America's CAR-MART Inc (CRMT) 2021 Q1 法說會逐字稿

Good morning, everyone. Thank you for holding, and welcome to America's Car-Mart's First Quarter Fiscal 2021 Conference Call. The topic of this call will be the earnings and operating results for the company's first quarter for fiscal 2021.

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 the 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 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, 2020, 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 Jeff Williams, the company's President and Chief Executive Officer; and Vickie Judy, Chief Financial Officer.

And now I'd like to turn the call over to the company's Chief Executive Officer, Jeff Williams.

Good morning, and thank you for joining us, and thank you for your interest in America's Car-Mart. As we mentioned in our press release, we had another good, solid quarter. And we're very proud of our team and how we've responded during these trying times in our country. We will continue to do our part to build bridges and be a positive force in our communities. We have a unique business that starts with a desire best reflected by our vision statement to be America's best auto sales and finance company in the eyes of our associates and customers while improving the communities we serve. We have made and will continue to make significant investments in all of our associates to allow them to grow and participate in the opportunities we're creating as we expand our dealership and customer accounts, and build an infrastructure to support a much larger business. Day in and day out, we put in the hard work required to serve our customers at the highest levels. Our purpose has never been more clear in our offering and how we conduct business has a direct positive effect on the quality of life in the communities we serve. We give customers peace of mind by standing with them when life's challenges happen by keeping them on the road after the sale. Again, we are very proud of our work, but we have a real sense of urgency to improve and get better quickly as we move forward.

I will now turn it over to Vickie to go over the numbers. Vickie?

Well, good morning. We had a strong quarter with a revenue increase of 9.3%, up to $188 million. The increased revenues resulted from an 8.5% increase in sales. This was due to a 12.2% increase in the average sell price, partially offset by a 2.8% decrease in the retail units sold. Interest income increased by 15.2%. And same-store revenues were up 5.5%. Revenues from stores in the over 10 years of age category were up 5%. Stores in the 5- to 10-year category were up 7%, and stores -- and revenues for stores in the less than 5 years of age category was up about 63% to about $18 million. Our first quarter sales volumes were impacted due to the reduced inventory levels, especially at the lower price points and lower customer traffic, both as a result of the pandemic. At quarter end, 20 or 13% of our dealerships were from 0 to 5 years old, 41 or 27% were from 5 to 10 years old, and the remaining 89 were 10 years old or older. Our overall productivity was 27.4 units per month per lot compared to 29 for the prior year quarter. Our 10-year plus lots produced 29.6 units sold per month per lot for the quarter compared to 31.6 for the prior year quarter. Lots in the 5- to 10-year category produced 24.6 compared to 26.2 for the prior year quarter. And lots less than 5 years of age had productivity of 23.3 compared to 20.2 for the first quarter of last year.

Our down payment percentage was 7.6% compared to 6.5% for the prior year quarter and collections as a percentage of average finance receivables were at 13% compared to 13.5% for the prior year quarter. An extension in the average contract term and slightly higher modifications were the primary drivers of the lower collection percentage. This was partially offset by improved collections on delinquent accounts. The average originating contract term was 32.4 months compared to 29.9 for the prior year quarter, and up from 31.8 months sequentially. The average selling price was up $1,390, with only a 2.5 months increase in the term compared to the prior year first quarter.

Our average monthly payment is approximately $430.

Our weighted average contract term for the entire portfolio, including modifications, was 33.9 months compared to 32.1 for the prior year. The weighted average age of the portfolio was basically flat at approximately 9 months.

Our interest income increased $3.3 million or 15.2% compared to the prior year quarter, primarily due to the $78.6 million increase in average finance receivables at a 14.2% increase.

The weighted average interest rate for all finance receivables at the end of the quarter was approximately 16.4%, flat from the prior year quarter.

Gross profit per retail unit sold increased by $693 to $5,579, up 14.2% compared to the prior year quarter. The gross profit percentage was 41.7% compared to 40.8% for the prior year quarter and up from the sequential quarter at 40.5%. The improvements in gross profit resulted from improved wholesale margins due to the strong demand and the low supply of the lower-priced units and also reduced expenses of the payment protection plan product. This was partially offset by the lower margin on the retail unit. Increasing average selling prices result in lower gross margin percentages but higher gross margin dollars per unit as our gross margin percentages are lower at a higher selling price.

The mix of the type of vehicles sold was fairly consistent, with SUV sales increasing approximately 3% over the prior year quarter. Our inventory volumes are back up to pre-pandemic levels, and we've been able to take advantage of recent efforts by rental car companies to reduce their fleets. allowing us to acquire some newer model, lower-mileage vehicles at affordable prices for our customers. This will continue to be a part of our procurement effort as we move forward.

SG&A for the quarter was up $86,000 compared to the prior year quarter, but down as a percentage of sales to 17.7% compared to 19.1% for the prior year quarter. SG&A as a percentage of total revenue, less cost of sales and provision for credit losses was 50.5% compared to 58.7% for the prior year quarter. Excluding the reduction in the allowance for losses in Q1 of the prior year. This metric is important for our integrated sales and finance business as a large part of our efforts are focused on keeping good customers and driving down credit losses.

As a reaction to COVID-19, we did significantly reduce expenses, including part-time and hourly payroll as well as other nonassociate-related expenses, and this continued through most of the first quarter. All associates are now back to normal working hours, and we're moving forward with the investments and initiatives that we were working on pre-pandemic. These initiatives include our revamped procurement efforts with preferred vendors, purchases from rental car companies and reconditioning efforts. Our customer service efforts in the digital area and improved service contracts, along with the continued investments in the recruiting and training of our associates. All of this with the goal of great customer service and increasing the number of customers served at each dealership. We will continue to focus on efficiencies and cost control while continuing to invest for the long term. And the health and safety of our associates and customers continues to be a top priority as we adapt to the changing environment amidst the continued pandemic.

For the current quarter, net charge-offs as a percentage of average finance receivables was 4.8%, down from 5.4% in the prior year first quarter. Our collection efforts returned to normal operating procedures during the first quarter while continuing safety measures related to COVID-19. We did see improvements in our delinquent accounts and our accounts 30 days past due was at 2.6% compared to 3.8% in the prior year first quarter. The CARES Act's enhanced unemployment benefits did contribute to this improvement, along with our efforts at working with our customers to keep them in the car and on the road. At the end of the fourth quarter, we did increase our allowance for credit losses by $11.7 million pretax to 26.5% related to the COVID and macroeconomic uncertainties. And although we have seen improvements in our portfolio in the current quarter, there continues to be much uncertainty caused by COVID-19 and its potential impact on our customers, collections, repossessions and the overall economic environment as we move forward.

The effective income tax rate was 23.4% for the first quarter of fiscal '21 compared to 21.8% for the prior year. Income tax expense did include an income tax benefit of $91,000 and $276,000 related to share-based compensation for the current quarter and the prior year quarter, respectively. We expect our base effective tax rate to be approximately 23.5% going forward prior to any excess tax benefits from stock option exercises.

We continue to have strong cash flows and a solid balance sheet. At quarter end, our total debt was approximately $214 million, and we had $50.6 million in cash, and over $26 million in additional availability under our revolving credit facilities. Our current debt, net of cash to finance receivables ratio is 25.4% compared to 28% at this time last year. During the quarter, we added $22.2 million in finance receivables, funded $2.9 million in net capital expenditures, increased inventory by $19.8 million for a total of $44.9 million with only a $7.7 million increase in debt net of cash.

Thank you. Now I'll turn it back to Jeff.

Okay. Well, thank you, Vickie. As we have said, we believe we have an obligation to serve significantly more customers over time. To position our company to do this, we will focus our efforts on investing in the recruiting, training and retention of all of our associates with special emphasis on the General Manager position. We will continue to invest in our digital efforts, aimed at improving efficiencies, reducing friction and making seamless the overall customer experience. There are many touch points before, during and after the sale of the vehicle and many opportunities to give great customer service along the way. We will continue to look to improve and enhance our service contract offerings with longer terms, oil changes, roadside assistance and other features that are very important to our customers and in line with our message to keep customers on the road. Additionally, we will continue to invest in the area of inventory procurement as we look for opportunities to leverage our size and improve the quality and the consistency of the vehicles we sell. We will continue to push for growth from our existing dealerships and believe that a large percentage can support 1,000 or more customers over time. This represents significant growth opportunities for us as we look forward.

We opened our Cabot, Arkansas and Chattanooga, Tennessee locations during the quarter, and we have Edmond and Norman, Oklahoma locations in process. Additionally, we believe that more acquisition opportunities will be available to us, and we're open to looking in that direction also.

We are excited about our future and look forward to continuing to improve our business in this dynamic environment. As always, thank you to our associates for giving 100% to each other, to our customers and to making our communities better.

We will now open it up for questions. Operator?

(Operator Instructions)

Our first question comes from John Murphy with Bank of America.

This is Yarden Amsalem on for John. So we've seen good improvement across a number of credit metrics in the quarter, but unit sales were actually down a little bit. So I'm hoping you can give us some color on the health of your underlying consumer as it relates to both demand and credit performance? And maybe potentially the impact that you're seeing from the different government stimulus programs?

Yes. We -- the volume reduction was, we believe, mostly related to just inventory. We're a little short on inventory coming into the quarter, especially at the lower price points. There has certainly been a nice consumer demand, somewhat related to stimulus. And so we certainly feel like the consumers were looking for cars, we were just a little bit short. There was just a frenzy, if you will, for cars at that low price point. And so we were a little short with inventory and maybe missed a little volume at the lower price points during the quarter, the stimulus funds certainly helped on the credit side of things, but we also did a lot of things internally to improve our credit metrics. It's hard to know exactly how much of each resulted in the better results, but certainly, the stimulus funds did have an effect on credit performance in the quarter.

Can you maybe give us a sense of the cadence of sales throughout the quarter from May through July and maybe even August?

Yes. I think we mentioned in the fourth quarter call that we were running around 90% of prior year in May, and that ended up being pretty close to where we ended for May. And then we did see nice improvements for June and July. In August is pretty good so far.

Okay. Excellent. And I guess my next question, I would like to hear your thoughts about used vehicle pricing, what you've seen in the quarter, how much it helped margins in GPUs and potentially even your forecast for the end of the year?

Well, certainly, used car prices have been up a lot more than expected, and that has to do with a combination of stimulus funds being out there and a very low supply of used cars, especially at the lower price points. So I think that most folks are saying, at some point in the next 6 months, we're going to get some relief on the supply side, we're not sure that, that relief comes at the lower price points. We may have challenges there for an extended period of time. But we are also, at the same time, trying to sell a better car to a better customer, keep customers in our family longer. So we were on track to push up the quality of the car we're selling as we try to expand our market share and keep customers in the Car-Mart family longer. So we do expect a continuing increase in our average selling price, and some of that relates to the overall market in the short term at least, being very strong and prices being up and then maybe a little further down the road, we do expect to see some price relief in terms of used car pricing. But that's going to be subject to some macro factors and repossession activity and cars coming off-lease and auctions back flowing full speed. And so there's a lot going on with used car prices, but we do expect prices to continue to increase over the short term.

Our next question comes from Vincent Caintic with Stephens.

First question, kind of broad overview question. But if you can give us an update on August trends so far and any differences from what you're seeing from the fiscal first quarter? And then if there's any sort of forward look you could provide for the rest of the year versus what we saw in the first quarter trends that you could provide for us?

Yes, I would just say that August is as expected, pretty solid on collections and demand on the sales side. As far as looking forward, there's just a lot of things that are unknown, pandemic related. And so we do expect, as we've mentioned several times that we're going to increase market share. We're going to control the things that we can control. And so we're going to get some market share increases, but it's a little bit unknown about what happens with unemployment, further stimulus and just general economic conditions.

So -- but I would tell you that our company is building for the future, building for 5 and 10 years from now. And we do expect to pick up market share. It's just -- there's a lot of unknowns right now in the economy, but we will be picking up market share. Just -- we don't know exactly what that market might look like over the short term.

Okay. That's very helpful. And next question is actually a follow-up on the previous question, but about the -- what you call, the per store sales volumes being down and the unit volumes being down. Just wondering if those inventory issues that you cited are largely fixed at this point? And if maybe we can think about pent-up demand that wasn't solved when you had your inventory issues. Are you able to clear that customer demand today because those inventory issues are longer there?

I think Vickie mentioned that the inventory volumes are back to close to pre-pandemic levels. We are a little higher on the cost scale. A lot of independent dealers buy a less expensive used product. So that, again, there's been a real frenzy for a lower-priced used car for several months, and we chose as a company to not participate as fully in that frenzy as it doesn't translate into a good value for a consumer. So our overall pricing and overall cost of inventory has drifted up. But it is -- the market is a little more friendly. We are finding more cars, and more cars at the lower price points, but there's still an excess demand for the low price point, and our inventory overall has drifted up a little bit, and we expect that to continue until prices are more rational at those lower price points as we go forward. We do expect that to happen at some point, but it may take a little time.

Okay. That's helpful. And actually, maybe just to clarify on that. So your average sales price this quarter was really -- it was strong year-over-year, 13% growth. Is that something we should be -- with the inventory being maybe cleared a little bit, is that something we should continue to expect in future quarters? Or is it still -- should we still be expecting high average sales prices?

I would say we're expecting quarter-on-quarter increases as we move forward, we've been drifting up for several quarters in a row but with the supply issues on used cars and the shortage of cars at the lower ends. We do expect some continuing price increases quarter-on-quarter as we look forward until we get a little more clarity on the overall market and things return to more normal in the flow of used cars.

Our next question comes from Kyle Joseph with Jefferies.

Congratulations on a good quarter, given all the uncertainty right now. I wanted to talk a little bit about lending competition out there. We've heard anecdotally that a lot of lenders have been tightening. Have you guys seen any evidence of this on your side?

Well, we've heard that, too. We don't see much direct evidence of that. Although the fact that our down payments and deal structures and the quality of the consumer we're seeing has been quite high, so we can kind of extrapolate that to mean that the lending environment is a little more tough. But we haven't seen a huge change in the competitive landscape at this point. We do expect that to happen over time. And believe we're positioning ourselves, again, to pick up some significant market share if credit constricts in a big way in our markets.

Got it. And then on the other competitive side, kind of some of the more mom-and-pop dealers you guys compete with you. I would guess they're seeing similar difficulty sourcing inventory as well, but are there any opportunities for additional acquisitions there? How would you say other dealers are doing?

Yes. Good point. They are certainly having a difficult time finding the less expensive cars. And as far as acquisitions, we do feel there's a number of companies out there that would like to be part of the Car-Mart family. And so we feel like that the acquisition we did earlier -- or later in last year that acquisitions like that are going to be a part of our growth plan. But I would say, yes, the smaller independent dealers are having trouble with finding good used inventory and probably having a little issues -- a few issues with their lending facilities and their liquidity also, which is a good thing for us.

Got it. Last question for me. So you guys took your reserve up last quarter. I believe that was related to kind of a temporary suspension of some collections activities, but we definitely saw credit really snap back and performed really well in the quarter. Can you just -- I know there's so much uncertainty out there right now in terms of stimulus and the pandemic and impacts on credit. But from a reserve perspective, over the near term, do you think this is the appropriate level?

Yes. As you know, Kyle, we review that in-depth every quarter. And certainly, our portfolio is looking a lot better with delinquencies better. But especially with adopting CECL and taking into impact all of the macroeconomic factors that are out there right now and the uncertainty, the higher unemployment. We've decided to leave it at that higher level until there's a little more clarity. And then we'll readdress that every quarter, but we certainly feel good about our portfolio.

Our next question comes from John Rowan with Janney.

A little surprised to see the jump in duration quite so sharply. Is that a competitive issue? Or is that just a function of trying to move an investment or, if you will, just a higher price inventory level at a lower monthly -- a payment?

Yes. I guess some of that, we've been talking for a while about keeping customers in the Car-Mart family longer term. We, over time, had let them kind of graduate beyond us. And when we look at the total cost of ownership and the deal they're getting down the street, we realize that there's no reason at all for us to lose these customers, but they do require a newer car with a higher sales price and a longer term. In the -- but this has been something we've been working into our model for quite some time, but the increase in used-car pricing overall certainly has an effect on our retail pricing, too, as we price, the retail prices set based on the cost of the car. So as used prices go up, our sales prices go up accordingly.

As far as the term, I think the sales price was up $1,400, and we're only up 2.5 months, which is actually a relative decrease in prices based on the sales price of the car. So we're doing our best to keep that term down. But as we improve our procurement processes, working with preferred vendors, railcar companies and recon, we have more confidence in our cars. And as a result, are very confident in adding a few months to the term would be a big positive for us from the consumer standpoint and the credit performance standpoint and a market share standpoint as we go forward.

Does that confidence come from the ability to -- or the lower maintenance that will go into these vehicles over time?

That is certainly part of it. The less mechanical issues you have with a car, the better your credit performance and the more time our dealership personnel have to sell cars and service accounts and then give customers great customer experience.

Okay. And then just lastly, I mean, this is the first quarter I've seen where the share count went up. Can you give us -- can you remind me what the status of the buyback program is and whether or not you look for additional liquidity in order to continue repurchasing stock?

Yes. We're just -- the buyback program is still in place. We're still out to consider to be an opportunistic buyer. There's so many unknowns in the world right now. And we have what we believe to be so many opportunities to grow our base business and our returns on growing the base business have historically been higher than our returns on the share repurchases. So we're just going to let things go a little bit here, try to get a better feel for what's going on with the macroeconomic environment and also making sure that we're investing where we need to invest right now so that we're not only relevant, but continue to be a leader in 5 and 10 years from now. There's a lot of places where we need to focus some significant investments. And again, that's in the digital side, making our customer experience seamless our customer care group here, our service contract expansions, the better quality of the car, the procurement efforts we're in. All of this is going to take investments now in growing our base business is our primary focus. And until we get a little more clarity on what's going on in the world, what's going on with the consumer, we're going to be a little conservative on the share repurchases.

(Operator Instructions) We have a follow-up question from Vincent Caintic with Stephens.

Just few more. So one, so SG&A expenses were flat year-over-year, even though your revenues were up really strongly at up 9% year-over-year. Vickie, I remember you were talking about that employees are now being fully employed after, I think, most of the quarter, they were not employed. Just sort of wondering what sort of expense level should we expect going forward? Because you had really strong expenses this quarter, is that sustainable? Or should we kind of expect expenses now that will be growing alongside your revenue growth?

Yes. I think you should expect the growth in the SG&A, like you were seeing prior to the pandemic. As Jeff mentioned, we feel like we've got a lot of opportunities here, and we know we've got some areas that we need to invest in, in order to support a larger business. So I think if you look at the cadence of the SG&A kind of pre-pandemic, this quarter was a little bit unique here.

But as always, we -- any investments we're making in SG&A are expected to be leveraged over time. It's just a little difficult on a quarter-to-quarter basis to always get that exactly right, good or bad. It's tough to get that exactly right, especially during a pandemic with some cost-cutting in place. But the investments that we're making, and we'll continue to make, are expected to provide some SG&A leveraging over time.

That's helpful. And last question, kind of a follow-up from Kyle's questioning earlier on the competitive front. But sort of wondering if you could talk about taking share opportunities that you highlighted over time. So we've -- so helpful color on kind of the independent used-car dealer, the mom-and-pops and maybe some struggles there. And also what we're hearing on some of the financing sides, like you saw the news about Wells Fargo pulling away from independent financing. And so I'm kind of wondering if you talk about the opportunity to take share, and I think you also highlighted that maybe some of these folks might be interested in joining the Car-Mart family. So just broadly, if you could talk about opportunities to take advantage of maybe some disruptions that are going on or to take advantage of more markets here?

Yes. We feel like what we do is unique, as we mentioned. We provide a good quality car for an affordable price, affordable payments. And then we give incredible service after the sale to a credit-challenged consumer that's going to need some help after the sale. So when we look at the total cost of ownership for our transaction and compare that total cost to what a consumer with choices might get down the street through special finance, we realize that we really have a better deal for that consumer. So we need to continue to look at and promote our dare to compare, our price comparisons to the person down the street and educate our associates and the consumers about the total cost of ownership and the peace of mind that you get from dealing with Car-Mart.

What Car-Mart does is take a big stress point out of consumers' lives. They trust us, they count on us. We're in this boat together. We're going to keep them on the road. And when you think about all the stresses in people's lives, if we can take a big stress point out related to local transportation needs, and also do that at a price that's actually more attractive, then we believe we've got just significant market share opportunities, both above us on the price points and below us. And we just feel like what we're doing and how we're doing it, the fact that we live our mission vision values from top to bottom here every day. We really are trying to make our associates better, give them opportunities, help these consumers and communities. And when you combine that with a price that makes sense, too, we jump in and do all the heavy lifting. We put our boots on and punch that clock every day and go to work for our consumers.

And that just, to us, is going to translate into significant market share increases as we go forward. And then on the acquisition side, we know that there are a lot of good independent buy here, pay here dealers that have been doing it a while, might be looking for an exit strategy or looking to team up with someone at some point in their journey. So we're open and active and believe that there are some good players out there that would -- would love to join our team and expand our geography and as we said, we have an obligation to grow the customer count. And we take that obligation very seriously, and we're pushing on with all these initiatives so that we can serve more customers over time.

And I'm currently showing no further questions. I'd like to turn the call back over to Jeff Williams for closing remarks.

Okay. Well, again, thank you for joining us, and thank you for your interest in our company. Thanks to all of our associates for all the great effort out there and the hard work and dedication to our mission. And you guys have a great day. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.