When investors finally got their chance to peer under the hood at America's Car-Mart (NASDAQ:CRMT) last week, things were looking pretty good. The company beat estimates for both revenues and "earnings" (actually, losses), growing the former 7.6% year over year, while holding its losses to just $0.16 per share, less than feared. And yet, the stock is trading 4% lower than before the good news broke. What gives?
If you can't say something nice .
I suspect Wall Street just got upset with management for discontinuing quarterly earnings guidance. Good news in the past just can't compete with panicky traders worrying over an uncertain future. But honestly, I think investors made the wrong call here -- and not just because the future is uncertain, and companies almost never hit precisely the numbers they forecast.
The big picture
The reason I'm optimistic about Car-Mart is because, guidance or no guidance, management's description of its problems, and its plan for fixing them, makes a lot of sense to me. In a nutshell, the problem is that it has been selling cars to people who can't afford them. That necessitated the higher "allowance for loan losses" that torpedoed second-quarter profits. But bigger picture, management explained how selling cars to people who can't afford them hurts its repeat business -- presumably because customers don't want to repatronize a store that repo'ed their last ride.
To help fix this problem, Car-Mart intends to do a lot more hand-holding for its customers in the future, to improve the car-buying experience, and turn them into repeat customers. For example:
- For customers with bad credit histories, Car-Mart will help ensure that regular payments on car loans are incorporated into their credit histories. Over time, this should mean better credit histories, lower interest rates, better ability to repay loans on future purchases . and so more repeat purchases.
- Car-Mart will also reexamine the financing terms it offers. The goal is to match payments to the "economic life of the vehicle" so that, when the time comes to become a repeat purchaser, the customer isn't still paying off her first car loan.
The company also aims to improve the quality of the cars it sells, and perhaps more importantly, to put an "emphasis on affordability." The fact that sales increased in dollar terms in both Q1 and Q2 of this year, while units sold declined, suggests that Car-Mart may have been selling its customers cars they couldn't afford. The way I see it, in addition to improving customer satisfaction, selling cheaper cars should result in more Car-Mart customers being able to afford their payments -- and the company writing off fewer loans.
For more on the retail side of the auto industry, read:
- Beware the Used-Car Salesman
- Foolish Forecast: Reading CarMax's Manual
- 3 Stocks That Missed the Mark
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Fool contributor Rich Smith does not own shares of any company named above.
