America's Car-Mart profit dropped 55%. Boo!
That's how the headlines ran yesterday, after the Bentonville, Ark., used car dealer reported fiscal Q4 and full-year 2007 results. Either the quarter was surprisingly good, or astoundingly bad. So which one was it?
Both, and neither
Technically, both headlines were correct. Car-Mart did beat earnings estimates, sort of, and its profits did drop -- more than was apparent at first. Analysts were guessing that the firm (which discontinued giving guidance a couple quarters ago) would earn $0.13 on $62.1 million in revenue last quarter. As it turned out, Car-Mart netted $0.17 per share on $59.3 million in revenue. But the way I see it, the company missed on both counts. Profits benefited from a pair of unforeseen tax boons -- an IRS decision that freed up $0.04 per share that had been reserved against anticipated tax liability, and a "favorable state tax law change" that added another penny to earnings. Add it all up, back it out of reported net earnings, and absent these tax bennies, Car-Mart would have earned $0.12 per share -- "missing by a penny."
But enough about the analysts and their guidance games. What's more interesting here -- what we talked about in Tuesday's Foolish Forecast -- is what's going on with management's efforts to turn the business around: to sell its customers cars they can afford, extend loans that will ultimately be repaid, and generate repeat business. On that score, the signs are encouraging (with two caveats).
Management emphasized declines in its 30-days-past-due accounts, both sequentially and year over year, along with "significantly higher down payments than a year ago" as evidence of improved "quality of ... sales." The former suggests that Car-Mart is doing a better job of putting affordable cars in buyers' hands. The latter suggests that the company is finding more financially stable customers to sell to.
Caveat No. 1
On the down side, management also mentioned that provisions for loan losses rose to 26.6% of sales, up 700 basis points year over year -- which tells us Car-Mart has a lot of ill-considered sales still to work through.
Caveat No. 2
Finally, a note on the subject of selling more affordable cars -- and this is less a caveat than an ambiguity. Six months ago, when Car-Mart first outlined the measures it was taking to remedy its problems, management seemed to say that one objective was selling cheaper cars -- that is, cars people could better afford. Yesterday's report, however, shows that the average car sold during the quarter was 9% more expensive last quarter than in the year-ago period. On the one hand, this suggests that the company isn't following through on its own turnaround plan. On the other, though, if delinquent accounts are indeed declining, and down payments rising, perhaps this just means Car-Mart is doing a better job than expected in finding more affluent buyers for its wares -- buyers who would naturally gravitate to more expensive purchases. For the time being, I'm going to go with the second hypothesis. But this is something we'll want to keep an eye on going forward.
What did we expect out of Car-Mart last quarter, and what did it produce? Find out in: