infrastructure investments which have been made over the last year and a half. These investments were made to strengthen controls and improved efficiencies within our support functions. We are now poised to leverage these costs into the future by being able to support the higher sales and loan volumes that we have seen in recent months.

For the quarter net charge-offs as a percentage of average finance receivables was 6.7% compared to 7.8% for the prior year's quarter. We expect net charge-offs for the remainder of this year to be significantly below levels experienced in the last two quarters of 2007.

Collections as a percentage of average finance receivables increased to 16.6% from 16% for the prior year period. The quality of the portfolio, shorter loan terms and the better collection efforts have led to increased collections when compared to last year.

The average percentage of finance receivables which were current during the second quarter was 83.3% compared to 78.2%. Down payments were 7% for the quarter compared to 6% for last year's second quarter. Again, we believe that the increase in the quality of the portfolio is reflected in the higher current percentages and the higher down payment percentages.

At October 31, 2007, our 30 plus past-due accounts were 3.8% compared to 5.4% at October 31, 2006. Also, our allowance for loan losses remains at 22% of finance receivables at October 31, 2007.

The provision for credit losses was 22.9% of sales during the quarter compared to 37% for the second quarter of fiscal 2007. That number is 24.7% last year when we excluded the effect of a $5.3 million increase in the allowance for loan losses that we made at the end of October 2006.

We saw an increase in total finance receivables of $9.1 million, or 5.1% during the second quarter due to higher sales levels including the sales of the new Payment Protection Plan product. Our debt level only increased by $3.7 million for the second quarter to $37.3 million due to our strong cash flows from operations which included strong earnings and solid management of cash flows including improved portfolio performance by the higher down payments at shorter terms and strong collections.

Our debt level is actually down $12 million from its high point in October of 2006 as we remain focused on cash flows and underwriting. Our debt to equity stood at 28.8% and our debt to finance receivables was 19.7% at the end of October.

We've gone through a tough time financially over the last year and a half and are very proud of our extremely healthy balance sheet and are excited about our opportunity to leverage our strength into the future. Our low leverage and asset based lending agreement have allowed to us grow and remain unaffected by the recent turmoil in the credit markets.

We are currently at prime plus 50 on our revolving credit facility. The rate going forward will fluctuate based on our operating performance. We anticipate continuing decreases in our rate as our trailing six and 12-month financial ratios improve.

Excess availability was $18.7 million at the end of October. As we adjust to our expected operating run rate we will continue to review the credit side of our balance sheet in the coming months to ensure that we position the Company with the best possible capital structure while maintaining the proper level of conservatism.

And now I'll turn it over to Hank.

Thanks, Jeff.

Sales for the quarter were up significantly over the prior year quarter as well as our first fiscal quarter and, as I mentioned last quarter, we have stepped up our efforts to increase sales even as we have somewhat tightened underwriting to improve the quality of our sales.

The difference includes additional sales training, a restructuring of our sales force and strengthening the entire sales process making sure we have adequate inventory and, where appropriate, aggressively advertising on TV, radio and print. And these efforts are showing good indications of success as we have increased our sales volume and we plan on a continuation of this sales growth.

On the collection side, we are rolling out a proprietary collection module which will allow to us improve the performance of our collection staff with a software application that will better track their performance and effectiveness of our collectors. And since we collect locally this will allow us in both a local and centralized way to monitor and improve our collection efforts. We believe this will be a great tool in further enhancing our collections and it is the result of the significant investment we've made and continue to make in our IT department.

We'll have two new dealerships opening up in the third quarter. First, the Mountain Home, Arkansas, location will open up later this month as a satellite of one of our most successful lots in Harrison, Arkansas. This location is a very strategic fit and should offer great growth prospects in northern Arkansas.

Also, we will be opening our fourth Alabama location in Athens in January. As most of you know, we have had this property for some time but we didn't want to open until we had the infrastructure in place there in Alabama to handle a fourth location as well as the right person for the job, and we are confident that both of these locations will be successful dealerships right out of the gate.

As well as new launch we have quite a bit of upgrading, relocating and improving going on at existing dealerships. We've expanded and opening a new facility in Batesville, Arkansas, and it has shown an immediate increase in sales in its first month at the new location. We've also moved into a new facility in Henderson, Kentucky, this past month in a much higher traffic location and we expect to see good growth at that dealership as well.

In addition to these recent moves, we also have construction ongoing in Magnolia, Arkansas, to expand that facility as well as projects under way to expands and relocate our North Little Rock, Arkansas, store and also our El Dorado, Arkansas, store. These projects should greatly enhance the operations at both of these dealerships.

This past month we started off our tax return promotion earlier than we ever have as we launched the promotion on November 1st. Customer response was excellent and results have been November being a very strong sales month and we will be continuing this same promotion for the next two months and are anticipating similar results.

Finally, I'd like to reiterate some of Skip and Jeff's earlier comments. We've been working hard to build upon and improve the foundation of our business not only get things right but to set us up to restart both our bottom and top line growth. Getting all these pieces in place takes time to do it correctly and I feel that we are definitely on the right track.

For now that concludes our prepared remarks so we'd like to turn it over for questions. Operator?

(OPERATOR INSTRUCTIONS) Your first question comes from the line of John Hecht of JMP Securities.

Good morning, guys. Great quarter. A couple questions.

First of all, and I think you, Hank, you touched on this, but over the past several quarters you've been working a little bit on putting together a big database which highlights some predictive behavior and allows, I guess, helps the credit decisions at the store level. Where are you on that process and how do you think things are going?

Well, right now it's very new. We've only been collecting the data now for just a few months and so, obviously, it hasn't had time to work its way through. But we do have it under way and we'll actually be expanding a little bit and putting something on the front-end at the stores coming up soon on a test basis so we can begin to do a little front end scoring and make sure we understand this.

And I think it's just the type of thing that the further we go along the more we'll learn. But right now we just have to tell you we're kind of at the very beginning stages.

So the credit improvements thus far are based more, I guess, blocking and tackling and just execution in terms of changing underwriting and maybe focus a little bit more on the collections?

Absolutely. And we have done, throughout this past year we've done a little more training, more emphasis on the credit decision and also I think we really rolled up our sleeves when we go into the stores and taking a hard look at the deals and making sure that our decisions are better one.

We've also, and I think Jeff may have mentioned it earlier, on a lot of our smaller stores we've raised the down payment requirements and that in and of itself strengthens the deal.

And what about the old versus new, how are the, I guess, are the newer lots starting to trend toward the loss curves of the older lots at this point?

Well, they're not to the same level but, yes, they are showing improvement.

And then the last question is, margins improved this quarter it sounded like more from an execution perspective in terms of focusing on the front end costs. What are you seeing at the auction level in terms of the supply dynamics of the cars? Are you going to get any relief there to help margins expand?

I don't think in the near-term we're going to see any real help with the process coming down immediately in the near-term. This is the time of year where the process seems to get a little tougher.

Just with tax refunds?

Exactly. Everybody's trying to by the same car right now.

Okay. So you're not seeing any change at the auction level from where we were the last couple of years, it's been pretty consistent?

Yes. For the most part.

Yes, I think so.

Great. Thanks a lot, guys.

Thank you, John.

Your next question comes from the line of Dennis Telzrow of Stephens, Inc.

Good morning, Skip, Hank and Jeff. Great quarter.

Thank you.

Maybe you could elaborate a little bit more on this collection module. Is it just tracking better or has it got some new tools that helps the actual collector?

Both, actually. This is something we actually started on years ago kind of building the foundation so that we could do this so we're pretty excited about it.

It's both. It's a module that enables the collector to more effectively, well as they sit there and talk to the customer, they see more information on the customer in front of them. It also enables us to kind of force the collector to do their work in a certain order, not skipping any accounts, that sort of thing.

And then we have better daily, weakly, monthly, however long production reports so we can really see and drill down and see how that individual numbers are compared to others. So really on both sides. And I think this'll help quite a bit.

I don't know if it's too soon, but I think years ago when we went through these credit crunches you used to see a better quality customer come down into your lots. Have you seen that yet?

I think we are. There's always a lag time, so to speak, and we can't really quantify. But, yes, I believe these tougher times certainly make the buy here pay here a more viable alternative for a lot of folks, and so, yes, I'd say we're getting some better customers.

And any, I know at the underwriting level you put a lot more tools in the hands of the lot people. Anything new or different coming down the pike there?

There will be. I would say that the really big changes there aren't in place yet. Right now we're, we've put together a model, we're collecting some information but we really haven't applied this new model at the lot level. But that will be coming up and we'll be testing that before year-end.

And last question. You opened one new lot this quarter. Where was that? Maybe you said, I just missed it?

Well, Springfield was the last.

The last one we, the last new one we opened was actually a satellite store in Springfield and, as I mentioned, this quarter we're opening a satellite store in Mountain Home that's connected to our Harrison, Arkansas, location, and then we have a new dealership coming up in January in Athens, Alabama.

Okay. Thank you.

Thanks, Dennis.

Your next question comes from the line of Dan Fannon of Jefferies.

Good morning. Thanks for taking my questions.

As you guys look back over the last, over this past quarter and through the months of how it progressed, was there any changes in your customers? You guys obviously had very good metrics across the board in terms of sales and credit.

Was it kind of sequential improvement? And then as you've looked now into November, and, obviously, you're only a couple of days here in December, but have those trends continued?

You know, I think during the quarter the results were pretty consistent. I think the customers and the level of sales. We didn't have the spikes in any single month during the quarter. It was pretty consistent building up to a good end to the quarter in October.

I think what we're seeing is sort of the, hopefully, the beginning of the improvements in the quality of the deals and our customers and the things we put into place months ago and so those results seem to be positive from what we're seeing at the lot level.

Okay. That's helpful.

And then if I remember correctly some of your newer stores about a year ago in Texas and some other areas were underperforming and you kind of slowed down some of the growth within those lots. Can we talk about some of those lots and how some of the metrics on a loss perspective and where they are today?

And if you've kind of, when you look out over all of your lots is everybody kind of growing at similar rates or are you still kind of curtailing some of the newer lots and how their loan volume?

Well, to speak specifically about the Texas lots that you mentioned, that would be one of the groups that we've put on a higher down payment requirement along with all the stores, of course, we've got a lot, a much more disciplined approach to our terms, the length of the term. And I would tell you that throughout this year we're certainly seeing and, of course, they had a lot more room for improvement, obviously, but we are seeing that group of stores headed in the right direct.

They're certainly not where we want them to be but the credit losses for those groups are coming down and so we're pleased about that. So I guess, really, the thing to say is we're headed in the right direction with those stores but we're not there yet.

Okay. And then are you seeing loss rates in any other areas or pockets or regions picking up?

I wouldn't say so, no.

I don't think so.

Pretty much improvement across the board.

Yes, I'd say more of an improvement, Dan, than the negatives pretty much across the board.

Great. Thank you very much.

You bet.

Your next question comes from the line of Quentin Maynard of [Moorhead] Capital.

Guys, congratulations on a great quarter. I just have one quick question for you.

When you look out into '08 do you have any feel for your expectation as far as getting new stores opened for the whole year?

Yes, I think so. We're really not prepared to give a number on that but as you see we've got a couple of stores coming open now so we're getting our feet under us and we've got some time to get ready. So, yes, I expect we'll be opening a few stores in '08 or, yes, the following year.

I'll tell you, also, one of the things we are excited about is, and kind of mentioned that this in the answer to the last question, we are seeing some improvement in our existing stores where there was room for improvement. So we'll continue to hopefully see some good growth at a lot of our newer, smaller stores that we've opened up in the last two or three years.

And that's, really, right now today we've got most of our opportunity lies in getting these younger stores to perform even more so than opening these stores.

That's great. Now as far as, you're thinking about expansion, any idea where that might be? Will you think about just kind of filling in in your existing territories or are you looking across the southeast at some other states, other regions?

Well, right now it depends on how you look at it. There is some fill in but, obviously, we're still new to Alabama and there's a lot of towns out that direction so we're looking at that but there's also some fill in in our other states as well.

If had you to pick a state, Hank, I think Alabama's probably the prime state --

It's wide open, yes.

Great. Well, we look forward to hearing more reports like this. Congratulations again.

Thanks, Quentin.

Your next question comes from the line of Bill Armstrong of C.L. King & Associates.

Good morning, Skip, Hank and Jeff. I will also add my congratulations. Very good numbers.

How do you drive 12% same-store sales increases even as you maintain your tighter lending standards?

You know, we have addressed every aspect of sales this year so for me to be able to tell you which of the factors that's helped the most, it's very difficult. But early on in this year we really went back through our sales process, even the simple act of running a sale at the local store and we evaluated that and let's make it more expedient.

We've looked at how we closed the loans locally. We've retrained every salesperson. We've stepped up our expectation of our sales staff. We, internally, we pretty well closed down our own advertising department, so to speak, and we renamed it the sales department.

We have a fellow heading that up and so that department is much more hands-on than both the displays and advertising but they actually go to the store. There's a lot more involvement. So, really, we have addressed every aspect.

And as we mentioned, we have done a lot more television advertising. I wish we new what helped the most because that's where we would do a lot more of it. It's just kind of hard to say but we've hit every area.

I think one thing you might add, Hank, is quality of the inventory. I think our inventory, availability and quality. Yes, I'd be remiss if I didn't mention. We've, our purchasing department has done an excellent job this year.

And it's not just the numbers of cars we have out there but when you drive by you see that we have a good selection. So when the customer shows up whatever they're looking for we generally have what it is they need and that's made a huge difference and we appreciate the efforts from that department.

So, really, across the board we've addressed everything that feeds sales and all the while trying to tighten up our decision making at the same time. So I think we're doing the right things, the results are there and we just keep plugging away at what we're doing.

Are you seeing generally better credit quality customers so you're able to, while you're getting more people coming through your stores, are you finding that you're able to approve maybe a higher percentage of people who want to buy a car?

I wouldn't necessarily say that. Actually, it kind of works the other way a little bit. If you create a lot more traffic and you get your confidence level up at the individual store, then actually you're able to turn more down and still sell more cars and that's what really results in better deals.

Okay.

And a follow-up question that I think it was, Skip, in your opening comments, you mentioned undercapitalized competitors presenting a tremendous opportunity. Are you referring to taking market share from these competitors, seeing them going out of business or maybe doing some small acquisitions?

I would say the first two for sure. I mean right now we don't have any acquisitions on the horizon as we start to go into new areas. We certainly always look at that as an opportunity to grow in a new areas, and our existing areas we find that if we're already there, we don't need to buy anybody, we'll just try to beat them at this game.

But we are seeing with our competitors that they're having a tough time getting funding. It's more difficult. Those lines of credit have tightened up and so many of our competitors may not have as many cars on the lot, may not have the selection.

Maybe buying older cars with more mileage but the customer then is able to compare with what Car-Mart offers versus what they offer we offer a much better vehicle at typically a better price and then our add-on products certainly are very helpful and a real part of our value proposition. But acquisition is something we would always look at and as we go into new locations and we keep our ear to the ground to see if there's something available but I wouldn't tell you that's a big part of our strategy at this time.

Are you seeing any of these struggling competitors actually exiting the market at this point?

Oh, you bet, absolutely.

Okay.

And then finally, are you seeing any customers, and I don't know if you're able to track this or not, but maybe just anecdotally are you seeing customers who maybe would have shopped at the used car department of a new car dealer but now with the credit crisis they can't get a conventional car loan and maybe they're coming into your shops now. Are you seeing any of that?

Absolutely. I would say we really don't have a means to track that but yes, I think I can say that with confidence we are seeing more of that.

Okay. All right. Well, congratulations and good luck. Thanks.

Thank you, Bill.

Your next question comes from the line of Gene [Nutsbit] of UBS.

Congratulations, guys.

Thanks.

I had a couple of questions. One on your loan covenants, they're all in order now?

Yes, they are.

With the banks. What's the book value now?

Our book value's $126 million

Okay.

Right about $10 a share. A little over $10.

$128 million. I'm sorry.

128. And do you all have any plans of, now that everything's back in order financially, doing any buy back of stock in the near-term?

We are certainly looking at now -- part of it is as the first question, Gene, you mentioned we needed to get our covenants back in line and since they have a tail on them it takes a while to get those back in line.

But you saying you're back in line now. Right?

Back in line with those and we have a large availability now under our lines, so we're going to balance that with our future growth prospects but, also, I think now we're getting more comfortable with our run rate, you know, what I told you six months ago we had expectations but not some proof in the pudding and we're beginning to see more of that proof so we're going to give it some strong consideration.

I don't want to sit here and tell you we're going to start buying, we do have a plan, it's been approved by our Board to buy back shares and how we affect that over the next few months.

How many shares was that approved for?

It was 1 million, I believe, most of which is still available for the most part.

Right. Well, congratulations. A real great quarter, you guys.

Thanks, Gene.

Your next question comes from the line of Daniel O'Sullivan of Utendahl.

Good morning. Great quarter. Thanks for taking my questions.

A quick question on the average sales price. I mean there wasn't much of an uptick there sequentially. Can we look at this as a run rate going forward or what do you guys thing there?

Well, yes, sequentially it wasn't a big bump and we do expect that maybe a small increase over the next few quarters and then, hopefully, as we hit the spring months, we're going to get some relief on the purchase price and maybe see a leveling off completely on that price is our hope.

As you know, we earn a higher margin on lower priced vehicles. So we're very conscious of keeping that purchase price low so it remains affordable for our customer.

Okay. So I mean you guys sense going out to the springtime that we could see come down a little bit then?

Generally, yes, or level off.

Just historically speaking.

I look back years from that, not long ago, typical price increases year-over-year were 2 to 4% and the past two or three years it's been more than that. But we'd like to get it back in that more kind of inflation type growth as opposed to, you know, in excess of that. So, yes, I think we'll see some leveling off in the spring.

Okay. Thanks again.

And real quick, I think, Jeff, you had mentioned that you guys expect to see some more improvements in the gross margin. I think one point, a year or so ago, you guys were up maybe in the mid-40s. Do you guys see that coming back any time soon or what are your thoughts there?

No, we're trying to get back to 43, 43.5 and, sure we'd love to get back in that mid-40 range but realistically that's not realistic in the short-term.

Okay.

And, Jeff, I think had you had mentioned that a lot of the increase sequentially, I believe, and the retail sales came from the Protection Plan. Is that correct?

Can you repeat that?

Quarter-over-quarter your increase from the retail auto sales, a lot of that came from the Production Plan sales? I think you said in your prepared comments. I don't know if that's what you had said.

No, a small percentage did. We did see a nice increase in revenue from the purchase, the Payment Protection Plan product.

Okay. Can you give us a sense what percentage of the sequential increase was from Production Plan revenue?

You know, it's around $1 million. $1million, 2%.

Okay.

And just a quick update on the Protection Plan. Can you tell us what states you've rolled it out in and kind of where that stands right now?

Sure. Right now we sell the product in Arkansas, Alabama and Missouri and we are looking hard at Kentucky and Oklahoma. We don't have anything definite but it looks promising and so I don't really have a time frame but we hope to be able to offer it in those states some time in the near future but I couldn't tell you exactly when. But customers like it, penetration is great.

We have no problem selling it whatsoever in the states we offer it, it's a very good product for our customers. So I think that as we are able to roll it out in other stats, it'll be a big benefit.

Okay. Thanks, Hank.

I think you guys had mentioned the take up rate in the last conference call. Can you give us one on that plan?

It is in excess of 90%.

Okay. So it actually sounds like it was a little bit better than last quarter even.

It is, yes. As we learn to sell it a little better and so forth.

Okay.

And lastly, any updates on advertising? Have you guys tweaked or are using different media channels for advertising over the last couple of quarters to help drive sales?

And that's my last question. Again, great quarter and I appreciate the questions.

Nothing new that we haven't done since we've talked last. Throughout this whole past year we've done a lot more television advertising than we have done in years past, but pretty well trying to drive the same message out there so nothing new recently.

You know, Dan, on some of that television advertising it's been more branding as opposed to promotion and it takes a while for that to really take hold. I think we're seeing, as Hank mentioned, there's a lot of factors that are part of increased sales and that's one of them. It just takes a while.

This customer typically, this is not an impulse purchase but you've seen Hank on TV or in the print for some time and when he gets ready to make the purchase hopefully he's coming to Car-Mart.

But since you mentioned that, that does remind me, we did, our current television advertising is the first real promotional TV we've done, I guess, I did fail to mention that, and it is geared towards our tax promotion which we started in November and, actually, as I mentioned it was very well received, we feel really good about it and it is a little more promotion driven than we've done so.

One quick follow-up on that, Hank, actually.

I think last year the tax preparers had offered a pay stub-type product where it doesn't look like they're going to be doing that this year. Have you guys factored that in or what are your thoughts?

I mean it looked like a lot of customers had probably cash in hand earlier last year. Have you guys taken a look at that to see how it's going to impact sales for this quarter?

You know, actually, it's definitely not going to hurt us the way we do it and we still look at the pay stub and use that as a means to do an estimation of what their refund will be. So, no, I think tax tight time's going to be very strong for us and so far all the indications are good. So we're optimistic.

Okay. Very helpful. Thanks, guys.

Thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Bill Baldwin of Baldwin Anthony Securities.

Good morning, gentlemen.

Hi, Bill.

The previous gentlemen answered a number of my questions on the revenue, this Payment Protection Plan but, Hank, can you kind of indicate what the determining factor is to when you enter the new markets or the new states for this plan? Is there licensing or regulatory issues involved?

It's regulatory issues. Specifically, for example, in Arkansas, where had had our biggest issue. We had to make sure that neither Insurance Commission, AG's office or whomever in Arkansas viewed it as insurance and both Alabama and Missouri, of course, Arkansas with the work we did there, it is not viewed as an insurance product.

The states I mentioned that we're looking at, it's a legal thing and there may be a little gray area and we just want to be safe and make sure we've got that nailed down, that it's understood this is not an insurance product before we venture out there. We just don't want to create any unnecessary exposure.

Okay. And do you have a pretty good feel right now or do you need more time, Hank, to develop a good understanding of what the profitability of this product's going to look like to you?

It's, you know, our customers have had their cars wrecked and stolen for years and we end up basically for the most part not collecting on a large percentage of that, so it is a profitable product for us. It's an add-on sale. It benefits our customer and it will be accretive to our gross margin percentages and it will help our credit loss line.

We haven't had it out there long enough to really quantify much of that yet. We do have some internal projections but nothing we really want to share at this point.

Okay.

And while I have you here a minute, Jeff, can you just explain from an accounting standpoint why the Payment Protection Plan is deducted from the principal balance that come up with your net receivables? In other words, why would it not be just considered a receivable?

We agree with you, Bill, I'm glad you asked that question.

Just one of these accounting type --

Basically the nature of the product is it's a debt cancellation product and we cannot take that to income on day one. It has to be taken to income in proportion to the amount of cancellation coverage we provide. So that liability on the balance sheet is the portion of that product that customers owe us for but we have not earned yet in accordance with accounting guidelines.

So we view that as an offset to the gross principal our customers owe us when calculating our 22% allowance for loan loss amounts. In other words, we wouldn't want to apply a 22% allowance percentage to an amount that we haven't taken to the bottom line yet. That's the reason for that deduct on the --

I see. Okay. Very good. Well, thank you much and good job and good luck.

Thanks, Bill.

Your next question is a follow-up from Bill Armstrong of C.L. King & Associates.

Just a follow-up on a previous question.

I think, Jeff, I think I heard you say you thought you could get the gross margin back up to 43 to 43.5 range. Are we talking about the second half of this fiscal year or further out?

You know, we'd like to move in that direction. Specifically how long it's going to take we don't know but that's certainly our goal over the mid term to long-term. It just may take a few more quarters to get there.

Okay. So we shouldn't necessarily expect that in the January or April quarters?

I'll answer that one, no. Again, we're trying but particularly in this current quarter that we're in now you're going to have higher car prices just by the nature of the beast and so there's factors that are part of that but it's a goal and a realistic target but, again, it will take some time.

Got it. Okay. Thanks.

Your next question is a follow-up from the line of Quentin Maynard of [Moorhead] Capital.

Hey, guys.

One other thing I just wanted to understand a little bit. Have you felt the impact of the downward shift in the discount rate? I know that in Arkansas that's what your interest is priced off of if I remember that right, and are you, is that something you're kind of prepared for, a continued downgrade in the discount rate?

Yes, about 58 to 60% of our portfolio is in the state of Arkansas and so certainly anything that caps our rate, which is currently capped at 10%, in the state of Arkansas is going to have an effect on us as new notes role in and old notes role off. So, yes, we're very aware of that.

It doesn't change a note that's already been issued, it's only the issuance of a new note. Is that correct?

It's a new note only, yes.

But we've seen a decrease from this year-to-date from, what, 11.25--

11.25 down to 10.

On loans as the rates have gone down. And I would say and I wish, we've been talking about this for years, we are working again to try to get this legislation in Washington to preempt the state law regarding the cap. And once again, we're optimistic but we don't have anything positive to say at this point in time but we're working on it.

Hopefully the banking sector will comes back, you'll see that pop up. Thanks.

Your next question comes from the line of Robert Terra, a private investor.

Good morning.

Good morning, sir.

Just a quick question.

If I went into the various stores today compared to, let's say, a year and a half ago, what am I going to see in terms of turnover in your managers and in your salespeople and can you give me any idea about voluntary and involuntary changes?

I don't know if I'll really split it up that way but I will tell you we did, you know, for so long one of the strong parts of our company was the fact that we had very little to no turnover with our managers and as we grew the Company we got a little bit ahead of ourselves, we talked about this before, I think we made some mistakes of putting people out there not as well prepared and so forth. So we did go through a time where we experienced a turnover.

I am pleased to say that this past year as compared to a couple of prior years we have, the turnover has gone down both in the manager rank and the staff ranks at the lot level, and so we're very proud of that but not satisfied with it. I think we need to do better and continue to do a better job of preparing and taking care of our people so we can bring that down further.

Thank you very much. Your stock's doing great today and you guys are, too. Thank you. Thank you.

Thank you.

Your next question comes from the line of Daniel O'Sullivan of Utendahl.

Hi. Actually a quick follow-up I forgot to ask you guys before.

I know historically you have mentioned gasoline prices have an impact on the customer. What are your thoughts given what we've seen in the spike in gasoline prices over the last couple of months here? You think that the customer's feeling any pain or what's going to happen going forward if you can? Thanks.

You know, it's hard to layer it against, yes, they're feeling pain. It makes it tough. People are already struggling enough and a bump in gas prices certainly doesn't help. But, again, the areas we are, there's no public transportation, they need the car, they need to get around and it's a priority out of the budget and so people will continue to come to Car-Mart.

But, no, I hate it and I hate it for our customers. Nobody likes higher gas prices. But it's really something we've never been to really measure against our business.

Makes sense, Thanks, Hank.

At this time, there are no further questions. Are there any closing remarks?

We thank everybody for being on the call today. We appreciate your questions and hope that we continue on track.

I think we've got the right things in place. We're going to continue for more of the same and hope to be able to continue to bring you guys some good news. So thank you again and, I guess, that concludes our call.

Thank you. That does conclude today's America's Car-Mart second quarter fiscal 2008 conference call. You may now disconnect.