America's Car-Mart, Inc. (CRMT) on Q3 2021 Results - Earnings Call Transcript
Operator: Good morning, everyone. Thank you for holding and welcome to America’s Car-Mart’s Third Quarter Fiscal 2021 Conference Call. The topic of this call will be the earnings and operating results of the company’s third quarter for fiscal 2021. 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 risks and uncertainties that could cause actual results to differ materially from management’s present view. These statements are made pursuant of 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.
Jeff Williams: Okay. Well, thank you and good morning. We appreciate you joining us this morning and for your interest in America's Car-Mart. We are pleased with our results and the progress we're seeing with our various operational initiatives. We have a lot of work to do, but we're optimistic that the improvements and the investments we're making will solidify our unique place in the market. We give our customers peace of mind by keeping them on the road. We try to eliminate the stress of car ownership, which can be one of the more stressful areas of life. We have an obligation to serve more customers as our customers’ lives and the communities we serve are better because we're there. We currently serve close to 86,000 customers or about 570 customers per dealership, and we're building a platform to increase that number significantly over time. We believe that a large majority of our dealerships can serve 1,000 or more customers at some point in the future. Our balance sheet and our historical focus on cash flows has put us in a great position to continue to deploy capital and grow market share in the areas we already serve, as well as looking to new markets through new lot openings and acquisition opportunities like the Taylor acquisition which is going very well. Our business model is strong and getting stronger. Our people are difference makers, and the amount of capital required to operate effectively in our market continues to increase giving us a distinct competitive advantage. We are transitioning from a collections-based company to more of a sales company that can collect our bricks-and-mortar structure, along with an outstanding digital presence will put us ahead of the pack and solidify our place. Better cars and better support infrastructure gives us confidence to move forward more aggressively. Our improvements in the inventory management and procurement area of the business, which is preferred vendors, reconditioning, logistics, and overall inventory and replenishment flow are progressing, and our IP investments will most certainly help us in this area, and specifically the Microsoft Dynamics 365 project that we mentioned in our press release.
Vickie Judy: Good morning, everyone. Our total revenue increased 22.2%, up to $228 million. We were happy to see a 5.6% increase in retail units sold and the improvement in productivity by dealership. The average retail selling price per unit also increased up to $13,688. Interest income increased by 20.5%, and same-store revenues were up 16.9%. Revenues from stores in the over 10 years of age category were up 15%. Stores in the five-year to 10-year category were 25%, and revenues for stores in the less than five years of age category were up to about $20 million. The supply of units at the lower price points continued to be tight. But as Jeff mentioned, we continue to invest in and improve our procurement processes, and we feel confident with our inventory as we move into tax time. At quarter end, 16 or 11% of our dealerships were from zero to five years old, 42 or 28% were from five to 10 years old, and the remaining 93 were 10 years old or older.
Jeff Williams: Okay. Well, thank you, Vickie. We have recently rolled out our new logo and tagline, keeping you on the road, and our associates in the market ever see the changes very favorably. They represent a new beginning and a fresh look at the business and are another foundational piece to our future growth prospects. We want to keep every customer for life and never have a bad customer experience. And we believe we can do this. We're in the process of rolling out our new service contracts to all locations. And these contracts will have oil changes and roadside assistance in longer terms. And they've been very favorably received. Again, it's all about keeping customers on the road. We're working on our new advertising and marketing strategy and expect to see positive results from this effort. As a collections company, we have not had to invest a lot in advertising and marketing. But as we focus more on productivity and market share and growing customer count, we will be devoting more resources to this very important area of the business. Again, we believe we have created a unique position in the market by anticipating, investing, and staying ahead of changes in the last few years as the industry has changed significantly. It's all about improving the customer experience from top to bottom. We are prepared for and have the ability and the passion to keep investing in the key areas and to reach excellence in everything we do. We will continue to gain market share, add new locations, and look for additional acquisition opportunities and the future is bright. Once again, we're in a position with our bricks-and-mortar structure, the digital efforts to secure and leverage our place in the market as we go forward. And lastly, as stated in our press release, we have over 2,000 associates. We have close to 86,000 customers and thousands of vendor partners. And collectively, we have a responsibility to help make the world a better place and we take this responsibility very seriously. Thank you and we will now turn it over for questions. Operator?
Operator: 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 to anything that may come up during the question-and-answer session. Our first question comes from the line of Kyle Joseph with Jefferies. Your line is open. Please go ahead.
Kyle Joseph: Hey. Good morning. Congratulations on another very strong quarter. I just wanted to get into -- I know you, guys, don't give guidance, but for the fourth quarter, a lot of moving parts. Obviously, it's tax refund season. And then on top of that, there's -- we have some stimulus. Kind of walk us through and remind us of how last year's fourth quarter was impacted by the pandemic and kind of your expectations going into this fourth quarter given all those moving pieces.
Jeff Williams: Well, for last year, we had a good start to the quarter in February, and then the pandemic hit the first part of March. So, it was a good start to the year -- to the quarter, but the pandemic kind of threw that in a tailspin from the 1st of March through the end of April. We did perform very well even in light of the pandemic, but volumes were much lower than anticipated prior to the pandemic this year. Strong results during the third quarter. Inventories are in good shape going into the fourth quarter. There was a stimulus check out in the market in January, but some delays with income tax. Refunds this year are going to be more of a negative net-net against the stimulus payments in January month, but all that money and maybe even some additional stimulus is expected to come through during our fourth quarter. So, inventories are in good shape. There should be tax refunds and stimulus coming in the fourth quarter. So, it's hard to know exactly how this settles out, but I think that we expect sales volumes to be strong and our inventories are in good shape. Our personnel with the dealerships are ready for increased volumes, and we feel like we're in a good spot going into the fourth quarter of this year.
Kyle Joseph: That's very helpful. Thanks. And then in terms of the retail sales prices, obviously, it takes used car market and those have been trending up although, quarter-on-quarter, they were fairly stable. Can you just give us a sense for if you anticipate further upward pressure on those given your outlook for the used car market?
Jeff Williams: Yeah. I think we do believe that prices are going to stay up for a while, maybe even drift up just a little bit more as the stimulus money gets out there and tax refund money is out and new car production has been limited since the pandemic started. And more recently, with some microchip shortages, there is a continuing shortage of good, affordable, mechanically-sound good cars out there, so we expect the prices to stay up for the foreseeable future, although increases like we've seen in the last 12 months are not expected. We do see and are seeing some leveling off of prices, but we do expect on a go-forward basis to see some increasing prices especially if we roll in our new service contracts, there's going to be a few percentage point increases in the sales prices just by us rolling out the new service contracts, but we do expect a continuing shortage of good used cars. And as a result of that, we expect prices to stay up and maybe even continue to drift up just a little bit.
Kyle Joseph: Got it. Very helpful. And then -- oh, sorry. Go ahead, Vickie.
Vickie Judy: No. I was just going to say I will add that even with the selling price being up, we do feel like the quality of the car that is out there is much better and overall does have fewer miles. So the quality is better, which should lead to better customer experience and lower credit losses, too, from a unit perspective.
Kyle Joseph: Understood. Thank you. And then just one last one for me. On the competitive environment, obviously it's been a pretty unique environment the last year but walk us through what you're seeing both from other buy-here-pay-here operators as well as from indirect lenders and the overall availability of credit.
Jeff Williams: Well, the cost of the car is certainly having an effect on competition in terms of the quantity and the quality of cars that they can have in inventory. So, with our balance sheet and cash flows, we are able to carry more cars and have a better presentation and more of a mix for our customers to choose from. But -- so we feel like some of our volume increases is related to our investments in inventory, and the competition is going to be in many cases more limited on the capital that they can allocate to inventory. So we've got a good advantage there by serving a deep subprime to subprime consumer. We feel like we're in a good spot from a market perspective. We offer some unique offerings to consumers that our competition doesn’t, especially with the new service contracts. But we feel like we’re picking up good market share. We do feel like if prices were a little lower on the used car side, that we would even be seeing more volumes at this point, but the prices have gone up and stayed up. And so, there probably are some customers that haven't been back in the market yet. And if prices do level off or come down even a little bit in conjunction with some efforts we had internally to recondition and recon cars at the lower price points, we feel like we're trying to create manufacture some better flow of product at the lower price points, which is much harder for our competition to replicate. So, competition is still out there. There's a lot of money to land, but we feel like we've been nimble and can be nimble and provide extra services on the customer experience side, but we feel like we are picking up some real market share and pretty optimistic about where we land against the competition going forward.
Kyle Joseph: Got it. Thanks very much for answering my questions and congrats again on a good quarter despite an uncertain market backdrop.
Jeff Williams: Thank you, Kyle.
Operator: Thank you. And our next question comes from the line of Vincent Caintic with Stephens. Your line is open. Please go ahead.
Vincent Caintic: Thanks. And thank you for taking my questions. First question, so it sounds like you're making a lot of investments in growing the business. I saw the Microsoft Dynamics within the marketing. I'm just wondering if you could give us a sense how much maybe additional expenses we should be modeling going forward from these investments. One of the things I noticed actually just reviewing the February 10 loan amendment is that you increase your CapEx limit to $25 million so that’s -- maybe if that’s the right number or any help you can give us on how much dollars of additional investment expenses we should be expecting.
Vickie Judy: Yeah. We did just increase -- our CapEx limit under our debt agreement has been $10 million for many years. And as we look to both add dealerships, new dealerships, and remodel and improve some of the facilities that we're currently in especially for larger volumes, we could see that that wasn't going to be enough on a run rate basis. And again, that's just CapEx. So we did make that change to our lending agreement. We are investing in other things just in the SG&A like Jeff talked about. We will be spending some more on marketing as we look to grow market share. Our advancement in the IT side with our new ERP project is really going to make us very good at customer experience. That's one of the big reasons that we're doing that. So there is going to be some increasing of SG&A spend as we go here. We're going to be very thoughtful and mindful of the timing of that without missing out on any market share as we move forward though.
Vincent Caintic: Okay. That's helpful. Thanks, Vickie. Second, on supporting the used car prices and your average selling price increasing, I know you've been talking about the efforts to get different procurement sources like rental cars, ex-rental cars and so on. Just wondering -- so even if we were seeing used car prices increasing and there seems to be demand issue as well, so supply issues, but are you able to hold the line on the cost of goods sold on the cars that you're sourcing?
Vickie Judy: Yeah. I feel like we're doing a pretty good job by holding costs down and being efficient with our operational efforts in that area. It is some market forces going on there outside of our control. There's a high demand and low supply of cars out there, overall, especially in the price points we're looking for. But I do feel like some of the partnerships that we formed and are working on, some of these additional efforts in the procurement area are certainly providing some benefits to us. And we feel very good about all of our efforts in that area. And we are controlling costs as best we can. But some of that is out of our hands in terms of just market forces and supply-and-demand imbalances. But we're going to continue to get better in all those areas. And -- but we feel like we are doing our part to hold down costs and keeping these prices just as low as we can.
Vincent Caintic: Okay. Great. Thank you. And last one for me. It's a broader question, but I thought your comment was interesting for going from being a collections company to being a sales company that can collect. And you talked about higher marketing spend, but, I guess, is there a philosophical difference from that statement? So, I know the branding has changed. You have new logo. And so -- but I was just wondering if you can talk about maybe the -- any philosophical or different operational way that you're now thinking about running the company. Thank you.
Vickie Judy: I think it just starts with us having more and more confidence in the product we're putting out there, good, mechanically sound, affordable cars, more confidence in our infrastructure especially when you talk about the customer experience, investments that we're making, the additional efforts we're making in the procurement area, the IT investments. All these investments are giving us a very solid foundation. And as we look up and we look at our cash flows and cash on cash returns and the performance of our credit, the credit side, it's just -- it's opening our eyes a little bit more to the opportunities to increase productivity at the lot level. Historically, maybe we didn't have as much confidence in the infrastructure and the support network in the quality of the car. But we are moving to a point where we're having a lot of confidence in all the areas of our business. Again, as we stated, we got a lot of work to do. But we feel like we're setting some really solid foundational anchors in all these areas and we're seeing a tremendous consumer demand. What we do is unique. Consumers are enthusiastic about what we do. And so, we have an obligation to serve more customers. We feel very strongly about that. And as we get our infrastructure more solid and can support more customers at the highest level, then we have an obligation to go out there and get those customers and keep those customers for life. So, yeah, there is some philosophical differences. We are continuing to look at things that can be better done here at corporate centrally, in freeing up time, valuable time in the field, to focus on customer experience and serving more customers in less time on the back office. And non-value-added functions that historically have eaten up a lot of time in the field. So, we've got some real opportunities to do some things from a central office standpoint to really benefit the field as they try to grow their individual businesses.
Operator: Thank you. And our next question comes from the line of John Rowan with Janney. Your line is open. Please go ahead.
John Rowan: Yeah. What percent of your current customer base already has a service contract in place?
Jeff Williams: It's about just a little less than half. It's a 12 -- historically, it's been a 12-month product.
John Rowan: Okay. So, I guess there are two ways to ask this question. As you roll it out and you now penetrate the other half of customers with service contracts, presumably that's what you all do. How much duration does that add onto the portfolio? Or conversely, how much of the portfolio the duration increase over the past year? Was car price in competition versus the end -- using the service contracts and having that in the up-front price of the car?
Jeff Williams: Yeah. So most of it is just inflation on the car itself. There has been a little bit related to the service contract to rollout so far. And as we look forward, I think we're looking maybe at another $400 to $500 overall ASP increase as we look at the entire portfolio heading service contract at the higher rates. We can expect another -- maybe another month of term and another $500 dollars of ASP specifically related to the rollout of the new service contracts.
John Rowan: Okay. I just wanted to understand, you’re at 35 months; you were at basically 31 last year. There’s four months -- a little over four months of duration increase. And so half of the portfolio would equate to about one month out of that four, I mean, is that -- like I'm in the right ballpark of framing out what's causing it?
Jeff Williams: John, what's out there now, the portion specific to the rollout of the new service contract is very minimal. It is almost entirely because of the increased selling price. We just started piloting this new service contract this past year and they just got rolled out in February. And we're not going back to any existing customers and offering these extended contracts. It is just on new contracts.
John Rowan: That's fine. I just wanted to also check on the -- are you guys having any weather impacts?
Jeff Williams: Yes, we are. We've had a lot of snow and ice and freezing temperatures. And we've had to scramble around to keep lots open and associates getting to and from work. So, it's been a little bit of a mess the last week.
John Rowan: I've been is to one, we’re in New Jersey than it is in some of parts of the country at least supposed to be hot. Are you guys having power outages? Do we see this impacting the next quarter results?
Jeff Williams: No. I mean, we are having some power issues and some rolling blackouts or brownouts and some of that, but the sun is supposed to come back out at some point soon. And so, we don't expect anything more than a temporary blip from the weather for the fourth quarter.
John Rowan: Okay. Thank you very much.
Operator: Thank you. I'm showing no further questions at this time. And I would like to turn the conference back over to Mr. Jeff Williams for any further remarks.
Jeff Williams: Okay. Well, once again, thanks for joining us this morning. And as always, we want to thank our associates in the great work that they're doing out in the field to keep our customers on the road and to give them real peace of mind as being part of our Car-Mart family. So, thank you. Have a great day.
Operator: Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.
