America's CAR-MART Inc (CRMT) 2011 Q3 法說會逐字稿

Good morning and thank you for holding and welcome to America's Car Mart third-quarter 2011 conference call. The topic of this call will be the earnings and operating results for the Company's 2011 fiscal third quarter. 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 contain 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 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 One of Part One of the Company's annual report on Form 10-K for the fiscal year ended April 30, 2010, and its current and quarterly reports furnished to or filed with the Securities Exchange Commission on Form 8-K and Form 10-Q.

Participating on the call this morning are 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 Chief Executive Officer, Hank Henderson.

Good morning everyone, and we appreciate you joining us today. As you saw from our press release this morning, in addition to the results for the quarter we also announced we've just opened a new store this week in Columbia, Tennessee, so this keeps us on pace for our projected openings for the year. We're very pleased with the performance of our new stores, and I'll go into some more detail on that shortly. I'm going to go ahead and turn it over to Jeff to go into the specifics on our recent numbers for the quarter.

Okay, thanks, Hank. Our 10.5% topline revenue increase for the quarter resulted from a 5.6% increase in unit volume, a 2.1% increase in the average retail sales price, 21.7% increase in interest income and a $1.3 million increase in wholesale sales. Same-store revenue was up 5.3%. Our down-payment percentage, which is typically lower during the third quarter because of our zero-down tax promotion, was 4.8% this year compared to 4.3% for the third quarter of last year, or, about $350,000 more in down-payment dollars, or $40 per vehicle sold.

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 front-end equity percentage will be in the 12% range. For the quarter, our initial loan term was 24.9 months, down from 26 months at this time last year. Our weighted average note term for the entire portfolio, including contract modifications, was 27 months, compared to 27.6 months at this time last year. The decreases in our term relate to software and operational changes made in an effort to shorten terms, even in the face of some increased pricing, by assisting our customers in maximizing up-front equity and scheduling payments to coincide with anticipated income tax refunds.

With the overall increases in average retail sales prices, as well is increased interest rates in Arkansas, we're even more pleased with the trend in our overall term-length within the portfolio. We are assessing these recent changes and the effect on sales volumes and expected future credit performance to ensure that we're maximizing our profitability and customer success. Our goal is to earn the repeat business, and the best what to do that is to ensure that our customers are successful on their individual notes. The average retail sales price increased to $9,463 from $9,267, or 2.1% for the third quarter. Sequentially, the average retail sales price increased 2.8%, or $254, a trend that's consistent with prior years' third quarters. Vehicle supply remains very tight. We are working hard to maintain gross margins by leveraging our purchasing strengths and with pricing efficiencies.

We are hopeful that we can keep our gross margins in the 43% range, and it will depend heavily on topline sales volumes and wholesale volumes driven by repossession activity, relative to topline sales as well as expense controls. As we said repeatedly, minimizing increases in purchase costs helps keep our vehicles affordable for our customers, which is our primary goal. The overall average retail units sold per month, per lot for the quarter decreased to 27 from 27.2 for the prior-year quarter. The monthly average for the 12 new dealerships that we've opened in fiscal 2009 and forward was a solid 25, and for those lots opened prior to 2009, the average is approximately 27.5, basically flat from the prior year. We did not see the growth from our more established dealerships as a group, due, to an extent, on the timing of tax dollars in the field. We continue to believe that most of our dealerships have significant room for topline growth, but as we've indicated, we expected a large percentage of our future topline growth and increased profits will come from the 52 stores that are less than 10 years old, 26 of which are less than 5 years old, as well as from new store openings. Sales volume leveraging opportunities within the current store base will continue to be heavily emphasized at the same time we will add new stores.

Our interest income was up 21.7% for the quarter due to an increase in average finance receivables outstanding of $20.5 million, and an increase in the weighted average interest rate in the quarter to 14% from 12.4% for the third quarter of last year. The weighted average interest rate for all finance receivables at January 31, 2011, was a little over 14%, compared to 12.9% at this time last year. The weighted average interest rate for Arkansas loans was 11.6% at the in the third quarter, compared to 9.4% at the end of fiscal 2010's third quarter. We are monitoring the status of an appeal currently before the Arkansas Supreme Court, related to the Constitutional amendment for interest rates, which was approved by Arkansas voters on November 2, 2010. For the third quarter of this year, our gross profit margin percentage was 41.8% of sales, down from 44% for the third quarter of last year, and down from 42.8% sequentially. The reduction relates primarily to higher wholesale sales, the increased selling price, higher inventory repair costs and lower-than-expected topline sales. We are working on holding down our expense costs and overall unit purchase costs, as well as maximizing pricing efficiencies, which all have a direct effect on overall gross margins. We do expect to see some improvement in our gross margin percentage, but we're somewhat limited by supply and our overiding efforts to keep our transactions affordable for our customers.

In the third quarter of this year, SG&A as a percentage of sales increased to 19.2% from 18.4% at the same time last year. The $1.9 million increase in overall SG&A dollars, related primarily to higher payroll costs, incremental costs related to new store openings, as well is higher utility and advertising costs. Had we not experienced the delay in income tax money and the resulting shift in sales to the fourth quarter, our SG&A percentage would have been very close to the percentage for the prior-year quarter. Over the longer term, we do expect to see some benefits from SG&A leveraging as we move forward, but it is hard to get it exactly right on a quarter-to-quarter basis, especially when we see a shift in sales as we saw. We will ensure we don't under-invest in our infrastructure to support the growing business, especially in the collections area.

For the current quarter, net charge-offs as a percentage of average finance receivables was 6.1%, up from 5.7% for the prior year period and down from 6.5% sequentially. Principle collections as a percentage of average finance receivables was 16.4%, up from 16.1% for the prior year period. Additionally, we did collect $1.9 million more in interest during the current quarter, and when you combine interest and principal collected, the current quarter was at 19.9% of average finance receivables, compared to 19.1% for the prior year period. This is especially impressive given the delays in tax money.

Our 30-plus past due amount accounts were 4.6%, compared to 4.2% at January 31, 2010. Again, the delay in tax money certainly had a negative effect on the 30-plus percentage between years. Our allowance for loan losses remains unchanged at 22% of finance receivables at the end of the quarter. The provision for credit losses was 21.9% of sales, which is basically flat with the third quarter of the prior year, and down sequentially from 22.7%. The positive trend sequentially is an indication that we're doing a better job of working with our customers, and as we've previously stated, losses in the 20% to 22% range are what we expect into the future. The overall quality of our deals has not changed significantly and our credit metrics remain strong, and we will continue to push for improvements in lot-level execution within the collections area. We do expect to see some continuing improvement in collections, and resulting credit performance for the fourth quarter, now that tax refunds are flowing. Our associates are working hard to help our customers succeed, and equity payments during the tax time are a very important factor in their success.

We saw very strong cash flows again this quarter, reflected in the increased unit sales and a resulting revenue growth of 10.5%, with finance receivables growth of $4.8 million, $1.5 million in CapEx, $5.5 million in common stock repurchases, $3.4 million in income tax payments, all with only a $3.7 million increase in total debt. At the end of the quarter, we had $35 million in additional availability under our revolving credit facilities. Our current debt-to-equity ratio is 30.2%, and our debt-to-finance receivables ratio is 19.5%. As a reminder, our balance sheet is even more impressive when you consider that since February 1, 2010, we have repurchased almost $28 million in common stock at 1.1 million shares, or 10% of our Company, and grown receivable base by over $20 million. Our financial position is extremely healthy. We plan to continue to repurchase shares opportunistically, subject to limits under our credit facilities. We believe in the long-term value of our Company. We did incur a $0.03 per share charge in November for the early payoff of the then-existing term loan as part of our new debt arrangement. This charge is reflected in our third-quarter results. I will now turn it over to Hank.

Thanks, Jeff. While we did see an increase in our sales year-to-year, it would have actually been a few points higher had it not been for some changes in tax refund processes within the IRS that pushed back the timing, as much as a couple of weeks as to when customers had the cash in hand. Refund anticipation loans were virtually eliminated this year, so many customers had to wait for the actual tax refund, whereas last year they may have been able to actually have several thousand dollars in their pocket by the middle of January. Sales levels so far this month make it apparent that many sales were, in fact, pushed back, that we typically would have seen at the latter part of January. The good news is that the refunds are now coming through and the process is going very smoothly for our customers.

On our last call we talked about some of the major changes we were making to our deal-writing software, as well as our practices and procedures that go along with it, as to how we structure the financing terms of our deals. This involved a tremendous amount of training and retraining at several levels, and also unfortunately, as is too often typical with major software changes, we also had a few bugs that we had to get worked out. In the end, the quality of the terms of the deals we've written during the past quarter has definitely improved, as compared to the same time last year, with better down-payments, accelerated payments on the front end and ultimately reduced terms. These improvements helped to get our customers into an equity situation much more quickly, helped to reduce future losses and obviously has a very positive impact on our cash flows. Realistically, it probably did cost us a few sales, in part through a push for better downs and front-end payments, and also the simple fact that this was a new process for all of our folks and there was a learning curve to go through. We feel very good about our direction in this area, and feel confident that the improvements in the structure of the terms will pay off. As many of you know, the tax refund season is not only a boost to our sales but it's also extremely beneficial with regard to collections. As you saw from the press release, our collections are trending in the right direction as our customers are now beginning to receive their tax refunds. We'll no-doubt see even greater improvements through our fourth quarter.

As I mentioned earlier, included in our release this morning was the announcement of our most recent opening, Columbia, Tennessee. That puts us up to 7 new locations added so far this fiscal year, 3 of which have been in Tennessee, and then 1 new store each for Arkansas, Alabama, Missouri and Kentucky. We do have other projects underway and expect to open at least 2 more, possibly 3, prior to our April 30, year-end. We are more than pleased with the performance of the stores we've opened over the past couple of years. For the month of January, as a group, they averaged just under 25 units each, which is very solid performance. We now have almost 1,500 active customers at these locations, and accounts receivable is well over $10 million.

For some time we have known that we needed to become more consistent with the new store openings to maintain the growth pace we have been able to achieve over the years, and the recent success across-the-board of these lots indicates that we have made great improvements in this area. We are very well-positioned to continue to grow. We've got the necessary components in place. We have capital available, and there are many towns within our present footprint that do fit our ideal size. Enough, in fact, that we can continue on this pace for the next few years before ever really having to step outside of it. And most importantly, with regard to our people, our MIT program continues to get better and better, with 32 management trainees presently in that program, as well as 26 assistant managers in place who are also preparing to become future general managers. We do look forward to seeing each of them develop and advance, and, of course, we are all very excited to see the Company continue to expand. That concludes our prepared remarks, so we would like to move on to your questions. Operator?

(Operator Instructions) And we have a question from the line of John Hecht with JMP Securities.

Good morning, guys, and thanks for taking my questions. The first one is related to the 24.9 month average term, or duration, right now. That's down nearly two months, I think, from the levels this was at several quarters ago. And I know that bodes well in the future for credit, generally speaking, but the first question is, how are you doing this? Are you actually taking the terms of each loan down in terms of month payments, or are you giving fewer extensions? And outside of more controlled credit costs, are there any other benefits or changes we should consider with respect to this?

As Jeff mentioned, we have seen an improvement in our down-payments, so that helps, and yes, we are working to structure better front-end payments, and as we've become more effective with our collections, controlling that better, we are doing fewer modifications, so yes, overall the number of contracts that are extended has come down. It's trimmed off quite a bit.

And with so much of our business to repeat customers, John, the shorter that term is, the more often our customers are back in for trade-ins, so it benefits us down the road, too.

Okay. I'm not asking for guidance of any type, but you mentioned that the tax refunds delay might have cost about two weeks of sales opportunities, or was pushed back two weeks, so is one way to potentially quantify that, to say that the portion of your sales that would've been associated to tax refunds, there was a 2 out of 12-week delay, and that that would be pushed into the next quarter?

I don't know if we know specifically -- we do think it was several hundred units.

I would characterize it this way. Typically, we really see a rush, a big spike in sales. That spike that we saw just became the 1st of February, instead of in that third or fourth week of January. So, we're only a couple of weeks into it, but it did seem like overnight the sales did jump up. As far as to quantify how that's going to affect the whole quarter would be difficult to say.

It wouldn't be the two-twelfths effect, but it was several hundred units.

Okay, thanks very much. The last question, and I'm asking this just because I haven't asked this for a while, I know your competitors, speaking to the mom-and-pop independent competitors in your market, were suffering during the downturn, having a difficult time getting access to inventory and so forth, how are they doing now? Are you seeing any shift given that the economy appears to be growing again?

I would say we haven't seen any dramatic change. Overall we've actually been surprised that more weren't affected, and we still seem to have very similar competition today as we had a couple of years ago. I think maybe they scaled back a little bit, but certainly where we are there's still the same competition we have had.

Thanks very much.

Our next question comes from the line of David Burtzlaff of Stephens.

Good morning, guys. Kind of a question on the gross margin. I know you guys have targeted the 43% to 44% range, but with car prices and your average selling price going up, is that a reasonable range, or are we looking, maybe, at shifting that down to 42% to 43% as realistic?

I think last quarter we even dropped the 44% that were talking about 43% and then we didn't quite get there this quarter, so, we're doing all we can on expense management and pricing efficiencies, and, of course, wholesales in repossessions have a big effect on that, too. We would love to see it coming back up closer to 43%, and that is what we're striving for, but there's a lot of things that are out of our control, especially with the tightened supply on the car and trying to keep these transactions affordable for the customer at the same time. We're doing all we can to keep that around the 43% range.

Okay. And then finally, on your losses, with the delays in the tax refunds and collections and delinquencies moving higher, your losses were still pretty flat with last year. So would that indicate, if you would've seen a normal pattern that you did last year, that you would've probably seen losses better than a year ago? Your overall loss rate was basically flat, and, delinquencies are up much higher and I assume that factors into your loss rate provision formula. So could losses have actually been down, year-over-year?

With the tax money being two weeks sooner than it was, we would have collected more, and some of those past-due percentages certainly would've been better, so yes, I think it's safe to say that the credit loss number could have been lower, absent the delay in tax money.

Okay. So really, this really does show that second quarter was more of a hiccup, and losses and collections are coming back to more normal ranges?

That would be accurate.

Okay, thank you very much.

Our next question comes from the line of Bill Armstrong from CL King & Associates.

Good morning, Hank and Jeff. When you're talking about working with customers, I know refinancing or extending the loan is one of the tools that you have to do that. Can you talk about other types of things that you do to help customers pay off the loans?

I think really, when we say that, from where we are, that has a lot to do with the type of training we're providing to our accounts reps, and certainly talk with their managers, and just encouraging working with our customers more. And really, just even as an example of what we were just talking about with showing a little higher, over-30 number, knowing that the tax money is just around the corner for some of our customers in some of these cases, maybe instead of doing a refinance or an extension or anything like that, we've decided to just carry them, wait for a little bit longer to give them a chance to get that. So we haven't actually made a change to the contract, but they had an agreement that they'll make this extra payment coming up, and obviously, we think we have several customers situated like that. And then just everything that's involved in our practices, and working with our customers to help them train our people better on how to assist the customer when they have a mechanical issue, or loss of a job, or anything like that, just to bridge them until they're back on their feet. I'll tell you, it's more focused around our own training.

Okay. To the gross margin question, is this really a matter of just the cost of the cars you're purchasing going up and not being able to pass all that onto the consumer?

For the most part. I think we also, when we're working too in a tight market, we tend to have a little bit more repair expenses and fix-up costs, so that has bumped up a little bit on us as well. The lion's share of that is certainly the higher average cost.

The effect of wholesale sales, we did have a pretty good increase in wholesale sales, which does have the effect of dragging down the overall margin.

Right, got it. Okay, thanks, guys.

Our next question comes from the line of Jordan Heimowitz, of Smith Financial.

Hey, guys, thank you very much, just a couple questions.First of all, so what's the dollar amount of charge-offs, we've got $17.1 million. Could you give the percentage, I'm trying to back in to the number.

The dollar amount of charge-offs? I don't have that for the quarter, for the year it is was $48.5 million.

I need the quarter number.

I don't have it right here.

Maybe you can call me back with that. You said that obviously delayed tax refunds hurt charge-offs numbers, would you happen to have the delinquency number as of, like, yesterday, or something like that, to see if it has come down some?

It's come down since the end of the quarter.

Can you say what it is now?

No. It changes every day, and there's still a lot of tax money that has not come in yet, so it's not an accurate indicator at all at this point.

But it has come down a little bit?

Yes.

What percent of people who buy cars own homes, do you know?

It's a fairly small percent. Don't have an exact percent, but it's probably 10% to 20%.

Okay. And then the final question, you said average down payments have come up, can you quantify that?

It was 4.8% compared to 4.3% last year. So we collected about $40 more per transaction during the quarter.

The first quarter is usually last, correct, in terms of down-payments?

Well our third quarter, ending in January, is usually less because of the zero-down tax promotion.

Okay. So, would that 50 basis-point improvement carry through to next quarter?

It carries through in the fact that we have lower principal amount outstanding, so future credit losses will be lower because of that increased down-payment.

In other words, if it was 4.8% versus 4.3% last year, next quarter are you looking to get more down-payments, and then the down-payment would also be up as a percentage?

I think so. We're certainly counting on that.

Thank you.

(Operator Instructions) We have a question from Darnell Azeez from Lord Abbett.

Are you guys still targeting 10% square-footage growth?

As we said, our goal is to open 10% new stores, right now we're at about a hundred stores, so yes, we're looking at about 10 stores a year over the course of the next couple of years, in that range.

Relative to all the work that's been done in the Company the last few years, and the growth opportunities that are ahead of you guys from a store perspective, when you look at the valuation the stock is getting from the market, obviously you think it's undervalued because you're buying back stock, but have you guys -- is there really any benefit for you guys to be a public Company right now, or why not explore some alternatives?

We don't understand the valuation, and that is why we're pretty bullish on the stock and the stock buyback program, and we're just doing the best we can to run the Company the right away. We don't know.

So there's really no benefit to being public right now, like maybe access to markets or, I mean, the balance sheet seems pretty strong.

Yes.

Thank you.

We have a question from the line of Brian Rohman of Robeco.

Good morning, couple of questions. The buyback is going to continue? Or what's the status?

It's still open and we're still going to repurchase shares opportunistically.

How big is the existing authorization? Or what's remaining on it?

I think we have about 600,000 shares remaining, but our Board has been very open to increasing that as needed.

Okay. So 600,000. Okay. So another $15 million or so.Let's see, next question. New stores, sales, you are saying they are averaging -- the new stores, these are the 10 to 12 that you put in over the past 12 months, are averaging 25 or so sales per month, is that correct?

Actually, it's over the last 2 years, 25 units per month.

Is there a wide variation, are there some that are doing 12 or 15, and some that are doing 35?

Among that group, I'd say we have one or two that we feel like could do a little bit better, but that's -- most all of them are doing very well.

There's not a wide range.

Is there any difference in the underlying profitability of a new store once it gets to 25 sales per month, versus the existing pool of stores?

A lot of time there's very little overhead with a new operation, and very few credit losses, so that the GAAP profits generated from a new store are oftentimes higher than some older, more established stores.

Last question. The appeal before the Supreme Court, could you talk about that?

We really don't know a lot about it. There was a motion to expedite, which the Supreme Court denied that motion, and for what reason I don't know, whether it's unnecessary or whatever. From what I am told, best guess is, we're still realistically a few months away from having an answer on that. The way it is now, it is the law that we can charge up to 17%. We feel very confident by everything we're told, that the circuit court's decision will be upheld, there's no reason to believe it will be overturned, and even if it were to be overturned, that doesn't necessarily say it would be applied retrospectively. We feel very good about where we are and what we're charging, and pretty confident it will be a favorable decision.

The existing pool of Arkansas loans, you said the average yield on them has risen year-over-year for about 9.5% to 11.5% or something in that order. How long before we have fully cycled through the legacy loans in that portfolio so that they're at their peak, or maximum interest rate yields?

We are charging 12% on new loans, and we're at 11.6%, so we've got a little more to go but not much.

All right. Thank you.

(Operator Instructions) We have a follow-up from Jordan Heimowitz from Smith Financial.

As your pricing goes up, the margin's going to go down. The more expensive a car, the less the gross margin. If you sold $5,000 cars you'd have a 15% gross margin.My question is do you think your gross -- even if your gross margin goes down to like 42% instead of 43%, do you think your gross margin dollars will maintain relatively flat?

It certainly could, and a lot of that just depends on the volume. The dollars produced could go up, yes.

Why does it depend on the volume?

From an overall perspective--.

I understand what you're saying, I'm sorry, I didn't follow at first, but I understand. Thank you.

I see no further questions in the queue at this time.

Thanks again, everyone, for joining us this morning, and like we said before, we are at the big time of the year in our sale, with the tax refunds fully underway, so this is a busy time for us and we do expect to see good things for the remainder of our year, so, thanks, and everyone have a great day.