America's CAR-MART Inc (CRMT) 2010 Q3 法說會逐字稿

Good morning, everyone. Thank you for holding, and welcome to the America's Car-Mart third quarter 2010 conference call. The topic of this call will be the earnings and operating results for the Company's fiscal third quarter ended January 31, 2010.

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 this morning's press release, which can be found on America's Car-Mart's 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 1 of Part 1 of the Company's annual report on Form 10-K for the fiscal year ended April 30, 2009, and its current and quarterly reports furnished to, or filed with the Securities 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 Officer 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, operator. Good morning everyone. We announced earlier this morning excellent operating and financial results for the third quarter and for the first nine months of fiscal 2010. We reported a 71% increase in net income to $6.3 million or $0.53 per share, up from $3.6 million or $0.31 per share for the prior-year quarter. Our revenue increased 14.1% to $83.8 million on a healthy retail unit sales increase of 11.8% and strong same-store revenue growth of 11%.

Also, our interest income was up 23% as we were rolling into our loan portfolio more of the Arkansas transactions with the 12% interest rate that we began charging late in 2009, June 2009. Also, as Jeff will go into more detail, our credit and delinquency statistics were also strong, reflecting our ongoing commitment to improving the credit quality of our loans.

One of the things we'd like to get across today in this call is to illustrate the stability and sustainability that we are and have been building into our business. If you look back over the last couple year, it is very evident that our business has grown consistently and reliably, with steady improvement in our results company-wide quarter-over-quarter, year-over-year. Our revenues in earnings have consistently increased. For example, for our fiscal third quarters, our topline has grown from $71 million in 2008 to $77 million in '09, nearly $89 million this year. And our credit losses as a percentage of sales have decreased from 23.4% in '08, to 22.4% in '09, to 21.5% this year.

These statistics, along with our other improving numbers and ratios have equated to third quarter EPS of $0.28 in '08, $0.31 in '09 and $0.53 for this year's third quarter. We are very confident that this type of steady consistent expansion of our revenues and profitability is sustainable because of the many improvements we've made in our operations, that we've discussed in past calls and various investor conferences and in press releases, and because of the tremendous talent, effort and dedication of our associates. We're still making changes, upgrades and improvements and we certainly have more work to do. We believe very strongly in our future as the industry leader in our segment of used car vehicle sales and finance industry. Now I'm going to turn it over to Jeff to go over the financials.

Okay, thanks Skip. Once again, we're pleased with our financial results for the quarter, which demonstrates continuing increases in both top and bottom lines without the need for significant additional debt. We continue to focus on cash flows and growing the business in a controlled manner to maximize our long-term potential. As mentioned in the press release, our topline revenues for the quarter increased 14.1% compared to the third quarter of last year. The increase was the result of an 11.8% increase in unit volume, a 1.1% increase in the average retail sales price, a 23.2% increase in interest income, and a $457,000 increase in wholesale sales.

Same-store revenue increased by 11%. Our down payment percentage, which is historically lower during our third quarter due to the effect of our Zero Down Tax promotion, was 4.3%, basically flat with last year's 4.4%. We are currently anticipating that after the receipt of our special payments for the Zero Down Tax Promotion, most of which will occur during the fourth quarter, our true down payment percentage will be in the 12% to 13% range, compared to slightly less than 11% for last year. This means that our customers can have between $1.2 million and $2 million more invested in their vehicles for this pool of loans, compared to last year's third quarter pool of loans, which will certainly have a positive impact on future loan performance.

For the quarter, our average initial loan term is 26.1 months, up a little more than one week from 25.8 months last year. The weighted-average note term for the entire portfolio, including contract modifications, was 27.55 months at the end of the quarter, which is flat with this time last year. Considering the slight increase in the average retail sales price, as well as the increased interest rates for our Arkansas loans, we are very pleased with overall loan terms within the portfolio at the end of January.

The success of our special payments related to our tax promotion is certainly having a positive effect by helping to keep the overall loan terms down. Shorter loan terms help ensure that our customers maintain appropriate equity in their vehicles. The average retail sales price increased slightly to $9,267 from $9,166, or 1.1% increase for the third quarter of this year- from the third quarter of last year. Sequentially, the average retail sales price was up $243 or 2.7%.

For the two previous quarters we had seen sequential decreases in the average sale price. Some of the increase for the current quarter is seasonal, as demand for vehicles increases in anticipation of income tax refunds. Wholesale vehicle pricing trends have shown recent increases and overall wholesale prices are above level seen at this time last year. Demand for the vehicles we sell remains quite high, so we will continue to leverage our purchasing strengths as we move forward with our growth plans. Minimizing our purchase cost is resulting money on the street, keeps vehicles affordable for our customers helping to keep terms- term lengths short, which is critical to our success.

We will continue to focus significant efforts in this area of our business. The average retail unit sold per month per, per lot, for the quarter was up almost 8% from the third quarter of last year and includes the effect of the five new lots we've opened since the end of our second quarter of fiscal 2009. We did see broad volume increases across most all of our lots, of particular note a significant increase in units sold and resulting profitability for our lots in the five- to ten-year age group and the less-than-five-year age group.

In the aggregate, our older stores continue to have significant room for topline growth. But as we had indicated, we expected a large percentage of our future topline growth and increased profitability is going to come from the stores that are less than 10 years old, as well as new store openings. Our Texas, Kentucky, Alabama and Missouri locations showed strong sales and profit growth and are poised to continue on this path as we move forward. Leveraging opportunities with our current store base will continue to be heavily emphasized and we will add new lots in a grass-fire approach as trained and qualified associates become ready.

Interest income was up 23.2% for the quarter due to an increase in the average finance receivable balance of $31.8 million and an increase in the weighted-average interest rate during the quarter to 12.8% from 11.8% for the third quarter of last year. The weighted-average interest rate for all finance receivables at January 31, 2010, was 12.98% compared to 11.7% at January 31, 2009.

The weighted-average interest rate for Arkansas loans were right at half of our outstanding loans we originated, was 9.4% at January 31, 2010, compared to 7.4% at this time last year. The Arkansas rate was 6.7% at the beginning of this fiscal year, moved up to 7.2% at July 31, 2009, the end of our first quarter, and then to 8.4% at October 31, 2009 at the end of our second quarter.

The sequential increases in the Arkansas rates between periods results from the passage at the federal level of the Supplemental Appropriations Act of 2009 in June of last year. We are now permitted to charge up to 17% for loans originated in Arkansas. We began charging 12% to Arkansas customers on June the 26th, and we anticipate charging this rate on a go-forward basis for new sales in Arkansas.

As a reminder, the federal legislation does have a sunset provision and the voters in Arkansas will be voting in the fall of 2010 on a state constitutional amendment, which will effectively accomplish the same results. For the third quarter of this year, our gross margin percentage was 44% of sales, up from 43.1% in the third quarter of last year, and up slightly from 43.8% sequentially. The improvement from the prior-year period relates primarily the improved pricing efficiencies and gross margin improvements for wholesale sales.

We will continue the focus efforts on holding down purchase costs, which has a direct effect on overall margins, and we expect to see gross margins in the 43% to 44% range on a go-forward basis. Higher topline sales levels, together with improved wholesale results, resulted in recent improvements in credit loss- resulting from recent improvements in credit loss experienced are having a positive effect on our gross margin percentage.

In the third quarter of this year, SG&A as a percentage of sales decreased to 18.4% from 18.8% same period last year. The overall dollar increase in SG&A relates primarily to higher payroll costs and to other incremental costs related to five new locations opened since October 31 of 2008. As previously discussed, the increase in payroll costs is concentrated in our HR, IT and collections areas. Also, any compensation arrangements at the lot level are based on profitability and, as such, payroll costs have increased in step with increased profits.

On a sequential basis, total SG&A was basically flat for the first and second quarters. We are pleased to see increasing benefits from leveraging of the infrastructure investments made over the last three-plus years through higher sales volume. For the current quarter, net charge-offs as a percentage of average finance receivables was 5.7% compared to 6% for last year's quarter. Collections as a percentage of average finance receivables was basically flat at 16.1% compared to 16.3% for last year's third quarter.

Severe weather hit almost our entire service area at the very end of our quarter and had a negative effect not only on sales volumes but also on collections. Our biggest collections days are Thursday through Saturday, especially during income tax refund time. In these days- these were the days that were most affected by the severe weather.

Absent the weather issues, we feel confident that our collections would have exceeded prior-year percentages for the current quarter and the nine-month period. Our 30-plus past-due accounts were at 4.2% compared to 4.5% at this time last year. Our allowance for loan losses remains at 22% of finance receivables. Provision for credit losses was 21.7% of sales compared to 22.4% from the third quarter last year and 21.1% sequentially.

Our credit results have benefitted from our focus on great vehicle selection, quantity, quality and service levels, while keeping affordability our number-one goal, what we believe to be solid market share gains in our service areas resulting from not only our inventory selection but also our ongoing branding efforts as well as continuing improvement in lot-level execution within the collections area.

Ongoing credit constrictions are affecting subprime vehicle customers and our competitors, which is allowing us to gain market share in an expanding market. Being the clear market leader gives us more collections leverage with our customer base in need of good basic affordable transportation. We saw strong overall cash flows again during the current quarter reflected in finance receivables growing by over $7.9 million, $449,000 in net capital additions, $4.1 million in income-tax payments all with only a $900,000 increase in total debt.

In January 31, 2010, we had $23.5 million in additional availability under our revolving credit facility. Our current debt-to-equity ratio is 19.7% and our debt-to-finance receivables ratio is 13.4%. Our extremely healthy and strong operating results have allowed us to really take advantage of our strengths at existing dealerships and to benefit from attractive lease rates at outstanding locations for our new locations- new additions. We recently renewed our existing loan agreement at substantially the same terms, moving the due date out one year to April 30, 2011.

Additionally, our board of directors has approved an increase in the number of shares we can repurchase under our stock repurchase plan. We have repurchased over 477,000 shares since December 2005 under our repurchase program. Now I'll turn it over to Hank.

Thanks, Jeff. You know, throughout the past many quarters now we've talked about how our positive results we've been consistently producing or evidence of effectiveness over various infrastructure improvements we've made over the course of the past few years, and I believe it should be fair to say that we're at a point now where we can all agree that the changes in investments that we made in that regard were the right ones to make.

So with that in mind, we're not looking back quite so far, as we move forward, and rather we're measuring our performance as to how effectively we're building upon this success. We've essentially just passed a mark of two solid years of consistently increasing sales and continuously improving our collection numbers. Our task at hand is to maintain the solid growth track. To accomplish this, it's critical that we provide the needed support and oversight to assure the individual success of each dealership so that we'll continue to realize more and more of the capacity we have within our existing store base.

It's equally important that we maintain the steady pace of new store openings as well, and likewise effectively apply our experience, resources and energy to these new dealership to assure successful start. We're very pleased with the overall results of our new stores we've opened throughout the past couple of years. We learn a little bit more from each one and apply that to the next. In our present fiscal year we've opened four new locations and expect to open two, possibly three more by our April 30 year-end. We're also presently in negotiations on a few more potential locations to be opened in the upcoming year.

Obviously, and we've said it many times, the most critical factor for new store openings is having the right people with the right training. And I am very pleased to report that our manager and training program is proving to be very successful. We presently have more future managers in the program than we've ever had before.

Continuous growth has always been the key to our success. Opening new stores and expanding existing stores creates great opportunities for our associates, which is very motivating for everyone. New people joining the team are excited about the opportunities that lie ahead, helps us all to keep a fresh look at our business. We do realize how valuable this has been to our success and we are committed to maintaining a solid growth pace. So that concludes our prepared remarks so we can move on to the questions. Operator?

Thank you. At this time, the participants will now answer questions from the callers. I would like to reiterate that my earlier comments regarding forward-looking statements apply both to the participants' prepared remarks and to anything that may come up during the Q&A. (Operator Instructions). Our first question comes from the line of John Hecht of JMP Securities.

Morning, guys. Thanks for taking my questions and congratulations on another strong quarter. First question is, you know, maybe can you give us a picture of the competitive markets, you know, how are- you know, given the protracted recession, how are- the kind of mom and pop peers behaving in the markets and is there anything changing in Arkansas with maybe new entrants into the market given the changes in rate caps that's been deployed?

I would first say to that last question, we certainly haven't seen new competition coming in and- well, I would say this, you know, I think that when credit really tightened up a couple years ago, we probably anticipated that we'd actually see more go out and see some more significant changes with regard to competition. But, you know, just driving down the highway, it still looks very much the same. People are hanging in there. I think the- some of our competitors have scaled back on inventory, perhaps not carrying as much as they were and probably tightening up. But, no, we've- they're still out there, so I don't say that we've seen any real radical changes in that regard.

Given that, you know, you're able to probably purchase superior inventory to them, are you seeing a, you know, measurable market share change that you could talk about?

I think this- our increase in sales obviously speaks to that. We have to be gaining that into the- certainly the way we purchase cars and is one of the biggest advantages that we have. We have- currently have, I think, 34 buyers out there on the road full-time, so it really give us an advantage to look at cars more, inspect them more thoroughly and all that, than our typical competitor. So we provide, I think, better quality. It also enables us to keep that price range. You know, we've always try- working with that balance of getting our customer a good solid car and at the same time something that's affordable. So we buy in a fairly tight range in order to accomplish that and I think that that's an advantage that we have, that we can buy right at the right mark we need to.

You know, John, I would say in addition to the, you know, better cars, we believe is products. The zero down has added customers to the lots that Jeff might speak a little more to than you, some new customers, and gets existing customers in there to trade in their cars and get their refunds. So the products we offer, as well as the better cars, I think is really making a difference in grabbing some of this market share. And if you look at the numbers, it's an expanding market.

Yes. Okay, and that's because just the expanding market is probably driven because there's no access to credit elsewhere, I assume?

Exactly.

Okay. The second question is related to margins. Obviously, you guys had a margin improvement despite an increase in cost of used cars, and you referred to, you know, you're just more- greater efficiencies and you're getting pricing in the wholesale execution. Are we, just given the kind of tightness in the market is- or you expect margins to kind of be in this range or is there any potential upside to margins, just given the efficiencies you're deploying?

Well, you know, the last few quarters, we've mentioned, being comfortable in that 43% range and keep exceeding it. So now we're saying 43% to 44% in the- our folks are just doing a good job of- on the pricing side and certainly wholesale has benefitted from lower credit losses and looks to us like that is sustainable. So, you know, 43% to 44% now is what we feel to be a comfortable range for us.

Okay. And then the last question, if you were to try to- you talked about the stores between five and 10 years really increasing their sales as they mature, can you tell us the stores that are greater than 10 years old, are they- what kind of clip are they growing at on a same-store sales basis?

You know, it varies. You know, about half of our locations are 10 years old and older right now, and we still have a significant amount of growth opportunities within that group of stores. It varies by store. But overall, we're looking for continuing increases from that group of stores, in addition to those under 10 years old. So we've got a lot of room to grow in all the stores, basically. Now, percentage-wise, it's going to be a higher percentage in the younger lots simply because they're moving up the food chain. Those lots that have been around a long time are still seeing some good growth.

Okay. Great. Thank you guys very much for the color.

Thanks, John.

Thank you, John.

Thank you, sir. Our next question is from the line of Bill Armstrong of CL King Associates.

Good morning, Skip, Hank and Jeff. I- I'm hearing that tax refunds overall may be down this year just because there were lower withholdings from paychecks last year, and I'm not sure if you've seen that down in your markets but if that's the case would that have any negative impact on your collections this spring?

No, actually we're seeing- I mean, fair to say, Jeff, we're actually seeing returns up.

Yes, the average rate (inaudible) up quite a bit this year versus last, so. And we've expanded our Zero Down Tax Promotion and tax return preparation so we're expecting good solid cash receipts in the fourth quarter and tax refunds are up for our customer.

Okay, good. It looks like you closed one store, at least one- a net reduction of one store during the quarter?

Right, that's correct.

Where was that?

It was in Owensboro, Kentucky, and I would tell you that was a very small kind of across-town location. We're actually doing very well in increasing sales in Owensboro, so that was not-

It was a satellite, wasn't it?

Yes, it was a small satellite location across town but, no, we're actually doing very well there.

Okay. So you're still in that market then?

Absolutely.

Okay.

(inaudible) dramatically.

Oh, okay.

Yes, doing well.

I see. And are you still on target, then, to start growing the overall store base by around 10% beginning in fiscal 2011?

It will be a number close to that. That is what we have our sights set on.

Okay. And the buy-back, looks like you- I thought you already had a 1-million-share buy-back authorized?

Well, we did, and back in December of '05 it was 1 million shares and since that point we've bought back close to 0.5 million shares, so we just re-upped it to 1 million.

Okay. So you have 1 million available now to buy, in other words?

Right. Yes.

Correct.

Yes.

Got it, got it. Okay. Okay, that's all I have. Thanks.

Thank you, Bill.

Thanks Bill.

Thank you, sir. Our next question is from the line of Daniel Furtado of Jefferies.

Good morning, and nice quarter everybody.

Thanks.

I apologize if you've already gone over this, I- my call dropped for the first five minutes or so, but I'm trying to get a handle on the income tax promotion, the- how it relates with the debit card portion. If you could just give some color onto- as to the, you know, attraction of that or how- what you're seeing your customers, in terms of, you know, utilizing that debit card piece of the promotion?

Yes, that- it was the first year that we'd offered that product and it was offered as an additional service to our customers and it went over very well. I'd say probably 40% of our zero-down sales participated in that debit card program. It was a good benefit for our customers and that's another thing that we expect to continue to build each year. This was the first year we did it and it was a good success for us. I think it was a good value for our customer and- but probably 40% of our customers participated.

How about explaining exactly what and how it worked.

Well, the debit card basically was a Car-Mart debit card that we issued to allow our customers to not have to take that cashier's check for the income tax refund and run around town and try to get it cashed. They were able to leave our lot with a loaded debit card and not have to worry about cashing their refund check from the IRS. So it was just a service we offered. It was very well received and we think it's going to build year after year as we go forward. And I'd consider it a good success this year.

Great. Thank you. And I know this is a difficult question to answer, and you guys could pass, obviously, but do you have any- you know, care to hazard a guess as to the unit impact or the sales impact from the poor weather at the end of the quarter. I know you're talking that you think that this is going to basically just spill into this fiscal fourth, but do you have any, or do you care to give a guesstimate for- as to, you know, what impact that was?

Oh, that- you're right, it would be hazarding a guess of, probably, potentially a few hundred sales even. But I think it was just a rollover. I think because it was weather that just had people shut down. I don't think we really lost those sales, but they carried forward.

Okay.

Really- you know, it really- we really were snowed out Thursday-

Yeah.

-- Friday and Saturday to end the quarter so.

Across most all- most everywhere.

There were a number of lots that had zero sales and probably darn near half the lots those couple of days, so. This isn't like the restaurant business where you- it's a meal, it's a lost sale. For us, most of those really are, like Hank said, deferred sales.

Would you- I mean, is the methodology of just taking the total unit sales divided by the number of days in the quarter and kind of backing into the lost units, is that an approach that would get me- or do you think would get relatively close, or there's just really no way to tell?

That would be a reasonable way to do it, maybe even a little on the conservative side since it's a weekend and-

Yes, probably sell more on Saturdays than on Mondays so.

Okay, perfect. And then the- my final question, and thanks for your time, there was a nice improvement in the SG&A expense year-on-year if you look at either, you know, asset balance or- as a percentage of the portfolio or however- whatever metric you want to take. And do I chalk that up to just, you know, the continued improvements that continue to happen in the business or is there anything that was specific going on in SG&A?

Are you talking about as a percentage of sales?

Yes, or kind of just as a percent of- not the absolute dollar amount but the- as a percentage of, you know, either assets or sales or, you know, whatever denominator you want to use?

Well, you know, Dan, we've been talking for quite a while about getting to a point where we're leveraging our SG&A costs through higher sales volumes.

Um-hmm.

So the last several quarters we're actually seeing that. And, you know, we've made some significant investments over the last three years and now we're starting to see some real benefit from supporting higher sales volumes and higher receivables, and we think we'll continue to see leveraging as we go forward.

Great. Thanks for your time. I appreciate the answers and, again, congratulations on the quarter.

Thank you.

Thank you, sir. (Operator Instructions). Our next question in line is from Christian Buss of Thomas Weisel.

Hi there, guys.

Hi Christian.

Congrats on the nice quarter, first off. I wanted to ask how much of the loan portfolio has rolled over to new interest rates in Arkansas?

Well, The Arkansas rate at the end of January was 9.4% and it will be going to 12% when it fully gets rolled over-

And what-

-- so we started-

oh, go ahead.

So we started-

We do that in July.

Yes, the first week in July was basically when the new rate went into effect, so we've gone from- I don't have the number right in front of me, but I think we started at like 6.7%-

Yes. Yes, that's right.

-- and we've gone from 6.7% to 9.4% since July 1st of last year. And then we expect it to continue to click in at about that same pace until it gets to 12%.

Okay. And can I ask about refund anticipation loans, there's been some tightness there in availability. Has that affected your business?

No, I think our tax- the company that we worked with on tax prep has indicated that their funding percentages were about the same this year as last, so we didn't see a negative from that at all.

Okay. That's very helpful. Thanks.

Thank you.

Thank you. Our next question is a follow-up from the line of Bill Armstrong of CL King Associates.

Yes, guys, on the referendum that's going to be in the election in Arkansas, how do we handicap the likelihood of this- these rates becoming permanent. I guess, how do- who's- who are the various constituents who may be for or against this and how do you get the ordinary rank-and-file voters to vote for higher interest rates?

Well, fortunately for this particular amendment, there are also some other issues involved that benefit our state and not just the raising of the rates. And I think we've got a few things going on. One is, and it's something that will be communicated, this is really an effort to correct a drastic error that was made many years ago. And even the new amendment, it still imposes a cap that is less than any of the other states. So, I mean, it would put us- a cap of 17% and, effectively, that's lower than any of the surrounding states.

We have not seen any organized opposition thus far. And I certainly think if there were any groups that we're going to come out with a loud voice against this, we would have heard that by now, so there is good support. Certainly, you know, it's not a done deal until we get through the election and everyone has voted, but so far, all indications are that this will be well supported.

Okay, great. Good luck with that.

Yes.

All right. Thank you.

Thank you, sir. I show no further questions in queue at this time.

Okay. Well, thank you all very much. We appreciate the questions and the interest and we'd like you all to take to heart the confidence we feel in the business and, as Hank said, the continued growth and sustainability of this level of growth.

If there are any other questions, please feel free to call us. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone, have a good weekend.