America's CAR-MART Inc (CRMT) 2013 Q2 法說會逐字稿

Good morning, everyone, and thank you for holding. And welcome to America's Car-Mart's second-quarter 2013 conference call. The topic of this call will be the earnings and operating results for the Company's fiscal second-quarter 2013. 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 the morning's press release, which can be found on America's Car-Mart's website at www.Car-Mart.com.

As all of you 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 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 1 of part 1 of the Company's annual report on Form 10-K for the fiscal year ended April 30, 2012, and its current and quarterly reports furnished to or filed with the Securities and Exchange Commission on Forms 8-K and 10-Q.

Participating on this 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. We appreciate you joining us today. As you saw in our press release, we are disappointed with our overall sales numbers for the quarter. While we are comping to a very strong quarter -- last year's second-quarter we were close to 18% on units and up about 20% on top-line -- we were expecting a little better results out of this quarter we just finished. We actually sold about 100 less units this year versus last. Less units sold, along with a slight decrease in average sales price, resulted in our top-line being down about 1%. We don't typically get into discussing the specific months. But I do think it is significant when we would look at this quarter, as most of our shortfall was in the month of September. We actually started off the quarter with solid sales in August and finished very close to our expectations in October. September, however, was another story as we were actually down a few hundred sales in that month.

And as we mentioned in the press release, we are seeing some increased competition, as funding to the subprime finance sectors increased. Our same-store sales for the quarter were down as we saw our larger, more mature stores sell on average about three less units per month for the quarter, compared with last year. And it's difficult to quantify to what degree our sales were impacted for the quarter, as the subprime financing market has become more aggressive. But it is our general sense that this was a factor. We have taken a hard look at any and all areas where we can be more competitive to assure our continued growth in every market. And we are making some adjustments accordingly. We're very confident in our ability to out-service the competition. We feel like we are well-aware of the need and value of the face-to-face relationship for effective collections and repeat business. We won't be responding to the competition in ways that, in our opinion, for us, would seem to be irrational or short-term focused. We have a long, successful history because we have always had our sights set of the long-term. That has served us very well, and we will continue to serve our customers with that same long-term outlook.

We have identified some areas where we can enhance our offering, while being mindful of the customers' best interests, and the continued growth of our Company. For example, we do have some room to be a little more flexible with the payment amounts, and we will do so where that makes good sense. And also we are going to increase some repurchase incentives for existing customers as they pay off, to assure we maintain a very high level of customer retention. We have long said that repeat business is very important to us, and we are more than willing to fight to keep our good customers. So with that, I'm going to go ahead and turn it over to Jeff to go into some more detail about our recent results.

Okay, thank you, Hank. As Hank mentioned, revenues for the quarter were right at $110 million, which is basically flat with the second quarter of last year, which was an outstanding quarter and a tough comp for this year. Same-stores' revenues decreased by 4.8%. The overall challenging macroeconomic environment, combined with our belief that increased funding to the used car industry has made its way down into a portion of our market, and has had a short-term negative effect on our top-line. Our average retail sales price decreased to $42 or 0.4% from the prior-year quarter, and $69 or 0.7% sequentially. We have now seen three sequential quarter-price decreases in a row. Partly by design, as we continue to focus on affordability, but recently also related to lower volumes at most of our older, more mature dealerships that tend to sell a higher-priced car. Decreasing prices do have many long-term positive implications for our business. Most importantly, affordability and resulting customer success.

Our down payment percentage was 6.4% for the quarter, down from 6.8% from the prior-year quarter. The weighted average down payment amount for all contracts at the end of the quarter was $650, which is close to our all-time high of $660 at the end of our first quarter. Collections, as a percentage of average finance receivables, was 14.5% for the quarter, compared to 15.7% last year. For the quarter our average initial contract term was 27 months, compared to 26.3 months for the prior-year quarter. Our weighted-average contract term for the entire portfolio, including modifications, was 28.3 months, compared to 27.5 months at this time last year. The increases in term are primarily related to our efforts to keep our payments affordable for our customers, and to continue to work with them when they experience financial difficulties in these challenging times. In addition, recent market conditions have required us to look a little harder at the overall term length. We've been very aggressive on keeping our relative term lengths shorter over the last several years, and we will continue to focus on this. Lower selling prices certainly help in this regard, but we do realize that in order to remain competitive, our term lengths may have to increase some. The quality of the vehicles we are selling is high, and we feel that prudent term increases will prove to be beneficial to our customers over the long-term.

The overall average retail units sold per month per lot for the quarter was 28.2, compared to 30.3 for the prior-year period. At quarter-end, 28 or 24% of our dealerships were from 0 to 5 years old, 28 or 24% were between 5 and 10 years old, and the remaining 61 lots were 10 years old or older. Our 10-year-plus lots produced 32 units sold per month per lot for the quarter, compared to 35 for the prior-year quarter. Had the productivity at our older dealerships been equal to the prior-period levels, our overall average monthly volume would have been right at 30 for the quarter. We have significant room for future volume increases from our existing store base.

As Hank mentioned, we are aggressively targeting customer retention, and we are convinced that our local offering will be more appealing to the market. With 55,000-plus active accounts and many more satisfied past customers, we have significant opportunities to demonstrate that Car-Mart is the best choice. We should also note that the new dealerships -- those between 0 and 5 years of age -- averaged 24 units sold per month for the quarter, compared to 23 for the prior-year period. We are proud of the productivity gains and our successful starts at the new locations. Our business model becomes even more attractive when factoring in volume potential from new dealerships that we will open in the future.

Interest income was up 12.6% for the quarter, due to an increase in average finance receivables of $33 million, an increase in the weighted average interest rate during the quarter to approximately 14.8% from 14.6% for the second quarter of last year. Weighted-average interest rate for all finance receivables at the end of the quarter was right at 14.9%, compared to 14.7% at this time last year. For the second quarter, gross profit margin percentage was 42.8% of sales. And that is up from 42.3% for the second quarter of last year. The improved gross margin percentage resulted from pricing efficiencies due in part to the lower-average retail sales price, slightly better margins on the service contract product, and slightly lower cost of sales expenses, as we really focus on controlling our car-related expenditures. We will continue to see good results from our efforts to reduce vehicle-related expenses. Our goal is to balance affordability for our customers with appropriate gross margin percentages to enhance customer success. Overall inventory for our vehicles remains tight, and we do expect this condition to continue, with gross margin percentages in the 42% to 43% range over the near-term. The sequential sales price decreases during the most recent three quarters is having a positive effect on our overall gross margin percentage.

For the quarter, SG&A as a percentage of sales increased to 17.7%, compared to 16.7% for the prior-year quarter -- $630,000 increase in overall SG&A dollars, related primarily to higher payroll costs and other incremental costs related to new lot openings. We had an average of 116 dealerships operating during this quarter, compared to 109 operating during the second quarter of last year. Sequentially, we saw a decrease in SG&A dollars, primarily related to lower non-cash stock-based compensation, and lower insurance costs resulting from a favorable workers comp audit. We fully expect SG&A leveraging in the future as we grow our revenues. The exact timing of this is a little more challenging in the current environment. We are committed to leveraging the infrastructure investments that we have made over the last several years as we grow.

For the quarter, net charge-offs as a percentage of average finance receivables was 6.5%, which was flat with the prior-year quarter. Principal collections as a percentage of average finance receivables was 14.5%, down from 15.7% for the second quarter of last year. The decrease in principal-collected percentage between periods can be primarily attributed to the increase in the average term, about 3.5 weeks, the fact that we did modify a higher number of accounts, and we had more delinquent accounts in the 30-plus category and those categories less than 30 days. We are working hard with our customers in these challenging times.

Also, in our continuing efforts to keep payments affordable, in addition to the increases in term, we have a number of special payments scheduled for tax time 2013, which we expect will increase principal collections during our third and fourth quarters. We believe that the quality of the portfolio at the end of the quarter is good. But the credit losses for the full year may be just a little higher than we've seen historically. We expect that our success with collections during the upcoming tax season will be the primary factor in our overall credit loss results for the full fiscal year. We will continue to push for better collection results. And we have made some good progress on process improvements within the collections area, with emphasis on tax time. We will always strive to do everything we can to help our customers succeed, and we will always work to get better in this critical area.

At October 31, with our total debt at $91.3 million, we had $53.7 million in additional availability under our credit facilities. Our balance sheet is very healthy. Our current debt-to-equity ratio is 48.8%, and our debt-to-finance receivables ratio is 26.9%. During the second quarter, we repurchased over 119,000 shares of common stock for $5.25 million. Since February of 2010, we have repurchased over $85 million in common stock -- or over 25% of the Company, added 22 dealerships, and grown our receivable base by approximately $78 million. We do intend to continue to repurchase shares into the future as part of our overall plan when conditions are favorable. The current market conditions may require us to allocate less capital to share repurchases when compared to recent periods, and more to growing our customer base, which is always our first priority. Now I will turn it back over to Hank.

Alright, thanks, Jeff. I would like to give you a quick update on the status of our new store openings. In October we opened our 117th store, and it was in Oxford, Mississippi. I had the opportunity to be there this past Friday and I could not have been more pleased with our facility, our inventory, and especially our staff there. They have gotten off to an excellent start on sales with regard to both quantity and quality, and it is absolutely a perfect example of what a new Car-Mart location should look like in every way. And there's no question that folks in our expansion department continue to get better and better at what they do. So hats off to that group. That's really a great job. Oxford is our fourth location in Mississippi. And I would like to add that all indications are this is going to be an excellent state for us. You know, we opened our first store there just this past spring, and as a group this past month, they all exceeded sales expectations. So. This most recent opening was our third new store for the fiscal year. We presently have six new store locations secured, four which we expect to have operating prior to the end of our current quarter. Which will put us at seven new stores through nine months, and that keeps us on our targeted growth pace.

Obviously to support this growth we have to be ahead of the game, preparing future managers. And I'm very pleased to report that our future-managers-in-training program continues to also get better and better. During this past quarter, we rolled out an updated training plan with new benchmarks and structured in such a way to help better assure that each of our future managers is getting the type of training they need to be well-prepared for when they get their own store.

In general, I would tell you that attitudes and outlook for the future are very, very positive for our Company. Initiatives continue to roll out to help us get better at what we do, while we hold tight to the values and culture of our Company that have brought us to where we are. We're all very excited about our future. There is, of course, much work to do to get there, always has been. But we do have a history of delivering, and we feel very strongly that we are well-positioned to continue to do so. So that wraps up our prepared remarks. We would like to move on to your questions. Operator?

Thank you. 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 participants' prepared remarks and to anything that may come up during the Q&A.

(Operator Instructions)

John Hecht from Stephens.

Good morning, guys, thanks for taking my question. Just trying to dig into sales a little bit, because it sounds like the younger branches are doing as well as you would expect. And it sounds like two to three months were okay. I'm wondering, was there something that -- maybe weather-related issues or something in September that would have stalled out sales of some of the older branches? And thus far into this quarter, have you seen things return to normal at all in these types of markets?

Yes, I would tell you that we are off to a good solid start right now. We don't feel like we're on that same situation. Honestly, we have scratched our heads about September a little bit ourselves. And of course, the anecdotal that we hear throughout that -- and not just with regard to vehicle sales, but in general, for our customer, things were just -- they had backed off in September. And I wish I could give you a little more specifics as to the reasons why. But we do know that their sales were just really soft for September.

And do you have the same-store figure for the, you know, breaches under 10 years old? I think you gave something during the call.

Yes, John. We went from about 23 to 24 for those units that are less than five years old.

So simply just a metaphor percent kind of pick-up in sales on average?

Yes.

Okay. And then just turning a little bit to credit. Two questions. One is, the portfolio duration has been pushing out for a few quarters, and understanding some of that is related to dealing with competition, some of it is related to just dealing with customers. Is there a level that you would start saying that at this point in time we are uncomfortable with moving past this duration? Or are you just experimenting with this on a case-by-case basis now in order to make sure you are not leaving any stones unturned?

Yes, I wouldn't necessarily call it an experiment. Because a few years ago we actually had gotten relatively quite a ways out there. You know, it was all well-intended to keep the payment down. And we have gone a little bit further on our term, and I think relatively we are still below that mark. So, we feel like we have got some room to go. We know that there is a point out there where it is not good for us or our customer. So these past few years, we have been pretty conservative in this area. And so feel like we have probably got a few months that we can stretch out a little bit more to help with the payment amounts without really adversely affecting us. And obviously it is to be more competitive, to make sure that we maintain our sales levels. So, I think it is more that we are just loosening up a little bit where we have been more conservative.

And I would add to that, that the quality of the car we're putting out there is very high. And when you're talking about adding a few months to a good car, we don't feel like that is going to significantly move the needle on the credit loss side. And we are still well-below the competition, or we will end up below the competition as far as overall term. It's just we've been so very aggressive the last several years in that area.

Okay. And then, we are heading into tax refund season. I guess two questions on that is -- one is, you mention that, the success of credit in this fiscal year is going to largely rely on how much the pickup payments, whether it is down payments of something paid to you occurred during that period. So the first question would be, you know, do you have a -- can you quantify what portion of the customer base you would expect that type of pick-up payment from? And the second is, how is inventory -- how do you think you are positioned into this important selling season coming up?

Well, we anticipate that around half of our customer base will have a special payment timed around tax time. So it is, a large percentage of our customers are going to have a payment tied to their refund with us, when their refund does come in. And then as far as inventory, I think we are in great shape in that respect.

Without question. We have the inventory at the lots. And then in addition to that, we do have some stockpile facilities. And we've got those loaded up. So yes, we are in great shape in that regard.

Alright, thanks very much, guys.

(Operator Instructions)

Bill Armstrong from CL King & Associates.

Hi, Hank and Jeff. So, the availability for subprime auto loans has been increasing for a while in the market with really no apparent impact on you guys until now. So I guess I'm just trying to figure out what has changed in -- recently to, cause the slowdown in sales?

Well, we are, too. Because, again, I will go back to -- September was particularly slow. And I think if it was more throughout, we would have felt like that more of some of the challenges were related to that. So, certainly all of our challenges were not related to the increased competition. Otherwise, I don't think it would have been isolated so much to that one month. I do think one of the reasons that it affected our largest stores a little bit more is -- on the higher end, our largest stores are where we do sell -- have traditionally sold a number of what we call our high-dollar cars, with those at the higher end. And it is at the very upper end where some customers have some more alternatives right now, some new car dealers and others set up. And have some more of this financing available.

Again, it is not like it dramatically cuts our sales. But when you look at it as a group, their average in selling is about three more. There is some things that we need to do to step up in that area. And it also -- because relatively, we sold a few less of those at the very upper end, that is in part what affected our average purchase price. So, I think we have identified the areas where we were missing out, and some of the things we can do to get those. It's really hard -- it is difficult to say how much of the impact is related to the competition.

Right, got it. And in terms of the -- you know, how long you might stretch the new contract terms, you are about 27 months now. Are you looking at, you know, maybe 30 months, 36 months? How far out our we? You know, kind of ballpark.

Well, I'm going to be a little more specific about that. We've talked about our repeat business. And we have long said, you know, for us -- and we do know for a fact that for us, our repeat customers, those are the better customers. So the way we look at it, where we are going to be more aggressive, those are the areas where we are going to be more aggressive.

And I think incenting our proven customers who have paid off with us, they have proven that they're going to be responsible. I think those are some of the areas where we are going to be more aggressive with the term. Because really, there is enough difference to be made up there for us to stay at the levels that we have got targeted for the remainder of the year. So, we feel like when we say we want to be aggressive where it makes good sense, that would be an example.

And Bill, most of our customers do receive an income tax refund that is a sizable. So, we continue to try to time a special payment to us to coincide with their refund, which certainly helps to reduce that overall term length.

Okay. And the connection between lengthening your customer contracts and reducing the capital available for stock repurchases. Is that just because a stretched out contract, you are generating less cash flow up front?

Yes, we want to make sure the our first priority remains growing the business, as we have always said. And the term goes out and your cash money out on the street increases. So --

More new stores.

More new stores. So yes, we are just looking at reallocating some dollars. And we have been very aggressive on the share repurchase program, and that will continue to be part of our long-term plans. But we do realize that the cash on the street, in terms of lengthening that term, is going to increase.

And are you considering reducing the capital allocated to new store openings going forward? Are you committed to the 10% increase per year?

We are fully committed to that new store opening level.

Okay, great, thanks.

Brian Roman from Robeco.

Good morning, thanks for taking my question. Wishing everybody a good Thanksgiving after all of this is done. A couple of questions. Or a bunch of questions, actually. Picking up on Bill's last question, new store openings. You're saying you're not going to cut back on them. Is that correct? And is it fill-in, new markets? Just explain.

It is a little bit of fill-in, but most will be, in general, new markets. As we mentioned, we have opened a few stores this past year in Mississippi. That is a new state for us. Mentioned earlier that we have six new locations secured. Four of which will be opened -- should be opened within this current quarter. One of those will be our first new store in Georgia. So that is a new market for us. It's a new market, but it is actually very close to existing locations in Alabama. And so most of our new stores are going to be to the east. Continuing in Georgia, Alabama and Tennessee.

To the east, okay. Now, could you just pick up on this issue you raised before, the difference in terms of sales between new stores and older stores? That it was -- the weakness was particularly evident in older stores? Just talk about that a bit little further?

Yes. Our new stores are, I think Jeff mentioned, the five-years-and-younger, as a group. Our average sales were actually -- went from 23 to 24 for that group. For older stores, we actually averaged about three less, I think it was. And that was from 35 to 32. And again, we feel like that what we did see is, we sold relatively fewer of what we call our high-dollar cars, which would indicate to us -- that it is at that end where we are feeling a little bit more competition.

What is a high dollar car? Just as an example? Like the ASP or -- type of car?

In our case, it would be a, you know, a $12,500-plus transaction.

As opposed to a $8,000 or $9,000 transaction?

Yes.

Yes, we are not talking about a huge difference. But it is at the upper end.

And you think that -- and so the next question I was leading towards, this issue of competition. Do you think that is because more traditional non-buy here/pay here dealers are being a little easier on credit?

Yes, well, we know that there is -- we are certain that there is certainly a lot more funding out there with the subprime finance companies. So when they shop these deals, I think there is some -- I think it is very, very aggressive right now. We have seen this before. So this isn't anything new. It's --

So let's just take for an example of the $11,000 or $12,000 car. What terms is somebody else offering that you aren't? And what is their average monthly payment versus what you have up until recently been offering?

Can you speak for that?

Well, you know -- and that is the area that we are making adjustments in. We are very competitive everywhere, except our payment is oftentimes not been competitive recently. Which means our payment terms have been shorter than the competition. And that --

So you're saying most of the difference is a result of somebody offering longer terms?

Yes, that is most of it, yes.

This is anecdotal, but for one, but, from what I'm hearing, I'm hearing a lot higher interest rates on those. At the same time, they're going out -- again, I don't have the, all the information. But what I hear is they are out there a year, even in some cases two years longer than we would consider going. Now, I --

So what are -- on a percentage basis o r on a dollar basis? Taking that prototypical $11,000 car. You extend the payments for -- instead of 27 months, make it to 40 months. What does that do to the payment?

Well, we are not going to make any kind of moves that drastic. We don't --

I understand that. But what -- if somebody's going to you -- that buyer is driving to your lot, and then they're driving to the other lot. And they are saying the other lot has got a lower monthly payment. Do you know how much lower it is?

You know, it has been in the $30 to $40 a month range. And so we're not talking about anywhere near going from 28 months to 40 months. But on a select basis for better customers, we feel like we have got some room to extend that term a little bit, remain competitive. It --

And these are mostly existing customers that you think you're losing business to?

We think --

Well, I think some of both. But we know that our existing customers are certainly those that have proven themselves, and we don't want to lose them.

Right.

So we feel like it makes good sense for us to be more aggressive there.

Okay. And Jeff, you said that the credit quality numbers in the second half of this fiscal year will be a little softer. Softer, meaning, you know, a little less favorable?

Well, it -- overall, for the full fiscal year, you know, we've been talking about full fiscal year credit losses in that 22% range. We might be a little bit higher than that.

What does a little bit higher mean?

Well, you know, a lot of it is going to depend on the success we have during tax time. So I'm not prepared to give any specific number there. But we feel good about tax time. And as I said, most of our customers get tax refunds, and we've got some process improvements in place. We feel like we can do very well the last couple of quarters on the collection side. But I think, realistically, we might see little bit higher credit losses for the full fiscal year. But nothing we can quantify at this point.

And we have also talked over the past few years about the fact that as we have relatively more younger stores, that we're going to -- it's going to put us operating at the higher end of the range.

Last question. What is the interplay between used car prices and gross margin? I mean, I understand for you folks that lower used-car prices generally are good. Because you can offer the customer a better quality car and it's a better value. But if car prices come down, as they have for the past three quarters, what is the impact on gross margins?

We -- our gross margin percentage actually goes up with a lower-priced car. All of our cars are priced at the retail level, based on what we pay for them, with lower-priced cars commanding a little higher gross profit percentage.

Yes. And what's your outlook for used car prices? Last question, I promise.

Well, it has been a little hard to predict. I know that, you know, for this year we have seen some softening overall from the various indexes that report monthly. It is a little hard to predict where that is going to go. I do think that mid-term and a little longer-term, we do expect to see some price appreciation in the price of cars. I know right now we are seeing some decreases. But if the economy does pick up a little bit, we did expect, you know, some slight increases in sales prices as we go forward.

Okay, great, thank you for taking my questions.

John Rowan from Sidoti & Company.

Good morning, guys. The competition that you talk about. Is that -- are you seeing that at other buy-here/pay-here lots just getting more aggressive? Or is it coming from, you know, used-car lots that are providing better credit through, you know, wholesale providers?

I would say it is, for the most part, those above us, those that have typically sold more of a later model. Or even some of the new dealers hanging onto some of their trade-ins.

Okay. And then the -- have you seen any impact in the supply chain for used cars from Hurricane Sandy and the used cars that were, you know, destroyed during the storm? Or are you guys just too local to have any effect from something along the East Coast?

No, we haven't seen any affect on it, really, to supply. I can tell you that we saw a few warnings where a lot of those cars were hauled down to the South be sold, for whatever reasons. So our guys are on alert to look out for flood cars, that sort of thing. Which is pretty easy to identify. But no, it hasn't affected our supplies.

Okay, thank you.

Daniel Furtado from Jefferies.

Good morning, guys, thanks for the opportunity. I don't know if you'll really be able to answer this or not. But I'm just wondering -- and I get it from the competition side. But have you noticed any, like, behavioral changes on the consumer side?

You know, I guess just to comment about the month of September. We do know that, overall, used-car volumes in general way were way down from August. So, when you combine that fact with the fact that there is more money going after the same used-car deals, I think that exacerbated our issue in the month of September. But we still haven't been able to exactly specify from a customer standpoint what happened in September. It just kind of shut the pocketbooks for a month there.

And I'm sorry if you said this or not. But did that behavior kind of follow through into October? Or are you not talking about the October month at this point?

Well, it picked up in October. I think it could have been a little stronger. But it carried over a little bit. But no, October was a lot closer to expectations than September. September was way off. And we certainly started out this quarter in a good fashion. So it was, again, a bad month there.

Understood. Thanks for the clarity, guys. Take care.

(Operator Instructions)

I am showing no further questions at this time.

Alright. Well, we thank everyone for joining us today. Wish everyone a happy holiday. And we will talk to you soon. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may now disconnect. And have a wonderful day.