Q1 2021 America's CAR-MART Inc Earnings Call
[music]. Good morning, everyone. Thank you for holding and welcome to America's called Mark first quarter fiscal 2021 conference call.
Topic of this call will be the earnings and operating results for the company's first quarter for fiscal 2020 line.
Before we begin I will like to remind everyone that this call is still recorded and will be available for replay for the next 30 days.
The dial in number and access information already created in last Night's press release, which can be found on America's car markets website at Www Dot card dashboard Dot com.
As you all know someone management's comments today may include forward looking statements, which inherently involve risks uncertainties that could cause actual results to differ materially from management's presently.
These statements are made pursuant to the safe Harbor provision other private Securities litigation reform back in 1995.
The company cannot guarantee the accuracy of.
The obligation to update such forward looking statements.
For more information regarding forward looking information, we see part one of the company's annual reports on form 10-K for the fiscal year ended April Thirtyth 2020.
It's kind of quarterly reports furnished to the two or filed with the Securities Exchange Commission or form 8-K M's in Q.
Participating on the call. This morning, or just once the Companys <unk>, Chief Executive Officer, and Vicki 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 Americas Cormark.
As we mentioned in our press release, we had another good solid quarter.
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 the 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 we 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 account.
And build it infrastructure to support a much larger business.
Diane and dialogue, we put in the hard work required.
To serve our customers at the highest level.
Our purpose has never been more clear and our offering and how we conduct business has a direct positive effect on the quality of life in their communities we serve.
We give customers peace of mind by standing with them.
When likes challenges happen.
By keeping them on the road after the sale.
Again, we're very proud of our work.
Well, we had a real sense of urgency to improve and get better quickly.
As we move forward.
We'll now turn it over to Vicki to go over the numbers Vicki.
Well good morning.
We had a strong quarter with the revenue increase of 9.3% up 298 million.
The increased revenues resulted from an eight and a half person increasing sales.
This was due to the 12.2% increase than the average sales price, partially offset by 2.8% decrease in the retail units sold.
Interest income increased by 15.2%.
Same store revenues were up 5.5%.
Revenues from stores in the over 10 years of age category were up 5%.
Doors in the five to 10 year category were up 7% in stores and revenues for stores and the less than five 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 point and lower.
Customer traffic, both as a result of the pandemic.
At quarter end, 20, or 13% of our dealerships work from zero to five years old.
41, or 27% work from five to 10 years old and the remaining 89 or 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 slots produced 29.6 units sold per month or lot for the quarter compared to 31.6 for the prior year quarter.
But then the five to 10 year category produced 24.6 compared to 26.2 for the prior quarter and a lot less than five years of age had productivity at 23.3 compared to 20.2 for the first quarter last year.
Our downpayment 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.
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 1300, $90 with only a two and a half month increase in the term compared to the prior year first quarter, our average monthly payment as approximately $430 a.
Our weighted average contract term for the entire portfolio, including modifications with 33.9 month compared to 32.1 for the prior year <unk>.
The weighted average age of the portfolio was basically flat at approximately nine months.
Our interest income increased three point, threemillion or 15.2 per cent 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 ended the quarter was approximately 16.4% flat from the prior year quarter.
Gross profit per retail unit sold increased by $693 to 50, 579 up 14.2 per cent compared to the prior year quarter.
The gross profit percentage was 41.7 per cent 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 at the lower price Tina and also reduced expenses of the payment protection plan product. This is partially offset by the lower margin on the retail unit.
Increasing average selling prices resulted 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 top of vehicles sold was fairly consistent with S. UBI sales, increasing approximately 3% over the prior year quarter.
Our inventory volumes are backup the pre pandemic level 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.
We will continue to be a part of our pharma effort as we move forward.
As DNA for the quarter was up 86000 compared to the prior year quarter, but down as a percentage of sales to 17.7 per cent compared to 19.1% for the prior year quarter.
As DNA as a percentage of total revenue less cost of sale and provision for credit losses was 50.5 per cent compared to 58.7 per cent for the prior year quarter, excluding the reduction in the allowance for losses in Q1 of the prior year.
This metric is important for 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 covert 19, we did significantly reduce expenses, including part time and hourly payroll as well as other non associate 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 revamp procurement efforts with preferred vendors.
Purchases from rental car companies and reconditioning hamper.
Our customer service efforts and the digital area and improve 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 and met the continued pandemic.
For the current quarter net charge off 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 cobot 19.
We did see improvements in our delinquent accounts and our account 30 days past due was it 2.6% compared to 3.8% in the prior your first quarter.
The cares ACA 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 fourth quarter, we did increase our allowance for credit losses by 11.7 million pretax to 26.5% related to the co bid and macroeconomic uncertainties.
And although we have seen improvements in our portfolio in the current quarter. There continues to be much uncertainty caused by cobot 19, and its potential impact on our customers collections repossession and the overall economic environment as we move forward.
The effective income tax rate was 23.4% for the first quarter fiscal 21 compared to 21.8 for the prior year.
Income tax expense did include an income tax benefit of 91002 hundred 76000 related to share based compensation for the current quarter in the prior year quarter, respectively.
We expect our base effective tax rate to be approximately 23, and a half person 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 and finance receivable under 2.9 million and 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 and now I'll turn it back to Jeff.
Okay. Thank you Vicki.
As we have said, we believe we have an obligation to serve significantly more customers overtime.
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.
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 inline with our message to keep customers on the road.
Additionally, we will continue to 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 still.
We will continue to push for growth from our existing dealerships and believe that a large percentage can support 1000 or more customers overtime.
This represents significant growth opportunities for us as we look forward.
We opened our Cabot, Arkansas, and Chattanooga, Tennessee locations during the quarter.
We have Edmund 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 forgiving 100 <unk> percent to each other.
Our customers.
And making our communities better.
We will now open it up for questions operator.
[noise] at this time, the participants will now answer questions from the callers.
I'd like to reiterate that my earlier comments regarding forward looking statements apply both to participants prepared remarks into anything that may come up during the culinary.
To ask the question you need to press Star one and your telephone withdraw your question press the pound King. Please standby will be compiled that you any roster.
Our first question comes from John Murphy with Bank of America. Your line is open.
Good morning, guys. This is your down Salim on for John.
I'm sorry, so we've seen a good improvement across a number of credit metrics in the quarter, but do you any child were actually Darrin, let a bad 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 governed.
And stimulus programs.
Yeah, we.
The volume.
Reduction was we believe mostly related just inventory, we're a little short on inventory coming into the quarter, especially at the lower price points.
There has certainly been a a nice consumer demand.
Somewhat related to stimulus.
And Oh, so we certainly feel like the consumers.
We're looking for cars.
We're just a little bit short there was just a frenzy. If you will for up for cars at that low price point.
And so we were a little short with inventory and maybe lift missed a little volume.
At the lower price points during the quarter.
The stimulus funds certainly helped on the credit side of things.
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 a better results but.
Certainly the stimulus funds did have an effect on credit performance in the quarter.
Can you get maybe give us the sense of the cadence of sales throughout the quarter from May through July and maybe even a hobby.
Yeah, I think we mentioned in the fourth quarter call that we were running.
Around 90% of prior year in May.
That ended up being pretty close to where we ended for May and then we did see a nice improvements for it for June and July.
And in August this is pretty pretty good so far.
Okay excellent and I guess my next question I would I would love to hear your thoughts about used vehicle pricing, what you've seen in the quarter how much it helped margins the jeep use and potentially even your forecast for the end of the year.
Well certainly a 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.
I think that most folks are saying at some point. The next six months, we're going to get some relief on the supply side, we're not sure 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 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.
In the some of that relates to the overall market.
In the short term at least being very strong in 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 a.
To some macro factors anda.
Repossession activity in cars coming off lease and auctions back flowing full speed so.
There's a lot going on with the used car prices, but we do expect a prices to continue to increase.
Over the short term.
Okay. Thank you so much that one July.
Thank you.
Thank you. Our next question comes from Vincent can check with Stephens. Your line is open.
Thanks, Good morning, everyone.
Next 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 year versus what we saw in the first quarter trends.
That you could provide for us thank you.
Yeah, I would you say that August is as expected pretty solid on collections and.
Demand on the sale side.
As far as looking forward, there's just a lot of things that are unknown.
Pandemic related.
And so Oh, 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 to 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 are companies is.
Building for the future building for five and 10 years from now.
And we do expect to pick up market share. It's just there's a lot of.
Knowns right now and 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 very helpful. Thank you.
And next questions that you follow up on the previous question, but about the.
The.
On the.
For store sales volumes being down in the unit volumes being down just wondering if those inventory.
Issues that you cited are largely fixed at this point and.
Maybe we can think about pent up demand that.
Wasn't solved when you had your inventory issues or you are you able to too.
Sure for demand, Dave because those inventory issues or longer there. Thank you.
I think Vicki mentioned that the inventory volumes are back to close the pre pay and then make levels.
We are a little higher on the cost scale.
Oh, a lot of independent dealers by a less expensive used product. So that again, there has been a real frenzy for a lower price to used car for several months and we chose as a company to not participate fully in that frenzy.
It doesn't translate into a good value for consumer.
So our overall pricing and overall cost as inventory has 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 a an excess demand for a for the low price point.
And our inventory overall has drifted up a little bit and we expect that to continue.
Still a until prices are more rational at those lot 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 strong year over year, 13% growth.
That's something we should be.
Except with the inventory being.
Maybe cleared a little bit is is that something we should continue to expect in future orders or is it still.
Should we still will be expecting high.
Average sales prices.
I would say we were expecting quarter on quarter increases as we move forward.
We've been drifting up for several quarters in a row.
But a you know with the supply issues on used cars and.
The shortage of cars at the lower end. So we do expect a some continuing price increases quarter on quarter. If we look look forward until we get a little more clarity on the overall market and and things return to more normal.
In the flow of used cars.
Okay. Thanks, very much I'll get back into queue. Thanks.
Thank you. Our next question comes from Cal Johnson from Jefferies. Your line is open.
Hey, good morning, Jettisoned Vicki Hope you guys are doing well congratulations on a on a good quarter given all the uncertainty right now.
I wanted to talk a little bit about lending competition out there you know we <unk>, we've heard anecdotally that a lot of a lot of lenders had 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 the fact that are down payments and deal structures and the quality of the consumer. We're seeing is has been quite high. So we can kind of extrapolate that to me that the lending environments, a little 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 overtime and believe we're positioning ourselves again to pick up some significant market share if credit constrict.
In a big way.
In our markets.
Got it and then on the other others competitive side gotten as some of the more mom and pop dealers you guys compete with you now I would guess there they're seeing similar.
Difficulties sourcing.
Inventory as well that you know are they are there any opportunities for additional acquisitions. There how would you say or other dealers are doing.
Yeah. Good point, they are certainly Uh huh.
Having a difficult time, finding the the less expensive cars.
And ER as far as acquisitions, we we do feel there's a number of the companies out there.
That would or would like to be part of the car Mart family.
And so we feel like that the acquisition, we did earlier and their later 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.
Their lending facilities and their liquidity also.
Which is a good.
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 perform really well.
In the quarter can you just I know, there's so much uncertainty out there right now in terms of stimulus and in the pandemic and impacts on credit, but you know from <unk> reserve perspective over the near term do you think this is the appropriate level.
Yeah as you know cow, we review that and that every quarter and certainly our portfolio. You know is looking a lot better with delinquencies better.
But you know, especially with adopting Cecil and taking into impact all of the macro economic factors that are out there right now and the uncertainty the higher unemployment.
Yeah, we decided to leave it at that higher level until there's a little more clarity and then well we had re address that every quarter, but we certainly feel good about our portfolio.
Got it well congrats again, thanks very much for taking my questions.
Thank you.
[laughter].
Thank you. Our next question comes from John Rowan genes.
[noise] good morning, guys.
Morning.
I'm, a little surprised to see the jumping duration quite so sharply is the other competitive issue or is that just a function of trying to move.
You know an investment or if you will just a higher price inventory level at a lower monthly paid off human.
Yeah, if some of that we've been talking for a while about keeping customers in the car Mart family longer term.
We overtime had let them kind of graduate beyond us.
When we look at the total cost of ownership in the dealer getting down the street we.
Realize that a there theres 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.
Based on the cost as a car so as used prices go up our sales prices go up a accordingly as far as the term I think the sales price was up 1400 bucks them earlier, two and half a month.
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 process is.
Working with preferred vendors rental car companies and recon, we have more confidence in our cars and as a result.
I'm very confident and adding a few months to the term would be a big positive for us from a consumer standpoint, the credit performance standpoint in a market share standpoint, as we go forward.
Does that confidence comping, the ability to or the lower maintenance I will go into these vehicles over time.
That is certainly part of it the less a mechanical issues you had with a car the better your credit performance and the more time are a dealership personnel have two to sell cars and service accounts and give customers great customer experience.
Okay, and then just lastly, I mean, she is the first quarter and seeing where the share count went up can you give this you remind me what the status of the buyback program is and you know whether or not you would look for additional liquidity in order to continue repurchasing stock. Thank you.
Yeah, we're just to the buyback program is still in place a we're still out to consider to be an opportunistic buyer. There's so many unknowns in the in the world right now.
And we have what we believed to be so many opportunities to grow our base business.
Our returns on growing the base business.
Has historically been higher than our returns on the share repurchases.
So we were just going to let a things go a little bit here try to get a better feel for what's going on.
With the macroeconomic environment.
And and also making sure that we're investing where we need to invest right now so that we're not only relevant to continue to be a leader in five and 10 years from now there's a lot of folks the along a lot of places.
Where we need to focus some significant investments and again, that's in the digital side, making our customer experience a seamless our customer care group here our service contract expansions.
The better quality of the Carter the procurement efforts were in all of this is going to take a 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 we're going to be a little conservative.
On the share repurchases.
Okay. Thank you.
Sure.
Thank you once again, ladies gentlemen, if you wish to ask the question at this time. Please press Star then one or you'd have some telephone.
We have follow up question from doesn't keen to with Stephens. Your line is open.
Hey, thanks for the follow up.
More so one.
So as you know expenses were flat year over year, even though your revenues were up really strongly up 9% year over year.
I remember you were talking about that.
Employees are now fully fully employed after I think most of the quarters. They were not employed just sort of.
Wondering what sort of.
Extensible should we expect going forward because he had really strong expenses. This quarter is that sustainable or should we kind of expect expenses now that would be growing alongside your revenue.
Yeah, I think you should expect the growth in the S. DNA like you were seeing prior to the pandemic as as Jeff mentioned, we feel like we've got a lot of opportunities here and we know we've got some areas.
We need to invest in order to support a larger business. So I think if you look at the cadence of the S DNA kind of pre pandemic.
And this quarter with a little little bit unique here.
But as always we any investments, we're making an S.G. and I are expected to be leveraged overtime.
It's just a little difficult on a quarter to quarter basis to.
To always get that exactly right, good or bad it's tough to get that that exactly right, especially during a pandemic with some cost cutting in place, but the investments that we're making you will continue to make are expected to provide some as DNA leveraging overtime.
That's helpful and last question that.
Kind of a follow up from a pile questioning earlier, but.
Competitive front.
Sort of wondering if you about.
Taking share opportunities that you highlighted overtime.
So weve.
So helpful color on kind of independent used car dealer the mom and Pops.
Maybe some struggles there and also what we're hearing on some of the financing side.
You saw that use about wells Fargo pulling away from independent so financing.
So I'm kind of.
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.
Take advantage more market share.
Yeah, we feel like what we do is unique as we mentioned.
We provide a good quality car.
We're in a safe 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 costs to what a consumer with choices.
Get down the street through special Finance.
We realized that we really have a better deal.
For that consumers, so we need to continue.
Look at a and promote our dare to compare our price comparisons to the to the person down the street and educate our associates and the consumers.
The the total cost of ownership and the peace of mind.
That you get from dealing with Cormark.
What car Mart does take a big stress point.
Out of consumers' lives.
They they trust us like 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 than we believe we've got just significant.
Market share opportunities both above us on the price points in below us and we just feel like what we're doing in 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 healthlease consumers and communities and when you combine that with a a price that make sense to.
We jump in and do all the heavy lifting we put our boots on and punch that clock everyday and go to work for our consumers and.
Just to us is going to translate into some significant market share increases as we go forward and then.
The acquisition side, we know that there are a lot of good independent buy here pay here dealers.
That had been doing it awhile might be looking for an exit strategy are looking to team up with a with someone.
At some point.
And there are in their journey. So we're we're open inactive and believe that there are some good players out there that 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 overtime.
Great. Thanks.
Thank you.
Thank you and I'm currently showing no further questions I 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 in the hard work and dedication to our mission.
You guys have a great day. Thank you.
Ladies and gentlemen, just today's conference call. Thank you for participation you may now disconnect.
[music].