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America's Car-Mart Inc (NASDAQ:CRMT)
Q1 2019 Earnings Conference Call
Aug. 17, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone. Thank you for holding, and welcome to America's Car-Mart's First Quarter 2019 Conference Call. The topic of this call will be the earnings and operating results for the company's first quarter for fiscal 2019.

Before we begin, I would like to remind everyone that this call is being recorded and 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 America's Car-Mart's website at www.car-mart.com.

As you all know, some of management's comments today may include forward-looking statements, which inherently involve risk and uncertainties that could cause actual results to differ materially from management's 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 1 of the company's annual report on Form 10-K for the fiscal year ended April 30, 2018, and its current and quarterly reports furnished to, or filed with, the Securities and Exchange Commission on forms 8-K and 10-Q.

Participating on the call this morning are Jeff Williams, the company's Chief Executive Officer and President; and Vickie Judy, Chief Financial Officer.

And now, I would like to turn the call over to the company's Chief Executive Officer, Jeff Williams.

Jeffrey Williams -- President, Chief Executive Officer, Secretary, Director

Thank you for joining us and thank you for your interest in America's Car-Mart. As we said in the press release, it's nice to see our hard work translate into solid top and bottom-line results for the quarter. Vickie will get into the numbers in just a minute, but I wanted to take a couple of -- talk about a couple of things that we're especially proud of. We've been around 37 years this month, and we've always had great associates taking care of our customers, now numbering almost 73,000. That's up almost 4,000 customers in the last year, and we believe it's a testament to the value we're adding to the markets we serve. We have a lot of work to do and can always improve on our service levels, but we're proud of the progress being made and the commitment of our associates to continue on the improvement. Everyone at Car-Mart is pushing to get better every day and we're very proud of that.

As per the numbers, it was nice to see the decrease in our overall average contract term, especially with the higher sales price and the corresponding increase in collections, which will put more of our customers in a position to succeed on their individual contracts. We've always focused on putting our customers in transactions that make economic sense for them individually and to see this movement as a real positive. Additionally, we had a strong quarter in terms of cash flows. By always focusing on cash flows, we will be in a position to continue to invest in our business and step up our game to provide better service for our customers.

I'll now turn it over to Vickie to go over some numbers. Vickie?

Vickie Judy -- Chief Financial Officer

Good morning. For the quarter, overall revenues were $164 million, with the same-store revenues up 12.1%. This resulted from a 12.3% increase in sales and a 9.8% increase in interest income. Revenues from the stores in the over 10 years of age category was up 11%. Stores in the 5 to 10 year category was up 11% to about $33 million. And revenues for stores in the less than five years of age category was up about 34%, to $24 million. Traffic in our dealerships has increased and we have kept our focus on having a good mix and volume of vehicles on our lots to meet customer needs.

Our average selling price increased to $11,015 or 6.1%, or $629 compared to the prior year quarter, and an increase of $93 sequentially. This increase results from selling a larger volume of the higher dollar vehicles, including SUVs and trucks to meet customer demand, also coupled with an increase in overall vehicle purchase price costs, which in turn results in higher selling prices. The average age and mileage of the vehicles sold this quarter were both slightly improved compared to the prior year quarter, as we work hard to improve the quality of our inventory. We currently anticipate flat-to-some-slight increases in sales prices for the near term, and we're hopeful the overall market prices will soften compared to prior years. Our goal is to be able to put customers in better cars for the same money.

At quarter-end, 24 or 17% of our dealerships were from zero to five years old, 33 or 24% were from 5 to 10 years old, and the remaining 83 dealerships were 10 years old or older. Our overall productivity increased to 29.8 from 28.2 in the prior year first quarter, almost 6% increase. Our 10-year-plus lots produced 32.4 units sold per month per lot for the quarter, compared to 30.6 for the prior year quarter. Our lots in the 5 to 10 year category produced 26.1 compared to 25.3 for the prior year, and the lots less than five years of age had productivity of 26.2 compared to 23.8 for the first quarter of last year.

Our down-payment percentage was essentially flat compared to the prior year quarter. Collections, however, as a percentage of average finance receivables, was 13.1% compared to 12.4% last year. Our average originating contract term was down slightly; that's even with the $629 increase in the average selling price at 29.7 months compared to 29.8 months for the prior year quarter, and down from 30 for the fourth quarter of fiscal 2018. Our weighted average contract term for the entire portfolio, including modifications, was 32.4 months for the first quarter compared to 32.6 months for the prior year. The weighted average age of the portfolio was flat at 8.9 months. We believe our improvement in collections is a result of being better in our daily processes of calling and visiting customers in tandem with them having a little more cash in their pockets due to tax reform, increased employment and wage increases.

Interest income was up $1.8 million compared to the prior year, due to the $36.7 million increase in average finance receivables, little over 80% of the increase, and also due to our increase in the interest rate on our contracts to 16.5% from 15%, which began in May of 2016. The weighted average interest rate for all finance receivables at the end of the quarter was approximately 16.3%, up from 16% at July of 2017.

For the first quarter, our gross profit margin was 41.6% of sales, up from 41.4% for the prior quarter -- prior year quarter, and up from 40.6% for the fourth quarter of fiscal 2018. This increase was primarily a result of better wholesale management, decreased repair costs and lower PPP claims, partially offset by a decrease as a result of the higher average selling price, as our margin percentages are lower at a higher selling price.

For the quarter, SG&A as a percentage of sales was 8.3% (sic) [18.3%] compared to 18.6% for the prior year quarter. Overall SG&A dollars were up $2.5 million from the prior year quarter. SG&A as a percentage of customer account was up slightly. We've added over 4,000 customers since this time last year. The majority of the increase in the SG&A is related to payroll and benefits as we continue to invest in our associates, as we train, develop and recruit to provide excellent customer service. This does include additional bonus and commissions related to the higher net income levels of several of our associates, especially, the general managers are compensated on net income. Stock-based compensation expense was also higher this quarter compared to prior year.

For the current quarter, net charge-offs as a percentage of average finance receivables was 6.4%, flat compared to the prior year quarter. We did experience an increased frequency of losses, however, severity was down due to improvements in collections and slightly higher recovery rates. Our wholesale value recovery rates continue to be under pressure, but did increase slightly for this first quarter to approximately 24%. Again, principal collections as a percentage of average finance receivables for the quarter was 13.1% compared to 12.4% for the prior year.

Our effective income tax rate was 17% versus 36% in the prior year. This decrease is as a result of tax reform, a reduction in our base effective rate from 37% to 24%, and an income tax benefit from the stock option exercises; $943,000 in the current year versus $172,000 in the prior year. We 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 debt was $155 million and we had over $44 million in additional availability under our revolving credit facilities. Our current debt to equity ratio is 65.2% and our debt to finance receivables ratio is 29.8%. Interest expense increased $632,000 this quarter compared to last year, due to the increase in debt, which is about 60% of the increase and also due to the increased interest rates.

During the quarter, we repurchased almost 116,000 shares, or 1.7% of our company for $7.4 million at an average of $63.59 per share. Since 2010, we have repurchased almost 51% of our company for $205 million at an average price of approximately $35. We continue to have strong cash flows. During the quarter, we added $19 million in receivables, repurchased $7.4 million of common stock, funded $685,000 in net capital expenditures and increased inventory by $3.9 million, a total of $31 million with only a $2.8 million increase in debt. As Jeff mentioned, with the strong cash-on-cash returns, we're in a position to be able to grow the business as we develop talented and experienced managers, and we will continue to repurchase shares opportunistically.

Thank you. And I'll turn it back to Jeff.

Jeffrey Williams -- President, Chief Executive Officer, Secretary, Director

Okay. Thank you, Vickie. As you know, the market we serve is very large and we believe that most every town can benefit from having a Car-Mart. We offer a higher level of personalized service for local transportation needs. We will continue to invest in our business, especially in the general manager recruitment, training and advancement program with emphasis on inventory management from top to bottom. This business starts and ends with providing our customers with quality vehicles at affordable prices.

As we discussed, our future manager bench is getting stronger and we're excited to see so many passionate people take advantage of the unique career opportunity that Car-Mart provides. We have several newer general managers with significant long-term potential and we are excited to watch them grow as leaders in the coming years. Since our last call, we've opened dealerships at Pryor, Oklahoma and in Fayetteville, Arkansas. Additionally, we have three new lot openings in process; Bixby, Oklahoma; Montgomery, Alabama and Conway, Arkansas. These dealerships will be managed by some of our top-performing general managers, as we look to expand the number of customers served by these managers to leverage the talents of our proven leaders. I'd like to thank our associates for their hard work and dedication to this effort. And again, thank you for your interest in Car-Mart.

Now, we'll open up for questions. Operator?

Questions and Answers:

Operator

Thank you. 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 the participants' prepared remarks and anything that may come up during the Q&A.

(Operator Instructions) Our first question comes from John Rowan with Janney. Your line is now open.

John Rowan -- Janney Montgomery -- Analyst

Good morning.

Jeffrey Williams -- President, Chief Executive Officer, Secretary, Director

Good morning.

Vickie Judy -- Chief Financial Officer

Good morning.

John Rowan -- Janney Montgomery -- Analyst

So I believe you guys said in the prepared remarks something about lower gross profit margin on more expensive cars. And I was just wondering, I mean, you're pretty close to that historical 42% rate. Is there any possibility that we actually get back to that 42% rate or is this -- was it 41.6% a high watermark?

Vickie Judy -- Chief Financial Officer

Well, we continue to try to buy the best car we can for the money. I mean, I think we're getting close to where we're going to stay. I don't expect any more large increases in the gross profit. It's a battle every day to keep repair costs down, obviously, on the cars that we're purchasing but -- so I don't see a lot of change in that gross profit margin.

John Rowan -- Janney Montgomery -- Analyst

Okay. And then can you give us an idea, obviously, there was an increase in the lot level productivity per month. Can you remind me where was the kind of the high watermark on that number? If I'm not mistaken, I thought -- everyone just kind of -- you guys were talking about numbers well in excess of 30 units per month per lot. Where has that number been? Where do you target that number getting to, because in past calls you guys have talked about that being really the focal point of being able to lever your infrastructure and create much better financial returns.

Jeffrey Williams -- President, Chief Executive Officer, Secretary, Director

Yeah. There have been points in our past where we've been over 30 as far as productivity and with the efforts we're putting into recruiting and training and supporting the general managers, we certainly feel like we've got room to grow as far as productivity. The dealerships we've added in the last several years, certainly have capacity, they continue to grow. Some of that is a function of new lot openings also. So -- but I think we have capacity and we have folks in the field that could certainly handle more than 30 cars per month per lot as we go forward.

John Rowan -- Janney Montgomery -- Analyst

Okay. And just two more quick questions. Your debt, it's all floating rate, correct?

Jeffrey Williams -- President, Chief Executive Officer, Secretary, Director

Yes, it is.

John Rowan -- Janney Montgomery -- Analyst

And there's not much -- is there a lot of ability for you to pass along higher rates to the consumers? I was -- you had mentioned something about in the prepared remarks. I had always been under the assumption that the vast majority of your contracts were at state maximums.

Vickie Judy -- Chief Financial Officer

We do have room in several of our states and Arkansas, where a large portion of our dealerships are. We are bumping up against to the state maximums. And there is some room there and we are below market in some of those. So right at the time, we don't have any plans to increase that. It's always a balance of making it affordable for our customers.

Jeffrey Williams -- President, Chief Executive Officer, Secretary, Director

And it is -- when customers compare rates, the better customers do look at our 16.5% as something that makes our offering look a little better, so.

John Rowan -- Janney Montgomery -- Analyst

Okay. And just one last question. Cash collection cycle, obviously better. Downpayment flat, net charge-offs flat. Obviously, there is a -- there are two moving parts in the net charge-off; higher frequency, lower severity. Is the only thing that's driving the better cash collection cycle, the lower duration, or is it also that you're actually getting -- even though you have flat downpayments, you are actually getting more cash upfront because the sales price is higher? I'm trying to parse out what's really driving that faster cash collection cycle. And that's it from me.

Jeffrey Williams -- President, Chief Executive Officer, Secretary, Director

Well, it does relate to a shorter overall term. Although it's not much, it is a little shorter. And then I think more than anything it's just good solid blocking and tackling on the collections side of the business in the field. We're just being more efficient with collections and more focused on that and just basically getting better at it as we go forward.

John Rowan -- Janney Montgomery -- Analyst

Alright. Thank you very much.

Vickie Judy -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Kyle Joseph with Jefferies. Your line is now open.

Kyle Joseph -- Jefferies -- Analyst

Morning, and thanks for taking my questions and congratulations on a good quarter. Given all the positive trends we saw in the quarter, both in terms of sales margins as well as credit, can you just give us an overview of, A, competitive factors in the quarter and then whether that was the driver or whether it's sort of the health of the underlying consumer, or is it a combination of those two?

Jeffrey Williams -- President, Chief Executive Officer, Secretary, Director

I think maybe the competitive environment is maybe a little bit more friendly than it was six months ago, nine months ago, a year ago. I think the consumer maybe does have a little more free cash -- a little more cash in the pocket. But, we believe more than anything, most of the positive changes is internal. We're really focused on the basic blocking and tackling of the business, accountability, and everyone here is really working hard to improve. So I think that the better results, by and large, are due to us just operating at a higher level at this point, but we are getting some benefit outside of the company. It's hard to know exactly how much of each is driving the results, but we believe the biggest factor is we're operating better, and we've got a lot of room to improve from where we're at now.

Kyle Joseph -- Jefferies -- Analyst

That's helpful. And then just going -- shifting to used car prices, obviously, they've been pretty strong, whether you look at NADA or J.D. Power, but just give us your sort of outlook there and thoughts on the impacts on the margins, as well as your credit performance?

Jeffrey Williams -- President, Chief Executive Officer, Secretary, Director

Yes. As you say, car prices are pretty stable to increasing in the -- especially for the car that we're looking for. But, I would say, compared to a year ago, the environment might be just slightly more friendly. We're not having issues finding good cars. We're having to pay a little more than we'd like. That's always the case. But the supply is out there and our guys are doing a good job of finding good, solid, mechanically sound cars. But our expectation is that the market, as far as the purchasing side, is going to stay pretty consistent with what we're seeing now for the foreseeable future.

Kyle Joseph -- Jefferies -- Analyst

Got it. And then last one from me. Saw your term shrink a little bit. Any outlook or targets there on where you'd like to see that go?

Jeffrey Williams -- President, Chief Executive Officer, Secretary, Director

Well, we'd love to see that drift down a little bit. It was nice to see the decrease even with the $629 increase in selling price. So, on a relative basis, that's a pretty good decrease in term. So by putting a better car out there, with this little shorter term, that should result in some lower credit losses down the road. We'd certainly like to see that term go down a little bit more. But when you're trying to attract those better customers, they do have choices. So sometimes we don't have as much leverage on that term with those stronger customers, but we'd love to see that term continue to go down.

Kyle Joseph -- Jefferies -- Analyst

Got it. Thanks very much for answering my questions.

Operator

(Operator Instructions) Our next question comes from Vincent Caintic with Stephens. Your Line is now open.

Vincent Caintic -- Stephens -- Analyst

Hey, thanks. Good morning guys. Three questions.

Vickie Judy -- Chief Financial Officer

Good morning.

Vincent Caintic -- Stephens -- Analyst

Good morning, Vickie. On the internal improvements to the business, I'm just kind of wondering if you could talk about how much more improvements you think are available to you, broadly speaking, in your view? And would you expect this level of revenue growth year-over-year to continue at the good pace that you've had this quarter?

Jeffrey Williams -- President, Chief Executive Officer, Secretary, Director

Well, I think when we talk around here about where we're at in the low-hanging fruit, I think everyone in Car-Mart is pretty convinced that we've got a lot of room for improvement. So how that translates into numbers, we're not exactly sure. But just, in how we do our jobs day to day, we've got so much more room to improve that customer experience. So we believe that will translate into some better numbers down the road. But more than anything, we're focused on coming in every day, putting on the boots and doing good work. And we think we've got a lot of room to continue to improve on the quality of the work we do every day here.

As far as the sales in the top line, traffic has been up for us, so we attribute a big part of that to buying better cars at better prices, getting them out front, titled and ready to sell, basically good solid inventory management. And then the sales process, everything is getting a little bit better. So on our online presence, what we're doing on the digital side is also increasing a lot of traffic. So, again, it's kind of hard to pinpoint what that's going to do to our numbers, but we are optimistic that what we're doing operationally with inventory management, especially, is certainly helping the lot traffic, which should give us more of an opportunity to cherry-pick those better credit risks in our local communities in the -- and continue to grow that top line in a healthy way by getting the very best customers in each market.

Vincent Caintic -- Stephens -- Analyst

Okay, great. That's very helpful.

Vickie Judy -- Chief Financial Officer

So much of all of that goes back to that general manager, the face there at the dealership. And the longer we can keep them in their job and keep training them year-over-year, the bigger opportunity there is there as well. So, again, that's why we're so focused on that development of those general managers.

Vincent Caintic -- Stephens -- Analyst

Okay, that's very helpful. Thank you. Second question, maybe if you could talk about the store growth that we should be expecting for the next few quarters, and kind of touching on that point, in your general manager bench how big of a pipeline is there to take advantage of store growth? And, for example, how many of them could be able to run multiple stores, or anything you could give on the general manager bench?

Jeffrey Williams -- President, Chief Executive Officer, Secretary, Director

Yes, we've got three in process and then we've got a few on the list beyond those three. So I think we've got room to leverage those top managers. It may or may not be with a new location. Our message and our efforts are directed at trying to significantly increase the number of customers that our top-performing general managers serve that may or may not relate in additional locations, but we're going to really focus on growing the number of customers they serve, and we do have some good room to continue to grow in that manner. As far as the bench, we are getting better. I think that everyone here is pleased with the recruiting and the training efforts and getting that bench strength up. We're seeing some really talented folks that will be ready for the keys pretty soon. The issue for us is, is the best use of those assets to improve existing locations that might be under-performing, and we've got some of those, or to open new dealerships under a seasoned franchisee-type GM, or to open new dealerships out on their own.

So the primary focus we have at this point is really getting that bench strength up. We're making good progress. But to give you much more detail on that at this point, we can't. But that's our total focus here, is to get our bench built up, and we think we've got a real unique offering to folks looking for a challenging career. And with the training and support and the investments we're making in our general managers, we feel pretty good about having a good bench over time.

Vincent Caintic -- Stephens -- Analyst

Okay. Thank you. And maybe two quick ones, but kind of related. On the lower term, what's driving your ability to lower that -- to decline that term? Then secondly, you mentioned that cherry-picking better credit risks. If you could talk about, has it gotten easier to do that as you're less -- maybe the competition is easier or there's other ways in which you're getting better selection? And that's it from me. Thank you.

Vickie Judy -- Chief Financial Officer

Well, so obviously, I mentioned our traffic has been up a lot at the dealership, so that help gives us a better pool to pick from and we can pick the better customers. Sometimes that gets offset by the competition, because when there is more competition out there and those above us kind of loosen their lending standards and they pick off those better customers. So there's always a constant give and take there. And so, what we try to do with the customer that we get in is try to structure the deal that best offsets that credit of the individual customers more than sales.

Jeffrey Williams -- President, Chief Executive Officer, Secretary, Director

But it all -- it does all start with inventory. If you've got the right product that's in demand, mechanically sound, just a good car, then -- and then you put increased traffic on top of that, then that gives us an opportunity to structure deals more favorably on the front end, but it all starts with inventory.

Vincent Caintic -- Stephens -- Analyst

Great. Very helpful. Thank you.

Jeffrey Williams -- President, Chief Executive Officer, Secretary, Director

Thank you.

Operator

Thank you. 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 closing remarks.

Jeffrey Williams -- President, Chief Executive Officer, Secretary, Director

Okay. Again, thank you for joining us this morning. I'd like to say a thank you to our associates just one more time. We've got a lot of great folks out there working hard to help our customers succeed. So have a great day. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a great day.

Duration: 30 minutes

Call participants:

Jeffrey Williams -- President, Chief Executive Officer, Secretary, Director

Vickie Judy -- Chief Financial Officer

John Rowan -- Janney Montgomery -- Analyst

Kyle Joseph -- Jefferies -- Analyst

Vincent Caintic -- Stephens -- Analyst

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