Car-Mart(US:CRMT)2024-03-10 16:00PART I. FINANCIAL INFORMATION Item 1. Financial Statements The unaudited condensed consolidated financial statements for the period ended January 31, 2024, show a net loss of $31.8 million for the nine-month period, a significant downturn from the $18.3 million net income in the prior year Condensed Consolidated Balance Sheets As of January 31, 2024, total assets were $1.47 billion, up from $1.41 billion at April 30, 2023, primarily driven by a rise in finance receivables and restricted cash Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Jan 31, 2024 | April 30, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $4,239 | $9,796 | | Finance receivables, net | $1,085,772 | $1,063,460 | | Total Assets | $1,466,947 | $1,414,737 | | Liabilities & Equity | | | | Non-recourse notes payable, net | $684,688 | $471,367 | | Revolving line of credit, net | $55,374 | $167,231 | | Total Liabilities | $997,540 | $915,790 | | Total stockholders' equity | $468,907 | $498,447 | Condensed Consolidated Statements of Operations For the nine-month period ended January 31, 2024, the company reported a net loss of $31.8 million, a sharp reversal from the $18.3 million net income year-over-year, driven by lower sales, increased provision for credit losses, and higher interest expense Statement of Operations Summary (in thousands, except per share data) | Metric | Q3 2024 | Q3 2023 | Nine Months 2024 | Nine Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $299,614 | $325,339 | $1,029,221 | $1,013,465 | | Provision for credit losses | $89,582 | $85,650 | $321,300 | $250,719 | | Interest expense | $16,731 | $9,765 | $47,587 | $25,460 | | Net (loss) income | $(8,542) | $1,508 | $(31,819) | $18,344 | | Diluted EPS | $(1.34) | $0.23 | $(4.99) | $2.79 | Condensed Consolidated Statements of Cash Flows For the nine months ended January 31, 2024, net cash used in operating activities was $63.2 million, an improvement from the prior year, with net cash provided by financing activities of $99.1 million leading to a net increase in cash and equivalents Cash Flow Summary (Nine Months Ended Jan 31, in thousands) | Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | $(63,172) | $(123,956) | | Net cash used in investing activities | $(9,329) | $(24,417) | | Net cash provided by financing activities | $99,056 | $171,256 | | Increase in cash, cash equivalents, and restricted cash | $26,555 | $22,883 | Notes to Consolidated Financial Statements The notes detail significant accounting policies, including a change in credit loss allowance methodology, an increase in the allowance rate for finance receivables, expanded debt facilities, and a subsequent amendment to the revolving credit facility - The company implemented new third-party software for calculating its allowance for credit losses using an undiscounted cash flow model. This change resulted in a $28.0 million increase to the provision for credit losses in the second quarter of fiscal 20244850 - The allowance for credit losses was 25.74% of the principal balance in finance receivables as of January 31, 2024, a decrease from 26.04% at the end of the previous quarter but an increase from 23.91% at April 30, 2023505183 - Subsequent to the quarter end, on February 28, 2024, the company amended its revolving credit facility, extending the term to September 2025, reducing total permitted borrowings from $600 million to $340 million, and updating financial covenants124 Debt Facilities Summary (in thousands) | Debt Type | Jan 31, 2024 | April 30, 2023 | | :--- | :--- | :--- | | Revolving line of credit, net | $55,374 | $167,231 | | Non-recourse notes payable, net | $684,688 | $471,367 | | Total debt | $740,062 | $638,598 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the decline in profitability for the third quarter and first nine months of fiscal 2024 to decreased retail units sold, a significant increase in the provision for credit losses, and higher interest expenses, while focusing on strategic initiatives to improve credit standards and inventory efficiency Overview The company's revenue increased 1.6% for the first nine months of fiscal 2024, driven by higher interest income and average retail sales price, despite a decrease in retail units sold, while the provision for credit losses significantly increased due to inflationary pressures - For the first nine months of fiscal 2024, revenue increased 1.6% YoY, driven by a 21.8% increase in interest income and a 5.6% rise in average retail sales price, despite a 6.9% decrease in retail units sold137 - The provision for credit losses as a percentage of sales rose to 37.6% for the first nine months of fiscal 2024, primarily due to a $28 million increase in the provision during Q2 and higher net charge-offs140 - The company is implementing a new Loan Origination System (LOS) across its dealerships to improve the customer application process, provide enhanced data for credit decisions, and tighten credit standards, expecting to reduce credit losses147 - A new strategic partnership with an automotive services provider aims to improve inventory supply chain efficiencies, particularly in vehicle reconditioning and quality139 Results of Operations For Q3 FY2024, revenues decreased 7.9% YoY, leading to a pretax loss of $10.3 million, while for the nine-month period, revenues increased 1.6% YoY, but a significant rise in credit loss provision and interest expense resulted in a pretax loss of $40.7 million Q3 FY2024 vs Q3 FY2023 Performance | Metric | Q3 2024 | Q3 2023 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $299.6M | $325.3M | (7.9)% | | Retail units sold | 11,664 | 14,508 | (19.6)% | | Provision for credit losses (% of sales) | 37.3% | 31.2% | +6.1 ppt | | Interest expense | $16.7M | $9.8M | +71.3% | | Pretax (loss) income | $(10.3M) | $1.8M | N/A | Nine Months FY2024 vs Nine Months FY2023 Performance | Metric | 9M 2024 | 9M 2023 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $1,029.2M | $1,013.5M | +1.6% | | Retail units sold | 42,738 | 45,929 | (6.9)% | | Provision for credit losses (% of sales) | 37.6% | 28.8% | +8.8 ppt | | Interest expense | $47.6M | $25.5M | +86.9% | | Pretax (loss) income | $(40.7M) | $23.5M | N/A | Financial Condition As of January 31, 2024, net finance receivables increased 2.1% to $1.09 billion, with a significant shift in total debt structure due to increased non-recourse notes payable and decreased revolving line of credit following asset-backed securitization offerings - The company completed two asset-backed securitization offerings in fiscal 2024 (July 2023 and January 2024) for aggregate principal amounts of $360.3 million and $250.0 million, respectively. Proceeds were used to pay down the revolving credit facility and provide liquidity168 Balance Sheet Highlights (in thousands) | Account | Jan 31, 2024 | April 30, 2023 | | :--- | :--- | :--- | | Finance receivables, net | $1,085,772 | $1,063,460 | | Inventory | $109,313 | $109,290 | | Non-recourse notes payable | $684,688 | $471,367 | | Revolving line of credit | $55,374 | $167,231 | Liquidity and Capital Resources The company's liquidity is primarily derived from operations and borrowings, with cash used in operations at $63.2 million for the nine months ended January 31, 2024, and future cash use planned for receivables growth, capital expenditures, and potential acquisitions - As of January 31, 2024, the company had $4.2 million in cash and an additional $125.6 million of availability under its revolving credit facilities179 - The company expects to use cash for growing its finance receivables, funding approximately $10 million in capital expenditures over the next 12 months, pursuing acquisitions, and repurchasing stock182 - Macro-economic pressures, including inflation, have negatively impacted customers' ability to make payments, resulting in increased charge-offs and affecting liquidity176 Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk from its variable-rate revolving credit facilities, where a 1% increase in rates would raise annual interest expense by approximately $554,000, while its fixed-rate finance receivables create exposure to margin compression - The company is exposed to interest rate risk from its variable-rate revolving credit facilities. A 1% increase in interest rates on the $55.4 million outstanding balance as of Jan 31, 2024, would increase annual interest expense by about $554,000200 - The company's finance receivables have fixed interest rates (mostly 16.75% to 18.25%), while its revolving credit facilities have variable rates, exposing net interest income to fluctuations in market rates201 Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of January 31, 2024, with no material changes to internal control over financial reporting during the last fiscal quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of January 31, 2024202 - No changes occurred during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting202 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings in the ordinary course of business but does not expect the outcome of these to have a material adverse effect on its financial position, results of operations, or cash flows - The company does not expect any ongoing legal proceedings to have a material adverse effect on its financial condition or results of operations205 Item 1A. Risk Factors There have been no material changes to the company's risk factors from those disclosed in its Form 10-K for the fiscal year ended April 30, 2023 - No material changes to the company's risk factors have occurred since the last annual report on Form 10-K206 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any shares under its stock repurchase program during the third quarter of fiscal 2024 and does not expect to pay dividends in the foreseeable future, with its ability to do so also limited by credit agreements - No shares were repurchased under the company's stock repurchase program during the third quarter of fiscal 2024207 - The company does not expect to pay dividends in the foreseeable future, and its credit facilities restrict its ability to do so208 Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, debt agreements, employment agreements, and officer certifications