America's CAR-MART Inc (CRMT) 2013 Q3 法說會逐字稿

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

As you all know, some of Management's comments today may include forward-looking statements, which inherently involve risks and uncertainties that could cause actual results to differ materially from Management's present view. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company cannot guarantee the accuracy of any forecast or estimate, nor does 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 the call this morning are Hank Henderson, the Company's Chief Executive Officer and President; and Jeff Williams, Chief Financial Officer. And now I'd like to turn the call over to the Company's Chief Executive Officer, Hank Henderson.

Good morning, everyone. We appreciate you joining us today. Now, those of you who listened in on our last call heard us talk about how, for the short-term at that time, we had felt some pressure from increased competition due to the increased availability of funds in the subprime financing market. Well, apparently it's true that competition can be a very good thing. Well, certainly we always strive to do our best. I do think that the pressure we felt pushed us to step up our game a bit. We worked very hard for many years to earn the loyalty of our customers, and our active customers now number over 57,000.

In this recent quarter, our general managers put intense focus specifically on customer service and retention, and their increased efforts are clearly reflected in the results, as we saw retail unit sales up 16% over the same quarter last year; and it's equated to close to a 13% increase in revenue, as our average sales price was down slightly year-to-year, which is a good thing for our customers. Same-store sales were up 8.8%, and as a group, our newer stores have gotten off to solid starts, contributing to a growth at expected levels.

Jeff will give you more detail as to how our increased sales break out by grouping by age of stores, but I would like to mention that we saw very good increases with all of these groups, which is an excellent indicator that our Company's performing well across-the-board, and we don't necessarily have one group picking up the slack for another. The biggest gains we saw were actually for those in the 5- to 10-year age range, which is extremely promising, as we presently have 30 stores less than five years old. Results like these are a reminder that these younger stores can look forward to significant increases in sales in the years ahead.

While on the topic of our younger stores, I am pleased to report that we're on track for new openings for the year, having opened three more stores recently, putting us at six for the year. In this past quarter we opened our first store in Georgia, bringing us now to 10 states in which we operate, and we are extremely excited about the possibilities for this new area. There are numerous towns throughout Georgia that fall into our ideal size range, and this should certainly be a big state for us. We presently have five more new location projects already underway -- two in Missouri, two in Alabama, and one in Mississippi. We feel confident that we'll have at least 4 of these open prior to our April 30 year-end, which will put us at 10 for the year.

I'm going to go ahead and turn it over to Jeff now to give you more details on our results from this past quarter. Jeff?

Thanks, Hank.

As Hank mentioned, revenues for the quarter were right at $119 million, up almost 13% from the third quarter of last year. Same-store revenues were up, increased 8.8%. Our lot managers are obviously doing a very good job of differentiating Car-Mart's transportation offering from that of our competition. The funding to the used auto industry has certainly increased, but we continue to perform well because we're focused on affordability and helping our customers succeed. Average retail sales price did decrease $125, or 1.3% from the prior year quarter, which was generally in line with overall wholesale price trends seen over the last 12 months, but it did increase $282, or 3%, sequentially.

As our older, more mature dealerships experienced nice volume increases, and these stores tend to sell a little higher-priced car to a more seasoned customer base, as well as the overall seasonal price increases that we see near tax refund season each year. As we look forward, we do expect some sales price increases more in line with historical experience on a comparable quarter basis, as we expect the demand for the type of vehicle we sell to remain high. We will work hard to keep price increases to a minimum, for obvious affordability reasons. Our down payment percentage was 3.9% for the quarter, which was down from 4.3%, or around $40 per unit from the prior-year quarter; and down payments were 5.8% for the nine-month period, compared to 6.2% for the prior-year nine-month period.

The average down payment amount for all contracts at January 31 was $602, which was down from $607 at the end of last January. Collections as a percentage of average finance receivables was 13.4%, compared to 14.8% last year. For the quarter, our average initial contract term was 27.8 months, compared to 26.6 months. Our weighted average contract term for the entire portfolio, including modifications, was 28.7 months, compared to 27.7 months at this time last year. The increases in term are primarily related to our efforts to keep our payments affordable, and to remain competitive with our payment amounts, and to continue to work with our customers when they experience financial difficulties.

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, but we do realize that in order to remain competitive, our term lengths may continue to increase some into the future. We are keenly aware of the downside with stretching out terms, but we're confident that we can manage that risk appropriately, and that our expected cash-on-cash returns will support our decision. We will not stretch terms or reduce downs any more than we think is absolutely necessary to attract and retain our target customers within our markets. The quality of our cars, the level of our excellence on service, along with the 57,000 active accounts and hundreds of thousands of past Car-Mart customers will also help us to attract the target customers and to manage the risk side in a profitable manner. We've been serving our customers for almost 32 years now, and we believe that we are truly earning good, solid repeat business every day at every dealership.

The overall average retail units sold per month per lot for the quarter was 29.4, compared to 26.9 for the prior year period. At the end of the quarter, 25% of our dealerships were from 0 to 5 years old; 29, or 24% were from 5 to 10 years old; and the remaining 61 dealerships were 10 years old or older. Our 10-year-plus lots produced 33.1 units sold per month per lot for the quarter, compared to 31.7 for the prior year quarter, which represent a 4.3% increase in productivity for that group. Our lots in the 5- to 10-year category produced 27, compared to 22. And our lots in the less than five years of age had productivity of 23 units, compared to 21 for the third quarter of last year. The improvements in our older dealerships certainly moved in the right direction, as we had expected. We have significant room for future volume increases from our existing store base. We will continue to aggressively target customer retention and highlight the benefits of our local face-to-face offering to the market.

Interest income was up $1.3 million for the quarter, due to the $34 million increase in average finance receivables outstanding. The weighted average interest rate for all finance receivables at the end of January was approximately 14.9%, up slightly from this time last year. For the quarter, our gross profit margin percentage was 42.6% of sales, up from 42.2% for the third quarter of 2012. The improved gross margin percentage resulted from pricing efficiencies, due in part to the lower average retail sales price, offset by slightly higher losses under our payment protection plan. Our goal is to balance affordability for our customers with appropriate gross margin percentages to enhance our customer success. Overall inventory for our vehicles remains tight, and we do expect this condition to continue, with gross margin percentages in the current range over the near term.

For the quarter, SG&A as a percentage of sales decreased to 17.7%, compared to 18.3% for the prior year quarter. $1.6 million increase in SG&A dollars related primarily to higher payroll costs and other incremental costs related to new lot openings. We do expect SG&A leveraging in the future as we grow our revenues, and we are committed to leveraging the infrastructure investments that we've made over the last several years.

For the current quarter net charge-offs as a percentage of average finance receivables was 5.7%, which was flat with the prior-year quarter. Principal collections as a percentage of average receivables for the quarter was 13.4%, down from 14.8% for the prior-year quarter. The decrease in principal collected percentage between periods can be attributed to the increase in the average term of that one month, the timing of refunds from the IRS this year compared to last, the fact that we did modify a higher number of accounts and we had more delinquent accounts in the 30-plus category, which was certainly related to the IRS delay, as well as the fact that our managers were given some additional leeway on deal structures for certain target customers during the quarter. Also, in our continuing efforts to keep payments affordable, in addition to the increases in term, we've increased the number of special payments scheduled for tax time 2013 when compared to prior years.

Due in part to operational improvements, both IT and process-related, we do expect increased principal collection percentages in our fourth quarter, and we believe that the quality of the portfolio at the end of January is good, but the credit losses for the full fiscal year may be a little higher than we've historically seen. 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. It is critically important that we help our customers increase their equity during this tax season, which will serve to lower our credit losses not only for the short term, but out into future periods. While we are behind the prior year with collections through January, the fact that net charge-offs was flat is something we're very proud of, and represents the true long-term metric that is the most important.

We are seeing good success with lower frequency of losses, but the severity of each loss is a little worse, and this is an area that we're focusing on currently. Of course, we're actively working on all aspects of credit losses, and we will continue to work to reduce our losses as we move forward. The lower collection percentage for the quarter, which we feel largely related to timing, had the effect of increasing our provision for credit losses on the income statement by a full percentage point. The fact that the current average selling price is lower also had the effect of increasing credit loss percentage on the income statement for the quarter. Again, by focusing our efforts on collections and minimizing charge-offs, we will see benefit in the provision for credit loss line as we move forward.

At the end of January, our total debt was $109 million; we had a $36 million in additional availability under our revolving credit facilities. Our balance sheet is very healthy. Our current debt-to-equity ratio is 56.6%, and our debt-to-finance-receivables ratios is 30%. These ratios will improve in the spring as we work off our higher inventory levels. The increase in inventory related to our new store openings, as well as our efforts to be fully stocked for tax time and the timing of the build relative to IRS refund timing, and we will see the seasonal improvements in collections in the fourth quarter.

During the quarter, we repurchased over 62,000 shares of common stock for $2.8 million (sic -- see press release "$2.58 million"). Since February 1 of 2010, we've repurchased almost $88 million in common stock, or 25% of the Company; and at 25 dealerships and grown our receivables base by approximately $102 million. While we do intend to allocate some capital to repurchasing shares in the future when conditions are favorable, our primary focus and our primary capital allocation will go to the healthy growth of our business.

And now I'll turn it back over to Hank.

All right. Thanks, Jeff.

We are, of course, in the middle of the busiest time of year for us, tax time. This is the time of year when our customers will have more cash on hand than any other time throughout the year; which, as Jeff already mentioned, does mean big impact on both our sales and collections. Our stores right now are busier than ever, with higher inventory levels to tend to, increased sales traffic, and assisting customers with their tax max returns, and counseling customers with the payment plans, and so on. We are well aware that how effectively we handle these tasks and take care of our customers at this particular time of year will impact our business for the remainder of the year.

Fortunately, our Management systems have improved substantially in the past few years, so we are now much better-equipped to handle the increased volumes of tax deals and seasonal payments. Most importantly, though, it is that we have a team of associates who are truly dedicated to our customers. Our daily intent is to provide our customers with the level of service that can only be realized with the face-to-face long-term relationships that we provide, and are the cornerstone of our Company. We're very proud of this fact and what we've accomplished thus far. We are also well aware that we have many areas where we know we have room for improvement, and I think that's one of the most intriguing and exciting aspects of our Company. While we do have a long history of growing and delivering solid results, at the same time we can see a lot of opportunities where we can do better, and we will.

So that concludes our prepared remarks. So now we would like to move on to your questions. Operator?

I would like to reiterate my earlier comments regarding forward-looking statements apply, both to the participants' prepared remarks, anything that may come up during the Q&A session.

(Operator Instructions)

John Hecht, Stephens.

First question. I wonder if you can give us some details on the monthly trends throughout the quarter? For instance, you had a pretty sizable pick-up in the units per sale per month in that 5 to 10 range. Was that fairly consistent throughout the quarter? Was there any months that were stronger than other months?

It was fairly spread out evenly among the three months. Maybe a little bit of a falloff just in January as folks waited on tax money to hit, but not a big difference between months. So maybe just a little lower in January, and we've certainly seen that pick up in a big way so far in February when the income tax refund money is out in market.

Yes, that's a typical trend, because as we come out initially with our promotion of the zero down. People preparing, but then as you get a little closer to when the returns are actually going to be in hand, it slows down a little bit as some folks are going to wait until they actually have the cash in hand. So nothing unusual about that, really.

Okay. And then I wonder if you guys can give us details or an update on the car mix. Obviously, cars lasting longer, higher-quality vehicles lasting longer. Have you seen any shift in the type of cars your customers are purchasing?

Not really. I think our mix is pretty typical, the way it has been for quite some time. Maybe just very recently, a little more anecdotal than any really hard data, but a few customers coming in wanting some more gas efficient cars, just as in the recent few weeks, gas prices have gone back up, but overall, no, our mix is still pretty constant.

Okay. And then, Jeff, you mentioned you might see provisioning a little higher in the near term, just because of changing dynamics with collections and down payments. I wonder, can you quantify that? I think your historical range has been 20% to 24% of sales. Are we still in that range, or is there shift in that, given the shifting dynamics of the purchasing?

Yes. I think historically we've talked in that 20% to 22% annual range as a percentage of sales. So we're looking at something above that 22% as a percentage of sales. A lot of this, again, is timing in nature in terms of principal collected and taking that risk off the table. So we feel like over the long-term that those historical trends will come back into line, but since we have stretched out the term and our current collections are a little less, it's having the effect mathematically on the income statement of showing a little higher credit loss as a provision of sales.

Okay. Thanks very much. Last question is, you guys are effectively inventorying your lots, and you did mention inventory is still tight. I wonder, can you give us the breakdown of wholesale versus direct purchases and how, maybe a description of how you're doing so well in that category?

I wouldn't say that it's changed necessarily. If you're talking about where we actually get our vehicles, that still pretty constant. I think we've talked about that before. We try to keep auction at a minimum, that hasn't changed a lot and still the majority of ours are through the wholesale market.

And can you give that breakdown, a percentage auction versus wholesale?

It's probably about 80%, 75% to 80% auctions -- or wholesale, I'm sorry, and then less than 10% on the auction side.

Great. All right, guys. Thanks very much for the color.

Thanks, John.

John Rowan, Sidoti & Company.

Just one question on the term. I just want to understand, where do you see the limit as far as how long you're going to push the term? Obviously, there are some risks in elongating customer term, but is it two more months? I just want to understand where you guys think you run into material additional risks with these consumers as far as increasing the loan term.

Well, as we've stated, we're not going to go a week longer than we feel like we absolutely have to, to attract the better customers out there. But we do expect, over the course of the next year, to see that average term go up. We'd like to keep it under 30, including modifications, 30 months. But we're a little -- we don't know exactly where that's going to land, but what we do know we're going to be very judicious in how we do that and who we do that for, and we're certainly not going to do it to any more extent than we feel like we absolutely need to, to retain the better customers out in our local markets.

What gets that back down? Is it declines in car prices? Or is it better employment market? When do you start to turn and go the other way?

All of the above. If you go back a few years, we got -- we were very disciplined. We actually brought it down quite a bit, over time, just working with our customers and where they are. It has gone up and down a little bit over the past few years, and we felt like we had some room there. Some of that was in response to some competition, trying to be a little bit more competitive. Not to say we're going to go out -- or haven't gone out and done anything that we feel like is unreasonable, but because we had been more disciplined with it, we felt like we had a little bit of room to give there.

Obviously, the average sales price goes, is going to affect that. And then as we also mentioned, how good a job we do utilizing this tax time, seasonal payments, that sort of thing, that's also going to affect term. Jeff also mentioned earlier, our down payment went down a little bit. Again, that was getting a little bit more competitive, which I think obviously with the sales up, think it was certainly worthwhile. Down payments going down can also affect that. So we've got all those different things to work with. So as we can bring down payments back up, keep our average prices down and so forth, we should be able to control the term.

And the car we're putting out there, it's a good, solid car. So we wouldn't want to put a deal out there that, with the term longer than the mechanical life of the car. And we certainly are well below that, and intend to stay well below that, but the quality car we're putting out there is high.

And we talk a lot about repeat business. And that's a measurement for us, let us know if we're keeping those terms where they need to be. Because as long as we're continuing to get customers down that equity situation, have some trade backs or customers pay off, drive it a bit, and then come back to us. As long as we can maintain our repeat business, we think that's a good indicator that we have return at a reasonable range.

Sure, Thank you.

(Operator Instructions)

Jordan Hymowitz, Philadelphia Financial.

Question, the Manheim is starting to go down, and your guys' recovery rate, I think, is like 20%. Is that correct?

It's a little higher than that.

Can you tell me the number?

It's closer to 30%.

Okay. So would it be fair to think that each percent decline -- not one point, because it's 125 index, but each percent decline in the index, 70 basis points of that decline would flow-through to your losses?

Not necessarily. We have a number of losses that happened later in term, and there's really a pretty solid floor on the value of these cars. We're not starting at $20,000, we're starting at $9,000, and there's only so far down they go.

You're saying because you're further out on the curve that the correlation of the Manheim, which is more new or used car oriented, isn't as good of a measurement?

Right, right.

Okay. And the second question is, a couple of other companies, Ford, GM, have started to show a normalizing of losses in their auto book a little bit, still much better than normal, but they've been trending up a little bit. Do you see an industry-wide normalizing of losses after being much lower than expected for a number of years?

We're actually seeing, as far as unit losses, we're seeing some decent improvements there, and we haven't seen any big shifts one way or the other in loss rates, and don't really expect anything as we look out into the future. Our collections have been pretty consistent, and loss rates consistent, and we have no reason to think that's not going to continue.

Okay. So basically the frequency of loss hasn't really changed, it's just the severity a little bit, is what you're planning for at this point?

Yes.

Okay. Thank you.

(Operator Instructions)

Daniel Furtado, Jefferies.

Thanks guys, but my question was just asked.

All right. Thanks, Daniel.

Thank you.

(Operator Instructions)

Showing no further questions in the queue at this time.

All right. Well again, thanks to everyone for joining us this morning. As we mentioned, we are right in the middle of tax time, and this is a critical time of year for us. So we hope to continue and have great success with where we are right now, and continue to bring back some good results to you. So everyone have a good day. Thank you.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect, and have a wonderful day.