America's CAR-MART Inc (CRMT) 2012 Q3 法說會逐字稿

Good morning, everyone. Thank you for holding and welcome to America's CAR-MART's third quarter 2012 conference call. The topic of this call will be the earnings and operating results for the Company's 2012 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 include Forward-looking statements, which inherently involve risks and uncertainties that could cause actual results to differ material 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 can not guarantee the accuracy of any forecast or estimate, nor does it under take 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 10K for the fiscal year ended April 30, 2011 and its current and quarterly reports furnished to, or filed with, the Securities and Exchange Commission on forms 8K and 10Q.

Participating on the call this morning are Hank Henderson, the Company's Chief Executive Officer and President; Rob Hey, the Company's Vice President of Staffing and Development; and Jeff Williams, Chief Financial Officer. And now, I would like to turn the conference over to the Company's Chief Executive Officer, Hank Henderson.

Well, good morning, everyone. We appreciate you joining us today. And I believe you can see from our press release that our people have once again delivered in excellent fashion. First things first, I would like to thank our general managers and associates for their hard work and dedication. We're so very fortunate to have such great people, and there's no question that the heart of our success lies within their passion and commitment to take good care of our customers.

For our third quarter, revenues were up close to 14% over the same quarter last year and net charge off as a percentage of receivables were down almost 0.5% from last year. Jeff will give all the detail in just a moment, but the net result was an increase in net income of 28% for the same time period and actually a 40.4% increase on an EPS basis with stock re-purchases. We know that to continue to produce and grow we must constantly seek out our areas of opportunity for improvement, and we are. We also know there are times to duly recognize and celebrate some outstanding achievements and this is certainly one of those times. A lot of people have put in a lot of hard work, and the results are solid evidence of those efforts. With that thought in mind, we're often asked what the most important factor is in our ability to continue to grow, and I don't think that answer has ever changed.

It truly is all about the people. And it is imperative that we continue to effectively recruit, train, and retain the very best. I've asked our VP of Staffing and Development, Rob Hey, to join us today to update you on some of the initiatives within his department at this time. As they say, time flies when you're having fun. It's hard to believe it's already been almost 7 years since Rob joined us. Coming here after being with Wal-Mart for over 20 years in both IT and Operations. So, I'll turn it over to Rob.

All right, Hank, thanks for the introduction. My department's responsibilities here at Car-mart, they involve the recruitment, selection, and training process for all the positions of the company, but I've got a much higher personal involvement in our future managers, as I know that's what is going to move us forward as a company. In fact, Hank and I will be meeting with each of our future managers in the next two weeks, so we that may get to know them and address any training needs that they may have.

As Hank did mention, prior to joining Car-Mart, I did work with our neighbor down the street, Wal-Mart, where I was involved with their aggressive growth plan, and I do understand the importance of developing people to help move us forward. We have very -- several initiatives underway. First of all, we have recently moved an associate, Josh Meltzer, into our recruiting position, and his primary focus is finding those future managers. Josh has been through our management training process. He served as an assistant manager, and he has also been a general manager. Josh understands the kind of person we need to be a great manager, and what kind of a candidate would be a good match for our mission, vision, and values. And, we have over 54 of our locations identified as a training site for our future managers. It's important to remember that not only is the management training process important to our future leadership, but our assistant manager program is an excellent springboard for future managers.

We've also recently produced a series of video training that was designed to focus on our sales process at all of our locations. These are not designed to replace the one-on-one training needed to develop an associate, but they're an excellent reference tool for any associate. They also help us maintain consistency in our training. And, in the next few months, we will producing several other videos to address key areas of our company. It's also important to remember that training of our future managers doesn't stop once they're promoted. We have three trainers that are dedicated to our new general managers after they are promoted. Once a manager is assigned their new location, these associates work with them one-on-one, helping to develop their skills. Also in this area, we have one associate, Rod Sherry, who is a very successful general manager and a AOM for over 25 years, and he's come out of retirement to help develop these new managers. Each one of our new managers is assigned time with Rod after they have been in place for a month or two.

The pool of people that we're looking for is huge. We're not focused on hiring people that have been in the car business before, but we are rather focused with people with excellent people skills, who come from many walks of life. Currently, we have very successful managers who have been teachers, in retail, fast food, and police officers, just to name a few. There's not a lack of talent to choose from. We just have to find the right people for the job. Now I'll turn it over to Jeff.

Okay. Thank you, Rob. Once again, we're pleased with our financial performance for the quarter with the 13.8% top-line growth and a 7.9% increase in same-store revenues. Quarter-to-quarter we continue to show steady improvement growth at the top and bottom lines. Our growth strategy and our execution levels are continuing on our steady path. Our down payment percentage was 4.3% for the quarter, down from 4.8% for the third quarter of fiscal 2011. For the 9 month period, our down payment percentage was 6.2%, which was basically flat with the prior year. Collections, as a percentage of average finance receivables, was 14.8% compared to 16.4% last year.

For the quarter, the initial contract term was 26.6 months, compared to 24.9 months for the prior year quarter. The weighted average contract term for the entire portfolio, which includes modifications, was 27.7 months, compared to 27 months at this time last year. The increases in term, are partially -- primarily related to the increased selling price, as well as our efforts to maintain affordability for our customers. The average retail sales price increased to $9,922 or 4.9% from $9,463 for the prior year quarter. Sequentially, we saw a $365 or a 3.8% increase in the average retail sales price. Sales price increases have resulted from continuing overall supply issues, and we do expect this condition to continue with gross margin percentages in the 42% range over the near term. We're not having problems finding good cars, but we are having to pay more, which is contributing to our gross profit percentage challenges.

The overall retail units sold per month, per lot, for the quarter was basically flat at 26.9%. Once again, it is important to note that we believe that we have significant room for future volume increases from our existing store base. We had very nice results for the quarter, and when you layer on top of that, the potential volume increases, the business model becomes even more attractive. We continue to offer our customers an outstanding inventory selection, as compared to our competition, and when combined with the sales execution at the lot level, the effective advertising and promotional efforts, we believe that we can drive higher sales volumes. Even with the increase of an average of nine lots for the quarter, our overall repeat customer percentage for the quarter was up slightly from the prior year period, a potential indicator that some previous customers who had put off purchases are coming back in to the market.

Interest income was up 16.5% for the quarter due to an increase in average finance receivables outstanding of $37.4 million and an increase in the weighted average interest rate during the quarter to approximately 14.7% from 14.3% for the third quarter of last year. The weighted average interest rate for all finance receivables in January 31, 2012, was approximately 14.7%, compared to 14.3% at this time last year. As a reminder, in mid-July, we did begin charging a 15% interest rate on all new contracts and all states. As such, eventually we expect the overall annual interest rate on our portfolio, including late fee income, to settle in at right around 15%. For the third quarter our gross margin profit percentage was 42.4% of sales up from 41.8% last year and basically flat sequentially.

The improvement from the prior year quarter, relates primarily to slightly lower overall cost of sales expenses and improved pricing efficiencies, offset somewhat by lower margins on the PPP and service contract products. We will continue to focus efforts on expenses and overall unit purchase costs, as well as ensuring that we maximize pricing efficiencies. Our goal is to balance affordability for our customers with appropriate gross margin percentages to enhance customer success. As a company, nothing is more important to us, than keeping our vehicles affordable for our customers. For the quarter, SG&A, as a percentage of sales, decreased to 18.3%, compared to 19.2% last year. The $1.3 million increase in overall SG&A dollars related primarily to higher payroll costs and other incremental costs associated with opening new lots, an average of 111 dealerships operating during the current quarter, compared to 102 for the third quarter of last year, as well as higher advertising and marketing costs.

Net charge offs as a percentage of average finance receivables, was 5.7%, and that's down from 6.1% for the prior year quarter. For the 9 month period, net charge offs were 17.7%, which is flat with the prior year period. Again, principle collections as a percentage of average finance receivables for the quarter was 14.8% which is down from 16.4% for the prior year quarter. For the nine-month period, collections were 46.3% compared to 48.8%. The decreases between periods can partially be attributed to the higher average portfolio interest rate, slightly longer average contract term, together with increased contract modifications, as we work with customers, as well as the fact that the portfolio is a little younger when compared to this time last year.

In addition, our associates are working very hard with our customers in their individual situations including special payments related to income tax refunds. There have been several significant IRS funding delays this year, and we are working with our customers through these delays. The delays this year have had more of a negative effect thus far than the weather-related issues we saw last year. The fact that our current -- that our quarter ends on January 31, has a pronounced effect on collections between the third and fourth quarters, and this effect has been more pronounced in the last couple of years. With that said, our collections for the third quarter were a little less than expected and less than prior year on a percentage basis. Our collections thus far in February, have been strong, and we're pushing hard to get customers' equity positions in great shape during the fourth quarter.

While we are still very early in the fourth quarter, our current expectations are that collections for the fourth quarter this year will exceed prior year collections, and that we will make up most or at least a very large percentage of the third quarter shortfall with collections in the fourth quarter. We have our work cut out for us, but our associates understand how important this is to our customer's success, and we are very focused on helping them succeed. Our 30-plus past due accounts were up 4.7%, up slightly from 4.6% last year. Our allowance for loan losses remains unchanged at 22%. The provision for credit losses for the quarter was 22.2% of sales, up from 21.9% for the prior year quarter. The timing of the collections for the third quarter had a negative effect on provision as a percentage of sales. Had collections been a little higher, our provision could have come in a little lower than the prior year as evidenced by our lower charge off numbers.

Annualized credit losses in the 20% to 22% range, continue to be what we expect into the future. We will continue to push for improvements in lot level execution within the collections area. We should note that if collections in the fourth quarter come in where expected, again, we're very early in the quarter, we could be in a position of needing to reduce our allowance for loan losses, and we have had several successive years of good, solid credit results. At January 31, with our total debt at $83.9 million, we had $21 million in additional availability under our revolving credit facilities. Our current debt-to-equity ratio is 45.7%, and our debt to financial receivables ratio is 26%.

Since February 1, 2010, we have repurchased $61 million in common stock, 2.3 million shares or almost 19% of our company. We have added 16 dealerships and grown our receivable base by approximately $61 million. And as a reminder, our senior credit facility allowed for a $20 million carve out for additional share repurchase's in fiscal 2012, and we took advantage of that during the first two quarters of this year. Currently share repurchase's are generally allowed for up to 75% of net income, with some other restrictions. We will continue to repurchase shares in the future when conditions are favorable. Now I'll turn it back over to Hank.

All right. Thanks, Jeff. Sales have started off strong for our fourth quarter, and as is typical for tax season sales, we didn't see a dip in January, as those customers taking advantage of our zero down promotion, began to shift to those waiting until they actually had their refund money in hand, and that is evidenced by both the pick-up in sales and the rise in down payments that we're beginning to see. With regard to this tax time season, Jeff has already mentioned this, but I would like to reiterate that we are presently in a very critical time. We have more special payments set up than ever before, as we have put forth more efforts through out the year integrating seasonal payments into our financing terms to help our customers structure a deal that sets them up for the greatest likelihood of success. Would have hoped by today we'd have an even better idea of the success rate of these scheduled payments, but due to a lag in processing with the IRS, we are not quite there yet. What indications we do have thus far are positive, and we are confident we will have an increase above last year. We learn a bit more each year on how to most effectively structure and service these payments, and I'm sure that this year will be no different. So I'm sure we'll need to tweak it a bit, but we do remain committed that continuing to structure payments in this manner is very beneficial as it does help to keep the overall term at a length to help assure the success of our customers. And everyone here understands that assuring the success of our customers is how we assure our own.

We are continuing to open new stores. Our most recent opening, our sixth for this fiscal year, was just this past week, in Moberly, Missouri. And we have additional projects underway. We're targeting to have three more locations opened prior to April 30, year-end, barring no excessive issues with weather, construction, and such, two of those being in Mississippi and one in Tennessee. And also I just want to thank Rob for joining us today. He and his team are doing a great job and getting better every day. I'd also like to highlight something that Rob pointed out. While it is very true that we're very selective to assure we're hiring just the right people to become our future CAR-MART managers, it's also very true we have a large pool to draw from, as we're not limited to just a particular sector. We have great managers who have extremely varied careers, and we have great opportunity for good folks with good people skills, high integrity, and willingness to work hard. So when you consider the wide scope we can draw from, there is no question that there are lot of them out there.

So that does conclude our prepared remarks. We would like to move on now to questions. Operator?

At this time, 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)

We'll take our first question from John Hecht from JMP Securities. Please go ahead, John.

Good morning, guys. Thanks for taking my questions. The first one, on this delay in tax refunds and the effects on the business, first of all, do you guys have a sense for how many weeks this refund is delayed versus, say, a year ago?

It's been very spotty this year. The IRS is having some system issues, so we were getting different answers every day, but it looks like maybe a couple of weeks, on average, behind last year. And then when you look back prior to last year, refunds came a lot earlier, and a lot of that had to do with the refund anticipation loans that have basically gone away. So we've really had a swing into the fourth quarter in the last couple of years, and this year is more related to some IRS system issues.

Okay, can you give us -- you talked about special payments or effectively extensions. Can you compare, say, where a year ago, what percentage your customer base was, in effect, one of those situations versus this quarter?

We, without giving specific dollar amounts, the dollars out there for special payments are significantly higher this year than last. Our promotion, the income tax promotion that starts the first of the third quarter, was more successful this year than last. Just that piece is more. Then we also had payments that had been set up throughout the year, so the dollars were significantly higher. I'm not really prepared to talk about the magnitude of that. It's just that they're quite a bit higher this year than last.

Okay. And final question related to that. You mentioned that you're seeing the early signals that things are starting to normalize or catch up. And if you had -- I mean, I don't know if you can do this mathematically, Jeff, but if collections went up by something like 4% or 5% in a quarter, can you give us the frame, how that might impact the provision on a downward basis?

Well, the simple way to look at it is, the reserve as a percentage of AR is 22%. So, every dollar collected, all things being equal, is that much less money on the table, and it's that much less that needs the 22% applied to it, in general terms.

Okay. I understand. That's a good framework to think about. And then, just finally on the margins, and I'll get back in the queue, it sounds like, you had referred to some margin pressures. You have been doing a nice job of holding margins up in the mid-42% range, despite having rising costs. And you are now saying that it seems like you're implying that might go, your margins might go down. Does that imply that you feel like you topped out your retail price movements, and you'd rather take a little bit of margin constraint now to help your customers out and not threaten credit quality? How should I think about that?

That has a lot to do with it. There's a -- in this business, maintaining affordability and ensuring that the customers have equity in the transactions from beginning to end is extremely important to us. And as a result, we have not passed on all those costs to consumers as the price has gone up, but there's also a fair margin we have to get in this business, so we're always trying to balance that equation. At this point, we've had to sacrifice a little bit on the margin percentages on a per-transaction basis. The dollars generated are still greater. The gross profit dollars per transaction are higher, but just as a percentage, in an effort to keep the payments affordable to this point, we've had to sacrifice a little bit there and --.

I would point out, too, while we've always had the rise in the prices, always, always been with us, never seen it actually go down. We do know that this has been the time of the year where we see the increase accelerate each year, so hopefully we will see it flatten back out as we get on into this next year.

Great, guys. Thanks so much for the color.

Okay, thank you. We'll go with our next question from Bill Armstrong from CL King & Associates. Please go ahead, Bill.

Good morning, Hank and Jeff.

Good morning.

So, the allowance for credit losses, you may reduce it from the 22% that you've had in place for a number of years. I just wanted to examine that a little bit. So collection rates are down; I know you're hoping for that to rebound in the fourth quarter. Charge offs, generally, on an annualized basis have been above 22%. So, I guess I was a little surprised to see that you might reduce your allowance below 22%. I was wondering if you could walk us through how that would work. And how much are we talking about? Would it be 21%, 20%, something like that?

Bill, we've had several successive years in a row now where credit losses have been very good and very steady and very predictable. And we've always looked at a five-year credit loss severity metric, and the issues that we had back in 2006, 2007 have now completely worked themselves out. We're more comfortable with the business model, the credit losses, our execution within the credit area. And it's just -- as we look forward, especially with good results in the fourth quarter here on the collections side, it looks like it's time to revisit that reserve amount. I'm not giving any specifics on how much we might reduce the reserve amount, because we don't know yet, but it does look like it's potentially time to do that, just based on the success and the consistency we've had quarter after quarter for several years now.

Okay. And then just a clarification on gross margins. My call got a little jumbled, but did you say that you expect to maintain around a 42% gross margin going forward? Or might you fall below that?

Well, right now, at least in the near term, we're looking at 42%. We'd love to see the supply of cars increase, and some pricing pressure go down, but looking at affordability and where we're at, all we can comment on is, in the near term, that 42% looks like what we're shooting for.

A lot of people in the industry are looking towards the fourth quarter of this year, calendar '12, and then especially into next year as more off-lease cars come back into the wholesale market, and we should start seeing supplies be more plentiful, and then prices hopefully coming down. Are you hearing that from your suppliers? And is that what you foresee as you look out for the next year or so?

Well, certainly in the near term, they generally flatten out for the range that we're in. We're not in that market for the direct off-lease cars, we're kind of a little step down from that, but certainly just more cars in the used market helps overall. But since this is such a big sales time of the year, we know that the demand's going to come down a little bit, and that will help flatten the process.

We're always looking at -- and we've got some things in place where we're continuing to broaden our scope, where we go, and look for cars. And as we said before, we just know that availing ourselves to more and more to look at and negotiate the deals and so forth, help us to control our own, and to keep those as flat as possible. So, that's our focus and intent for this next year.

Okay, great. Thanks very much.

Okay, thank you. We'll take our next question from [Gene Nastatz] from US Capital.

Congratulations, gentlemen, on your quarter. My first question is -- how many shares are now outstanding?

About 9.5 million.

9.5 million. And you continue -- and how much is available on the repurchase, currently?

A little over 900,000 shares.

900,000 more?

Yes.

Okay. And has the Board considered a dividend?

Well, we consider the stock repurchases a pretty good dividend, but as far as a cash dividend, no.

Cash dividend?

No.

No?

No.

I got you. Is that into consideration in the future?

We're really looking out 5 and 10 years, and we feel like the share repurchase program and how we've executed that is going to benefit current shareholders over the long-term.

I got you. Thank you very much.

Thank you.

(Operator Instructions) I'm showing just one -- well, a couple more questions now coming in. Our next one coming from [Mike Stern] who is a private investor.

Thank you. My question is similarly along the same lines as the dividend question, but it relates to the trade-off between using cash to buy shares versus using that cash to accelerate new store openings. My thought was that would lead to a faster growth rate, which potentially could lead to a higher PE multiple. And then in the long run, shareholders might be better taking that approach. And I just wanted to get your thoughts on that.

I think that for quite some time, we've certainly had availability of capital where we could have accelerated our growth. Ours is a business, we feel very strongly, it has to be such controlled growth, and we feel like for the development of the people, the type of business that we're in, that we feel like our growth plans are reasonably aggressive, and so we don't want to get ahead of ourselves. We want to grow, but it's important that we have very healthy growth and do it in the right way. Might there be an opportunity in the next few years to pick up that growth even a little bit more? Absolutely. That's some of the things we talked about as we continue to develop these training tools and such. We may be able to pick up some growth a little bit more, but we feel like, for where we are right now, that this is reasonably aggressive for us.

Our balance -- the Company, basically, without the share repurchases, would have very little debt at all, and so we've been very aggressive the last few years with the share repurchases, and the balance sheet is still extremely healthy, and the internally generated cash flows support the growth. And we've been able to have our cake and eat it, too, with the very strong top-line growth and the share repurchases. So we feel like what we've done in the recent past is going to benefit shareholders very well in the long-term.

Okay, thank you.

Thank you.

Okay, thank you. I'm showing our last question at the moment coming from Dan Furtado from Jefferies.

Good morning, guys. Nice quarter, and thanks for taking the time.

All right, thank you, Dan.

I just had two relatively simple questions. The first is, just from a competition standpoint. Are you noticing, is there any noticeable changes taking place on the competitive front?

Not any big moves, really. We're in small towns, and the vast majority of our competition has always been the local mom and pops, and I'm sure the numbers were reduced slightly, but for the most part they continue to hang in there. I think they probably reduced their overall volumes, certainly with the rise in cost of cars over the past few years has put a crunch on them. It takes a lot more money. But, no, overall, we haven't seen any significant changes.

Great. And then the second is -- can you help me understand just what your exposure would be to some of the troops coming back home, are starting to come back home. Is that something that could materially impact the business, or is this just something that's more on the periphery?

I don't think there's -- it would materially impact. We do have a few of our locations that are around large bases, but there's already so many folks there. We do have a lot of great customers that are in the military, but don't think that would move the needle any.

Great. Well, thanks for the time, and congratulations on another solid quarter.

All right, thank you, Dan.

Thank you. (Operator Instructions) And at the moment, I'm showing no further questions, so I would like to turn the conference back to your host for any concluding remarks.

Well, again, thanks, everyone, for joining us today, and we will get back to work and continue to do our very best to continue to bring you some good reports, show good results. Thank you.

And ladies and gentlemen, this does conclude your conference. You may now disconnect, and have a great day.