They say there's a first time for everything, but investors in America's Car-Mart (NASDAQ:CRMT) would really rather it weren't so. According to analyst estimates, the company is set to report its first quarterly loss in at least the last three-and-a-half years when it reports its fiscal Q2 2007 numbers tomorrow morning.

What analysts say:

  • Buy, sell, or waffle? Car-Mart has seating for four analysts: one buyer, and three holders.
  • Revenues. On average, they're looking for 6% sales growth tomorrow, to $58.9 million.
  • Earnings. Wall Street analysts predict a loss of $0.18 per share.

What management says:
Car-Mart broke the bad news to investors three weeks ago in an earnings warning: Thanks to a $0.28 per share (after tax) charge it is taking to account for bad debt on its financed cars, this quarter will end in a loss ranging from $0.16 to $0.20 per share. We could give the benefit of the doubt and assume this is truly a "one-time" event, but Q2 2007's profits are still likely to come in at less than half what the company earned in the year-ago quarter (even with the $0.10 in profits it would have earned without the charge).

While that's the news that grabbed the headlines, the subtext was perhaps more important to investors. Specifically, I'm referring to CEO Skip Falgout's depiction of a financially stretched Car-Mart customer base where the average level of overdue payments has risen from 4.1% to 5.4% over the past year (proportionally, a 32% increase). It's a scene where repossessions on bad car loans are rising, as "customers have had difficulty making payments under the terms of their notes." Comparable-store sales are down 3.3% year over year, while "some of [Car-Mart's] local competitors are offering terms that are irrational and not economically viable," as they fight for market share.

What management does:
Focus in on that last weakness for a moment, and see how it's reflected in the table below. As sales numbers decline, and financing terms become less profitable to Car-Mart and its competitors, gross margins have slimmed, pulling operating and net margins down with them.

Margins %

4/05

7/05

10/05

1/06

4/06

7/06

Gross

31.7

31.2

30.1

29.5

29.4

29.2

Op.

14.5

14.1

12.8

12.4

12.4

11.9

Net

8.8

8.5

7.5

7.3

7.1

6.7
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
More than two years ago, I began making the argument that Detroit's efforts to keep its sales numbers up by offering cash rebates, "employee prices for everyone," and "0% financed" vehicles were flooding the market. Back then, struggling automakers like GM (NYSE:GM) and Ford (NYSE:F), in their desperation to make sales, were mortgaging their future sales numbers.

Now, Car-Mart's November earnings warning might be an anomaly -- but it might also be the first proverbial chicken coming home to poop on the automotive sector. As bad as things have been for the auto industry in recent years, Car-Mart's dire depiction of the retail-level situation suggests the worst may be still to come. If the best-qualified car buyers have indeed already bought their cars, pushing the industry to dredge up the dregs of the creditworthy public -- and paying the price in bad loans -- things could get ugly indeed.

Competitors:

  • AutoNation (NYSE:AN)
  • CarMax (NYSE:KMX)
  • Sonic Automotive (NYSE:SAH)
  • United Auto Group (NYSE:UAG)

For more on the retail side of the auto industry, read:

CarMax is a Motley Fool Inside Value recommendation. Where are the unfairly punished stocks, the undervalued enterprises? Philip Durell and his merry band of Fools at the Inside Value newsletter service are standing by, ready to lend a hand with the valuation scenarios. Try out a 30-day trial subscription to see whether bargain-hunting is right for you.

Fool contributor Rich Smith does not own shares of any company named above.