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AMERICA'S CAR-MART, INC.

(CRMT)
  Report
Delayed Nasdaq  -  04:00 2022-12-02 pm EST
74.59 USD   +1.73%
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AMERICAS CARMART INC Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

09/02/2022 | 02:25pm EST

The following discussion should be read in conjunction with the Company's Condensed Consolidated Financial Statements and notes thereto appearing elsewhere in this report.




Forward-Looking Information



This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address the Company's future objectives, plans and goals, as well as the Company's intent, beliefs and current expectations regarding future operating performance, and can generally be identified by words such as "may," "will," "should," "could," "believe," "expect," "anticipate," "intend," "plan," "foresee," and other similar words or phrases. Specific events addressed by these forward-looking statements include, but are not limited to:



  ? operational infrastructure investments;


  ? same dealership sales and revenue growth;


  ? future revenue growth;


  ? receivables growth as related to revenue growth;


  ? customer growth;


  ? gross margin percentages;


  ? gross profit per retail unit sold;


  ? new dealership openings;


  ? performance of new dealerships;


  ? interest rates;


  ? future credit losses;


  ? the Company's collection results, including, but not limited to, collections
    during income tax refund periods;


  ? seasonality;


  ? technological investments and initiatives;


  ? compliance with tax regulations;


  ? the Company's business, operating and growth strategies;


  ? financing the majority of growth from profits; and


  ? having adequate liquidity to satisfy the Company's capital needs.




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These forward-looking statements are based on the Company's current estimates and assumptions and involve various risks and uncertainties. As a result, you are cautioned that these forward-looking statements are not guarantees of future performance, and that actual results could differ materially from those projected in these forward-looking statements. Factors that may cause actual results to differ materially from the Company's projections include those risks described elsewhere in this report and in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2022, as well as:



  ? general economic conditions in the markets in which the Company operates,
    including but not limited to supply chain disruptions, as well as fluctuations
    in gas prices, grocery prices and employment levels;


  ? business and economic disruptions and uncertainty that may result from the
    ongoing outbreak of the Omicron sub-variants or any future adverse
    developments with the COVID-19 pandemic and any efforts to mitigate the
    financial impact and health risks associated with such developments;


  ? the availability of credit facilities and access to capital through
    securitization financings or other sources on terms acceptable to us to
    support the Company's business;


  ? the Company's ability to underwrite and collect its contracts effectively;


  ? competition;


  ? dependence on existing management;


  ? ability to attract, develop and retain qualified general managers;


  ? availability of quality vehicles at prices that will be affordable to
    customers;


  ? changes in consumer finance laws or regulations, including but not limited to
    rules and regulations that have recently been enacted or could be enacted by
    federal and state governments;


  ? ability to keep pace with technological advances and changes in consumer
    behavior affecting our business;


  ? security breaches, cyber-attacks, or fraudulent activity; and


  ? the ability to successfully identify, complete and integrate new acquisitions.



The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the dates on which they are made.



Overview


America's Car-Mart, Inc., a Texas corporation initially formed in 1981 (the "Company"), is one of the largest publicly held automotive retailers in the United States focused exclusively on the "Integrated Auto Sales and Finance" segment of the used car market. The Company's operations are principally conducted through its two operating subsidiaries, America's Car Mart, Inc., an Arkansas corporation ("Car-Mart of Arkansas"), and Colonial Auto Finance, Inc., an Arkansas corporation ("Colonial"). References to the Company include the Company's consolidated subsidiaries. The Company primarily sells older model used vehicles and provides financing for substantially all of its customers. Many of the Company's customers have limited financial resources and would not qualify for conventional financing as a result of limited credit histories or past credit difficulties. As of July 31, 2022, the Company operated 154 dealerships located primarily in small cities throughout the South-Central United States.

The Company has grown its revenues between approximately 4% and 32% per year over the last ten fiscal years (average 11%). Growth results from same dealership revenue growth and the addition of new dealerships. Revenue increased 23.0% for the first three months of fiscal 2023 compared to the same period of fiscal 2022, due to a 32.0% increase in interest income, a 19.8% increase in the average retail sales price and a 2.1% increase in retail units sold. The first quarter of the prior year was impacted by the pandemic, resulting in lower sales volumes. The increasing sales price results from the tight supply and high demand for the vehicles the Company sells.

Demand for the vehicles we purchase for resale has remained high and the supply has continued to be restricted due to lower repossessions and lower levels of new car production. While the long-term impact of COVID-19 and the ongoing microchip supply shortages on new car production and sales and the availability of used vehicles in our market is undetermined at this time, the Company has seen disruptions in the supply of vehicles since the beginning of the pandemic and expects the supply to remain tight in the near-term relative to demand, resulting in the continuation of elevated purchase costs.

Over the last five fiscal years, the Company's provision for credit losses as a percentage of sales has ranged from approximately 20.3% in fiscal 2021 to 28.7% in fiscal 2018 (average of 24.4%). Credit losses began to normalize to pre-pandemic levels in late fiscal year 2022. For the first three months of fiscal 2023, provision for credit losses as a percentage of sales was 27.6%.

Historically, credit losses, on a percentage basis, tend to be higher at new and developing dealerships than at mature dealerships. Generally, this is because the management at new and developing dealerships tends to be less experienced in making credit decisions and collecting customer accounts and the customer base is less seasoned. Normally more mature dealerships have more repeat customers and, on average, repeat customers are a better credit risk than non-repeat customers. Credit losses and charge-offs can also be impacted by market and economic factors, including a competitive used vehicle financing environment and macro-economic conditions such as inflation in the price of gasoline, groceries and other staple items and overall unemployment levels, as well as the personal income levels of the Company's customers. Negative macro-economic issues, however, do not always lead to higher credit loss results for the Company because the Company provides basic affordable transportation which in many cases is not a discretionary expenditure for customers.




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In an effort to offset credit losses and to operate more efficiently, the Company continues to look for improvements to its business practices, including better underwriting and better collection procedures. The Company has a proprietary credit scoring system which enables the Company to monitor the quality of contracts. Corporate office personnel monitor proprietary credit scores and work with dealerships when the distribution of scores falls outside of prescribed thresholds. The Company also uses credit reporting and the use of global positioning system ("GPS") units on vehicles. Additionally, the Company has placed significant focus on the collection area as the Company's training department continues to spend significant time and effort on collections improvements. The Company's vice president of collections oversees the collections department and provides timely oversight and additional accountability on a consistent basis. The Company believes that the proper execution of its business practices is the single most important determinant of its long-term credit loss experience.

The Company's gross profit dollars per retail unit sold increased by $740, or 12.0%, during the first three months of fiscal 2023 compared to the first three months of fiscal 2022, while gross margin as a percentage of sales for the first three months of fiscal 2023 decreased to 35.7% of sales from 38.1% in the prior year period. The increase in gross profit dollars per retail unit sold and the corresponding decrease in the gross margin percentage were primarily related to the increase in average retail sales price of the vehicles sold during the respective periods coupled with inflationary pressures and increased cost of sale expenses. The Company's gross margin is based upon the cost of the vehicle purchased, with higher-priced vehicles typically having higher gross margin dollars but lower gross margin percentages. Gross margin is also affected by the percentage of wholesale sales to retail sales, which relates, for the most part, to repossessed vehicles sold at or near cost. The Company expects that increasing vehicle purchase costs and sales prices will continue to put pressure on its gross margin percentage over the near term as the demand for the vehicles the Company purchases remains high. However, the Company plans to continue to focus on managing gross margin dollars in the near term, as demonstrated by the increases during the first quarter of fiscal 2023 and the entire fiscal year 2022 in the gross margin dollars per retail unit sold.

The Company consistently focuses on collections. Each dealership is responsible for its own collections with supervisory involvement of the corporate office. Total collections of principal, interest, and late fees for the first quarter of fiscal 2023 increased by $17.3 million, or 13.2%, over the prior year quarter. Principal collections, as a percentage of average finance receivables, were in line with expectations at 9.1%, compared to 11.5% for the same period in prior year, reflecting an increase in the weighted average contract term compared to the prior year period.

Hiring, training and retaining qualified associates is critical to the Company's success. The rate at which the Company adds new dealerships and is able to implement operating initiatives is limited by the number of trained managers and support personnel the Company has at its disposal. Excessive turnover, particularly at the dealership manager level, could impact the Company's ability to add new dealerships and to meet operational initiatives. The landscape for hiring remains very competitive as the business activity and workforce participation continue to adjust post-pandemic. The Company has continued to add resources to recruit, train, and develop personnel, especially personnel targeted to fill dealership manager positions. The Company expects to continue to invest in the development of its workforce.

The Company will continue to prioritize its investments in areas that will allow it to improve its product and service, while operating more efficiently to support a larger, more profitable business over time. The Company's investments in its people, digital/technology, procurement/inventory management, and customer experience are critical as it moves forward to serve an ever-increasing customer base.









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Three months ended July 31, 2022 vs. Three months ended July 31, 2021

© Edgar Online, source Glimpses

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