America's CAR-MART Inc (CRMT) 2017 Q4 法說會逐字稿

Good morning, everyone.

Thank you for holding, and welcome to the America's Car-Mart Fourth Quarter 2017 Conference Call.

The topic of this call will be the earnings and operating results for the company's fiscal fourth quarter 2017.

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 last night's press release, which can be found on America Car's (sic - 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 views.

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 forecasts or estimates nor does it undertake any obligation to update such forward-looking statements.

For more information regarding forward-looking information, please see Part 1 of the company's annual report on Form 10-K for the fiscal year ended April 30, 2016, and its current and quarterly reports furnished or filed with the Securities and Exchange Commission on Form 8-K and 10-Q.

Participating on today's call this morning are Hank Henderson, the company's Chief Executive Officer; and Jeff Williams, President.

And I would now like to turn the call over to the company's Chief Executive Officer, Hank Henderson.

Good morning, and thank you all for joining us.

As you saw in the press release this morning, our unit sales were strong for the quarter, with 29.1 retail sales per store per month, up from 28.2 for the same time last year.

For the whole year, we were at 27.7, up from 26.7 for the prior year.

So we are pleased with these improved results and the direction we're heading in our sales productivity.

Revenues for the year were $588 million, up from $568 million for the prior year, with a 3.5% increase in same-store sales.

We also saw improvements for both the quarter and the year in our gross margin and charge-offs as a percentage of accounts receivable as well, and Jeff will give you the details on all that in just a moment.

So overall, we are -- we have had improved results in most areas of our business and are definitely heading in the right direction.

While we are happy with where we're going and the better results thus far, we're by no means satisfied or celebrating as we do know we can do much better.

We've put into motion several specific initiatives this year to improve recruitment, training, expense management, collections and marketing to ensure we continue to perform better and produce better results in every facet of our business so that we can continue our long history of growing the company.

We are clearly seeing some positive benefits from most of these efforts.

So I'll go ahead and turn it over to Jeff now to give you more detail on our results and then come back to you with a few final comments.

Okay.

Thank you, Hank.

For the quarter, same-store revenues was up 1.3%, which is not too bad considering the very strong prior year top line results.

The 1.2% decrease in revenues related to the offsetting effect of the 8 dealerships that have been or are being closed.

Revenues from stores in the 10-plus-year category was down slightly, about 1%.

Stores in the 5- to 10-year category was up 1.4% to $20 million, and revenues for stores in the less than 5-year age category was up about 6% to $33 million.

We have several initiatives underway that we believe will help us going forward on the revenue side.

These initiatives include improvements with lot-level execution, including training and support, improved customer prospecting and strengthening our social website presence as well as inventory improvements, all in an effort to increase quality traffic and closure rates at our dealerships.

At quarter end, 36 or 26% -- 36 dealerships or 26% were in the 0- to 5-year-old category, 21 or 15% were in the 5- to 10-year-old category, with the remaining 82 dealerships being 10 years old or older.

Our 10-year-plus lots produced 31.2 units sold per month for the quarter compared to 31 for the prior year.

Our lots in the 5- to 10-year category produced 26.4 compared to 26 for the prior year quarter.

And our lots in the 5-year-age and less category produced 25.4 compared to 24.7 for the fourth quarter of last year.

The average selling price increased 0.1% or about $13 to $10,654 compared to the prior year and increased about $25 or 0.2% sequentially.

The flattening out of our sales price has been expected as we are working hard to find higher-quality vehicles and also maintain affordability for our customers.

We currently anticipate some increasing overall sales prices for the near term as the demand for the cars we buy is high, especially for trucks and SUVs.

But we are hopeful that prices will continue to soften compared to prior years and that we will be in a position to put our customers in better cars for the same or less money.

Decreasing car prices is actually a good thing for us and doesn't necessarily mean that overall selling prices go down.

Our down-payment percentage for the quarter was 7.9% compared to 8.4%.

The decrease was offset some by improvements in special payments on the front end of the contracts.

Collections as a percentage of average finance receivables was 15.6% compared to 16.8% last year.

Our average initial contract term was 30.1 months compared to 29.7 for the prior year quarter and up from the third quarter's 29.4%.

Our average -- our weighted average contract term for the entire portfolio, including modifications, was 32.5 months, which was up from 31.6 at this time last year and up from 31.9 sequentially.

The weighted average contract -- the weighted average age of the portfolio was 8.8 months.

That's up from 8.4 months for the prior year due to the slightly increasing selling price, but more for competitive reasons, our term lengths may continue to increase some into the future, but we remain committed to minimizing any increases.

We have to always focus on affordability.

And the better customers can demand lower, more affordable payments, so it's always a balance for us.

If competitive offerings get more conservative, we will have room to keep our terms down.

As always, we will try to ensure that the term length and the useful life of the vehicle are in alignment, and we will continue to put our customers in good vehicles.

Interest income was up $1.6 million compared to the prior year quarter due to the $29.9 million increase in average receivables, that was about 60% of the increase; and to our increase of the interest rate on our contracts to 16.5% from 15%, which began in May of this year.

That was about 40% of the increase.

The weighted average interest rate for all finance receivables at the end of the quarter was approximately 15.9% compared to 14.9% at this time last year.

For the quarter, our gross profit margin percentage was 41.5% of sales.

That's up from 38.7% for the prior year quarter and up from 40.8% sequentially.

The improvement relates to lower wholesale volumes and lower repair expenses.

We are pleased with our continuing efforts to improve the quality of our inventory and improve inventory terms and efficiencies.

And these efforts are having a positive effect and will continue to benefit us as we move forward.

We've been very aggressive with our inventory management, and our efforts are certainly showing up with improved gross profit percentages.

We will keep pushing for improvements, and we'll focus on keeping our gross margin percentages up.

As always, we do a lot of work to earn our margins, and we need to execute at the very highest level in this area of the business.

For the quarter, SG&A as a percentage of sales was 17.2% compared to 16.7% for the prior year quarter.

Overall SG&A dollars were up by about $154,000.

We believe we have a very lean but effective cost structure, and we will continue to focus on cost controls as we move forward.

As we've discussed, we are making some additional investments in GM recruitment, training and advancement, collection support, and we are getting some outside help with our marketing, online and social efforts.

We do anticipate leveraging these investments over time as we grow.

We are very proud of our associates and their dedication in helping us keep our costs down.

At the same time, we remain mindful of how important it is in this high-touch business to ensure that our infrastructure is solid to support our customers before and after the sale in an effective manner.

For the current quarter, net charge-offs as a percentage of average finance receivables was 8.7%.

That's down from 9% for the prior year quarter.

The decrease related to a lower frequency of losses.

Excluding the 8 dealerships that are closed or winding down, credit losses was about 27.9% on the income statement or about 50 basis points lower.

Our wholesale value recovery rates continue to come under significant pressure, but as expected, they have leveled off the last few quarters, and we are hopeful that they have bottomed out.

Our recovery rates for the quarter were again in the 22% to 23% range, with basic cars continuing to drag down our percentages.

Principal collections as a percentage of average finance receivables for the quarter was again 15.6% compared to 16.8% for the prior year quarter.

The decrease resulted mostly from the longer average term; higher levels of contract modifications, which related to a large extent on the delays in income tax refund this year; a lower level of early payoffs; we actually had 2 less collection days when compared to last year; and an increase in our contract interest rate, offset by a slightly higher average age of our receivables.

The lower collections percentage resulted in about a 90 basis point increase in the provision for credit losses on the income statement for the quarter as we reserve at 25% of uncollected receivables.

So between the effect of the closed dealerships and the lower collections percentage, for the reasons mentioned above, we would have been about 140 basis points lower on the income statement credit loss to around 27% for the quarter.

We were optimistic that collections would have been a little higher in the fourth quarter, but the delay in tax refunds put our customers in a real pinch, and we had to work very hard with them to adjust.

We continue to believe that we are selling a higher-quality vehicle, slight improvement with age and mileage to a better credit risk customer.

We believe that our customer service levels are improving, and when combined with affordable, dependable vehicles, we do expect losses to trend downward over time.

Once again, we've seen great execution improvement with our inventory management, and we do expect to see similar positive results from the investments we are making in key areas, including collection support.

We don't know what the competitive landscape looks like in the future, but we plan to grow the business and run it efficiently and effectively.

Our relationships with our customers will grow stronger as we move forward, which will improve our customer success rates.

We are truly committed to improving our service levels and our relationships with our customers.

At the end of April, our total debt was $118 million, and we had almost $79 million in additional availability under our revolving credit facilities.

Our current debt-to-equity ratio is 50.6%, and our debt-to-finance receivables ratio is 25.3%.

We have significant room to grow, and there's a lot of demand for what we are offering, especially as we improve our customer relationships.

We know we can do much better in efforts to improve consistency in results with existing dealerships.

We'll stay focused on -- intensely on cash-on-cash returns.

And in the last 12 months, we've grown receivables by $30 million, repurchased almost $21 million in our own common stock, $12.3 million in the fourth quarter, funded a couple million dollars in CapEx, and we only added $10 million in process.

We will attract and retain quality individuals to manage our dealerships, and we will grow the business in a healthy manner into the future.

Our cash-on-cash returns have remained strong, and we plan to keep it that way.

Now I'll turn it back over to Hank.

All right.

Thanks.

I would like to expound just a little bit on one item that Jeff mentioned earlier.

We are currently working with an outside marketing and public relations firm.

Our internal sales and marketing departments have done a great job throughout the years, and we are proud of their hard work and dedication.

But with all the changes in the world of marketing and advertising, moving from the traditional media to digital and through the various social channels, we recognize that we're a bit behind the curve and needed some outside expertise to come in and work with us to educate us to get us closer to where we need to be.

We're very proud of our company, and we are proud of what we have to offer.

So we do, in fact, have a great message, but we need to broaden the means we use to make sure it gets delivered to prospective customers as well as an additional means to more effectively communicate with our existing customers and those that have done business with us in years past.

The first phase of this project involved a series of focus group discussions conducted by an unbiased third party in some various parts of our company geographically.

And frankly, it seems we learned a lot more from this than we probably expected on the front end.

Our customers know better than us what they want and where we need to do better, and our task is to take it all to heart and do better, and we're working to do just that.

And it's all centered around better customer service, and we are fully committed to taking it to a higher level.

Also, within this project is the overhauling of our website, along with more effectively utilizing other means to expand those initial contact points to be true sales generators, not just getting our name out there.

Sales resulting from our online initial contacts have picked up during the latter half of the year with only minimal improvements.

So we're confident we have some real opportunity here with these focused efforts.

We want to not only reach more people but also to make this a better experience for our customers.

And as mentioned in the press release, we have recently made the decision to close a store in Jefferson City, Missouri.

Yet at the same time, we're opening another one in Siloam Springs, Arkansas.

To realize our full potential, we need to improve our average productivity level at our stores.

And part of that process is to ensure that every store is located within a market that provides for a sufficient level of business to obtain solid returns on our investment.

For most of our history as a company, we haven't closed many at all.

We have a strong track record.

Most have proven successful.

However, to ensure our resources are being put to their best possible use, we have to continually review each individual situation, and there are times that we have to recognize our investment resources can realize a better return elsewhere.

Just 2 weeks ago, we had a year-end meeting in Fort Smith, Arkansas.

It's the one time of the year when we bring all of our general managers together.

They do meet regionally typically on a monthly basis, but this is when we bring them all together.

It was a great meeting, and I can tell you that morale is high.

While we did have a number of managers who were disappointed in the year they had and are looking forward to a better one, we also did have several general managers recognized for exceeding their individualized goals and raising the bar with some outstanding achievements.

Having them all together and seeing the enthusiasm was very energizing for all.

It was also a great reminder of what a great, dedicated team we have.

Growth has long been a part of not only our business plan but a vital part of our culture.

Creating opportunity and giving people a chance has long been a big part of who we are, and it's very encouraging to see the positive results we've discussed and to see that we are doing better in the development of our up-and-coming general managers.

And so long as we continue to build on this, we will be back on track with growing our footprint and opening new stores.

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

So operator?

(Operator Instructions) Our first question will come from the line of John Hecht with Jefferies.

Jeff, you gave a normalized kind of 27% loss rate figure after you adjusted for certain items that occurred in the quarter.

And I think that's a little better than recent quarters but still above kind of your long-term goals.

And then you mentioned you expect this to go down over time.

So I guess the question is, what time frame are you now comfortable with your credit book that you think you can kind of execute or just observe improving credit quality to the point where that migration starts moving downward now?

Or is it just you're still hopeful, but you still have some things you need to work through?

And kind of what patterns are you seeing with payment rates now that would suggest the consumer is either stabilizing or more capable of servicing their debts?

Yes.

I think our expectation looking forward is that we are going to see some reduced credit losses.

We don't have a specific range to talk about at this point, but I do think that all the efforts going into our training, to our collection support.

We've got some visibility now on productivity in the field on collections and a lot of good enthusiasm on customer service, which is so important to that ending credit loss number.

I think as we look forward, we are expecting some reductions.

It's really hard to quantify it.

I think it's safe to say, we don't think things get any worse than they've been for us, and from this point forward, we do expect to see some reductions.

I will just throw one word out there.

Last year's first quarter, 2017's first quarter, we did have very good credit losses because we came into the year with very, very low delinquencies.

So we're starting this next year with a little higher delinquency level, but we still think that going forward, especially for the full fiscal year '18, we are going to see better credit results.

We -- our internal metrics indicate we're selling a higher-quality customer, structuring the deals a little better, and our execution levels are certainly improving.

And then we're really focused as a company on customer service and customer relations after the sale, which is a little harder to quantify, but we really have a big commitment.

The field is excited about that.

And I think from a customer service perspective, we're certainly taking it up a few notches, and that will show up in those credit results.

Okay.

And then on the gross margin front, number one, I'm kind of interested in just sort of your thoughts on the general pace of decline of used car prices.

And do you think there's some factors that might accelerate that or you expect to be stable?

Number one.

And number two, it sounded like you were optimistic that the reduction in used car prices would carry forward to an improving potential gross margin.

Is that accurate?

At what point would you start sharing some of the benefits with the customer base?

We -- our folks are very excited about decreasing car prices.

We set our retail sales price based on what we pay for a car.

We pass on that savings or that good buy to a consumer.

So when our folks -- when our general managers have an opportunity to sell a better car for the same or less money in a decreasing deflationary environment, that is a really good thing.

So we've got folks really excited about the opportunity to truly go out there and buy a better car and keep that price down, keep those payments down, make sure that transaction is affordable and more mechanically sound than it was with a higher price when the supply was more constricted.

Okay.

And then what about your just general thoughts?

You did mean -- I know there's no perfect science around this, but do you -- given the kind of supply out there, do you think that we'll see an acceleration in the decline of -- or, I guess, the acceleration in the ability to buy wholesale cheaper or just more on pace with what we've seen?

I think our expectations is it's going to kind of be on pace with what we have seen.

The NADA number that's more representative of what we do is something that I think we kind of expect that trend to continue going forward.

Okay.

And then, final question, maybe just an update.

I know it's been a tough competitive environment for a while.

Anything changing in that regard, loosening, tightening that you might would point us to?

I think we've seen some things in the news just in the past week where some dealers have been cut off from some of the indirect lenders.

Some have pulled back.

And as I mentioned, just a couple of weeks ago, we had our year-end meeting.

And each year at those, we meet with a group of our more senior managers, those that have been around a long time.

And while some of the reviews were a little bit mixed, the feedback that we're getting from them, I would say, about half that group were getting the sense that in their particular markets, the competition was tightening up.

And that's really where it matters to us, in those local markets, and what they're feeling.

It's also gone on long enough, I think there is a bit of customers cycling back.

We fully recognize, and as we've talked about many times over, one of the greatest things we have to deliver is the ability to work with our customers -- we're local.

And I think some have had an experience with some of the indirect guys, and they've realized they need that local presence.

And so we're hearing from some of our general managers that they feel like we've got some customers coming back.

And I think that this does account for some of our -- as mentioned, we're up on our average units per store, and I think that's part of it.

So I think this will -- and we fully expect that this will continue a bit through the year.

And we do -- a big part of what we do is educate the customers on the benefits of our offering: the shorter terms and lower interest rate.

Folks can get into a low-payment transaction and then realize halfway through, they've got another 3 years of payments.

And so a big part of what our guys do in the field is truly show the total cost of ownership and what our offering is compared to something across the street with a 22% interest rate and a long term.

So we are seeing some of those folks cycle back and appreciate the education.

Our next question will come from the line of Elizabeth Suzuki with Bank of America Merrill Lynch.

Last quarter, you noted that delayed tax refunds hindered your same-store sales growth, and you mentioned it on this call as well.

How much of an impact do you think that, that had?

And how many of your customers still haven't -- or hadn't gotten their tax refunds by the end of April?

I would say that most all of the refunds for our customers were out -- maybe a small percentage, but for the most part, those refunds were out by the end of April.

I think some of our productivity improvements in the fourth quarter maybe did relate to the delay from the third quarter.

So we did see nice improvements with sales volumes.

Of course, the delay kind of tossed everything up in the air.

It's a little hard to know how much better credit losses would have been or sales would have been had those refunds come when they normally do.

But I think all in all, we were pretty pleased with the productivity improvements, and we kind of worked through the delayed tax refunds with our customers.

So I think all in all, we were pretty pleased with sales volumes and productivities in (technical difficulty) delay in (technical difficulty).

Great.

And just in terms of your credit metrics, it seems like a tough comparison against the fourth quarter last year when you had a very low level of accounts that were 30 days past due and a fairly high level of collections.

Can you just talk about what was going on in the fourth quarter of last year that may have been kind of a one-timer or just shorter term in nature or otherwise presented a tougher comp?

Or do you think there was real deterioration in 4Q '17 versus 4Q '16?

On the credit side?

Yes.

Well, we did -- both quarters, we think we did a good job on the collections side both quarters.

We were a little better on the charge-offs this quarter.

So I think maybe at the end of '16, we did have some real focus on cleaning up inventory and cleaning up accounts and starting '17 on good footing.

But I wouldn't say there was any big changes in either quarter.

In terms of operationally, both quarters, we were focused on getting things done.

Yes.

And this was a solid finish with regard to that number.

It's just the comparison, but it's -- we definitely finished out within the range we'd like to see ourselves.

Great, that's really helpful.

And then just one more quick one.

Can you just talk about any constraints you have on share repurchases in terms of your maximum debt-to-equity level that you're comfortable with or your buyback expenditures as a percent of net income or any other constraints you might have there?

No.

We -- there aren't any constraints other than we've maintained the opinion that at some point, we're going to get some relief on the competitive side, especially with the 82 dealerships that are over 10 years old, and we may be in a position to really grow the base business.

So we want to make sure and have plenty of gunpowder to take advantage of that opportunity if and when it comes up.

And we want to be able to have our cake and eat it too with share repurchases.

So we don't have a specific threshold.

We buy opportunistically, and we've maintained some degree of optimism that at some point, we'll be able to grow that base business.

And we have the capacity to do that with the balance sheet we have.

So we've just maintained some conservatism with thought of having some opportunities around the corner.

Our next question will come from the line of Bill Armstrong with CL King & Associates.

In your press release, you do mention the competitive environment remaining difficult, but you're seeing some positive indicators.

So I was wondering if you could maybe detail that a little bit more.

And are you actually seeing, in your market, maybe more or less availability of credit to your customers that may be helping bring some customers back to your stores?

Yes, again, I'd kind of point to our discussion we had with some of our more tenured managers a couple of weeks ago, just one component of that.

To get really down to the ground level, one of the obvious ways we see it is with the number of payoffs they receive from some of our competitors in town.

And as we've said, the past few years, a lot of those have been at the new car stores.

And just as we kind of go around the room to see what those level of payoffs look like for a number of our stores, this past year, they are down from last year.

Meaning fewer customers going and trading their car they had financed with us off somewhere else.

So we're hearing more.

I would tell you, a year ago, we were hearing no change.

But now we're beginning to hear from some of those that they're getting fewer payoffs.

And so to us -- and again, we're most interested, our local market may not always reflect the larger macro world out there, but we do feel like locally, some of these guys are getting some relief.

And then the -- we get same news everyone gets, saying where some of these lenders have cut off some dealers.

So we know that, that number has gone down somewhat in the past few months.

Okay, got it.

That's good to hear.

And on gross margin, Jeff, you've mentioned you have lower wholesale volume and lower repair expenses, which you guys have done a pretty good job on for a while now.

Is -- but is the bulk of that big increase just from kind of lower acquisition costs when you're buying your inventory?

Yes, no.

Most of it, Bill, relates to just lower repair expenses and more efficiencies within the inventory management process.

If your wholesales -- you're keeping your wholesales moving, your inventory turns up, you have less cars sitting there to repair, that certainly helps.

And then just we're buying a better car.

The market is letting us have access to some cars now that maybe we didn't have access to a year ago and better quality.

So it's mostly related to repairs.

And then second to that would just be good solid inventory management.

Yes.

When the supply side is strong, we -- our confidence level to pass on some cars that need some minor repairs is up.

So we're able to say, well, we can pass on that and we'd prefer to buy something that doesn't need work done to it prior to sale.

And so we've really focused on looking at number of repairs after our initial purchase.

And again, in a good purchasing environment, we can weed some of those out.

Got it.

I don't know if you would have this number handy, but if you looked at your inventory today and compared it to a year ago, would you see a significant reduction in the miles on the odometer today versus a year ago?

The mileage is down a little bit, but as Hank mentioned, we're being pickier out there with what we buy.

So it's -- we think we're getting a much better car, but the mileage is down a little bit.

It's not -- and to your question, it's not significant, but we always measure the average age, average miles.

And with as many cars as we buy, just a little change in that does generally mean an overall improvement.

(Operator Instructions) Our next question will come from the line of Brian Hollenden with Sidoti.

We saw a relatively flat retail sales price.

Do you have the optimal mix of trucks and SUVs that you want now?

And can you give us a breakdown of what that vehicle mix currently looks like?

I'd say we're in the low 40s as far as trucks and SUVs as a mix.

And we've been at that level for a few years now and expect that to kind of be the trend going forward.

Yes.

We could always -- it's common around here that I mean, the bulk of that mix is in the SUV side.

We -- trucks have maintained their value a lot more so than the rest, so we could probably always use more trucks.

But yes, the overall mix, we're pretty pleased with.

And then sorry if I missed this, but can you provide an update on your outlook for adding new dealerships?

Any net new dealerships, I guess, over the next fiscal year?

No.

But we hope some of those announcements will be forthcoming on a call soon, but no, at this time, we don't have a number for you on that.

And I'm showing no further questions over the phone lines.

So now it's my pleasure to hand the conference back over to Mr. Hank Henderson for some closing comments and remarks.

Sir?

All right.

Well, thank you all for listening in this morning.

I'd just like to reiterate that we're happy we're making some positive strides and heading in the right direction.

Morale is high around here, yet we're also fully aware we've got a lot more capacity, so everyone here is working diligently for continued results and growth.

So that is our plan.

So we look forward to speaking with you all again in the future.

Have a great day.

Ladies and gentlemen, thank you for your participation on today's conference.

This does conclude the program, and you may all disconnect.

Everybody, have a wonderful day.