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America's Car-Mart (NASDAQ:CRMT) Misses Q2 Sales Targets, Provision for Loan Losses Soars, Stock Drops 31.9%


Full Report / December 05, 2023

Used-car retailer America’s Car-Mart (NASDAQ:CRMT) fell short of analysts' expectations in Q2 FY2024, with revenue up 3.1% year on year to $361.6 million. It made a GAAP loss of $4.30 per share, down from its profit of $0.48 per share in the same quarter last year.

America's Car-Mart (CRMT) Q2 FY2024 Highlights:

  • Revenue: $361.6 million vs analyst estimates of $376 million (3.8% miss)
  • EPS: -$4.30 vs analyst estimates of $0.79 (-$5.09 miss)
  • Free Cash Flow was -$30.94 million compared to -$41.81 million in the same quarter last year
  • Gross Margin (GAAP): 7.6%, down from 15.9% in the same quarter last year
  • Same-Store Sales were up 2.7% year on year (big miss vs. expectations of up 7.5% year on year)
  • Net charge offs: 7.2% vs analyst estimates of 6.4%

With a strong presence in the Southern and Central US, America’s Car-Mart (NASDAQ:CRMT) sells used cars to budget-conscious consumers.

This core customer is usually a credit-constrained consumer who may have difficulty securing financing from traditional lenders such as banks. These customers may have poor or limited credit histories, which traditional lenders rely on to underwrite auto loans. America’s Car-Mart’s ‘buy here, pay here’ model addresses these difficulties. In this model, the dealership acts as both the seller of the vehicle and the financier, allowing a customer to purchase a car directly from America’s Car-Mart and make their payments directly to the company rather than a bank or other finance provider.

America’s Car-Mart locations are 8,000 to 10,000 square feet with ample outdoor space to display used cars for sale. These locations are primarily located in smaller cities and towns, especially ones with credit-challenged and likely lower-income populations. While the company does have an e-commerce presence, it was only established in 2020 and physical locations remain the primary avenue for doing business.

Vehicle Retailer

Buying a vehicle is a big decision and usually the second-largest purchase behind a home for many people, so retailers that sell new and used cars try to offer selection, convenience, and customer service to shoppers. While there is online competition, especially for research and discovery, the vehicle sales market is still very fragmented and localized given the magnitude of the purchase and the logistical costs associated with moving cars over long distances. At the end of the day, a large swath of the population relies on cars to get from point A to point B, and vehicle sellers are acutely aware of this need.

Competitors in the auto retail space include AutoNation (NYSE:AN), CarMax (NYSE:KMX), and Group 1 Automotive (NYSE:GPI).

Sales Growth

America's Car-Mart is a small retailer, which sometimes brings disadvantages compared to larger competitors that benefit from economies of scale. On the other hand, one advantage is that its growth rates can be higher because it's growing off a small base.

As you can see below, the company's annualized revenue growth rate of 19.8% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was excellent despite not opening many new stores, implying that growth was driven by increased sales at existing, established stores.

America's Car-Mart Total Revenue

This quarter, America's Car-Mart grew its revenue by 3.1% year on year, falling short of Wall Street's estimates. Looking ahead, analysts expect sales to grow 6.3% over the next 12 months.

Number of Stores

When a retailer like America's Car-Mart keeps its store footprint steady, it usually means that demand is stable and it's focused on improving operational efficiency to increase profitability. As of the most recently reported quarter, America's Car-Mart operated 154 total retail locations, in line with its store count a year ago.

America's Car-Mart Operating Retail Locations

Taking a step back, the company has only opened a few new stores over the last eight quarters, averaging 1.4% annual growth in new locations. Although it's expanded its presence, this sluggish store growth lags other retailers. A flat store base means that revenue growth must come from increased e-commerce sales or higher foot traffic and sales per customer at existing stores.

Same-Store Sales

Same-store sales growth is a key performance indicator used to measure organic growth and demand for retailers.

America's Car-Mart's demand has outpaced the broader consumer retail sector over the last eight quarters. On average, the company has grown its same-store sales by a robust 16.4% year on year. Given its flat store count over the same period, this performance stems from increased foot traffic at existing stores or higher e-commerce sales as the company shifts demand from in-store to online.

America's Car-Mart Year On Year Same Store Sales Growth

In the latest quarter, America's Car-Mart's same-store sales rose 2.7% year on year. By the company's standards, this growth was a meaningful deceleration from the 23.2% year-on-year increase it posted 12 months ago. We'll be watching America's Car-Mart closely to see if it can reaccelerate growth.

Gross Margin & Pricing Power

We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate product differentiation, negotiating leverage, and pricing power.

America's Car-Mart has poor unit economics for a retailer, leaving it with little room for error if things go awry. As you can see below, it's averaged a 17.8% gross margin over the last two years. This means the company makes $0.18 for every $1 in revenue before accounting for its operating expenses. America's Car-Mart Gross Margin (GAAP)

America's Car-Mart produced a 7.6% gross profit margin in Q2, marking a 8.3 percentage point decrease from 15.9% in the same quarter last year. Although the company could've performed better, we care more about its long-term trends rather than just one quarter. Additionally, a retailer's gross margin can often change due to factors outside its control, such as product discounting and dynamic input costs (think distribution and freight expenses to move goods). We'll keep a close eye on this.

Operating Margin

Operating margin is a key profitability metric for retailers because it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

This quarter, America's Car-Mart generated an operating profit margin of negative 5.2%, down 8.8 percentage points year on year. We can infer America's Car-Mart was less efficient with its expenses or had lower leverage on its fixed costs because its operating margin decreased more than its gross margin.

America's Car-Mart Operating Margin (GAAP)

Zooming out, America's Car-Mart was profitable over the last eight quarters but held back by its large expense base. It's demonstrated subpar profitability for a consumer retail business, producing an average operating margin of 4.9%. On top of that, America's Car-Mart's margin has declined, on average, by 6 percentage points year on year. This shows the company is heading in the wrong direction, and investors were likely hoping for better results.

EPS

These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.

In Q2, America's Car-Mart reported EPS at negative $4.30, down from $0.48 in the same quarter a year ago. This print unfortunately missed Wall Street's estimates, but we care more about long-term EPS growth rather than short-term movements.

America's Car-Mart EPS (GAAP)

Over the last year, America's Car-Mart's adjusted diluted EPS dropped 133%. We hope this changes. If there's no earnings growth, it's difficult to build confidence in a business's underlying fundamentals, leaving a low margin of safety around the company's valuation (making the stock susceptible to large downward swings).

On the bright side, Wall Street expects the company's earnings to grow over the next 12 months, with analysts projecting an average 297% year-on-year increase in EPS.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe in the end, cash is king, and you can't use accounting profits to pay the bills.

America's Car-Mart burned through $30.94 million of cash in Q2, representing a negative 8.6% free cash flow margin. The company increased its cash burn by 26% year on year.

America's Car-Mart Free Cash Flow Margin

Over the last two years, America's Car-Mart's capital-intensive business model and demanding reinvestments to stay relevant with consumers have drained company resources. Its free cash flow margin has been among the worst in the consumer retail sector, averaging negative 10.8%. However, its margin has averaged year-on-year increases of 3.8 percentage points, showing the company is at least improving.

Key Takeaways from America's Car-Mart's Q2 Results

With a market capitalization of $515.9 million, America's Car-Mart is among smaller companies, but its more than $4.31 million in cash on hand and near break-even free cash flow margins puts it in a stable financial position.

We struggled to find many strong positives in these results. Same-store sales missed, leading to a revenue shortfall vs. expectations. Most worrying was a huge step-up in provision for credit losses, which impacted margins and EPS. Management called out a "challenging economy" and added that the "persistent inflationary environment impacted existing customers, which was evident in our credit losses. This required an increase in the allowance for credit losses which subsequently impacted the bottom line for the quarter." Overall, the results could have been better. The company is down 31.9% on the results and currently trades at $55 per share.

Is Now The Time?

America's Car-Mart may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of America's Car-Mart, we'll be cheering from the sidelines. Although its revenue growth has been exceptional over the last four years, its declining EPS over the last one years hurt its performance. And while its projected EPS growth for the next year implies the company's fundamentals will improve, the downside is its cash burn raises the question of whether it can sustainably maintain growth.

America's Car-Mart's price-to-earnings ratio based on the next 12 months is 13.5x. While we think the price is reasonable and there are some things to like about America's Car-Mart, we think there are better opportunities elsewhere in the market right now.

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