Unveiling America's Car-Mart's Q2 Financial Success

Total Revenue: Navigating Market Challenges

Total revenue stood at $347.3 million, a 3.5% decline compared to the previous year. This was primarily driven by a decrease in retail units sold. However, an increase in interest income and a $13.2 million benefit from service contract revenue partially offset the decline. The service contract revenue increase was a result of a performance analysis that led to an accounting change, reducing the estimated revenue recognition period. This change accelerated deferred service contract revenue on outstanding contracts and will lead to faster revenue recognition in subsequent periods.

Excluding the impact of this accounting adjustment, the company's adjusted loss per share for the quarter was $0.24. This non-GAAP financial measure provides a clearer picture of the company's underlying operating performance.

Sales: Weathering Market Volatility

Sales volume for the quarter was 13,784 units, a 9.1% reduction from the previous year. Lower volumes in September, partly due to weather events in various markets, and the closure of two underperforming dealerships contributed to this decline. The average vehicle retail sales price, excluding ancillary products, decreased to $17,251, showing a sequential decrease of $212.

Gross Profit: Margin Improvements and Initiatives

Gross profit margin as a percentage of sales was 39.4%, with a 290 bps benefit from the service contract accounting change. Absent this change, adjusted gross margin (non-GAAP) was 36.5% for the quarter, an improvement of 200 bps over the prior year and 150 bps sequentially. These improved margins reflect the company's initiatives in improving wholesale results and pricing.

Net Charge-Offs: Reducing Credit Risks

Net charge-offs as a percentage of average finance receivables improved to 6.6% from 7.2% in the previous year. The company saw improvements in the frequency of losses and a small increase in the severity of loss. The severity of loss is tapering off when looking at loss per unit sequentially.

Allowance for Credit Losses: Strengthening Underwriting

The allowance for credit loss as a percentage of finance receivables decreased from 25.00% to 24.72%. This was driven by favorable performance in loans originated under the company's enhanced loan origination system (LOS). As of October 31, 2024, approximately 50% of the outstanding portfolio balance was originated under this system. Delinquencies (accounts over 30 days past due) improved by 10 bps to 3.5% and remained flat sequentially.

Underwriting: Focusing on Deal Structures

Average down payments improved by 30 bps to 5.2%. The average originating term was 44.2 months, essentially flat compared to the prior year and a slight reduction sequentially. The company continues to focus on improving deal structures, particularly within the underlying credit tiers of customers, which is expected to strengthen the portfolio's performance.

SG&A Expense: Managing Costs

SG&A expense increased by 5.7% to $47.4 million from $44.9 million. The company's last two acquisitions drove $2.1 million of the increase, and the remainder was related to stock compensation increases. Favorable declines in payroll and payroll-related costs from prior expense management actions were noted.

Leverage & Liquidity: Maintaining Financial Stability

Debt to finance receivables and debt, net of cash, to finance receivables (non-GAAP) were 51.8% and 43.0%, respectively, showing improvement compared to the end of the prior year. During the quarter, the company completed an underwritten public equity offering and a private asset-backed securitization offering, resulting in proceeds of $73.8 million and $297.9 million, respectively. These funds were used to pay down existing debt. As of October 31, 2024, the company had $107.4 million in outstanding borrowings under its revolving line of credit.

Annual Cash-on-Cash Returns: Solid Performance

The company continues to generate solid cash-on-cash returns. The actual and projected cash-on-cash returns as of October 31, 2024, for the company's finance receivables by origination year show consistent performance. For example, contracts originated in 2024 have a projected cash-on-cash return of 72.3% with 89.7% of the receivables remaining.

These key operating results highlight America's Car-Mart's efforts to navigate industry and economic pressures while positioning itself for future growth and profitability. The company's strategic decisions, enhanced underwriting systems, and focus on customer affordability have contributed to its performance during the second quarter.