CRMT: Another Nail in Automakers' Coffin?

As car manufacturers struggle and consumers obtain fewer car loans, used cars have become a hot or “hotter” market. Notably, used car financing and dealership chain America’s Car-Mart (CRMT) said on its recent conference call that the perceived uptick in SUV interest due to falling oil prices has dissipated. The company has also seen more car buyers that would likely have been new car buyers beforehand.

That’s more bad news for automakers. Particularly GM because it relied so heavily on manufacturing SUVs and is still trying to unload them. These and other trends from America’s Car-Mart’s FQ209 conference call:

Q: Gas prices versus unemployment, what has a bigger impact on your portfolio?

A: Gas prices. Because I think it is immediate and we know that that affects every customer... Our car payments do represent a big portion of our customer’s paycheck and you know most of our customers are living paycheck to paycheck. So, when they have to gas the car we know that is significant.

When we sell cars typically we are looking at folks that have steady employment and we are mostly in small towns and I think we tend to be less affected by a lot of these big macro issues that you hear about in some of these smaller towns. So, I think the employment numbers tend to hold a little bit more steady.

To quantify the gas prices situation a little further our average customer buys $100 worth of gas and we have actually seen a $2 per gallon decrease in gas costs from its high. So, we have got upwards of $200 of additional cash in many of our customers’ pockets recently and that is much bigger factor than the unemployment right now.

Looks like the era of SUVs really is over:

Q: You were seeing 6 months ago interest in SUVs despite the high gas prices because of the resale prices then dropped significantly where the customer could for the first time in their – maybe in their lives afford one. What are you guys seeing in terms of mix shift in this quarter?

A: I think there was a spike in interest in SUVs somewhat but it settled back down

The company is benefitting from new customers, but even used cars are not exactly selling like hotcakes:

We do know that we are picking up a number of customers that are dropping down into our market with the credit tightening… We’re certainly seeing a number of customers that tend to be a little more creditworthy than we typically have seen in years past.

Prices are holding flat for our range of vehicle. It is actually is a really, really good thing because typically at this time of year the prices start to really jump up on it because the dealers are trying to get same vehicles in preparation for income tax return time and all that and at least very recently we haven’t seen the same spike that we have experienced I think in years past

Interesting twist to a subprime concept: A zero-down payment that’s directly tied to tax refunds:

We grew our business methodically out of cash flow and through traditional bank financing, whereby we hold and are responsible for the performance of our loan portfolio. We never were swayed by the securitization attraction and never felt comfortable with excess leverage.

We do expect down payments in our coming third quarter, which began November 1 to be sequentially less than our second quarter and be less than our third quarter of last year. This is due to the significant expansion of our zero down tax promotion… Zero down is in effect a deferred down payment program as we schedule special payments to coincide with actual tax refund receipts for our customers.

We currently expect our overall collection results for the entire year to be strong. These results, of course, will be somewhat dependent on the results of collecting our zero down special payments, which we will begin receiving towards the end of January.

Comments

[Alan Brochs...:]

Judy, I am very glad that you are paying attention to CRMT - it is my largest holding and still, despite the big rise, cheap (1X tangible book value and <8X PE). More importantly, it has a business model that actually should thrive in this environment. It is a stretch, though, to try to apply what their customers are doing to those in general. The company operates in 8 states only and all in the Southeast and in small towns primarily. It caters to the working poor for the most part.

2008 Dec 04 08:16 AM

[SA Editor J...:]

Hi Alan,

I think what's relevant to the big automakers, in terms of CRMT, is that they are doing well in this downturn. Car manufacturers are obviously not. CRMT is poised to gain market share and is working hard on that. I doubt they will put car makers out of business-- after all, a used car has to be sold new first! But if more and more customers that would have bought a new car are looking for alternatives, then it will take that much longer for new car sales to revive.

The other important aspect is that the company found that SUVs had become more attractive initially when oil prices and auto prices were falling last quarter. Now gasoline is even cheaper, but the spike in SUV interest has waned. For a car manufacturer like GM that has so much SUV inventory and manufacturing infrastructure, that's not a very good indicator.

I don't think CRMT will put the Big Three out of business, but do believe the trends they note have bearing on the automotive marketplace.

All the best,
Judy

2008 Dec 04 08:44 AM

[jay73:]

Judy,

Won't large inventory and downward pricing pressure on the big three affect the topline revenues for the used car market? Won't used car prices fall as auto makers clear inventory on new cars at lower prices? Wont that affect CRMT? Also, wouldn't initial customers buying used cars be facing home mortgage pressure currently? What would you rather lose - home or car?

Interesting point of view though - great reporting and interesting questions especially the thought of timing payments with tax refunds.

Best,
Jay

2008 Dec 08 03:57 PM

[Rubin Jiang:]

good recview,logical and meaningful!

2008 Dec 08 08:16 PM

[SA Editor J...:]

Dear Jay73,

Several interesting questions for which I'll hazard a few guesses: Used cars have less overhead to begin with. Building a new car and selling it takes a lot more money than just selling an old car. So even if pricing keeps going lower, it's still going to be less of an impact than on those who have manufacturing costs.
In the same vein, I'd venture to say that no matter how much you lower prices on a new car, it's still got to be higher than an old car. My brother once told me that as soon as you get the keys and drive your new car away from the showroom, you've lost 10% of the value of your car.

Again, it's all guesswork, but I agree with you about the home vs. car question.

ATB,
Judy

2008 Dec 09 08:26 AM

[billddrummer:]

Hi Judy,

Happy holidays, and thanks for keeping up your top-notch reporting!

I've studied the auto industry for years (in my commercial banking career, I've had a chance to review financial performance for more than a dozen local dealers, both new and used). Your brother's comment is apt, although it may be understated. I'd say a minimum of 10%, but as much as 30% if the buyer overpaid for the vehicle. That's why customers buy gap insurance on new vehicles, in case the car is stolen or destroyed before the customer builds up any equity in it.

I haven't studied the financial statements of CRMT. But the comment about having higher quality borrowers applying for credit is instructive, and points to both the tightening of credit at new car dealers and a perception that a family looking for a car will consider clean used vehicles as a viable alternative to a new one. (A dealership in Reno specializes in late model used vehicles that have been heavily discounted, sometimes by as much as 30% below MSRP. These cars are typically mid- to high-mileage vehicles less than 2 years old.) This dealer acquires its vehicles through repos and auctions, ensuring a low investment for inventory.

CRMT seems to have a good handle on its business, and could be poised to expand into other areas depending on market conditions. As new dealers fold, the company could pick up additional locations with minimal cash outlay. And as we've seen, there are plenty of cars out there, ensuring a steady supply of inventory no matter where you look.

All the best,

Bill

2008 Dec 23 12:07 PM

[SA Editor J...:]

Hey Bill,

Happy Holidays to you and yours!

ATB,
Judy

2008 Dec 23 12:37 PM

[billddrummer:]

Thanks, and the same to you and yours!

Bill


On Dec 23 12:37 PM Judy Weil, SA Editor wrote:

> Hey Bill,
>
> Happy Holidays to you and yours!
>
> ATB,
> Judy

2008 Dec 23 02:17 PM