Car-Mart(US:CRMT)2023-06-25 16:00Part I Business Overview The company is a leading automotive retailer specializing in selling affordable used vehicles and providing in-house financing to credit-challenged customers - The company operates in the 'Integrated Auto Sales and Finance' segment, selling older used vehicles and providing financing to customers with limited or impaired credit histories90116 - As of April 30, 2023, the company operated 156 dealerships, primarily located in small cities across the South-Central United States90 - The business strategy focuses on expanding through controlled organic growth at existing dealerships and pursuing strategic acquisitions, having successfully acquired dealerships in two of the last three fiscal years6970 Business Strategy The strategy emphasizes decentralized operations, affordable transportation, strong customer relationships, and growth through expansion and acquisitions - Maintains a decentralized operation, with each dealership responsible for its own vehicle quality, sales, credit decisions, and collections91 - Focuses on selling basic, affordable transportation, with an average retail sales price of $18,080 in fiscal 202329 - Grows by increasing revenues at existing dealerships and through strategic acquisitions, adding 3 new dealerships in fiscal 20237074 - Emphasizes cultivating customer relationships, leading to a large percentage of sales from repeat customers and referrals at mature dealerships54 Operations Operations involve decentralized dealerships managing vehicle sales, in-house financing, and collections, with a focus on older, affordable vehicles Dealership Count (Fiscal Years 2021-2023) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Dealerships at beginning of year | 154 | 151 | 148 | | Dealerships opened or acquired | 3 | 3 | 3 | | Dealerships closed | (1) | - | - | | Dealerships at end of year | 156 | 154 | 151 | Typical Vehicle Purchase & Financing Terms (FY 2023) | Metric | Value | | :--- | :--- | | Vehicle Profile | | | Age | 5 to 12 years | | Mileage | 70,000 to 140,000 | | Average Cost | $10,000 | | Financing Terms | | | Average Down Payment | 5.4% | | Average Term Length | 46.3 months | | Portfolio Weighted Avg. Interest Rate | 16.7% | - Collections are a primary focus, with annual provision for credit losses ranging from 19.30% to 29.20% of sales over the last five fiscal years28 - New dealerships are capitalized with approximately $1.5 million to $2.5 million and typically become profitable within the first year of opening38 Competition The company faces intense competition in the fragmented used automotive market, primarily on financing availability, vehicle quality, pricing, and customer service - Competes with other independent Integrated Auto Sales and Finance dealers, franchised dealerships, other used car dealers, and private sellers82 - Principal competitive factors include the availability of financing availability to credit-challenged consumers, vehicle selection, pricing, and customer service41 - Increased competition and tight vehicle supply have led to higher purchase prices and influenced the company to offer longer financing terms and slightly lower down payments82 Human Capital Resources The company employs 2,260 associates, emphasizing diversity, safety, and professional development through internal training programs - Employed approximately 2,260 full-time associates as of April 30, 202346 - As of April 30, 2023, 52% women and 34% racially or ethnically diverse associates comprised the company's workforce44 - Offers comprehensive training and development programs, such as 'Future Manager' and 'Car-Mart U', to foster internal promotion and career growth218 Executive Officers of the Registrant The executive leadership team comprises Jeffrey A. Williams (CEO), Vickie D. Judy (CFO), and Douglas Campbell (President) Executive Officers as of April 30, 2023 | Name | Age | Position | | :--- | :--- | :--- | | Jeffrey A. Williams | 60 | Chief Executive Officer and Director | | Vickie D. Judy | 57 | Chief Financial Officer | | Douglas Campbell | 47 | President | Risk Factors The company faces risks from economic conditions, inventory costs, intense competition, credit-impaired borrowers, extensive regulation, and stock volatility Risks Related to the Company's Business, Industry, and Markets Risks include adverse economic conditions, used vehicle availability and cost, intense competition, extensive regulation, and dependence on successful growth strategies - Disruptions in economic conditions, including rising interest rates and inflation, could adversely affect consumer demand and increase delinquencies, repossessions, and credit losses, particularly for the non-prime customer base209253 - Reduced availability or increased cost of used vehicles, affected by new car sales volumes and supply chain issues, could negatively impact inventory and gross margins210 - The business is geographically concentrated, with approximately 27.4% of revenues from Arkansas, making it susceptible to local economic conditions256 - The business is subject to extensive regulation from federal, state, and local authorities, including the Consumer Financial Protection Bureau (CFPB), which could result in significant compliance costs and penalties227 Risks Related to the Company's Operations Operational risks include high delinquency rates from credit-impaired borrowers, insufficient credit loss allowance, dependence on key personnel, and cybersecurity threats - Financing sales to individuals with impaired or limited credit histories entails a higher risk of delinquency, default, and repossession compared to traditional lenders262 - The allowance for credit losses, an estimate based on historical data and forecasts, may be insufficient to cover actual losses, which could adversely affect financial results235263 - The company's decentralized model makes it dependent on its management teams and its ability to attract and retain qualified employees in a competitive market237 - Information systems are vulnerable to security breaches, cyber-attacks, and system failures, which could disrupt operations, lead to data theft, and cause reputational damage239 Risks Related to the Company's Common Stock Common stock risks include price volatility due to low trading volume and the company's policy of not paying cash dividends - The common stock's relatively low trading volume may result in greater price volatility and may not provide adequate liquidity for investors245272 - The company does not currently pay cash dividends and intends to retain earnings for future growth, meaning stockholders should not rely on future dividend income246273 Properties The company leases approximately 79% of its facilities, including its 50,000 sq ft corporate office in Rogers, Arkansas, and dealerships across ten states - The company leases approximately 79% of its facilities, including most dealerships and its corporate offices275 - Corporate offices are located in a 50,000 square foot leased space in Rogers, Arkansas275 Legal Proceedings Management anticipates no material adverse effect on financial position or operations from ongoing legal proceedings - The company does not expect any ongoing legal proceedings to have a no material adverse effect on its financial condition or operations305 Mine Safety Disclosure This item is not applicable to the company's business - Not applicable276 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common stock (CRMT) trades on NASDAQ, with 977 shareholders; the company retains earnings for growth and did not repurchase shares in Q4 FY2023 - The company's common stock trades on the NASDAQ Global Select Market under the symbol CRMT278 - As of June 23, 2023, there were approximately 977 shareholders of record307 - The company has not paid cash dividends and intends to continue retaining earnings for future growth281 - No shares of common stock were repurchased under the company's authorized program during the fourth quarter of fiscal 2023310 Management's Discussion and Analysis of Financial Condition and Results of Operations FY2023 revenues grew 17.6% to $1.41 billion, but net income declined significantly due to a 48.2% increase in credit loss provision and a 250.9% surge in interest expense Results of Operations FY2023 revenues rose 17.6% to $1.41 billion, but income before taxes fell sharply due to a 48.2% increase in credit loss provision and a 250.9% rise in interest expense Key Operating Metrics (FY2023 vs FY2022) | Metric | FY 2023 | FY 2022 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $1,405.5M | $1,195.6M | 17.6% | | Retail Units Sold | 63,584 | 60,595 | 4.9% | | Average Retail Sales Price | $18,080 | $16,372 | 10.4% | | Gross Margin % | 33.4% | 36.4% | (3.0 p.p.) | | Provision for Credit Losses | $352.9M | $238.1M | 48.2% | | Interest Expense | $38.3M | $10.9M | 250.9% | | Income Before Taxes | $25.8M | $122.6M | (79.0%) | - The increase in provision for credit losses in FY2023 was due to credit metrics normalizing to pre-pandemic levels, driven by the absence of government stimulus, inflationary pressures on customers, and an increased frequency and severity of losses323286 - Interest expense surged in FY2023 due to higher interest rates (71%) and higher average debt balances (29%)293 Financial Condition Total assets grew to $1.42 billion, driven by a 24.2% increase in net finance receivables to $1.07 billion, funded by increased debt Selected Balance Sheet Data (in thousands) | Account | April 30, 2023 | April 30, 2022 | | :--- | :--- | :--- | | Finance receivables, net | $1,073,764 | $863,674 | | Inventory | $109,290 | $115,302 | | Total Assets | $1,420,431 | $1,154,696 | | Non-recourse notes payable, net | $471,367 | $395,986 | | Revolving line of credit, net | $167,231 | $44,670 | | Total Equity | $498,547 | $476,534 | - Growth in finance receivables (24.2%) exceeded revenue growth (17.6%) in fiscal 2023, primarily due to an increase in the average contract term to 46.3 months from 42.9 months in the prior year327 Liquidity and Capital Resources Liquidity sources include operations, revolving credit, and securitizations; FY2023 saw $135.7 million net cash used in operations, with $121.4 million available credit - Net cash used in operating activities was $135.7 million in FY2023, compared to $119.2 million in FY2022, primarily due to the increase in finance receivable originations363110 - Net cash provided by financing activities was $188.7 million, largely from the issuance of non-recourse notes and net borrowings on the revolving credit facility110 - As of April 30, 2023, the company had $121.4 million of availability under its revolving credit facilities, which mature in September 2024338485 Critical Accounting Estimates The allowance for credit losses, $299.6 million (23.91% of receivables) as of April 30, 2023, is the most significant estimate, based on historical data and macroeconomic forecasts - The allowance for credit losses is the most significant accounting estimate, determined by management's judgment372 - The allowance calculation uses historical loss experience adjusted for qualitative factors and a one-year forecast of macroeconomic conditions373348 - At April 30, 2023, the allowance for credit losses was $299.6 million, representing 23.91% of the net finance receivables principal balance, up from 23.57% at the end of fiscal 2022344 Quantitative and Qualitative Disclosures about Market Risk Primary market risk is interest rate exposure on variable-rate revolving credit facilities; a 1% rate increase would raise annual interest expense by $1.7 million - The primary market risk is interest rate risk on its variable-rate revolving credit facilities352398 - A 1% increase in interest rates on the $167.2 million of revolving debt outstanding at April 30, 2023, would increase annual interest expense by approximately $1.7 million398 Financial Statements and Supplementary Data This section presents audited financial statements with an unqualified opinion from Grant Thornton LLP, highlighting the allowance for credit losses as a critical audit matter - The independent auditor, Grant Thornton LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of April 30, 2023355384 - The auditor identified the allowance for credit losses as a critical audit matter due to the significant management judgments required for its estimation, particularly adjustments for current conditions and macroeconomic forecasts386402 Consolidated Financial Statements FY2023 consolidated financial statements show $1.41 billion in revenues, $20.4 million net income, $1.42 billion total assets, and $638.6 million total debt Consolidated Statement of Operations Highlights (FY 2023, in thousands) | Metric | Amount | | :--- | :--- | | Total Revenues | $1,405,498 | | Cost of Sales | $805,873 | | Provision for Credit Losses | $352,860 | | Income Before Income Taxes | $25,794 | | Net Income | $20,432 | | Diluted EPS | $3.11 | Consolidated Balance Sheet Highlights (As of April 30, 2023, in thousands) | Metric | Amount | | :--- | :--- | | Total Assets | $1,420,431 | | Finance Receivables, Net | $1,073,764 | | Total Liabilities | $921,484 | | Total Debt (Revolving + Non-recourse) | $638,598 | | Total Equity | $498,547 | Consolidated Statement of Cash Flows Highlights (FY 2023, in thousands) | Metric | Amount | | :--- | :--- | | Net cash used in operating activities | ($135,728) | | Net cash used in investing activities | ($27,571) | | Net cash provided by financing activities | $188,746 | | Increase in cash | $25,447 | Notes to Consolidated Financial Statements Notes detail accounting policies, including segment reporting, credit loss allowance, and debt composition, noting a corrected immaterial error in prior period financials - All individual dealerships are aggregated into a single reportable segment: Integrated Auto Sales and Finance117 - The allowance for credit losses is a significant estimate. At April 30, 2023, it was $299.6 million, or 23.91% of the net principal balance of finance receivables118426 - Total debt of $638.6 million at April 30, 2023, consists of a $168.5 million revolving line of credit and $472.9 million in non-recourse notes payable from asset-backed securitizations459 - Certain immaterial errors in prior period financial statements related to deferred revenue and the allowance for credit losses were identified and corrected159509 Controls and Procedures Disclosure controls were effective as of April 30, 2023, with a previously identified material weakness in CECL analysis fully remediated through personnel and system enhancements - Management concluded that disclosure controls and procedures were effective as of April 30, 2023512 - A material weakness related to the CECL analysis for the allowance for credit losses, identified in a prior quarter, was fully remediated as of the end of fiscal 2023540541 - Remediation actions included hiring new Senior Director of Finance, implementing third-party software, and engaging advisory services to improve the CECL analysis process164 Part III Directors, Executive Compensation, Security Ownership, and Other Matters Information for Items 10-14, covering directors, executive compensation, and security ownership, is incorporated by reference from the 2023 proxy statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's definitive proxy statement172 Part IV Exhibits, Financial Statement Schedules This section lists all Form 10-K exhibits, including governance documents and material contracts; financial statement schedules are omitted - This section provides a list of all exhibits filed with the annual report, including governance documents, material contracts, and required certifications554 - Financial statement schedules have been omitted because the required information is included elsewhere in the report or is not applicable553 Form 10-K Summary This item is noted as not applicable in the report - Not applicable558