America’s Car-Mart Inc. (NASDAQ: CRMT) Q3 2021 earnings call dated Feb. 17, 2021.
Corporate Participants:
Jeffrey A. Williams — President & Chief Executive Officer
Analysts:
Vickie D. Judy — Analyst
Kyle Joseph — Jefferies — Analyst
Vincent Caintic — Stephens — Analyst
John Rowan — Janney — Analyst
Presentation:
Operator
Good morning, everyone. Thank you for holding, and welcome to America’s Car-Mart’s Third Quarter Fiscal 2021 Conference Call. The topic of this call will be the earnings and operating results of the Company’s third quarter for fiscal 2021.
Before we begin, I would like to remind everyone that this call is being recorded, and will be available for replay for the next 30 days. The dial-in number and access information are included in last night’s press release, which can be found on America’s Car-Mart’s website at www.car-mart.com.
As you all know, some of management’s comments today may include forward-looking statements, which inherently involve risks and uncertainties that could cause actual results to differ materially from management’s present view. These statements are made pursuant of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company cannot guarantee the accuracy of any forecast or estimate, nor does it undertake any obligation to update such forward-looking statements. For more information regarded forward-looking information, please see Part 1 of the Company’s Annual Report on Form 10-K for the fiscal year ended, April 30, 2020, and it’s current and quarterly reports furnished to, or filed with the Security Exchange Commission on Forms 8-K and 10-Q.
Participating on the call this morning are Jeff Williams, the Company’s President and Chief Executive Officer; and Vickie Judy, Chief Financial Officer.
And now I’d like to turn the call over to the Company’s Chief Executive Officer, Jeff Williams.
Jeffrey A. Williams — President & Chief Executive Officer
Okay. Well, thank you and good morning. We appreciate you joining us this morning and for your interest in America’s Car-Mart. We are pleased with our results and the progress we’re seeing with our various operational initiatives. We have a lot of work to do, but we’re optimistic that the improvements in the investments we’re making will solidify our unique place in the market. We give our customers peace of mind by keeping them on the road. We try to eliminate the stress of car ownership, which can be one of the more stressful areas of life. We have an obligation to serve more customers as our customers’ lives and the communities we serve are better because we’re there.
We currently serve close to 86,000 customers, or about 570 customers per dealership, and we’re building a platform to increase that numbers significantly over time. We believe that a large majority of our dealerships can serve 1,000 or more customers at some point in the future. Our balance sheet, and our historical focus on cash flows, has put us in a great position to continue to deploy capital and grow market share in the areas we already serve, as well as looking to new markets through new lot openings and acquisition opportunities, like the Taylor acquisition, which is going very well.
Our business model is strong and getting stronger. Our people are difference makers. And the amount of capital required to operate effectively in our market continues to increase, giving us a distinct competitive advantage. We are transitioning from a collections-based company to more of a sales company that can collect our bricks-and-mortar structure, along with an outstanding digital presence will put us ahead of the pack, and solidify our place. Better cars and better support infrastructure give us confidence to move forward more aggressively.
Our improvements in the inventory management and procurement area of the business, which has preferred vendors, reconditioning, logistics, and overall inventory, and replenishment flow are progressing, and our IT investments will most certainly help us in this area, and specifically the Microsoft Dynamics 365 project that we mentioned in our press release. We have tremendous opportunities in the procurement area, and we’re very excited about the team we have in place to maximize our efforts here, and to continue to provide our valuable customers with quality, affordable vehicles. We must be excellent with our inventory management, as it’s make or break to the overall customer experience. Once again, above all else, our customers demand mechanically sound car that is affordable, and they need us to help keep them on the road.
We’re making good progress in our efforts to streamline our sales process and seamlessly support our customers’ physically and/or digitally in whatever manner they want to be served. We understand that the car buying experience is not high on anyone’s list of things they enjoy, and we’re devoting significant efforts to continue to improve our online digital experience, including online credit approval and enhanced home delivery and curbside options.
We’re investing significant resources in our corporate customer experience team, as we continue to centralize certain functions that can be better more consistently, more efficiently and effectively provided centrally, leaving key customer face-to-face engagement, touch points to the field, to allow our field associates to focus on growing their businesses. Our recruiting, training and retention efforts are extremely important, and we’re continuing to see very good progress and enthusiastic engagement as we support our associates, and they take advantage of individual growth opportunities with our growing company.
With that, I’ll now turn it over to Vickie to go over some numbers. Vickie?
Vickie D. Judy — Analyst
Good morning, everyone. Our total revenue increased 22.2% up to $228 million. We were happy to see a 5.6% increase in retail units sold and the improvement in productivity by dealership. The average retail selling price per unit also increased, up to $13,688.
Interest income increased by 20.5%, and same-store revenues were up 16.9%. Revenues from stores in the over 10 years of age category were up 15%, stores in the five-year to 10-year category were 25%, and revenues for stores in the less than five years of age category were up to about $20 million. But the supply of units at the lower price points continued to be tough, but as Jeff mentioned, we continued to invest in and improve our procurement processes, and we feel confident with our inventory as we move into tax time.
At quarter end, 16 or 11% of our dealerships were from zero to five years old, 42 or 28% were from five years to 10 years old, and the remaining 93 were 10 years old or older. Our overall productivity was 31.2 units per lot per month, compared to 30.6 for the prior year quarter. Our 10-year plus lots produced 32 units per month per lot for the quarter, compared to 32.7 for the prior year. Lots in the five-year to 10-year category produced 30.2, compared to 28.3 for the prior year quarter. Lots less than five years of age had productivity of 27.4 compared to 20.9 for the third quarter of last year.
Our down payment percentage was 5.5%, compared to 5.4% for the prior year quarter, and collections as a percentage of average finance receivables was 12.1%, compared to 13.2% for the prior year quarter. However, absent the increase in the average contract term, collection percentages would have improved over the prior year quarter. The average originating contract term was 35 months, compared to 30.8 months for the prior year quarter, and up from 33.8 months, sequentially. The average selling price was up $1,938, with a 4.2-month increase in the term, compared to the prior year third quarter. Our average monthly payment is approximately $440. Our weighted average contract term for the entire portfolio, including modifications was 35.7 months, compared to 32.5 months for the prior year quarter. The weighted average age of the portfolio was basically flat at nine months.
Interest income increased $4.8 million, or 20.5% compared to the prior year quarter, primarily due to the $116.3 million increase in average finance receivables at a 19.5% increase. The weighted average interest rate for all finance receivables at the end of the quarter was approximately 16.5%, relatively flat from the prior year quarter.
Gross profit per retail unit increased $836 to $5,774, and that’s up 16.9% compared to the prior year third quarter. The gross profit percentage was 40.6%, compared to 40.3% for the prior year quarter, and down just slightly from the sequential quarter, it was at 40.7%. The improvement in gross margin over the prior year resulted from improved wholesale margins, again, due to the strong demand and the low supply of lower priced units, and lower repair costs. However, that was partially offset by the lower margin on the retail units. As you recall, increasing average selling prices result in lower gross profit margins, the higher gross profit dollars, as our gross margin percentages are lower at a higher selling price. The mix of the type of vehicle sold was fairly consistent with SUV sales increasing approximately 3% over the prior year quarter. Pickup sales decreased due to the high price and the tight supply of trucks.
SG&A for the quarter was up $3.1 million, compared to the prior year quarter, but down as a percentage of sales to 16.7%, compared to 18.6% for the prior year quarter. SG&A as a percentage of total revenues, less cost of sales and provisions for credit losses was 54.1%, compared to 61.9% for the prior year quarter. Again, this metric is important for integrated sales and finance business, as a large part of our efforts of focused on keeping good customers in their cars and driving down credit losses. Our investments continue to be primarily payroll-focused, as we build our customer experience team and investment procurement, combined with increased commissions as a result of the higher net income and increased stock compensation.
For the current quarter, net charge-offs as a percentage of average finance receivables was 4.9%, down from 5.9% in the prior year third quarter. We saw improvements in delinquent accounts, and our accounts 30 days past due was at 2.8%, compared to 3.6% in the prior-year third quarter. The CARES Act enhanced unemployment benefits and stimulus payments possibly still contributed to some of this improvement along with our efforts at working with our customers to keep them in their cars and on the road.
We have continued to provision at 26.5%. Although, our portfolio continued to perform well in the current quarter, there still remains much uncertainty caused by COVID-19, and its potential impact on our customers, collections, repossessions, and the overall economic environment as we move forward.
The effective income tax rate was 22.8% for the third quarter of fiscal ’21, compared to 19% for the prior year quarter. Income tax expense included an income tax benefit of $341,000 and $922,000 related to share-based compensation for the current quarter and the prior year quarter, respectively. We expect our base effective tax rate to be approximately 24% going forward, prior to any excess tax benefit during the stock option exercises.
We were pleased to increase our credit facility by $85 million during the quarter, and also added a new lender to give us more headroom as we grow our portfolio and customer count. At quarter end, our total debt was approximately $210 million, and we had $4 million in cash, and approximately $115 million in additional availability under our revolving credit facilities. Our current debt, net of cash, to finance receivables ratio is 27.7%, and that’s compared to 30% at this time last year just prior to the pandemic.
During the quarter, we added $51.7 million in finance receivables, funded $2 million in net capital expenditures, increased inventory by $1.1 million, and repurchased $3.7 million of our common stock, a total of $58.5 million, with only a $12.3 million increase in debt, net of cash. As a point of reference, in the last 12 months, most of which were during the pandemic, we added $137 million in receivables, increased inventory by $14.5 million, repurchased $10 million of our common stock, and funded $9.3 million in capital expenditures, a total of $170.8 million, with only a $24.1 million increase in debt, net of cash. We are well positioned to serve more customers and grow market share.
Now, I’ll turn it back to Jeff.
Jeffrey A. Williams — President & Chief Executive Officer
Okay. Well, thank you, Vickie. We have recently rolled out our new logo and tagline, Keeping You on the Road, and our associates in the market ever see the changes very favorably. They represent a new beginning and a fresh look at the business, and are another foundational piece to our future growth prospects. We want to keep every customer for life, and never have a bad customer experience, and we believe we can do this.
We’re in the process of rolling out our new service contracts to all locations. And these contracts will have oil changes and roadside assistance in longer terms. And they’ve been very favorably received. Again, it’s all about keeping customers on the road. We’re working on our new advertising and marketing strategy and expect to see positive results from this effort. As a collections company, we have not had to invest a lot in advertising and marketing. But as we focus more on productivity and market share and growing customer count, we will be devoting more resources to this very important area of the business.
Again, we believe we have created a unique position in the market by anticipating, investing, and staying ahead of changes in the last few years as the industry has changed significantly. It’s all about improving the customer experience from top to bottom. We are prepared for, and have the ability and the passion to keep investing in the key areas, and to reach excellence in everything we do. We will continue to gain market share, add new locations, and look for additional acquisition opportunities and the future is bright. Once again, we’re in a position with our bricks-and-mortar structure, the digital efforts to secure and leverage our place in the market as we go forward.
And lastly, as stated in our press release, we have over 2,000 associates. We have close to 86,000 customers, and thousands of vendor partners. And collectively, we have a responsibility to help make the world a better place, and we take this responsibility very seriously.
Thank you, and we will now turn it over for questions. Operator?
Questions and Answers:
Operator
At this time, the participants will now answer questions from the callers. I would like to reiterate that my earlier comments regarding forward-looking statements that apply both to the participants’ prepared remarks, and to anything that may come up during the question-and-answer session. [Operator Instructions] Our first question comes from the line of Kyle Joseph with Jefferies. Your line is open. Please go ahead.
Kyle Joseph — Jefferies — Analyst
Hey. Good morning. Congratulations on another very strong quarter. I just wanted to get into — I know you guys don’t give guidance, but for the fourth quarter, a lot of moving parts. Obviously, it’s tax refund season. And then on top of that, there’s — we have some stimulus. Kind of walk us through and remind us of how last year’s fourth quarter was impacted by the pandemic and kind of your expectations going into this fourth quarter given all those moving pieces?
Jeffrey A. Williams — President & Chief Executive Officer
Well, for last year, we had a good start to the quarter in February. And then the pandemic hit the first part of March. So, it was a good start to the year — to the quarter, but the pandemic kind of threw that in a tailspin from the March 1, through the end of April. We did perform very well even in light of the pandemic, but volumes were much lower than anticipated prior to the pandemic this year. Strong results during the third quarter. Inventories are in good shape going into the fourth quarter. There was a stimulus check out in the market in January, but some delays with income tax. Refunds this year are going to be more of a negative net-net against the stimulus payments in January month. But all that money and maybe even some additional stimulus is expected to come through during our fourth quarter. So, inventories are in good shape. There should be tax refunds and stimulus coming in the fourth quarter. So, it’s hard to know exactly how that settles out. But I think that we expect sales volumes to be strong, and our inventories are in good shape. Our personnel with the dealerships are ready for increased volumes, and we feel like we’re in a good spot going into the fourth quarter of this year.
Kyle Joseph — Jefferies — Analyst
That’s very helpful. Thanks. And then in terms of the retail sales prices, obviously, it takes used car market and those have been trending up, although, quarter-on-quarter, they were fairly stable. Can you just give us a sense for, if you anticipate further upward pressure on those given your outlook for the used car market?
Jeffrey A. Williams — President & Chief Executive Officer
Yeah. I think we do believe that prices are going to stay up for a while, maybe even drift up just a little bit more as the stimulus money gets out there, and tax refund money is out. And new car production has been limited since the pandemic started. And more recently, with some microchip shortages, there is a continuing shortage of good affordable, mechanically sound good cars out there. So we expect the prices to stay up for the foreseeable future. Although increases like we’ve seen in the last 12 months are not expected, we do see and are seeing some leveling off of prices. But we do expect on a go-forward basis to see some increasing prices, especially if we roll in our new service contracts, there’s going to be a few percentage point increases in the sales prices just by us rolling out the new service contracts. But we do expect a continuing shortage of good used cars. And as a result of that, we expect prices to stay up and maybe even continue to drift up just a little bit.
Kyle Joseph — Jefferies — Analyst
Got it. Very helpful. And then — oh, sorry. Go ahead, Vickie.
Vickie D. Judy — Analyst
No. I was just going to say I will add that even with the selling price being up, we do feel like the quality of the car that is out there is much better, and overall does have fewer miles. So the quality is better, which should lead to better customer experience and lower credit losses, too, from a unit perspective.
Kyle Joseph — Jefferies — Analyst
Understood. Thank you. And then just one last one for me. On the competitive environment, obviously, it’s been a pretty unique environment the last year, but walk us through what you’re seeing both from other buy here, pay here operators, as well as from indirect lenders and the overall availability of credit.
Jeffrey A. Williams — President & Chief Executive Officer
Well, the cost of the car is certainly having an effect on competition in terms of the quantity, and the quality of cars that they can have an inventory. So with our balance sheet and cash flows, we are able to carry more cars and have a better presentation, and more of a mix for our customers to choose from. But — so we feel like some of our volume increases is related to our investments in inventory, and the competition is going to be, in many cases, more limited on the capital that they can allocate to inventory. So we’ve got a good advantage there by serving a deep subprime to subprime consumer. We feel like we’re in a good spot from a market perspective. We offer some unique offerings to consumers that our competition doesn’t, especially with the new service contracts. But we feel like we’re picking up good market share. We do feel like if prices were a little lower on the used car side, that we would even be seeing more volumes at this point. But the prices have gone up and stayed up. And so, there probably are some customers that haven’t been back in the market yet. And if prices do level off or come down even a little bit in conjunction with some efforts we have internally to recondition and recon cars at the lower price points, we feel like we’re trying to create manufacture some better flow of product at the lower price points, which is much harder for our competition to replicate. So, competition is still out there. There’s a lot of money to land, but we feel like we’ve been nimble and can be nimble, and provide extra services on the customer experience side. We feel like we are picking up some real market share, and pretty optimistic about where we land against the competition going forward.
Kyle Joseph — Jefferies — Analyst
Got it. Thanks very much for answering my questions, and congrats again on a good quarter despite an uncertain market backdrop.
Jeffrey A. Williams — President & Chief Executive Officer
Thank you, Kyle.
Operator
Thank you. And our next question comes from the line of Vincent Caintic with Stephens. Your line is open. Please go ahead.
Vincent Caintic — Stephens — Analyst
Thanks. And thanks for taking my questions. First question, so it sounds like you’re making a lot of investments in growing the business, just like the Microsoft Dynamics within the marketing. I’m just wondering if you could give us a sense how much maybe additional expenses we should be modeling going forward from these investments? One of the things I noticed actually just reviewing the February 10 loan amendment is that you increased your capex limit to $25 million, so that’s — maybe if that’s the right number or any help you can give us on how much dollars of additional investment expenses we should be expecting?
Vickie D. Judy — Analyst
Sure, Kyle. Yeah. We did just increase — our capex limit under our debt agreement has been $10 million for many years. And as we look to both add dealerships, new dealerships, and remodel and improve some of the facilities that we’re currently in, especially for larger volumes, we could see that that wasn’t going to be enough on a run rate basis. And again, that’s just capex. So we did make that change to our lending agreement. We are investing in other things just in the SG&A like Jeff talked about. We will be spending some more on marketing as we look to grow market share. Our advancement in the IT side with our new ERP project is really going to make us very good at customer experience. That’s one of the big reasons that we’re doing that. So there is going to be some increasing of SG&A spend as we go here. We’re going to be very thoughtful and mindful of the timing of that without missing out on any market share as we move forward though.
Vincent Caintic — Stephens — Analyst
Okay. That’s helpful. Thanks, Vickie. Second on — so on the used car prices and your average selling price increasing, I know you’ve been talking about the efforts to get different procurement sources like rental cars, ex-rental cars, and so on. Just wondering, so even if we were seeing used car prices increasing, and that seems to be demand issue as well as a supply issue, but are you able to hold the line on the cost of goods sold on the cars that you’re sourcing?
Jeffrey A. Williams — President & Chief Executive Officer
Yeah. I feel like we’re doing a pretty good job by holding costs down and being efficient with our operational efforts in that area. It is some market forces going on there outside of our control. There’s a high demand and low supply of cars out there, overall, especially in the price points we’re looking for. But I do feel like some of the partnerships that we formed and are working on, some of these additional efforts in the procurement area are certainly providing some benefits to us. And we feel very good about all of our efforts in that area. And we are controlling costs as best we can. But some of that is out of our hands in terms of just market forces and supply and demand imbalances. But we’re going to continue to get better in all those areas. And — but we feel like we are doing our part to hold down costs and keeping these prices just as low as we can.
Vincent Caintic — Stephens — Analyst
Okay. Great. Thank you. And last one for me. It’s a broader question, but I thought your comment was interesting for going from being a collections company to being a sales company that can collect. And you talked about higher marketing spend. But, I guess, is there a philosophical difference from that statement? So, I know the branding has changed. You have new logo. And so — but I was just wondering if you can talk about maybe the — any philosophical or different operational way that you’re now thinking about running the Company? Thank you.
Jeffrey A. Williams — President & Chief Executive Officer
I think it just starts with us having more and more confidence in the product we’re putting out there, good, mechanically sound, affordable cars, more confidence in our infrastructure, especially when you talk about the customer experience, investments that we’re making, the additional efforts we’re making in the procurement area, the IT investments, all these investments are giving us a very solid foundation. And as we look up and we look at our cash flows and cash on cash returns, and the performance of our credit, the credit side, it’s just — it’s opening our eyes a little bit more to the opportunities to increase productivity at the lot level. Historically, maybe we didn’t have as much confidence in the infrastructure and the support network, in the quality of the car, but we are moving to a point where we’re having a lot of confidence in all the areas of our business. Again, as we stated, we got a lot of work to do. But we feel like we’re setting some really solid foundational anchors in all these areas, and we’re seeing a tremendous consumer demand.
What we do is unique. Consumers are enthusiastic about what we do. And so, we have an obligation to serve more customers. We feel very strongly about that. And as we get our infrastructure more solid and can support more customers at the highest level, then we have an obligation to go out there and get those customers and keep those customers for life. So, yeah, there is some philosophical differences. We are continuing to look at things that can be better done here at corporate centrally, in freeing up time, valuable time in the field, to focus on customer experience and serving more customers in less time on the back office, and non-value-added functions that historically have eaten up a lot of time in the field. So, we’ve got some real opportunities to do some things from a central office standpoint to really benefit the field as they try to grow their individual businesses.
Vincent Caintic — Stephens — Analyst
Okay. Very helpful. Thanks so much.
Jeffrey A. Williams — President & Chief Executive Officer
Thank you.
Operator
Thank you. And our next question comes from the line of John Rowan with Janney. Your line is open. Please go ahead.
John Rowan — Janney — Analyst
Good morning.
Jeffrey A. Williams — President & Chief Executive Officer
Good morning.
John Rowan — Janney — Analyst
What percent of your current customer base already has a service contract in place?
Jeffrey A. Williams — President & Chief Executive Officer
It’s about just a little less than half. It’s a 12 month — historically, it’s been a 12-month product.
John Rowan — Janney — Analyst
Okay. So, I guess there are two ways to ask this question. As you roll it out and you now penetrate the other half of customers with service contracts, presumably that’s what you all do, how much duration does that add onto the portfolio? Or conversely, how much of the portfolio the duration increase over the past year? Was car price in competition versus the — using the service contracts and having that in the up-front price of the car?
Jeffrey A. Williams — President & Chief Executive Officer
Yeah. So most of it is just inflation on the car itself. There has been a little bit related to the service contract to rollout so far. And as we look forward, I think we’re looking maybe at another $400 to $500 overall ASP increase as we look at the entire portfolio having service contract at the higher rates. We could expect another — maybe another month of term and another $500 of ASP, specifically related to the rollout of the new service contracts.
John Rowan — Janney — Analyst
Okay. I just wanted to understand, you’re at 35 months, you were at basically 31 months last year. There’s four months — a little over four months of duration increase. And so half of the portfolio would equate to about one month out of that four. I mean, is that — does this sound like I’m in the right ballpark of framing out what’s causing it?
Vickie D. Judy — Analyst
John, what’s out there now, the portion specific to the rollout of the new service contract is very minimal. It is almost entirely because of the increased selling price. We just started piloting this new service contract this past year, and they just got rolled out in February. And we’re not going back to any existing customers and offering these extended contracts. It is just on new contracts.
John Rowan — Janney — Analyst
Okay.
Vickie D. Judy — Analyst
Does that help?
John Rowan — Janney — Analyst
That’s fine. I just wanted to also check on the — are you guys having any weather impacts?
Jeffrey A. Williams — President & Chief Executive Officer
Yes, we are. We’ve had a lot of snow and ice, and freezing temperatures. And we’ve had to scramble around to keep lots open and associates getting to and from work. So, it’s been a little bit of a mess the last week.
John Rowan — Janney — Analyst
Yeah. How — I mean, do we — I’ve been [Indecipherable] while we’re in New Jersey than it is in some of parts of the country, at least we’re supposed to be hot. Are you guys having power outages? Do we see this impacting the next quarter results?
Jeffrey A. Williams — President & Chief Executive Officer
No. I mean, we are having some power issues and some rolling blackouts or brownouts and some of that, but the sun is supposed to come back out at some point soon. And so, we don’t expect anything more than a temporary blip from the weather for the fourth quarter.
John Rowan — Janney — Analyst
Okay. Thank you very much.
Jeffrey A. Williams — President & Chief Executive Officer
Thank you.
Operator
Thank you. [Operator Instructions] I’m showing no further questions at this time. And I would like to turn the conference back over to Mr. Jeff Williams for any further remarks.
Jeffrey A. Williams — President & Chief Executive Officer
Okay. Well, once again, thanks for joining us this morning. And as always, we want to thank our associates in the great work that they’re doing out in the field to keep our customers on the road, and to give them real peace of mind as being part of our Car-Mart family. So, thank you, and have a great day.
Operator
[Operator Closing Remarks]