America's CAR-MART Inc (CRMT) 2009 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 2009 conference call.

The topic of this call will be the earnings and operating results for the company's fiscal second quarter ended October 31, 2008.

Before we begin, I would like to remind everyone that this call is being recorded and will be available for replay for the next 30 days.

The dial-in number and access information are included in today's press release which can be found on America's Car-Mart website 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 could cause actual results to differ materially from management's present view.

These statements are made pursuant to the Safe Harbor provision 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 one of part one of the Company's annual report on Form 10(K) for the fiscal year ended April 30, 2008, 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 Chief Executive Office 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.

We are pleased to announce this morning that we have reported that net income rose 12% to $3.9 million or $0.33 per diluted share, that's $0.35 excluding a non-cash $0.02 reduction for change in fair value of interest rate swap which Jeff will talk more about later in this call and that's for our second quarter of fiscal 2009 versus $3.5 million or $0.29 per share for the prior year period quarter.

Overall revenue growth was 5.5% and same store revenue growth is 5.3% which we consider strong considering the seasonality and the macroeconomic issues affecting consumers today.

On the credit and collection front we also showed significant improvement as our accounts over 30 days past due held steady at 3.8%.

Our provisions for credit loss increased to 22% of sales in contrast to 22.9% for the prior year quarter.

Jeff has additional credit information and will add some background to the percentages in just a minute.

Again, though, these are solid results for this quarter.

Following up on some of my comments in today's press release, we believe that Car-Mart's conservative balance sheet and strong cash flows make us a uniquely formidable player in the used auto retail and finance sector.

While others in this industry were attracted by seemingly easy credit, we stayed true to our core values and principles and grew our business methodically out of cash flow and through traditional bank financing whereby we hold and are responsible for the performance of our loan portfolio.

We never were swayed by the securitization attraction and never felt comfortable with excess leverage.

Because of our consistently conservative approach, we are doing just fine while our competitors are trying to adjust to this new and more difficult financing environment.

Also, as I mentioned in the release today, a little over a year ago we changed our senior management incentive structure to reflect economic profit per share instead of GAAP profit.

Although we are confident in our GAAP assumptions by tying our compensation to economic profit, we utilize the true cash economics of our portfolio performance to determine financial results and by utilizing economic profit as the measurement we must consider the amount of capital we deploy to achieve expected financial results.

And we focus on economic profit per share which is most relevant to you, our investors.

We are all on the same page.

This relatively straight forward capital structure and compensation plan aligns our interest with our shareholders and as a major shareholder of the Company, I like this and it makes sense.

There are no easy answers and we use no creative or confusing accounting or financing structures or techniques.

Our management team and all of our associates have worked diligently to improve the way we do business, constantly upgrading and innovating new ways to make us more successful in our business all within the framework of conservative and safe capital structure which will allow to us continue our steady profitable growth all by doing what we have been doing for over 27 years, selling quality vehicles, holding and packaging and selling our loans and providing excellent customer service so that we can earn our customers repeat business.

I will assure you we will stay on that path.

Now I'm going to turn it over to Jeff.

Thanks, Skip.

As mentioned in the press release, our top line revenues for the quarter increased by 5.5% compared to the second quarter of last year.

The increase was the result of a 0.6% increase in retail unit volume, a 4.9% increase in our average retail selling price, a 9.2% increase in interest income offset by a $91,000 decrease in wholesale sales.

Same-store revenue increased by 5.3%.

Overall revenues were up only 5.5% as we do feel that we did see some negative effects from the significant macro issues that were prevalent during our second quarter.

We feel that we did pick up solid market share during the quarter and will continue to benefit from our increased advertising and branding efforts and other sales initiatives.

We also believe that we will continue to see benefit from the expansion of our market as a result of the continuing constriction in the credit markets above us and expect more good customers to be coming to us for their basic transportation needs.

Our down payment percentage for the quarter was 7%, the same as last year's second quarter.

Higher down payments, including deferred down payments, are very important and can have a significant positive effect on individual loan as well as overall pool performance.

In looking forward, we do expect down payments in our coming third quarter which began November 1, to be sequentially less than our second quarter and to be less than our third quarter of last year.

This is due to the significant expansion of our zero down tax promotion which actually began at the very end of October.

Zero down is in effect a deferred down payment program as we schedule special payments to coincide with actual tax refund receipts for our customers.

We do not count these special payments in our down payment percentages but fully expect special payments which typically equal or exceed our normal down payments to be received in January and during our fourth quarter to be very strong this year.

For the quarter our initial, -- our average initial loan term was approximately 26 months compared to approximately 25 months for the second quarter of fiscal 2008.

The 26 months is down slightly, about one week, from our sequential quarter.

The initial term was up due to the 4.9% increase in average retail sales price quarter over quarter, $8,913 compared to $8,496.

It should be noted that the average retail sales price for the quarter was actually down for the second consecutive quarter.

The average price for the current quarter was $76 or 0.85% lower than the fourth quarter of fiscal 2008 which was $8,989, the highest level we've seen.

The overall price decrease resulted for mixed changes as well as general improvements within the Purchasing Department.

We are very happy to see the price reduction for several reasons including, number one, a price reduction increases the affordability for our customers and, number two, lower priced cars carry higher gross margin percentages, again allowing to us keep terms affordable for our customers.

As we mentioned in previous calls, going forward we do expect to see some growth in our average retail sales price when compared to prior year results, but we will work hard to minimize these increases while ensuring that we continue to provide our customers with the quality and the mix of vehicles that they need.

Even though we had a solid quarter, we are somewhat disappointed in that the average number of retail units sold per lot per month was up only 2.8% for the quarter as compared to last year's second quarter from 24.8 to 25.5 units.

No doubt some of this was due to macro issues out of our control but we know that we can improve and do feel that our continuing focus on no lot left behind will allow to us push this number up above 30 where it had historically been prior to our significant lot count expansion.

Once again, we continue to believe that all of our dealerships, but particularly our newer dealerships, have significant leveraging opportunities.

We have capacity to increase sales volumes, GAAP profits and most importantly real economic profits going forward.

Interest income was up 9.2% for the quarter as the average finance receivable balance was up about $36 million offset by a decrease in the effective interest rate to 11.8% from 12.9% for the prior period.

This decrease in rates was the result of decreases in the Federal primary discount rate, the base rate used for loans generated in Arkansas.

The maximum rate allowed in Arkansas is the discount rate plus 5%, currently that's 6.25%.

Twelve months ago, at October 31, 2007, the maximum rate in Arkansas was 10.25% and 15 months ago at July 31, 2007, the rate was 11.25%.

For the second quarter of this year our gross profit margin percentage was 42.8% of sales up from 42.1% in the second quarter of last year and down from 43.6% sequentially.

The increase over the prior year mostly resulted from increased efficiencies in retail pricing offset by slightly higher operating expenses, gasoline and repair costs.

The decrease sequentially resulted from selling a higher percentage of wholesales, higher operating expenses, mostly repair costs, offset buy retail pricing efficiencies.

We will continue to focus our efforts on purchasing costs, retail pricing and repair and transport costs and expect to see gross margin percentages stay around the 43% level on a go-forward basis.

In the second quarter of this year, SG&A as a percentage of sales increased to 19.1% from 18.7% in the same period last year.

The overall dollar increase for SG&A related to high payroll costs, a large percentage of which related to performance based and compensation at the lot level.

Additionally, there was a $300,000 46 basis points increase in non-cash stock-based compensation during the quarter.

Sequentially, we saw $300,000 decrease in SG&A costs due mostly to lower compensation costs, 200,000 of which were stock based.

Once again we will continue to review our infrastructure to ensure that we have adequate support for our associates in the field but feel that the current volume levels we have a good solid structure that we can continue to leverage.

For the current quarter net charge offs as a percentage of average finance receivables was 6.2% compared to 6.7% for the prior year's quarter.

Collections as a percent at this point of average finance receivables decreased to 16.3% from 16.6% for the prior year quarter and from 16.4% for the first quarter of 2009.

The decrease in the collection percentage between years relates to a large extent on the longer originating term offset by a lower effective interest rate and equates to about $650,000 less in cash receipts for the quarter.

We are keenly aware of the importance of our collection efforts and will be working very hard in the coming months in this area.

Again, looking forward we currently expect our overall collection results for the entire year to be strong.

These results, of course, will be somewhat dependent on the results of collecting our zero down special payments which we will begin receiving toward the end of January.

Tax refund season is very important for our collections efforts over and above the zero down special payments and our general managers will be working with our customers to ensure tax refunds are utilized effectively in managing their individual accounts.

At October 31, 2008, our 30 plus past due accounts were at 3.8% compared to 3.8% at the end of October 2007.

We are pleased with this percentage as it is below our historical average of around 4.5% at this time of year.

Our allowance for loan losses remains at 22% of finance receivables at October 31, 2008.

The provision for credit losses was 22% of sales compared to 22.9% for the second quarter of fiscal 2008.

We have seen significant improvement in our credit losses thus far this year and are very proud of the efforts from our associates.

We saw strong cash flows during the quarter reflected in the $4.8 million reduction in total debt.

We did receive a $3.2 million income tax refund from the IRS during the second quarter which was used to pay down our revolving credit facility.

Our total debt stood at $37.8 million at October 31, 2008, which is actually less than our debt level back in fiscal 2002.

In fact, at April 30, 2002, our total debt was $40 million on a finance receivable basis of $75 million.

Since that time we have been able to grow finance receivables by $148 million and actually pay down a net $2 million in debt.

With the significant disruption in the debt markets over the last several months we are even more proud of our healthy balance sheet and are well positioned to continue to grow from our internally generated cash flows and increases in our revolver if needed.

At October 31, 2008, we had $21.5 million in availability under our credit facility.

We are currently working with our lenders through a [New York] credit facility well in advance of the April 30, 2009, expiration date.

Based on our strong, long-term relationship with our lead lender Bank of Oklahoma, our low leverage and our strong operating performance, we feel very good about our renewal but are conscious of the fact that our overall interest rates may increase somewhat.

We hope to have an announcement on our debt renewal within the next few weeks.

As we have discussed, we have made significant investments over the last 2-1/2 years in our infrastructure to be in a position to increase our top line at an accelerated rate into the future.

Since we do not know what the credit environment will look like in the future, we want to ensure we maintain adequate availability so as to not be in a position of having to slow down growth as we have seen others in our industry have to deal with.

We will continue to consider buying back stock under our repurchase plan but our foremost concern currently is ensuring that we have adequate funding to grow our business well into the future which will benefit our shareholders over the long-term.

We will continue to view any future investment decisions from an economic profit perspective.

As discussed, our current debt to equity ratio of 25.5% and our debt to finance receivables ratio of 16.9% are very low and a testament to our commitment to maximizing cash flows.

During the second quarter we had a $0.02 per share non-cash charge related to change in fair value of our interest rate swap agreement which was entered into in May of 2008.

The agreement provides that the Company pay interest on a $20 million notional amount at a fixed rate and receive monthly interest on a notional amount at a floating rate based on prime.

The effective rate at the end of October was 6.43%.

The change in fair value was caused by a number of factors including changes in interest rates, amount of notional debt outstanding and number of months until maturity.

Since the Company intends to hold the swap until maturity, which is May 2013, this charge which resulted from a change in fair value, will reverse by the maturity date.

Changes in the fair value will continue to be recognized quarterly as non-cash charges or gains as the case may be.

It should be noted that should our pricing tiers under our revolving credit facilities be adjusted with the renewal such that we are no longer paying prime less a quarter where we are currently at, are all in effective rate under the swap agreement could change from the current 6.43%.

Now I will turn it over to Hank.

All right.

Thanks, Jeff.

Obviously I'm extremely pleased that we are continuing to produce positive results on all fronts, purchasing, sales, collections are all headed in the right direction.

And the hard work and commitment of our dedicated associates that are making it happen is duly noted and greatly appreciated.

As mentioned in our press release this morning, while most of the automobile market is experiencing a decline in sales, ours have actually increased substantially as we compare the first six months of our current fiscal year with last.

Despite the fact that trade-in numbers have been down at the new car stores, our purchasing team has very effectively been able to maintain an impressive inventory both in terms of price and mix.

Our average purchase price has stayed flat this year as we continue to provide our customers with a good selection.

I believe it's also important to note that our turnover within our Purchasing Department is extremely low and by no means due to low expectations.

This low turn over, the expertise and effectiveness of our purchasing agents continues to grow and I have great confidence in their ability to continue to meet our inventory demands as our sales increase and I am very proud of this group.

The purchase of the right vehicle for the right price is the critical first step towards assuring a good deal for both Car-Mart and our customer and, again, I am very pleased with the overall performance of our Purchasing Department.

One component of our efforts to increase sales is expanding sales within the Hispanic market and we are very pleased to announce that [Albert Arbakka] has joined our Sales Department recently as our new director of marketing with focus specifically on developing the Hispanic market.

Albert is hard at work and I'm confident with his expertise and positive attitude, his contributions will be very evident in our results in a short time.

We are very excited about the opportunity that lies ahead as we better develop this market.

Presently, we are particularly focused on the northwest Arkansas and Tulsa markets as these areas present the greatest opportunity in this particular market, but there are many other markets where we are located that we will begin working to develop very soon as well.

Also, now in the saddle is [Bill Elizondo].

Bill is the Director of Collection Practices and Review.

We discussed that a little bit in our last call.

He brings 18 years of expertise in this area to Car-Mart as well as extremely positive and enthusiastic leadership, and I look forward to working with Bill as we continue to work to improve the efficiencies of our collection efforts.

His focus will be not only on assuring effective collections but also on customer retention as well.

I would like to make you aware of a particularly significant achievement that was realized just this past month.

As we mentioned on our last call, we are increasing our efforts on the recruitment and training of not only future general managers but for all positions in a significant step for this effort, [Rob Hay] was promoted to the newly created position of VP of Staffing and Development.

And I am very pleased to say that in our first quarter with Rob leading this charge, we hit our target number of management trainees that is we wanted to have in place.

Our goal has been to be there by the end of December and we are already there.

We are well aware that our future success will be dictated by our ability to hire, train and retain the very best people possible and preserve our principles and culture that have gotten us this far.

I recently had the opportunity to spend a day with several of the newly hired management trainees and I can tell you I could not be more pleased with the quality of people we presently have in this program.

For now, we have now slowed down our new store openings but we haven't halted them completely.

This past month we opened a new lot in Decatur, Alabama, making this our fifth dealership in Alabama and bringing our total number of stores presently to the 92.

Throughout the remainder of the year we plan to continue to be conservative on the number of new stores we open as our primary focus is to work to increase the profitability of each of our existing dealerships.

We have significant capacity to grow sales and increase profitability on our existing store base as we do presently have many young lots in operation that have yet to reach their potential.

Our plan is to open three more new stores this present fiscal year and one of those will be an additional location in northwest Arkansas.

With all of the growth in this area in recent years and the extensive existing customer base we already have here, it became evident that we actually needed an additional location right here in our own backyard.

Technically, this new location is in Rogers, Arkansas, but this area pretty much runs all together now, the new location will be much more convenient for Bentonville customers as well as the customers that come down across the line from Missouri.

Construction of this new location will begin this next month and we plan to have it open this spring.

We are also continuing to make excellent progress on the expansion projects underway in north Little Rock, Arkansas; Muskogee, Oklahoma; and Sherman, Texas.

We plan to have each of these completed and moved in within the next 90 days.

These new facilities will allow these locations to operate much more efficiently and continue to grow their sales numbers.

In summary, I guess the most important point that I would want you to know is that I believe we have assembled an excellent team here which is what we've been working toward for quite some time now and I do have great confidence in the leadership that we have in place in each of our key areas of our business.

So I think that concludes our prepared remarks, so now we'd like to move on to your questions.

Operator.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of [Dan Ferdado].

Good morning.

Good morning, Dan.

Hi.

A couple quick questions for you.

Can you give an update on servicing and payment performance on the portfolio since 10/31, so basically kind of quarter to date and anecdotally what you are seeing there?

I mean, yes, so far in the third quarter our collections are pretty much what we had expected.

In fact our refinances are actually below expectations and we have actually seen a slight to down tick in the 30 plus number, so we are very pleased with the performance after quarter end.

I know this is probably one of the most common topics that comes up, but gas prices versus employment, can you help me think about what has a bigger impact on your portfolio or the current portfolio?

Well, I would have to guess it is gas prices because I think that's immediate and we know that that affects every customer.

When the price of gasoline ranges $1 dollar a gallon we know it's hitting everybody's pocketbook.

Our car payments do represent a big portion of our customer's paycheck and so, and most of our customers are living paycheck to paycheck.

So the more gas in the car we know that's significant.

The unemployment numbers, when we sell cars typically we are looking at folks that have steady employment.

And we are mostly in small towns and I think we tend to be less affected by a lot of these big macro issues that you hear about in some of these smaller towns.

So I think that the employment numbers tends to hold a little bit more steady.

Dan, I will tell you regularly Jeff and his team surveyed employment numbers in the areas we are in and we were just looking at it yesterday and surprisingly in a number of areas employment numbers have actually improved, some they are slightly higher but still well below the national norms of 6.5% right now so the areas we are in with one or two exceptions are at or below the national norms.

Now obviously those could go up a little bit but.

I would go further even the couple of areas where they are higher are actually some of our best lots.

And have been high for a long time.

So it's not necessarily an indicator.

To quantify the gas price situation a little further our average customer might by $100 worth of gas and we've actually seen a $2 per gallon decrease in gas price from its high, so we have upwards of $200 of additional cash in many of our customers' pockets recently so that's a much bigger factor than the unemployment right now.

That's right.

And then one final question if you don't mind.

I'm just trying to get an idea if you guys are seeing anything, and it's not necessarily credit or sales, just kind of anything in your business that you're seeing that's different or unexpected this time considering the massive contraction in credit, and I appreciate how your business is benefiting from that, but is there anything that you're seeing either positively or negatively that's surprising you or outside what your expectations would have been?

Well, I wouldn't necessarily say outside what our expectations have been and in conversation we said yesterday while we really can't measure it real effectively right now we know we are picking up a number of customers that are dropping down into our market with the credit tightening and we know that has to be a benefit.

It's a little difficult to get our arms around exactly how many of those folks there are.

It's kind of hard to measure that precisely but in speaking with the managers we are certainly seeing a number of customers that tend to be a little more creditworthy than we typically have seen in years past.

But we, again, I wouldn't say that was unexpected.

Thank you very much for your time.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Bill Armstrong with C.L.

King & Associates.

Good morning, good quarter.

In terms of sales, it sounds like you might have been a little bit disappointed with the sales volume.

Can you talk about maybe traffic into your stores, trends in maybe your turning down applicants for loans those sort of metrics?

I wouldn't say we're disappointed.

The fact that we did increase sales and particularly when we look at the six-month to six-month I think the sales increase was significant and we are actually increasing sales at the same time we are really making a push to tighten up on our underwriting.

So I think the fact that we are doing both but yet still increasing sales I think we feel pretty good about and increasing sales at a time we are also, as Jeff gave you the numbers, we are bringing down the credit loss number so, no, I would say we are actually pleased and we really started off toward our win right now very strong.

We started our tax promotion and it started off very well.

So actually with all things considered, I think we feel pretty good about ourselves right now.

In terms of the tax promotion did that actually start in October or November?

November, started very first weekends in November.

Okay.

So I guess for the third quarter then we should expect a lower average down payment but when those tax refunds come in that will impact your collection rate, is that how the accounting would work?

Yes.

We expect significant what would amount to deferred down payments coming in late January or February and then going through the quarter December sales.

We expect the lower percentage in the quarter more offset with receipts from special payments when the tax refund money comes in.

And, Bill, typically our down payments are about 7%.

What these tax refund payments are tied to for the most part will be our requested down payment of closer to 15% so we expect to see a nice bump from those receipts as they come in.

Again, it's a time of year that our customer has significant cash and gives us the ability to get a good down payment but also catch up on collections.

Right.

Okay.

Finally the renewal of your bank line, Will you issue an announcement when that gets renewed?

Yes, we will.

Okay.

And then we hope to have that in place within the next couple of weeks.

Couple of weeks, okay, great.

Are you looking to increase the line, size of the line?

Maybe slightly.

We have $21.5 million in head room right now and that's certainly takes us into the foreseeable future with the current growth plans and really more than anything we want to get something in place for a period not a long period but a period to let the debt markets settle down a little bit and then take another look at the entire debt situation and see what's out there at that point.

But at this point since the line expires in April we really just want to get an agreement in place to take us maybe another 15 months and then have things settle down.

Got it.

Okay.

Thanks.

Your next question comes from the line of John Hecht with JMP Securities.

Good morning, guys, good quarter.

Thank you, John.

Most of my questions have been answered.

I guess one thing I would be interested in your commentary on is how you guys quantify or gauge your apparent market share gains.

Can you give us a sense for what you are seeing in terms of foot track.

I think somebody else referred to the potential turn-down ratio versus acceptance ratio?

I know you guys do some proprietary scoring of your own maybe in scoring shifts just to give us a sense of where this, the market share is coming from and how it's impacting overall portfolio?

I would say that there hasn't been any dramatic changes other than to tell you that we are seeing, we have said somewhat of an increase we know in traffic because we've increased our sales at the same time that we do know our number of turn downs really comparing year to year has increased.

So that means we are being a little bit more selective and at the same time picking up a few more sales.

Again, not a dramatic change.

As far as our scoring goes, again without really getting into the numbers of our scoring I would say that the trend is we are improving slightly.

It's not a different market.

Definitely the vast majority of customers are the same folks but we are improving, heading in the right direction.

So improvements but not drastic changes I guess is the way it summarizes .

The biggest things, John, there might be some indication of customers dropping down to us butter higher percentage of customers with higher percentage of customers with prior credit which tends to indicate they have been around for a while and may have been up the food chain a bit, but these factor do move around a little bit.

The good thing I will tell you is when you look over our base period from a few years ago and we started developing our plan, our scoring system through the last few months and currently there's been an improvement all in all in the scores, but you don't see dramatic changes month to month but you see some and hopefully we will develop some more of these trends as we go forward.

Okay.

In terms of mix shift change I think you were seeing six months ago interest in SUVs despite the high gas prices because of the resale price has dropped significantly where the customer could, for the first time maybe in their lives, afford one.

What are you is seeing in terms of mix shift this quarter?

What are the popular types of cars given the economic and what should we see in terms of gross margin?

It really hasn't changed substantially and, again, most of our sales have always been comprised of the basic transportation, your sedans and such, the SUVs even as interest went up they never even represented half of our overall sales, so I would say that we try to still offer a selection for the customers who want those.

I would say the mix has stayed flat throughout the past six months for us.

We talked about it a little bit.

I think there was a spike in interest in SUVs somewhat but it settled back down.

I think it's kind of where we have been.

Most of our variations on that gross margin percentage are going to relate to the volume of wholesales compared to retail sales levels and those expense items that hit cost of sales also but we feel like that 43% is probably at least over the short term where we are going to end up on the gross margin line.

Okay.

Can you give us a sense for wholesale?

Are the dynamics there changing with deflationary concerns, steel price movements?

Are you seeing any measured impacts on the wholesale side?

Yes, I tell would say wholesale prices have definitely dipped down a little bit very recently.

I think you have a little bit fewer cash buyers at the auctions where we liquidate some of our wholesales.

Okay.

On the front end in terms of purchasing we see Manheim drop somewhat precipitously.

Are you guys at the type of car you're buying are you seeing more opportunity to by cars at a lower level, maybe pass some of that pricing on to the customers?

The prices are holding flat for our range of vehicle which actually is a really, really good thing right now because typically this time of year the prices start to get really jump up on us because the dealers are trying to get the same vehicles in preparation for income tax return time and all that and at least very recently we haven't seen the same spike that we experienced I think in years past.

And I hope that continues to hold true over the course of the next few months.

I think that's further indication that some of our competitors are in not buying as many cars as they were before.

I think we are seeing it affect them which in the short run certainly helps us in buying cars and hopefully able to sell, increase our market share.

Usually with the fall spike in cars is, what, $200 to $500 a unit.

There's been some years where it's been pretty much $500.

Flat is huge own a $4,400 car.

It's helpful.

Good for our customers.

So in a sense you are seeing some on a relative basis I guess?

Relative, absolutely, yes.

Okay.

All right.

Gentlemen, thank you very much.

Next question, Dennis Telzrow with Stephens Incorporated.

Good morning.

Jeff, I don't know if there's an easy answer to this but I will ask it anyhow.

In this funky interest rate swap adjustment, if the cost of your revolver goes up how will that impact the swap, is it favorable or negative?

If the, basically the current line of credit is prime minus a quarter and as long as our line of credit is prime minus a quarter then there is no change in the effective interest rate that hits the income statement at 4.

-- or 6.4%.

If our renewal on the revolver includes some kind of interest rate floor where we may pay a little more than prime minus a quarter, then our effective rate under that revolver would go up accordingly.

I'm not sure if that answers your question but mechanically that's how it works.

But how would that impact the difference between that and the swap, I guess?

As far as the fair value of the swap?

Yes, fair value.

Well, the fair value of the swap is calculated every quarter end based on basically what it would take to unwind the agreement itself and that's based on future interest rate expectations, the length of time until it matures and several other factors.

There's basically a market price out there at every quarter end from for what it would take to unwind that swap agreement itself.

At the end of October to unwind that agreement would have been $494,000.

Hence the $0.02 charge.

Yes, hence the $0.02 charge.

And like we indicated in the press release, that charge completely reverse itself during the remaining term of the swap agreement but we will have quarterly fluctuations along the way.

Right.

But they are non-cash.

I got it.

On the scoring model, have you tweaked it any?

We are six or nine months into it?

Have you seen any need to change it or is it pretty similar to what you started with?

It's still pretty similar to what we started with.

We made minor tweaks but nothing we would consider significant.

Most of the changes would he have done with thus far have really been on developing the entry point that would make sure we are capturing the right data.

That's kind of where most of the programming and that sort of thing has been.

Okay.

Thank you.

Your next question comes from the line of [Lars Munson] with (inaudible).

I recollect it's Lars from (inaudible).

Just a followup on the share question and forgive me if you addressed this earlier directly in the call, but can you just about overall what you are seeing with capacity in the Buy Here/Pay Here industry?

I know we know of one chain out there that you have a lot of overlap with that's essentially exiting the business and I'm thinking that the mom and pop are probably struggling, but I'm not sure about that.

Just talk about what benefit you are seeing or you might see from just capacity coming out of the industry?

Thanks.

I would probably look at that over a long period of time.

I think that right now entry into this business has to be tougher today than it ever has been.

And so I guess, and certainly people have moved in and out of this business so I think right now what we will see is as people move out there will be fewer move back in and so I think that will reduce some of our competition over the course of the next few years.

I don't think we are seeing any dramatic changes just overnight.

But it's a lot tougher business to start today than it was a few years ago.

So I think over time this is going to serve us very well.

Is there any sense there would be a short-term negative impact as some of these mom and pops and as this chain goes into liquidation mode or are you not worried about that?

Not really worried about that, no.

We might see -- we are spread across 92 different towns so maybe one location here or there experiences a struggle a month or two but there's no effect on us company-wide at all.

Lars, I would tell you I think the biggest effect just going forward really is the fact that these mom and pops probably won't spring up as fast as they have in the past or those that stay in business will kind of constrict what they do.

They won't sell as many cars and we are not capital constrained, those customers have to go somewhere for their basic transportation needs and real simply the lot down the street was selling 30 cars a month and they dropped to 20, that's ten more customers than we have the ability to have a good shot at.

I think you combine that with our stores, our very neat, clean, professionally ran a little different from some of our competition and I think you combine that fact with it's a lot harder to get a car loan today, I think that over, that we are in the process or in a time where this market is really expanding so that I think there's a segment of people that become Buy Here/Pay Here type customers, the Buy Here/Pay Here becomes a much more viable alternative for a larger segment of people.

Thanks a lot.

Just one more quick one on marketing.

I know sort of month to month call backs and promotions are a part of the business but aside from that on the brand building or brands messaging television commercials you guys have doing, I know, Hank, you have been filming a couple of those recently, is there more of that to come and what is to come and where will see see that in the numbers over time?

We spend more on advertising, that's part of it but, yes, we are commit to do this but we are holding strong.

As a matter of fact, the commercials we did just very recently were actually in Spanish, ran some of those on Univision, that sort of thing as part of our efforts in the Hispanic market recently and those are very consistent that coincide with our brand building campaign that we have.

So we are going to hold to that.

We think it's helpful and, again, trying to speak particularly to the customers that may be taking a look at the Buy Here/Pay Here that just a couple of years ago they weren't necessarily a Buy Here/Pay Here customer.

Thank you.

You bet.

Your next question comes from the line of [Alan Bosning] with AB Analytical Services.

Hey, guys, congratulations on the good quarter and hello, Skip.

I just have one question.

If I'm reading in between the lines correctly it sounds like you used the word stock repurchase and you also discussed the agreement for your credit line.

Is it correct to assume that you guys would consider that after you closed the credit line and, if so, I'm not familiar with your historical repurchase activity but do you have any sort of guidelines in general how you guys think about that?

Well, what we have in the past purchased a considerable amount of our stock back as the prices were lower and we considered it a good use of our money.

And I would tell you obviously that our stock price is down from September we had a great first quarter which we reported in our stock hit somewhere near $23 they were trading in single digits, high single digits.

So do we consider our stock undervalue like everybody else?

Yes, we do, but we want to take into consideration these credit markets as Jeff said to make sure that we have adequate funds available to grow the Company.

And that's part and parcel of this decision, the decision to buy back stock but I would tell you as a shareholder and all of our shareholders that these values we think in our stock is a bargain, especially considering where we think the Company is going in the future and where we are today.

So you may be reading something between the lines but we do have to be cognizant of the credit markets and what's available and our hamstring our ability to continue to grow the business so we will take that into consideration.

In your conversation with Bank of Oklahoma or other parties has that specific use of capital come up as potentially being restricted by some amount?

No, the banking agreements and the covenants all relate to certain amounts of debt to EBITDA and interest coverage ratios and things of that nature which as long as you're within those ratio requirements then there are no restrictions on the stock buybacks or opening new lots or however you decide as a management to grow your business or to invest your capital it's not restricted underneath those overall ratio requirements.

Okay.

So no additional covenants.

Your stock is trading way below tangible book equity and you have probable approval of this new credit agreement, it sounds like you guys might be able to do something then.

Thanks a lot.

Thank you.

Your next question comes from the line of Dennis Scannell with Rutabaga Capital.

Rutabaga.

Morning guys.

We were finishing that for her.

Thank you, thank you.

I just had a couple of quick things.

I was wondering if you could kind of comment on how I guess store traffic, unit volumes kind of looked relative to your expectations on a monthly basis looking at kind of August, September, October, and maybe if you could make any comments about November.

I'm just kind of curious whether or not you saw a fall off in the latter part of October or whether your customers aren't really kind of watching the credit markets and the stock market the way the rest of us seem to be?

I would say that we are small towns in Arkansas, Oklahoma, Missouri are a little bit more shielded from that sort of thing.

I think our traffic and sales were generally in line with our expectations both through the down term and the upside meaning typically in our second quarter we see sales start to get a little such.

We've always speculated on the reasons why but it's pretty well always been the case with seasonality.

I think people are generally a little bit shorter on cash this time of year, kids going back to school, thoughts are turning to other things.

It was just one year ago that we actually started our tax promotion in November, last year was the earliest we have ever done that and this year we did it again and sure enough sales really picked up substantially in connection with that.

In general, I think our sales have kind of tracked along with our expectations.

Again, very pleased with how we started off in November and right in line with our own internal projections that we have.

So I think that --.

When we say, I guess I say somewhat disappointed that's just fact that we averaged 25.5 units per lot per month and we just know that going forward we can do better than that.

It was a good quarter with all things we had to deal with it was a good solid quarter but at 25.5 units per lot per month we can do better than that.

A couple other quick things then.

When you talk about 25.5 units per lot and trying to get back to the 30 or so where you were in the past, I mean that's not a short-term thing, right?

That's going to take some time.

Sure.

It will be a build.

Yes.

And then help me think about seasonality.

Is typically your fiscal third quarter is that also kind of weak from a seasonal standpoint or how does that fit?

No, that, you will see an increase in sales typically in our third quarter as a result of our tax promotion.

Sales go up.

Okay.

So at least on a quarter over quarter basis we should see it go up?

Yes.

Could you remind me how much, do you have an actual share repurchase authorization that you are working against?

I know did you buy back some stock in the first quarter?

But what is the either dollar amount or share amount that --?.

Share amount was originally 1 million, I think it's down to, what remaining.

Around 700,000.

Okay.

Okay.

Great.

Okay that's it for me.

Thanks a lot.

(OPERATOR INSTRUCTIONS) You have a followup question from the line of Bill Armstrong with C.L.

King & Associates.

Yes, just sort of a follow up on a previous question.

We've seen some data indicating that close to 3,000 independent used car dealers throughout the country have closed so far this year and there's probably more to come.

Now obviously those are all Buy Here/Pay Here dealers, but are you seeing in your markets any Buy Here/Pay Here dealers or other used car dealers going out of business to any material amount that might give you some market share opportunities?

I would say not any real material, the competition is stronger in some areas than others but we haven't seen any great exits in any of the towns that we are in I would say.

I would tell you, Bill, in some of these towns there may be 30 dealers, 40 dealers, sometimes more, so --

So 3,000, that's nothing really.

Frankly, maybe I shouldn't write an analogy but someone like roaches their place goes empty somebody tends to come in and they may not be a good operator necessarily but they don't stay vacant for long.

That's not a good analogy.

Understood.

Okay.

Thanks.

At this time there are no further questions.

Okay.

I guess we will end, I would like to point out one thing that Jeff mentioned that really caught my eye as we were going through the prepared remarks and that was the debt level that we are frankly at a level that we haven't seen since 2002 with receivables of 150, almost $150 million more than we had at that time.

It was a stunning number that I guess I hadn't focused on until Jeff brought it out and I hope everybody on the call realizes that that we have grown this Company dramatically in this five or six-year period without increasing debt and it's a testament to this team here that they've grown really out of cash flow and that original debt, as some of you may recall, has something that has been with us for a long time was really put on this Company as acquisition debt in 1999, so really this Company has grown since '81 without any debt other than this acquisition debt, at that period of time effectively when you look at it, paid it off because we have effectively grown from the receivable number back then, 75 million, and today our receivables on the books are 220 or there about.

223, 224, with debt being flat.

That's really something, particularly in these markets.

So any way, thank you all for your interest and your questions and we look forward to talking to you again.

Thank you, ladies and gentlemen.

This concludes today's conference call.

You may now disconnect