Q3 2024 America's CAR-MART Inc Earnings Call

Participants

Vickie Judy; CFO; America's CAR-MART Inc

Doug Campbell; President, CEO, & Director; America's CAR-MART Inc

John Murphy; Analyst; BofA Securities

John Rowan; Analyst; Janney Montgomery Scott LLC

Derek Sommers; Analyst; Jefferies Group

Presentation

Operator

Good day, and thank you for standing by, and welcome to America's CAR-MART's third-quarter fiscal 2024 results conference call. (Operator Instructions) Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Vickie Judy, Chief Financial Officer.

Vickie Judy

Thank you. Good morning and welcome to America's Car-Mart Third Quarter Fiscal Year 2024 earnings call for the period ending January 31st, 2024. Joining me today is Doug Campbell, our Company's President and CEO. We've issued our earnings release earlier this morning, and it is available on our website along with the slide of supplemental materials, we will post the transcript of our prepared remarks following this call and the Q&A session will be available through the webcast after the call.
During today's call, certain statements we make may be considered forward-looking and 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 provision 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, including important cautionary notes please see Part one of the Company's annual report on Form 10 K for the fiscal year ended April 30th, 2023, and our current and quarterly reports furnished to or filed with the Securities Exchange Commission on Forms 8-K and 10-Q. I will now turn it over to Doug for his introductory comments about our third quarter.

Doug Campbell

Good morning and thank you for joining us and for your interest in our company. I mentioned in our earnings release that sales volumes fell short of our internal expectations during the quarter. There are times when the results you produce don't align with the level of effort or output. And this was one of those quarters. I want to acknowledge the hard work of our associates because they do so much to take care of our customers and keep them on the road, very appreciative of the effort put out by the team.
I'll start by highlighting some of the positive items that occurred during the quarter and discuss more in detail the drivers of the sales decrease last quarter, there was speculation about direction of the credit loss and whether it would continue to degrade flatten or even improve.
Our associates have worked tirelessly to assist our consumers in navigating an ongoing challenging environment. Throughout the quarter, we reduced the number of unit losses taken when compared sequentially by 9%. As an industry backdrop, delinquency trends worsened throughout the quarter. However, we improved our 30 plus day delinquencies by 30 basis points This drove a $3.9 million favorable adjustment in the provision for credit loss. We've now completed the planned rollout of our loan origination system and with the implementation of any large scale system that is built on change management. There were some challenges in getting it fully in place, but we're happy that those implementation challenges are now behind us. We now have two quarters with the LOS originations driving more money down, stronger consumer profiles and shorten term lengths.
Let me make this point clear. The LOS is a game changer for Car-Mart, and we're really excited about the system leaving its imprint on the fourth quarter and into the future.
As mentioned in the press release, we also entered a strategic partnership with Cox Automotive, which will aid in vehicle movement, repairs, acquisitions and remarketing. I'll cover this more in detail, but let me start with revenue and sales. Revenue was down 7.9% for the quarter, driven by several factors. First, a 19.6% decrease in unit volume was the primary driver. Overall industry softness accounted for roughly half of that. Recall that in our second quarter report, we said that August and September volumes were up or flat with October contributing to the decline. Does October trends persisted into the third quarter with overall application volumes softening by 8.3%.
The LOS implementation challenges Mitch mentioned, along with balancing volume and deal structure also contributed to the decrease. The benefits of system updates to the LLS, along with an augmented marketing plan for the fourth quarter are expected to win back some volume and deliver stronger outcomes. We also had two fewer selling days in the quarter because of holiday shifts.
Our stores are always closed on Sundays, but the shipping days for Christmas Day and New Year's Day landing on a Monday added two more closure days to the quarter when compared to the prior year's quarter. Additionally, there was severe winter weather in January, which necessitated closures of up to three days at roughly a third of our 154 dealerships in January, which kept consumers from shopping. These revenue headwinds were partially offset by a 16% increase in interest income and a 7.5% increase in the average retail sales price. That increase in the average retail sales price was driven equally by a mix of ancillary products sold and vehicle price.
You'll hear more from Vicki on the specifics on the LOS here in a minute, but let me comment on the results of these deal structures.
The credit losses that we're seeing on our loan originations are very positive when compared to the legacy system. However, I want to caution these results are very preliminary in nature, but that's rapidly changing with now 10,000 originations performing materially different than the loans generated by our legacy system. We plan to share more specifics in the future, but words like substantial and material come to mind when we start to quantify their effect on both the frequency and the severity of loss, we've mentioned numerous times the importance of acquisitions and it being one of the strongest uses of capital for our company. We're proud to announce that the purchase of central auto and Hot Springs is complete, and we're actively pursuing other opportunities that we expect to close in the calendar year.
I want to provide more detail on this critical initiative that we teased out in last quarter's report. As noted in our release this morning, we've entered into a strategic partnership with Cox Automotive to aid in driving efficiencies within our vehicle supply chain process. I personally have a long history with Cox and their leadership team across several organizations in driving large scale projects that have driven tremendous value. We've begun to leverage their digital and physical assets as well as their logistics services.
This initiative will be centrally managed, removing the day-to-day burden of processing and overseeing the disposal and reconditioning of assets from our operations team. Strategically, we expect this to allow our dealership teams to have more time selling and helping customers navigate vehicle ownership. We believe this partnership will help address some of the affordability challenges that exist in our industry, and we expect it will lead to greater value creation for our shareholders and customers alike. And I'll turn it over to Vicki to cover more details on our financials. Vickie?

Vickie Judy

Thank you, Doug. In my commentary, the comparisons that I will cover will be the third quarter of 2024 versus the third quarter of 2023, unless otherwise noted.
As Doug mentioned, LLS has allowed us to improve upon our deal structure with average down payments for the quarter trending up 30 basis points to 5.1%, also up sequentially by 20 basis points. Our originating term was 43.3 months improved from 44.1 months sequentially. And for the second quarter in a row, they were up from 42.5 months compared to the prior year third quarter. The weighted average total contract term for the portfolio is at 47.6 months, including modifications, the average age of the portfolio improved to nearly 12 months or almost two months better compared to last year, our total collections increased 9.3%.
The monthly average total collected per active customer rose to $540 from $519. This metric also improved sequentially. We originated contracts in the third quarter that are expected to produce cash on cash returns of over 66% and an IRR over 41%. We provided a table in the earnings release and a supplemental chart on our website that demonstrates our positive cash-on-cash returns over time. This data reflects our history of earning strong cash-on-cash returns in various market and macroeconomic conditions.
We're very focused on quality of originations and deal structure to maximize these returns and ultimately our profitability. The gross profit dollars per retail unit improved 10.5% and the gross profit percentage increased 50 basis points compared to the prior year quarter, primarily due to improved pricing discipline and repair expenses. There was also an increase in profit dollars sequentially, and we expect further improvements in our gross margin as volumes rise and we have more affordable vehicles in our supply chain from the initiatives underway. Net charge-offs as a percentage of average finance receivables were 6.8% versus 5.9% last year and down sequentially 40 basis points.
We were pleased with this, especially when considering the sales decline, we experienced an increase in the frequency of losses compared to prior year, which was about 55% of the increase as well as an increase in severity. Severity continues to be impacted by the longer term links, although that has begun to stabilize recovery values for the quarter were approximately 24%. Accounts over 30 days past due improved in Q3 dropping 40 basis points to 3.3%. This was also a 30 basis point improvement sequentially.
Our customers continue to face ongoing pressures related to the increased costs for housing energy, childcare, auto insurance, however, that slightly offset by lower inflation in some groceries and fuel. Sequentially, the company decreased the allowance for credit losses from 26.04% to 25.74%, resulting in a benefit of $3.9 million to the provision the key drivers of the adjustment were lower delinquencies at quarter end and a lower overall inflationary outlook.
In summary, the improvements we've made in deal structure, the higher average age of the receivables portfolio, lower delinquencies and our operational initiatives are expected to lead to better customer success and lower credit losses in the future.
Moving on to SG&A. Sequentially, we were able to lower SG&A dollars by $1.3 million. The steps we took in the second quarter to reduce expenses contributed to the sequential improvement was slightly offset by increased collections cost related to repossessed. Our SG&A per average account was down 6.7% from $451 to $421. We're very focused on cost efficiency while continuing to serve over 102,000 customers and providing quality service.
Interest expense as a percentage of sales increased to 7% for the quarter compared to 3.6% in dollar terms. Interest expense increased $7 million due to increasing interest rates and an increase in average borrowings of approximately $145 million over the prior year. Our funding and financing program remained strong in December. We called our 2021 notes and paid them off during the quarter. In January, Kroll upgraded all tranches of our 23 one notes and the Company completed its fourth securitization at the end of the quarter, issuing $250 million in bonds with a weighted average fixed coupon rate of 9.5%.
In February, we renewed and extended our revolving credit agreement to September of 2025 with a $340 million revolver, along with access to a $100 million accordion feature. At quarter end, we had $4.2 million in unrestricted cash and approximately $126 million in additional availability under our revolving credit facilities based on our borrowing base of receivables and inventory access to capital with our revolving credit facility and a successful securitization program gives us flexibility and a distinct advantage over many competitors. Our nonrecourse securitized notes represent the bulk of our funding and our cost of funds fluctuates with the level of interest rates and credit spreads. We remain committed to growth, thoughtful capital allocation and financial management as well as improving profits and shareholder returns.
Now let Doug close this out.

Doug Campbell

Thank you, Vicki. February is off to a better start than last quarter. We're closely monitoring our consumer and the tax season. Initial refunds are up slightly year over year, but they're running a little bit behind the last year. Affordability continues to be the biggest challenge in our industry. We're all competing for similarly priced assets, provide customers with reliable and affordable transportation initiatives like the ones that we put in place will aid in addressing these issues and enhance our ability to grow as a company.
We do have near-term challenges that we're addressing, such as striking the right balance between loan origination volumes and our cost structure. We reported progress in the third quarter on key metrics, including gross profit, credit losses and loan originations. And we expect to make additional profit progress on these and other areas. We believe that our agility and underlying cash generative nature of our company continues to position us for long-term profitable growth. We're bullish about Premier's future because our initiatives will be accretive to earnings and shareholder returns.
We'll now open up the line for questions. Operator, please provide instructions to do so.

Question and Answer Session

Operator

(Operator Instructions) John Murphy, Bank of America Securities.

John Murphy

Good morning, guys, and just a first question, Doug, from your end, Judy, if you want from us as well as when you look at this, you're basically transacting in vehicles that are approaching $20,000 before pre-COVID, there were 10,000 on a you know, I know there's obviously been a major inflation in used vehicle pricing, but can you talk about sort of the challenges and opportunity and what that really means because that really is on your has some very potential big implications for how the business is run and performance over time. And will it go back down over time?

Doug Campbell

Yes. Yes. Appreciate the question, John, and good morning. So on I think you're spot on. This is a second variant of a question we got last quarter but I'll I'm trying to answer it slightly differently. And that 19,019,500.0 cars trend equals about a $570 payment today in terms of origination payments. We look at that and you start to deconstruct that a lot of that is price. A lot of that is what we've done with service contracts, which you've improved over time and our debt cancellation product, which is a percentage of the transaction price.
If we even went back just a year ago and said, hey, let me normalize for what the management action items on taking price increases and adjustments to these items. The payment is actually today less than what it is a year ago. If I take away some of these management execution items. In addition to that, we believe our prices are coming down, although all the indicators are pointing in the right direction for our prices to come down in the balance of the year. How quickly that is sort of the question mark around how quickly that comes down. But I think the back half of the year is really going to provide some relief for us and our consumers.
Additionally, on the initiatives like the one we mentioned with Cox, automotive is going to go a long way in aiding us getting there faster and not so reliant on the marketplace to get there. Our ability to recondition and repair more vehicles to resell it expensive way is going to help us drive down that price, and we think we can do that in fairly short order.

John Murphy

And that just leads to a second question. Can you can you talk about what exactly Cox is doing. And when you get into recon, there's also questions of what level you recon to, I mean, better recounting, a three-year-old vehicle. You want to get close to new, but if you're retaining a something that's closer to 10 year old vehicle. There's a lot of questions as to where you reconstitute your outsourcing that. How do you how do you make those decisions efficiently? And how much money can you save and what kind of increase in throughput Could you get ultimately per store as a result of this?

Doug Campbell

It's a great question. So today when we look at the business and we have partners that help us, they're helping us on a store-by-store basis. And so you can imagine those agreements for repairs are written up sort of one-off and low volume when you have a large skilled partner who has a footprint that aligns closely with your footprint and you can start to negotiate labor rates in parts rates and body repair rates at more commercialized terms for an or a player our size, I think there's still savings to be had and improve and drive a nicer product in the end. And so that's our goal. We think there's a tremendous opportunity to do that. We're not trying to repair cars and make them like new vehicles. We have a standard. And we've been working closely with the Cox team over the last 90 days to get them up to speed on what that standard is.

John Murphy

Okay, great. I got a few more questions, but I'll drop back in the queue.

Doug Campbell

Thank you very much. Appreciate it, John.

Operator

John Rowan, Janney Montgomery Scott.

John Rowan

Good morning. And my apologies if you went over this already, but can you kind of deconstruct the decline in unit volume? I know obviously you mentioned weather and a couple of or a couple of missing days on and kind of the timing of sales days in the quarter, but more so just looking at, you know, the declining in volume relative to the reduction in duration, did that have a material negative impact on sales? And also whether or not there was anything being driven by any changes in the competitive environment? Thank you.

Doug Campbell

Good morning, John. I'm trying to answer it and I know, no one sort of asked, so I'll train reiterating some of the key points and add a little bit more color. So we mentioned the environment was generally softer. We thought that was about half the decline. If you look at other our competitors, other public retailers all reported being sort of down single digits, some double digits. And so if you take that as a proxy like that's part of it.
The other portion we mentioned comes from weather and we had some closure days there, too. I think the biggest driver there is traffic. And so we've gone in been on record about the ability to drive loan or excuse me, application volume, and that's been really healthy. That's the first time we've seen a decline, but more importantly was that was the type of channel. So when we give you that sort of report out on traffic, it's an aggregated view of floor traffic and online traffic and what we call application track back on iPods, we can see customers who were walking into stores.
And so some channels declined stronger than others. Other ones actually had improvements and we know some of that's driven by marketing and the way we've sort of run the business in terms of the LOS and so on to your point, we opened up term slightly from on the prior quarter to aid in driving some more of that traffic. We also made some more iterations and adjustments in getting getting ready for the fourth quarter that's what gives us some confidence that we can win back. Some volume in February is any indication of some of those changes are working. So which I mean, you wouldn't attribute it you wouldn't attribute the change in traffic to competition?
No, we're really not seeing that. I wouldn't I wouldn't I wouldn't say that that's a major contributor at all.

John Rowan

Okay. All right. Thank you.

Doug Campbell

You're very welcome.

Operator

Derek Sommers, Jefferies.

Derek Sommers

Good morning. Just to kind of follow up on the unit sales decline, 3% to 4% was attributed to weather and roughly half of the remainder was attributed to kind of lower volumes? And was there any portion meaningful portion attributed to them kind of credit approval rates associated with the LOS implementation?

Vickie Judy

I would say there's certainly some of that anytime you restrict your underwriting, whether it's in terms of down or the terms, there's certainly going to be some impact from that. It's difficult to kind of tease all of those pieces out, but that's part of what Doug mentioned, balancing originations. And that's that's a piece of that. And we're and we're really trying to look at the customers and the score of the customers that we're allowing those longer terms for. And so Doug mentioned that we made a few adjustments to that and we're continuing to make adjustments to that and reiterating as we adjust to this new system.

Doug Campbell

I would also say it would be hard to measure because of the approval rate line, you'd see a negligible difference, if any, for us, it's the deal structure. We do want that customer, but we want to under different terms. And so whether that's how much money we're willing to finance for a certain rating of customer, whether that's how much equity position we want them to be. And when they originate their loan, those are those are just different terms. It's not that they're not approved, but we want them to be structured differently. It's why the affordability component is so important because if they don't have anymore, the thing that we can do to assist them is get cheaper vehicles, right? And that would aid in getting more customers qualified under the new terms that we would like to have them.

Derek Sommers

Got it very helpful. And then you guys have a time line in mind for kind of full LOS implementation across your dealerships.

Doug Campbell

Yes. So the LOS is implemented across all of our dealerships today. With the exception of our stores that we've acquired over the last couple of years and they're in their earn outs. And so we don't want to tinker with them whether during those periods, but they'll be tucked in And underneath that shortly thereafter. But all origination volume for for our base stores will be pretty much the the LOS.
There's one last piece we need to address, which is we cross border state transactions where people drive from Missouri into Arkansas to get a car or vice versa. That's like 5% of the volume but I think on a go forward basis in a greater than 80% of our originations should come from our LOS.

Derek Sommers

Got it. And then just one more. Just any kind of commentary on February trends on tax refunds, what you're seeing at the consumer would be helpful.

Doug Campbell

What we mentioned. I mean, the tax data sort of out there, it was off to a slow start where we saw refunds initially down. Now, they're up higher year over year, but they're still trending about a week behind. We stay really close to a third party tax partners and they are and the IRS data and our application data. And we anecdotally from our stores, some of that data might be just shifted out to the right. And so I'm encouraged Friday, excuse me, February started off. We're off to a better start in the quarter than we were last quarter. So that's indicating move upward and some of that U.S. Some of those sales are going to be pushed into March, which is that's a great thing and we have a nice long, nice long march with five weekends in there as well. So we're excited about a big month.

Derek Sommers

Okay. Thank you, guys. That's all for me. You've got it there. Thank you.

Vickie Judy

Thank you.

Operator

John Murphy, Bank of America Securities.

John Murphy

Hey, I just had two more. You guys are looking at the volume decline versus, um, what were stronger GPUs. Is there the potential to take pricing down in GPUs a little bit lower to drive volume? And how are you making that decision in the new world order you want to because?

Vickie Judy

Yes, we will and that's certainly an option. Most of the changes in the GPU are really where we've been focused on efficiencies around costs and on the repair side and being more efficient there as well as movement of our vehicles. But the pricing of that is certainly something that we'll also always consider as we move forward. And that will be a piece of it and we are continuing to iterate on this LOS. John should be okay.

Doug Campbell

The historical gross profit average is really driven off a function of sales price. If I just hold price constant, we are going to continue to make improvements in the gross profit that we're seeing through initiatives. Some of that we can give back to win back volume. And so we're trying to balance that with water volumes in a normal run rate with this new LLS. And I think when we see that sort of normalize and get in a good spot, then that's certainly an option for us as well.

John Murphy

Okay. And then just one other on the acquisitions of you're not totally new to the story, but sounds like they're going to ramp up significantly as you're going through this ramping LOS. and then thinking about integrating your new stores or acquired stores or how is that process working? And how big is that team and how does that actually work on the integration?

Vickie Judy

We do have a team. It's not a huge team. We just started building it out this last year. So it's a smaller team. These acquisitions are also a bit unique, and we've talked about this before and that this is a business that these owners have built up over a significant amount of time, and it's kind of their baby and their life's work. And so the task of working through them preparing to sell. These takes them a bit of time. So some of these we may talk to for a couple of years till they finally get ready to do this. But we do have several in the pipeline, several that we've been talking to for a couple of years or several months. And we have several in the pipeline that are getting close to being able to be closed on. So that was in relation to our comment that we are expecting some others before the end of this calendar year.

John Murphy

Okay. Thank you very much, guys.

Doug Campbell

Thank you, John.

Operator

Thank you. I'm showing no further questions at this time, and I would like to hand the conference back over to Doug Campbell for closing remarks.

Doug Campbell

Great. Thank you very much. Listen, I am I am really excited about all the initiatives that we have underway. And again, I'm really thankful for the effort being put forth by our team. They keep getting backed up and fighting our way and helping our consumers might be. The thing that we are myopically focused on is helping our teams and our customers be successful.
And when you think about some of the initiatives and the Cox partnership, the alignment of our interest and just having customer success rate in the center of everything that's there, that's going to be a really great partnership so I'm excited about them on the LOS front. I'm glad the implementations behind us.
And I think as we go forward, I'm really excited for what is going to do our business. We included another supplemental slide on our cash on cash returns. And if you look at the third quarter projections, we had a nice improvement and that's showing the LOS and its influence on our on the financials of our company already. So really excited about them. And we're really bullish about the company's future and these initiatives to be accretive to earnings and shareholder returns. So I thank you for your time today and your interest in our Company.

Operator

This concludes today's conference call. Thank you for participating, and you may now disconnect.