America's CAR-MART Inc (CRMT) 2012 Q2 法說會逐字稿

Welcome to America's Car-Mart second-quarter 2012 conference call. The topic of the call will be the earnings and operating results for the Company's 2012 fiscal second quarter. Before we begin I would now like to remind everyone that the 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 website at www.CarMart.com.

As you all know, some management comments today may include forward-looking statements, which inherently involve risk 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 ending April 30, 2011, and it's 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 Hank Henderson, the Company's Chief Executive Officer and President; Jon Sims, the Company's Vice President Purchasing; and Jeff Williams, Chief Financial Officer. And now I'd like to turn the call over to Company's Chief Executive Officer, Hank Henderson.

Well, good morning, everyone; we appreciate you joining us today. And assuming everyone saw the press release this morning, I'm sure you're all well aware that we're extremely pleased with the results for this quarter. I said on our last call that we were beginning to see a lot of positive impact from our efforts to provide better support for sales and it has certainly continued through this most recent quarter as well.

As some of you may recall, a couple years back we said we felt we had the capacity to bring our lot unit sales average to as high as 30, and I am extremely happy to report that with improvements in inventory management, marketing and sales training and of course as well as new lot starts, we have reached that target. We had an average of 30.3 units sold per lot per month for the quarter and this is particularly impressive when you consider the number of stores we've opened throughout the past couple of years.

Our sales for the quarter worked out to be a 17.6% increase in unit volume over the same time last year. That combined with a 3.8% increase in average sales price, a 15.8% increase in interest income, and a $360,000 increase in wholesale sales, we had a 20.7% increase in our top-line and same-store revenue was up by 13.7%. Very, very impressive sales results on all fronts.

This big increase in sales combined with solid performance in collections resulted in an increase in net income of over 25%, which was an increase of 37.5% on an EPS basis with our stock buyback which Jeff will cover later.

Collections were consistent with last year as losses were flat and we did actually see a slight improvement over last year on our quarter-end delinquency numbers. And I say this is a solid performance in that it is consistent with where we were at the same time last year. But we still know we have room for improvement in this area and are intensely focused on achieving better results here.

John Blevins was recently named as our Director of Collection Practices, bringing a tremendous amount of experience to this position having served as an area operations manager with us for the past three years. And he has over 20 years in management with Walmart prior to joining Car-Mart.

His predecessor, Bill [Elizondo], did an excellent job in that position as well and he has recently moved back to his home state of Texas where he's taken over the role of Regional Vice President of Operations. And although he's only been there a short time, we are already beginning to see improvements in both sales and collections in the region and we have great confidence that these positive trends will continue there. We wish both of these gentlemen the greatest success in their new roles.

And obviously in order for us to continue our growth in sales we must also continue our growth in purchasing. We're often asked exactly how we intend to source more and more cars and manage the cost in a seemingly ever increasing market. So I have asked our Vice President of Purchasing, Jon Sims, to join us on our call today to update you on efforts within his department and to explain how we're going to carry this forward and continue to meet our growing demands in the same excellent fashion we've done this past year. So, Jon?

Thank you, Hank. For the quarter ending 10/31 we purchased around 9,000 units and finished the quarter with over 5,000 vehicles in inventory. Approximately 10% of these units are staged at regional holding facilities awaiting store demand.

Comparable stores open for one full year ended the quarter with 12.5% more inventory than the same period last year. Our overall retail inventory ended the quarter 20% higher than last year and is 11% higher than our designated inventory plan as designed with movement into the tax season period.

We currently have 43 active purchase agents geographically located within our trade territory. They report to our store managers meeting the needs of our customers through vehicle purchases from various sources. We closely track vehicle procurement expenses such as wages, commissions and fuel and are happy to report that we are on plan in a pretty tough environment.

Our purchasing team is doing a great job in this respect. Our mix of purchases is driven by customer demand within our stores' trade areas. The purchases for last quarter were 37% sedans; 29% SUVs; 16% trucks; 12% vans; and 6% coups. So you can see trucks and SUVs now represent close to half of our purchases.

We continue to evolve best practice approaches to meet the growing vehicle demand. This is accomplished through additional purchasing locations, expanded agent tools and continual education ensuring our agents are well equipped in a competitive and changing environment. We are confident that the team and structure in place can supply the inventory needs well into the future.

Each new store provides an additional market to purchase vehicles such as our recent entry into Columbus, Mississippi. Additionally, we continue to expand efforts in larger markets within proximity of our trade territory such as St. Louis; Birmingham, Alabama and Oklahoma City.

Okay, well thank you, Jon. As Hank mentioned, we're pleased with the 20.7% top-line revenue increase, 13.7% coming from same-store base, and the resulting profitability increase. The business model is stronger than ever and we're excited about the future.

Our down payment percentage was 6.8% for the quarter which was flat with the second quarter of 2011. Principal collected as a percentage of average finance receivables was 15.7% compared to 16.2% last year. For the quarter our average initial contract term was 26.3 months, basically flat both sequentially and with the prior year quarter.

Our weighted average contract term for the entire portfolio, including modifications, was 27.5 months compared to 27.4 months at this time last year. Benefits from deal structuring, especially as related to the scheduling of payments during upcoming income tax refund periods, is allowing us to maintain the overall term length within the portfolio.

The average retail sales price increased to $9,557, or 3.8%, from $9,209 for the second quarter of last year. Sequentially we saw a $116 or 1.2% increase in the average retail sales price. Vehicle supply remains tight. We will continue to work hard to maintain gross margins in the 42% to 43% range as we move forward.

The overall retail units sold per month per lot, as Hank indicated, increased to 30.3 from 28.4 for the prior year quarter and up from 28.2 sequentially. The monthly average by age category was for the 22 lots that are under five years of age we averaged 23 compared to 22 for the prior year period in this category. For the 33 lots that are between five and 10 years of age we averaged 26 compared to 24 last year. And for the 54 lots that are over 10 years of age we averaged 36 compared to 34 for the prior year. So we saw good growth in all age categories.

We continue to believe that most all of our dealerships have significant room for top-line growth and it's nice to see such positive volume trends. The overall sales volume gains can be attributed to several factors including outstanding inventory quantity, quality and mix, especially as compared to our competition; better sales execution at the lot level resulting from improved training and support together with lower turnover levels at key sales positions together with very effective advertising and promotional efforts.

Although hard to quantify, we continue to believe that many customers -- sorry, we believe that many customers are getting to a point where they have delayed the vehicle purchase as long as they can and are now entering the market. Our results indicate that this includes some past Car-Mart customers who may have been delaying car purchases.

Our overall repeat percentages have held steady to increasing just a little even with the significant volume increases. We would like to note that our Texas dealerships showed nice volume gains for the quarter and we're very pleased with the progress being made in the state.

Interest income was up 15.8% for the quarter due to an increase in average finance receivables outstanding of $26.6 million, together with an increase in the weighted average interest rate during the quarter to approximately 14.6% from 14% for the second quarter of last year. The weighted average interest rate for all receivables at October 31, 2011 was approximately 14.7% compared to 14.1% at this time last year.

As a reminder, in mid-July we did begin charging a 15% interest rate on all new contracts for all lots in all states. As such we expect the overall annual interest rate on our portfolio, including late fee income, to settle in at slightly above 15%.

For the second quarter our gross profit margin percentage was 42.3% of sales, down from 42.8% for the second quarter of last year and down from 42.9% sequentially. The reduction from the prior year period relates primarily to higher costs of sales expenses including higher transport costs and higher service contract claims. The decrease sequentially relates in part to higher service contract claims and higher protection -- payment protection plan claims along with a higher sales price.

We continue to work on holding down our expense costs and overall unit purchase cost as well as maximizing our pricing efficiencies. We're making every effort to balance the affordability for our customers with the appropriate gross margin percentage in the face of increasing prices and we do expect to continue to see some challenges in this area.

For the second quarter SG&A as a percentage of sales decreased to 16.7% compared to 17.8% for the prior year quarter. The $2 million increase in overall SG&A dollars primarily related to higher payroll costs and other incremental costs related to new lot openings. We had an average of 109 dealerships operating during the current quarter compared to 99 for the second quarter of last year, as well as higher advertising costs.

For the quarter net charge-offs as a percentage of average finance receivables was 6.3%, flat with the prior year period. And once again, principal collections as a percentage of average finance receivables was 15.7%, down from 16.2% for the prior year period.

The slight decrease between periods can be attributed to the higher average portfolio interest rate, slightly longer average contract term, together with an increase in contract modifications as we work with customers, as well as the fact that the portfolio was a little younger when compared to this time last year.

We did collect $1.4 million more in interest during the current quarter and when you combine interest and principal collected the current quarter was 19.1% compared to 19.5% last year. We do anticipate increased collections toward the end of our third quarter and throughout our fourth quarter as we process special payments due during income tax refund time. This is a time when our customers can increase the equity they have in their vehicles and we are very focused on helping them with this effort which will ultimately lead to higher success rates.

Our 30 plus past due accounts were 3.9%, basically flat with this time last year and down from 4% sequentially. Our allowance for loan losses remains unchanged at 22% of financed receivables. The provision for credit losses was 22.6% of sales compared to 22.7% for the second quarter last year.

We're doing a good job of working with our customers to help them succeed and we do expect future credit performance to be in line with our historical experience. As we have previously stated, annualized credit losses in the 20% to 22% range are what we expect into the future. We will continue to push for improvements and lot level execution within the collections area.

At the end of the quarter our total debt was $76 million. We had $29 million in additional availability under our revolving credit facilities. Our current debt to equity ratio is 42.8% and our debt to finance receivables ratio is 24.7%.

Since February 1 of 2010 we have repurchased over $57 million in common stock, about 2.2 million shares, almost 19% of the Company. We've added 15 dealerships and grown our receivable base by approximately $49 million. Now I'll turn it back over to Hank.

All right, thanks, Jeff. In closing I would like to bring you up to date on our new store openings. Going into the year we said we intended to open 10 new stores. So six months into the year I am pleased to report that we're right on pace having opened five new stores so far this year -- Bartlesville, Oklahoma; Albertville, Alabama; Nicholasville, Kentucky; Columbus, Mississippi; and most recently Phoenix City, Alabama.

We have other projects underway and intend to open five more prior to year end. And it's also important to mention we've expanded several stores as well this year to accommodate our growth. And we recently actually relocated our stores in Muscle Shoals, Alabama to a much larger facility. And we do have a similar project underway in McAllister, Oklahoma which we hope to be moving into within the next few weeks.

We do talk a lot about our new store openings when we talk about expansion, but it is very important to note that these expansions of existing facilities and relocations are also a very critical part of our overall growth plan so that our stores can take their volumes up to that next level when the opportunity presents itself.

And Ted Taylor, our Director of Expansion, he works tirelessly to stay ahead of where we need to be so that we're not stifling any of our growth potential by not having adequate display or office space. And he absolutely does a fantastic job and we're very fortunate to have Ted on our team.

That does conclude our prepared remarks. So now we would like to move on to your questions. Operator?

(Operator Instructions). Kyle Joseph, JMP Securities.

Congratulations on a great quarter.

Thank you.

I was hoping to get a little more color on the composition of sales to get a better idea of your buyer behavior. Are still SUVs remaining popular or, given that economic uncertainty, are you seeing a bit of a shift toward cars?

No, not really. I would tell you that, as we said many times before, our customers do like the SUVs and trucks. And as Jon mentioned, we are buying more and more of them, so I think a lot of our sales there are reflected in what we have available.

We like our customers to be -- to watch their budget obviously and buy affordable economical vehicles. But at the same time we need to provide to them what they feel best suits their family and those are high demand vehicles. So they're now approaching close to half.

Okay, thanks. And for credit, are you seeing any particular regions with elevated charge-offs or --?

Well, actually the charge-offs were flat percentage wise with last year.

All right, Jeff, I'm sorry. I was just saying in terms of just -- is your credit kind of consistent across all regions or --?

Yes. We've been pretty consistent between regions and by age category. Of course of the newer losses are going to have -- the newer lots are going to have a little higher loss rates. They don't quite have the repeat customer base that the older lots have. But between regions and between age categories the trends have been very consistent on the credit loss side.

Okay, great. That makes sense. And then as we enter tax season, I know you guys mentioned that you guys have increased inventory, but have you seen -- how are car sales ramping up as we enter tax season?

Good, they're strong, they seem to be holding consistent with where we finished out this last quarter.

Okay, great. Thanks a lot for answering my questions.

David Burtzlaff, Stephens.

I'll echo -- great quarter. A few questions. Last call you mentioned your Texas stores and, Jeff, I think you alluded that those stores were showing better performance here. Was there an issue with the losses in those stores too or is that -- or was it really just on the sales side?

It was really just on the sales side. We have seen some recent improvements in credit loss results along with a sales increase down there. So, but the credit losses have been fairly consistent, it was mostly just a sales issue.

Okay. And is getting those stores back, does that -- how much would that have factored into the overall growth in the second quarter?

It wasn't that big of a percentage. It looks like for Texas between this second quarter and last year maybe we were up mid-single digits on a unit basis. So it wasn't a big contributor, but it was positive.

Okay. All right. And do you guys feel that the level of sales -- I mean obviously they were very good. Is that a sustainable -- I mean, do you think that's a sustainable rate or are we likely to fall back? Because you come off of first quarter where same-store sales are low-single-digits and now you're way up. Is there anything to think about going forward in terms of sales momentum?

Well, Dave, that is an excellent question because that's one we ask ourselves, that's one of the things we're talking about. We try to target our numbers and where we want to be as best we can. And I would tell you there were -- certainly we had some areas in some particular lots this past quarter that exceeded our expectations.

So to say that this growth level is sustainable, it definitely would be on the very high end of it. I feel confident that we're going to be able to -- we've reached a higher sales level and that we will be able to maintain a higher level. But this was an outstanding quarter. So probably a little on the upper end.

And we do know that historically we have at times seen a dip in the third and I think we'll be at a higher level. But to say that we'll continue as strong -- we hope so, that's what we'll work towards. But I would tell you that's somewhat on the higher end.

Okay. And you haven't seen any differences in terms of your credit scores or anything in terms of your deals made -- I guess when you look at your scoring model?

The down payment percentages have been consistent; the structure of the deals has been very consistent. And as we mentioned, we were very pleased to see the overall repeat customer percentage being flat to actually up a little bit with a pretty good run-up in unit sales. So that was very encouraging for us. So we feel good about the quality of the deals.

Okay. And then finally, the loss rate seemed to be a little higher than what I would have expected. Obviously it's below last year, but I thought last year you seemed to have a little bit of a hiccup in terms of whether it was focus or something on the collection side, to see that it's only down marginal.

Is there something there that -- is it a lot of new customer sales or from newer lots, or maybe sales later in the quarter or something that would kind of keep that similar -- that loss rates similar to last year? Obviously there's going to be some seasonality to that loss rate.

Well, as Jeff said earlier, keep in mind we have opened a lot of newer stores and just relative those tend to bring the average up a bit. I think we said we've opened 15 since year-ago February. So that pushes it up somewhat.

And I think too we have a lot of confidence that we have control of our business. And so we have over the past couple of years -- we have pushed pretty hard on the sales side. So I think that's evident certainly from the sales levels that you've seen recently. And so we feel like it's controllable, but I think it's realistic to expect that when we push on the sales side to the degree that we have, realistically our losses are probably going to run on the higher end of our range.

And for the six-month period, David, we're at 21.6% compared to 21.1% for last year. And when we look at credit losses we're looking really at a full year overall loss rate and we're very comfortable in that 20% to 22% range. We hope it's on the lower end of that. But as Hanks said, when you're opening the number of new lot that we are, we certainly are going to have a little higher credit losses which is just part of the business.

Okay. Alright, well thank you very much.

Mark Mandel, ThinkEquity.

Good morning and congratulations. Just a follow-up on that last question. I was wondering if you could just articulate to some degree what John Blevins, what are his key initiatives to keep a tight control or perhaps even improve the credit performance?

Well, in that [he assumed] the position [you can imagine] his focus right now is certainly on the training side of it. And I'll share with you, we've recently over the course of the past year, as we've talked a lot about, improved our sales training, which means produced some video training tools that are very accessible to our sales people and right now we're going to do some of the same -- develop some of the same type tools on -- for our collection staff.

And so I would just tell you that right now his focus is on the training and also know he's spending a lot of time really focusing on the reasons why we repossessed vehicles. And I would anticipate we'll see John over the course of the next year really become very involved in communicating a lot with regard to our underwriting and what he feels are acceptable quality deals. And so I think that we're going to -- we'll better match those and have real good communication there. So I think he's absolutely focused on the right things.

Okay. Jeff, how do you -- this is a separate question. What's the accounting treatment of expanded and relocated stores? Do they come out of the same-store base and then go back in after a year? How do you treat those?

Yes, if it's just a relocation across the street or down the street, then it's the same-store base for us. We don't start over with that, it's the same customer base, it's the same market, so it continues to be in the store base even if it is a relocation within the same city.

Okay and what about a store that you expand? Or a lot that you expand?

Same situation, it's the same-store base.

Okay, got it. And you had mentioned an increase or more intense marketing efforts as one of the reasons for driving the sales. I was just wondering if you can give us a little more color as to what exactly you're doing there?

We continued to increase advertising throughout the past year. We've done more custom made focused advertising for our new stores. A few years ago we would open a new store and get them going before we'd really add additional advertising, but now we're doing that kind of hand in hand.

We certainly have done a large number of on-lot stall promotions with the concession wagons, the banners and the radio stations and all that. There's been quite a bit of that. And we have also -- I think we're doing a better job with some of the -- the material that they see displayed when you come into our lobby to make sure that everyone that comes onto our lot is aware of any particular specials that we have going on at the time. So really on all fronts I think we continue to do a little better at our marketing.

Is your ad spending increasing faster than the rate of sales growth?

No, it's not. In the markets we serve the cost is just pretty low and we've been able to hold pretty steady or even a little under the revenue base and really cover the market.

Okay. And then my final question -- in terms of average selling prices, I don't know if you guys have any crystal ball on how that might play out in future quarters. Would you see an accelerating rate of increase or a steady rate of increase? What's your guesstimate as to how that might come through?

Well, I think certainly this time of year we expect an increase for the next few months just based on the income tax refund timing and then after that maybe as we approach next summer maybe we get a little flattening. But we're still prepared for some pricing increases for the next year or two until new car production and sales gets back up to levels we saw before.

Okay, great. Have a great holiday season. Thanks.

Bill Armstrong, C.L. King.

To go back to a topic that has been discussed already, is the collection rate 15.7% versus 16.2%? And Jeff, I think you were mentioning something about higher interest rate and longer loan terms having something to do with that. I was just wondering if you could walk through that a little bit.

Yes, our interest rate is up about 60 basis points from last year, so just on an amortization schedule at the same point in time for the quarter just based on that higher interest rate, more of our collections are going to interest and a little less to principal. So the effect there is part of that difference.

The fact that the overall portfolio is just a little bit newer again shifts your -- the points you're on the amortization schedule to a point where a little less principal is being collected. We did modify a few more accounts which it sounds like a little bit of a negative, but in our business it's actually a positive. That means we're working with those customers closer and keeping them in those cars and doing all we can to help them succeed.

And then the overall term length, of course, as the term stretches out just a little bit, it didn't go up much, but did a little bit, means that a little less principal is going to be collected in this current quarter if your term is a little longer.

But again, when you count the interest income increase and the principal decrease, we're down only a couple hundred thousand dollars between years on a percentage basis with an increasing portfolio. So we're not at all disappointed with collections. It's just the principal piece of that was down for those various reasons.

So that percentage -- the decrease then is a little bit misleading then in terms of it looks worse than it really is?

Yes, it's -- yes, for those reasons it's all explainable.

Yes, yes, okay. What kind of tax rate should we use going forward in modeling?

We're -- about 38% is where we're at.

38%?

Yes.

Okay, great. All my other questions have already been asked. So thanks and congratulations on a great quarter.

(Operator Instructions). Daniel Furtado, Jefferies & Company.

Good morning, gentlemen, this is actually [Martin Kimneck] in for Dan Furtado. Just a quick question back to the inventory side, although still elevated, auction prices look to continue to trend downwards. Gross margins were down slightly. I'm just kind of curious, are you guys sourcing less from that channel or has the benefit kind of eroded there from transport and service costs as you guys mentioned earlier? And then just how to think -- how do we think about inventory costs moving forward?

In our purchasing sources, auctions have always been one of our lower areas that we get vehicles from, actually in the teens, low teens. The auction costs have decreased. That tends to be some of the higher end units. The vehicles in the lower cost range has pretty much stayed flat, but auctions don't remain to be I mean a very high source location for us. So it's not that big of a play for us.

Okay, great. And then back to the -- I know you guys purchased -- you said I think it was 50% trucks and SUVs this quarter.

Right at that amount.

Is that due -- with gas -- gas prices seem to have moderated slightly since summertime. Are you guys seeing an incremental shift towards customers who are opting for the bigger cars now or is that -- are people still stretched to the point where that small delta pretty much goes unnoticed?

Martin, I think you're right on there. It's kind of like Novocain. It has kind of leveled out from an aspect of people feeling that $3 price range. And as Hank alluded to, SUVs remain very popular in America and we are able to source them and the customers want them and I think that's kind of it more so than anything. I think we will still continue to see that trend and additionally, the SUVs that are out there today, they're actually getting better and better gas mileage as well.

Right, okay. Great. Well, all my other questions have been answered and great quarter. Thanks again, guys.

I'm showing no further questions at this time. I would now like to turn the call back to management for further remarks.

All right, well, again, thank you all for joining us today and we are very excited about what we have done. I think we've identified a few areas that we need to go forward and make some improvements. And we're moving into our tax time now and so we expect some good things coming up from that very soon. and we wish you all happy holidays coming up and look forward to talking with you again soon.

Ladies and gentlemen, that does conclude today's conference, but you may all disconnect and have a wonderful day.