Business Overview and History

America's Car-Mart, Inc. (CRMT) is one of the largest publicly held automotive retailers in the United States, focusing exclusively on the "Integrated Auto Sales and Finance" segment of the used car market. The company has a rich history, a strong financial profile, and a strategic vision to navigate the evolving landscape of the automotive industry.

America's Car-Mart was initially formed in 1981 and has grown to operate 156 dealerships primarily located in small cities throughout the South-Central United States as of July 31, 2024. The company's two operating subsidiaries, America's Car Mart, Inc. and Colonial Auto Finance, Inc., have played a crucial role in its success.

Over the past decade, America's Car-Mart has demonstrated impressive revenue growth, averaging 11.4% annually. This growth has been fueled by the company's focus on providing financing for used vehicle sales to customers with limited financial resources or credit histories. Many of the company's customers would not qualify for conventional financing from traditional lenders.

The company has faced challenges over the years related to managing credit losses from its customer base. As a lender to customers with impaired or limited credit, the company has had to navigate economic conditions and their impact on its customers' ability to make payments. This has required the company to carefully monitor its underwriting criteria and collections processes to minimize losses.

Despite these challenges, America's Car-Mart has continued to grow its footprint. The company has devoted significant efforts to improving its purchasing processes to ensure an adequate supply of quality used vehicles at appropriate prices for its customers. This has included forming strategic partnerships to streamline its inventory management.

The company's revenue for the fiscal year ended April 30, 2024, was $1.39 billion, with a net loss of $31.39 million. The net loss was primarily due to the company's strategic initiatives, including investments in technology and operational infrastructure, as well as challenges in the macroeconomic environment.

Financials and Liquidity

America's Car-Mart's financial position remains strong, with a current ratio of 15.38 and a quick ratio of 14.08 as of July 31, 2024. The company has a long-term debt to capitalization ratio of 62.40%, providing financial flexibility to support its growth plans.

The company's operating cash flow for the fiscal year ended April 30, 2024, was negative $73.9 million, while its free cash flow was negative $80.0 million. This was primarily due to the significant investments the company has made in its finance receivables, which grew by $624.9 million during the year.

America's Car-Mart's liquidity position remains robust, with $4.7 million in unrestricted cash and $33.5 million in additional availability under its revolving credit facilities as of July 31, 2024. The company's access to capital, including its revolving credit facility and successful securitization program, provides it with a distinct advantage over many of its smaller competitors.

For the most recent quarter (Q1 2025), the company reported revenue of $347.76 million, a decrease of 5.2% year-over-year. This decline was primarily due to a 9.6% decrease in retail units sold, partially offset by a 7.2% increase in interest income and a 2.4% increase in the average retail sales price. The company reported a net loss of $964,000 for the quarter, with operating cash flow of negative $14.97 million and free cash flow of negative $15.96 million.

The company's debt-to-equity ratio stood at 1.66 as of July 31, 2024. In addition to its cash reserves, America's Car-Mart had $93.87 million in restricted cash as of the same date.

Operational Highlights and Strategic Initiatives

In recent years, America's Car-Mart has made significant investments in its operational infrastructure, including the implementation of a new loan origination system (LOS) and an enterprise resource planning (ERP) system. These strategic initiatives are designed to improve the company's efficiency, customer experience, and credit quality.

The LOS has allowed the company to tighten its underwriting standards, primarily by requiring higher down payments and shorter terms from certain customers. As of July 31, 2024, almost 40% of the company's total portfolio dollars originated through the LOS, and the deals originated through this system have demonstrated a lower frequency and severity of loss compared to the company's legacy system.

Additionally, the ERP system implementation is expected to provide enhanced efficiency and operational flexibility within the company's finance, accounting, and customer management functions, as well as support future growth.

America's Car-Mart has also focused on improving its vehicle procurement and reconditioning processes through a strategic partnership with Cox Automotive. This partnership has allowed the company to utilize Cox's reconditioning and auction facilities, which is expected to improve the quality of the company's vehicle inventory and contribute to better gross margins.

The company's gross profit dollars per retail unit sold increased by 3.4% in the first quarter of fiscal 2025 compared to the prior year period, and gross margin as a percentage of sales increased to 35.0% from 34.7%. This improvement was primarily due to an increase in the average retail sales price, pricing discipline, reduced transportation costs, and lower vehicle repair costs.

Challenges and Opportunities

The automotive retail industry, particularly the "Integrated Auto Sales and Finance" segment, has faced various challenges in recent years, including macroeconomic pressures, supply chain disruptions, and changes in consumer preferences. America's Car-Mart has not been immune to these challenges, as evidenced by the company's net loss in the fiscal year ended April 30, 2024.

One of the key challenges the company has faced is ensuring the affordability of its vehicles for its customer base, which primarily consists of individuals with limited financial resources and impaired or limited credit histories. To address this, America's Car-Mart has implemented several initiatives, such as reducing vehicle acquisition costs, optimizing its loan origination system, and partnering with Cox Automotive to improve vehicle quality and procurement efficiency.

The company's provision for credit losses as a percentage of sales averaged 26.36% over the last five fiscal years, with a pre-pandemic rate of 23.71% in fiscal 2019. During fiscal 2024, credit losses exceeded pre-pandemic levels, partially due to inflationary pressure on customers and increasing interest rates. For the first quarter of fiscal 2025, the provision for credit losses as a percentage of sales decreased slightly to 33.2% compared to 33.3% in the prior quarter.

Despite these challenges, America's Car-Mart sees significant opportunities in the market. The company's focus on the "Integrated Auto Sales and Finance" segment, where it has a distinct competitive advantage, positions it well to capitalize on the growing demand for affordable used vehicles. Additionally, the company's investments in technology and operational infrastructure are expected to enhance its customer experience, credit quality, and overall financial performance.

Geographic Markets and Future Outlook

America's Car-Mart primarily operates in the south-central United States, with approximately 29% of current period revenues resulting from sales to Arkansas customers. While the company does not break out financial performance by geographic region, its focus on small cities throughout the South-Central United States has been a key element of its business strategy.

Looking ahead, America's Car-Mart has outlined several key initiatives for fiscal year 2025:

1. Continue to push for operational excellence in sales and collections by leveraging recently installed technology. 2. Improve affordability for consumers by reducing the average retail price during the fiscal year. 3. Continue optimization of the loan origination system (LOS), which is already showing benefits. 4. Capitalize on the partnership with Cox Automotive. 5. Implement their strategic plan and focus on acquisitions.

The company expects the benefits from the Cox Automotive partnership and the LOS to continue improving their gross margins and collections. America's Car-Mart projects the 2024 and 2025 origination vintages to have significantly better cash-on-cash returns compared to the 2021-2023 back book, which accounted for 33% of their portfolio at the time of the most recent earnings call.

Additionally, the company is focused on driving cost efficiencies and executing on cost control measures to help leverage their SG&A expenses.

Conclusion

America's Car-Mart, Inc. is a resilient leader in the "Integrated Auto Sales and Finance" segment of the used car market. With a rich history, a strong financial profile, and a strategic vision to navigate the evolving industry landscape, the company is well-positioned to capture market share and drive long-term shareholder value. While the company has faced some challenges in recent years, including a decline in sales volume and increased credit losses, its focus on operational excellence, technology investments, and strategic partnerships suggests a promising future for America's Car-Mart. The company's ability to adapt to changing market conditions and its commitment to serving its unique customer base should continue to be key drivers of its success in the years to come.