What happened

Investors in used-car dealer America's Car-Mart (CRMT -0.53%) found themselves in a one-car pileup Thursday, with their stock damaged 22.2% as of 1:40 p.m. ET after reporting a massive earnings miss (but a sales beat) last night.

Heading into its fiscal first quarter of 2023, analysts had forecast Car-Mart would earn $3.14 per share on sales of only $322.4 million. It beat that sales projection, collecting $344.8 million in the quarter. Problem was, it didn't earn nearly as much on those sales as anticipated, with earnings coming in at an even $2 a share.  

So what

This was the opposite of what it reported three months ago, when its fourth-quarter 2022 report showed the company beating on both sales and earnings, and indeed, beating earnings by nearly as much as the $1.14 that it missed them by last night.

In the middle of a gigantic supply deficit for used cars, Car-Mart's profits surged to $4.01 per share last quarter. But with the arrival of a new fiscal year, Car-Mart now seems to be giving back those windfall profits in a big way.

Although the volume of cars it sold grew only 2% year over year, the company posted a 23% gain in the dollar value of its sales thanks to still-inflated prices on used-car inventory. Hence the sales beat.

Problem is, Car-Mart's costs to acquire inventory are also rising, slimming the company's gross profit margin per car to about 37.5%, down from 40.1% a year ago. When combined with rising selling, general, and administrative expenses, and much higher provisions for credit losses, this resulted in profits getting cut nearly in half, to just $13.2 million, or $2 a share, in the first quarter of 2023.  

Now what

The good news, though, is that car prices are starting to level off (both the prices Car-Mart pays, and what it sells cars for), and CEO Jeff Williams is predicting "a gradual flattening." The company believes high car prices could be scaring off some of its potential customers, and a moderation in prices could mean more sales.

In the meantime, investors are simply reacting to the steep decline in profits today, and selling off America's Car-Mart stock in droves. Despite its valuation of less than 10 times trailing earnings, they're worried that the stock will look a whole lot more expensive if earnings continue to deteriorate. And they may be right.