Q1 2020 Earnings Call
Again, I would like to remind everyone that this call is being recorded and I will be it 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 Americas car Marts website at Www Dot car dash Mark Dot com.
As you all know some of managements comments today may include forward looking statements, which inherently involve risks and uncertainties that could cause actual results to differ materially from managements present view. These statements are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995, the company cannot guarantee the accuracy of any forecast or estimate nor does it undertake any obligation to update such forward looking statements for more information regarding forward looking information. Please see part one of the company's annual report on Form 10-K for the fiscal year ended April Thirtyth 2019, and its current and quarterly reports furnished to or filed with the Securities 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 Vicki Judy Chief Financial Officer, and now I'd like to turn the call over to the company's Chief Executive Officer, Jeff Williams.
Okay, well, thank you for joining us and thank you for your interest in Americas car Mart.
We are pleased to report another good solid quarter, and we're off to a great start for the fiscal year.
Our topline was up almost 5% and we added 1600 customers for the quarter.
We are happy with the significant improvement in our credit results and what that says about our product and service and the value that we're adding to the lives of our customers.
We believe that taking care of people will drive operational success and long term value creation.
We will continue to invest in training and development of our associates.
At the same time educate consumers.
On the savings we provide in terms of the total cost of ownership.
With the goal to keep customers for life.
And move up market as their credit profiles improve overtime.
We will leverage the infrastructure, we have built and grow our topline and customer count.
As we have said, even though were 38 years old and have a great history in many ways, where a startup company. Many important initiatives are just getting off the ground and we're excited about our place in the world.
Our team is putting everything we have into giving our customers a great experience and supporting our associates as they build their careers.
As we've said our model represents the best way to serve this high touch market.
And we aim to be the best company in the world at providing transportation solutions to create a challenge customers.
I will now turn it over to Vicki to go over some numbers Vicki.
Good morning for the quarter overall revenues were 172 million with same store revenues up 3.3%.
This resulted from a 4.1% increase in sales and a nine and a half first the increase in interest income.
Revenues from the dealerships in the over 10 years of age category was up 2%.
Doors in the five to 10 year category was up 4% and revenues for stores and the less than five years of age category was up about 34% to about 16 million. Most of the sales increase was a result of the increased selling price.
Sales volumes were basically flat, our average selling price increased to $11410, a 3.6% increase or $395 compared to the prior year quarter.
There's also an increase of $105 sequentially.
This resulted from the continued high demand for vehicles in the used car market and our effort to provide a high quality vehicle for our customers.
At quarter end, 20, or 14% of our dealerships were from zero to five years old.
40, or 28% more from five to 10 years old with the remaining 85 being 10 years old or older.
Our overall productivity was 29 units per lot per month down from 29.8 compared to the prior year quarter. Our 10 year plus thoughts produced 31.8 units sold per month per lot for the quarter compared to 32.8 for the prior year quarter.
Lots in the five to 10 year category produced 26.6 compared to 26.8 for the prior year quarter.
Lots less than five years of age had productivity of 21.7 compared to 22.1 for the first quarter of last year.
We continue to believe we have potential to increase sales volume.
And improve productivity with the ongoing investments being made in our inventory our field sales efforts and the digital area.
Our down payment percentage was that's partly to 6.5% compared to 6.1% for the prior year quarter collections as a percent of finance average finance receivables was up 40 basis points to 13.5% compared to 13.1% last year.
The average written originating contract term was 29.9 months.
Compared to 29.7 for the prior year quarter and up slightly from 29.8 sequentially.
Our weighted average contract term for the entire portfolio, including modifications was 32.1 month compared to 32.4 for the par July .
The weighted average age of the portfolio was basically flat at approximately nine months.
Interest income increased 9.5% to 1.9 million or 1.9 million compared to the prior year quarter, primarily due to the 41 and a half million increase in average finance receivables at an 8.1% increase the weighted average interest rate for all finance receivables at the end of the quarter was approximately 16.4 up from 16.3.
Our gross profit margin dollars per retail units sold increased $504, 2.2% to $4896 compared to 40 782 in the prior year quarter.
Our mix of retail units sold was consistent with the prior year.
S. DNA for the quarter was up 2.3 million, 19.1% of sales compared to 18.3 for the prior year quarter.
This increase was almost entirely related to salaries and benefits, including stock based compensation as we're making long term investments focused on recruiting and developing great associates and an infrastructure to support a growing customer base.
We've added over 4300 customers since this time last year.
1600, since fiscal year end and our efficiency improved again this quarter based on the number of customers for our associates.
We're focused on efficiencies and cost control, while continuing to invest for the long term to be able to grow and be prepared to capitalize on market opportunities.
As an integrated sales and finance company, we would not have seen the improvements in our credit losses.
And net income without these investments.
For the current quarter net charge offs as a percentage of average finance receivables was 5.4% down from 6.4% in the prior year first quarter.
Both the frequency and severity of losses have improved compared to the prior year as a result of a higher quality vehicle improved deal structures and improved collections practices, our focus on customer experience and ensuring customer concerns are addressed and resolved in a timely manner have contributed to the reduced frequency of losses.
Improved collection 40 basis points, better and higher recovery rate contributed to the decrease in severity of losses.
Recovery rates for the quarter were approximately 27% compared to 28% last quarter and 25% in the prior year quarter.
We're very pleased with this continued improvement in credit results and the fact that we have more customers being successful and staying in their vehicles.
As a result of these continued improvements in our net charge offs and the quality of our portfolio, we reduced the allowance for credit losses from 25% to 24.5%, resulting in a 2.6 million decrease in the allowance for credit losses as of July 31st.
This was a 2 million after tax benefit in net income or 29 cents per diluted share.
Excluding this adjustment the provision for credit losses on the income statement would have been 22.7% of sales for the current quarter compared to 26.1% for the prior year quarter.
The effective income tax rate was 21.8% for the first quarter fiscal 20 compared to 17.1% for the prior year quarter income tax expense did include an additional income tax benefit of 276000, and 943000 related to share based compensation for the current quarter and the prior year quarter respectively.
We continue to expect our base effective tax rate to be approximately 24% going forward prior to any excess tax benefits from stock option exercises.
At quarter end, our total debt was approximately 159 million, we had over 56 million in additional availability under our credit facilities and our current debt to equity is 58.1% and our debt to finance receivables ratio was 28.3%.
During the quarter, we repurchased 55507 shares of our company for 4.7 million at an average of 84 94 per share.
Since 2010, we've repurchased approximately 53% of the company for $229 million at an average price of approximately $37 per share.
We continue to have strong cash flows for the quarter, we added 17.8 million and finance receivable repurchased 4.7 million of our common stock.
Funded a million dollars and net capex and increased inventory by 7.2 million a total of 30.7 million with only 5.8 million increase in debt.
Thank you and now I'll turn it back to Jeff.
Okay. Thank you Vicki has mentioned in the press release, we did open two new dealerships during the quarter.
One in Bryant, Arkansas, and one in Conway, Arkansas.
These dealerships have gotten off to a good start and we expect great things from these locations.
As well as the other new lots opened in the last year.
We will add additional locations in the future at a rate that matches, our ability to support customers and associates at the highest levels.
Our focus over the near term, we will continue to be to leverage our top performing general managers.
As we have a large number that can serve 1000 customers are more in their existing markets. These proven leaders are executing at very high levels and they deserve all our full support and attention.
As they pick up market share and help us build our future leaders.
As a company.
With great customer experience as our guide we are transitioning into being more aggressive in keeping customers for life.
And making the necessary investments with inventory facilities at associates to make that happen.
Once again, we have built an infrastructure that can support a significantly higher number of customers.
And we believe we have an obligation to grow as communities are better when car Mart is there.
We will now open it up for questions operator.
At this time the participants will now answer questions from the callers I would like to reiterate that my earlier comments regarding forward looking statements apply both to participants prepared remarks into anything that may come up during the Q and a.
Ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one kuna Touchtone telephone. If your question has been answered or you wish him move yourself from the queue. Please press the pound key to prevent any background noise. Please. Please your line on mute. Once your question has been stated our first question comes from John Murphy with Bank of America. You May proceed with your question.
Good morning, guys did you hear that I'm, sorry, I'm on for John .
Excuse show my Gosh, what you're seeing in terms of credit availability, the subprime space as well as the competitive environment, there and I guess related belatedly, how low interest rate the impact these dynamic.
Well, yeah, we can see continue to see a healthy competition out there there's still a lot of money available for subprime and deep subprime.
So it it is competitive.
We do believe that our offering in the pricing of our offering is a very attractive to consumers.
When you look at the total cost of ownership.
And our job is to educate those consumers on the the value that we have on our offering.
Compared to others and but it is it is competitive.
The the market certainly is flush with cash.
And Oh, we were trying to ER.
To make our offering better that customer experience better and to educate those consumers about the benefit and the cost savings of dealing with the car Mart and we do have a lot of room, we believe.
To be more aggressive with our repeat customers and the customers, we know keeping those customers in the family, but the competitive market is it's pretty intense.
Okay. Thank you and I guess lately I used teenage changing pretty helpful. Good question, obviously your credit metrics improved materially increased it in recent quarters, but accounts over 30 days past years picked up a lot of it what do you think what's driving that.
Well it was such a slide which we don't look at that as a as a as a big deal the slight increase in 30, plus I'd say overall the health of our customers is pretty strong the the wages are up the hours worked or Ah Ah.
We're attracting more repeat customers with the offering.
And we believe the overall portfolio is healthier today than it was a year ago.
Okay. Thank you and I'll just add to that the that 30 plus in some of those I. They are pretty sensitive to the day of the month that the or the day of the week that the month closes on.
So you know unless we're seeing something out of the ordinary.
We're not too concerned about where that that right now.
Thank you. Thank you for that color and I guess my last question can you maybe talk more broadly on your capital allocation strategy, how you're prioritizing share buybacks versus investment the manager is stopping paying down debt and so on.
Well, our first order of business is to always.
Make investments for the business first prior to buybacks and then when we have excess cash you know then we reinvest in those buybacks opportunistically, but certainly our first order of business is to take care of our associates. So that they can provide that service that we're looking for for our customers.
And that's where our first priority is going to be and we have a number of has mentioned the number of general managers that are that are very talented and running good businesses and so capital allocations to those folks as a top priority for us as we try to build market share.
And improve and increase our already impressive repeat business percentages.
Okay. Thank you. Thank you very much that's <unk>.
Thank you.
Thank you and our next question comes from Hugh Miller with Buckingham You May proceed with your question.
Hi, Thanks, Thanks for taking my questions you I guess, one of which as we think about the improvement in collections that you guys have enjoyed it how much would you say is kind of driven by internal efficiency enhancements that you've been able to deliver versus kind of just you know benefits from a higher quality car.
Okay.
We do believe that most of the improvements we are seeing is from internal improvements we have much better visibility.
On on delinquent accounts.
We are getting resolution with delinquent accounts much quicker than we were before we're seeing productivity at the field level that we didnt have the visibility is better.
We have a great team in place Corporately.
To assist the field with collections efforts and training and hiring in the.
In the personnel matters involve with those account reps in the field. So we think the primary reason for lower credit losses.
Is the basic improvements with the blocking and tackling and run running the play in the field.
But certainly we do also believe we're putting a better car out there more mechanically sound car.
Customer expectations are higher.
Especially as you try to attract a more creditworthy customer you've got to put a good product out there. So that certainly is a piece of the equation too.
That's helpful. Thank you and then I guess as you mentioned the initiative to kind of maintain the customer base create customers for life move up the credit spectrum with them.
How should we think about that and the influence over time on kind of the gross margin and also the other income revenue line item.
As you kind of progress with that customer base.
Well Thats a good question and.
Overtime.
Over the years.
Customers good customers, sometimes have graduated beyond car Mart and moved onto a special finance.
Maybe at new car dealerships or independent dealers.
And we believe that.
When we look at pricing above us and what our customers paying above us that there's quite a bit of room for us to move up.
With the quality of car the age and mileage of the car.
In and keep some of those customers that we know and have known.
And our good credit risks.
By offering a better a better product.
Maybe a little longer term with a lower payment the car quality would certainly support that.
So were looking.
Being more aggressive with inventory.
And with underwriting and marketing.
The customers, we already know as we see what's going on above US we think we've got some competitive advantages.
For markets.
Above us a little bit, which which would mean more inventory carrying more inventory.
The mix in quality of inventory being a little higher and certainly that sales prices overtime.
Maybe continuing to drift up which which is a good thing.
Got it Thats helpful color there and then just as we think about the unit volumes and kind of some of the headwinds that we've seen more recently there.
Can you just talk to us a little bit about kind of what's driving that I know in the past you've mentioned kind of inventory mix.
Having the right mix to sell.
Important but are you seeing any intensification of competition or has there.
Has there been any benefit the notice to this point about some of the website enhancements you've made just just some more color on that and how we should think about kind of unit volumes on a go forward basis would be great.
Well, we are again, its a little bit of a transition where we are certainly improving the quality of our inventory the quantity and the quality to be more competitive.
Really focusing in on repeat customers and customers we already know.
And.
And it is competitive theres and Theres a lot of money and we've got to educate our consumers about the quality of our car the value of the service. So we're in a little bit of a transition period with inventory educating consumers. The digital side is is really is very new to us.
The online credit application the pictures of inventory online.
The online marketing efforts, where we're new in that side of things within the last quarter or two and we're very optimistic that we're going to see some nice movements in all those areas in the right direction.
With increased volumes.
And we feel like the market is there for us the value proposition we bring is.
Fantastic.
And but we're in a little bit of a transition period, but in the meantime steel selling plenty of cars.
And credit losses are fantastic. So it's really in a pretty good spot.
Great color there I appreciate that and then last for me.
The tax rate came in a little lower than what were looking for any guidance. You can provide about how we should think about the tax rate on a go forward basis would be great. Thank you.
Sure so.
You know that the only difference really is the.
This discrete item of the stock based compensation.
And when exercises or Dan, we always get a get benefit from those we do still continue to have.
And options that will be expiring over the next few quarters.
We don't know exactly when those get exercised otherwise, we should be pretty close or just under that 24% tax rate excluding those discrete items.
Got it thank you very much.
Thank you.
Thank you. Our next question comes from Kyle Joseph with Jefferies. You May proceed with your question.
Hey, good morning, guys. Congratulations on another good quarter and thanks for taking my questions first.
One more on credit if you don't mind.
Talking about better vehicles, and better collections anything on the underwriting front or any any changes in terms of approval rates there.
Oh, no that traffic is a traffic has been up.
Based on the improvements with inventory in the efforts to improve our field sales efforts in the field. So traffic is actually hub.
The online efforts have improved online traffic obviously.
And so we're seeing we're seeing more customers at the dealerships and online.
In the end, we're being a little more selective.
And that's a good thing for a finance company.
We're trying to find always trying to find that right balance and make sure that.
That we are cherry picking it getting the very best credit risks and but the traffic has been solid both online and at the dealerships.
And.
And we we are being a little more selective on the underwriting.
We have some room to.
To to loosen up there, but we have room to really go after and be more aggressive with those higher rated customers.
Got it and then one follow up for me.
Given the weak Weve had can you just remind us how your your business performs.
In economic cycles.
Well you know the only a recent example is not that recent anymore is the is the great recession and the Companys credit results.
We're actually at all time lows at the tail end of the last recession, so by putting a good product out there for a fair price and.
And supporting these customers.
If credit was to constrict.
In the market significantly that would certainly be a positive for us.
And as somebody that's providing good basic affordable transportation.
With the service to support these customers and things that happen in their lives.
The last recession was actually very good for for car Mart.
Got it thanks very much for answering my questions.
Thank you.
Thank you and as a reminder, ladies and gentlemen that Star then one to ask a question. Our next question comes from John Rowan with Janney. You May proceed with your question.
Good morning.
Good morning.
Just wanted to drill down into its severity and frequency and severity a little bit more obviously, you talked a lot about proving the.
Part of that you're providing to the consumer how much of that.
Increase in loss frequency is a function of a better or mechanical soundness of the cars.
As opposed to a change in underwriting.
The majority of it is related to the cars I mean, we continue to tweak our underwriting and obviously they are credit I mean, our down payment and RF front equity in a lot of that stuff is improving.
I would say the majority of it is related to the car and just to add getting in front of the customer a little thinner and making sure. We're resolving any issues on a timely basis. If you. Let these guys go too far then then they can't get back out of it and I can't catch up so I think a lot of it is the car and and again our internal processes.
But if you had to kind of break it out to.
We feel like the biggest factor in frequency is.
Is the good work our folks are doing in the field. The visibility we have on collections efforts and the quality of the car fits in there too.
But it's a combination of things.
Okay, and then as far as severity goes I don't know if you gave out the information on duration, but we've obviously seen you know over the past year or so we've seen the region come down Weve seen downpayment go up in the cash conversion cycle improved what should theoretically even in a static you know.
In a static frequency situation reduce severity.
You know is that it can you give the duration figure.
And just speak to how much of that is driving that reduction in severity.
Yeah, So it's not huge.
You know our overall portfolio that 32 months.
And you know what 0.3 compared to last year, so not a big reduction in the term.
Oh, we are keeping customers and their cars a little over a month longer so that can contribute to some reduced severity there and of course better and the cars better.
When we if we do have to re pellet and wholesale it we are getting more on our.
Fair market values, there as well.
So has there been a big change in the number of cars that youre, repurposing and scrapping as opposed to repowering and taking that to auction.
No it's been really pretty consistent.
Okay, all right. Thank you very much.
Thank you.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Jeff Williams for any further remarks.
Okay, well. Thank you again for for listening to our call and your interest in Americas car Mart.
And as always we'd like to thank our associates for all the great work going on out there to take care of our customers.
We feel like we're in a great spot as a company very excited about our future.
We're all on the same page in pulling the same direction.
I think we have an obligation to grow and serve more customers over time, and that's that's where we're going so.
You guys have a great day. Thank you.
Thank you.
Thank you ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program and you may all disconnect everyone have a wonderful day.