America's Car-Mart Slows Down

Previewing the Q3 2007 earnings report from car salesman America's Car-Mart (Nasdaq: CRMT  ) earlier this month, I warned that "the numbers might look bad, but still not tell the whole story about whether the company is improving." I was at least half right, because when Car-Mart reported its quarterly results, they were anything but pretty:

• Unit sales down 11.7%
• Same-store sales down 5.3%
• Revenues up just 1.8%

And yes, the firm lost a penny per share as well. What's more, every single number shown above reflects a deterioration in the numbers for the year-to-date, in which:

• Unit sales declined only 5.1%
• Same-store sales fell just 0.5%
• Revenues were up a good 5.4%, and the firm even booked a profit.

The rest of the story
That said, remember how I suggested we focus more on the prose portion of the release than on the expected bad numbers? Well, here's the story there. I'll go through what I think are the most important major initiatives the company is undertaking, and the hints it dropped as to how investors can best gauge its progression on these fronts.

• Better collections: CEO Skip Falgout highlighted "accounts more than 30 days past due" as an indicator of whether its collections training is working. With the percentage of such delinquent accounts down 90 basis points to 3.8% since this time last year, Car-Mart gets a passing grade here.
  
• Inventory: Quite simply, we want to see inventories decline, or at least not rise faster than sales. Therefore, the 17% year-over-year rise in inventories must constitute a failing grade.
  
• Improved underwriting and credit analysis: Falgout mentioned that the firm will be focusing on writing "profitable business... as opposed to [just] generating sales volume." That suggests we should (perhaps perversely) view slow sales growth over the next few quarters as a good thing -- an indication not that the company can't sell cars, but that it won't sell cars to buyers who can't pay. This doesn't necessarily make the firm's 11.7% decline in unit sales a good thing, but it does suggest that this number may not be as bad as it seems.
  
• Sales: That said, retailers are in the business of selling (obviously), and Car-Mart has tasked a new "internal sales specialist" with improving results at underperforming stores. My guess is that same-store sales improvement is the metric to watch when evaluating progress on this front. Same story as in the last point here -- same-store sales dropping 5.3% looks bad, but perhaps not as bad as it appears on the surface.

Going forward, we'll be watching each of these unconventional metrics for evidence of improvement. Clearly, there's still room for it.

What did we expect out of Car-Mart last quarter, and what did it produce? Find out in:

• Foolish Forecast: Bumper Car-Mart
• America's Car-Crash

Got something to say about Car-Mart? Say it in Motley Fool CAPS, the Fool's new, free, completely spiffy stock-rating service.

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.