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America’s Car-Mart, Inc. (NASDAQ:CRMT)

F3Q 2014 Earnings Conference Call

February 19, 2014 11:00 ET

Executives

Hank Henderson - President and Chief Executive Officer

Jeff Williams - Chief Financial Officer

Analysts

Kyle Joseph - Stephens

John Rowan - Sidoti & Company

Jordan Hymowitz - Philadelphia Financial

Nick Zulovich - SubPrime

Quin Mathews - Qkm

Jean Neustadt - U.S. Capital

Dan Furtado - Jefferies

Joe Segrave - Benchmark Auto Sales

Jim Fowler - Harvest Capital

Operator

Good morning everyone. Thank you for holding and welcome to America’s Car-Mart’s Third Quarter 2014 Conference Call. The topic of this call will be the earnings and operating results for the company’s fiscal third quarter 2014.

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 to 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 regarding forward-looking information, please see Item 1 of Part 1 of the company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2013 and its current and quarterly reports furnished to or filed with the Securities and Exchange Commission on Forms 8-K and 10-Q.

Participating in the call this morning are Hank Henderson, the company’s Chief Executive Officer and President; and Jeff Williams, Chief Financial Officer.

And now, I’d like to turn the call over to the company’s Chief Executive Officer, Hank Henderson.

Hank Henderson - President and Chief Executive Officer

Good morning everyone. I appreciate you joining us today. And as you saw in our press release this morning, we have made a 2% adjustment to our credit loss allowance estimate. And I am sure it will not come as a surprise to anyone familiar with the current competitive environment that we are operating with a higher loss level at this time. And it’s not to say we are satisfied with this level. We are working diligently to push it down. Though we are feeling the pressure from competition more than we typically have in the past, we do continue to see great opportunity to continue to grow our business in a highly profitable manner just as we have throughout the company’s history.

Despite current challenges so far this year, revenue is up 8.1% over last, with unit sales up by 6.7%. We have added over 4,000 active accounts to our growing customer base, increased receivables by $37.5 million, invested $5.5 million in CapEx and repurchased $8.7 million of stock with an increase to debt of only $14.8 million. So this certainly shows that our capacity to grow efficiently is very much alive and will and we remain as committed as ever to our future growth.

And with regard to growth, we have opened 7 new stores so far this fiscal year, with our most recent being just yesterday in Troy, Alabama, putting our store count now up to 131. We have additional projects well underway and hope to have four more open by our year end of April 30. We have opened a lot of new stores in the past few years and we feel we have really improved in this area and as we continue to learn from each one. As there are a great number of towns to choose from for future locations, we will apply what we have learned and be even more selective as we go forward to help assure the best possible starts and long-term success of each new location.

I want to go ahead and turn it over to Jeff now to give you more detail on the recent results and then come back later for a few closing comments. So, Jeff?

Jeff Williams - Chief Financial Officer

Thank you, Hank. Total revenues for the third quarter was right at $123 million, up 3.1%. It’s made up of a sales increase of 2.1% and an increase in interest income of 11.7%. Same-store revenues decreased 2.8%. Revenues from stores in the 10-plus year category was down around 6%. Stores in the 5-year to 10-year category was down about 2% offset by a 47% increase in revenues from our stores less than five years old. The challenging competitive environment is really putting pressure on our sales volumes especially at our older dealerships. We do feel like the weather also played a part in the lower volumes for the quarter although the effect is a little difficult to quantify. Our continuing efforts to sell less expensive vehicles should help with our volume challenges as we move forward.

Our average retail sales price for the quarter was down 0.6% to $9,739 due to our continuing efforts to keep our selling prices down for affordability purposes and for competitive reasons. As always, we will work hard to supply our customers with best mechanically sound cares to meet their basis transportation needs. We will continue to target flat to decreasing overall sales prices in our efforts to keep our payments affordable with rational term lengths to increase customer success rates and to further differentiate Car-Mart from the competition.

We believe it is more important than ever for us to stick with our basic philosophy of earning repeat business by providing quality vehicles affordable payment terms and excellent service. The down payment percentage was 4% for the quarter, up slightly from 2.9% or around $15 per unit sold. Collections as a percentage of finance receivables was 13.3% for the quarter compared to 13.4% last year. The initial contract term was down to 27.4 months compared to 27.8 months for the prior year quarter and up slightly sequentially from 27.3 months.

As we continue to work hard like keeping the term lengths down and our customer equity up, and by offering some special payment options during the term of the contracts including some tax down payment options. Our weighted average contract terms for the entire portfolio including modifications was 29.5 months which was flat sequentially, but up from 28.7 months at this time last year. The increases in turn from the prior year relate to our efforts to keep payments affordable for competitive reasons and to continue to work with our customers when we experience financial difficulties. For competitive reasons, our term lengths may continue to increase some into the future. We are committed to minimize the increases. We are aware of the downside that comes with increased term lengths and we remain committed to not stretching terms anymore than we think is absolutely necessary to attract and retain our target customers. We will also work hard to keep our down payments up as this is the key to higher success rates. The competitive environment together with a tough macroeconomic environment that our customers are facing presents headwinds for us. We will stay focused on customer success and earning repeat business and believe our future is bright.

The overall retail units sold per month per lot for the quarter was 27.7 compared to 29.4 for the prior year and compared to 27.6 sequentially. At quarter end 38 or 29% of our dealerships were from zero to five years old, 24 or 18% were from five to 10 years old with the remaining 68 dealerships being 10 years old or older. Our 10 plus lots produced 29.7 units sold per month per lot for the quarter compared to 32 for the prior year quarter which was a 7% decrease. Our lots in the 5-year to 10-year category produced 27.1 compared to 28.1, a 3.5% decrease and our lots that are less than 5-year category had productivity of 24.5 compared to 23.8 for the third quarter of last year which is a 3% increase. Our productivity especially in our older dealerships continues to be negatively affected by macro and competitive factors. We will continue to focus on customer retention and repeat business and offering good quality, lower priced vehicles that are affordable under national terms.

And on the secured dealerships has a deep pool in past and current customers. We will continue to highlight the benefits of our excellent service and our local face to face offering to the market. Interest income was up $1.5 million, 11.7% for the quarter due to the $44 million increase in the average finance receivables. The delayed average interest rates for all finance receivables at the end of January was approximately 14.9%, which is flat with this time last year. With the longer contract terms had been a positive effect on interest income and our ultimate cash returns.

Gross profit margin percentage was 42.7% of sales compared to 42.6% last year and compared to 41.7% sequentially. The sequential improvement related to better wholesale – wholesale results and lower repair expenses offset by higher claims under our payment protection plan product. We will continue to focus on minimizing repair costs. The competitive environment does put some pressure on discretionary repair expenses. Our goal is to balance affordability for our customers with appropriate gross margin percentages to enhance customer success. We expect gross margin percentages to remain generally in the current range over the near term.

For the quarter SG&A as a percentage of sales increased 18.1% compared to 17.7%, is down from 18.2% sequentially. The $875,000 increase in overall SG&A dollars compared to the prior year quarter related primarily to higher payroll costs and other incremental costs related to new lot openings. Additionally we did incur around $300,000 in GPS expenses for the quarter and ended the quarter with over 40% of our accounts having the product. Overall, SG&A dollars have been flat the first three quarters of this year. We are aggressively managing our expenses and we do expect some SG&A leveraging in the future as we grow our revenues. We will continue to invest in our infrastructure to support our growth. The GPS effort is a long-term infrastructure investment that will result in some direct cost savings, but more importantly will enhance our operational efficiencies out in the field. When this project is completely rolled out, we expect the cost to be from $2 to $4 per account per month, hopefully closer to the $3 as we work very hard to squeeze efficiencies out of this effort.

For the quarter, net charge-offs as a percentage of average finance receivables, was 6.7%, that’s up from 5.7% for the prior year quarter. The increase for this quarter related mostly to higher frequency of losses, pretty much across all age categories but 90% of the increase. But we also saw an increase in the severity of losses measured as a percentage of principal outstanding which resulted in part from lower wholesale values at repo.

Our associates continued to do good job of minimizing losses for those accounts that do default, but we did see a higher relative number of account losses due primary to competitive pressures. We also think that the cold temperatures and resulting higher utility bills had a negative effect on our customers’ cash flows which certainly didn’t help loss rates. Principal collections as a percentage of average finance receivables for the quarter was 13.3%, down slightly from 13.4% for the prior year quarter. The decrease in the principal collected between periods can be attributed to the increase in the average term of 0.8 months, the fact that we did modify a higher number of accounts, which was offset by some collection efficiency improvements that we saw during the quarter.

Credit losses on the income statement excluding the effect of a change in the allowance is higher for the quarter due to higher charge-offs, slightly lower principal collections did have a very small effect on the quarter. Overall, credit losses were about 25 basis points higher due to the shift in the relative age of the lots versus this time last year. Tax time is well underway and we expect results from tax time to be fully consistent with what we have seen in the prior years. No tax money was received in this January and we did receive a small amount in January 2013.

We had anticipated and hoped that some of the intense competitive pressures on the front end side would have started to decrease by now and anecdotal evidence would say that maybe it should have. Unfortunately, we have not seen it at the ground level and we have to conclude that the ultra-low interest rate environment and lack of alternatives is continuing to attract excess capital into our market. The worst part is that good people are being put into bad deals and it becomes more difficult for us to help our customer succeed. We are not good at predicting when conditions may improve. So we are left to consider the current environment to be maybe more permanent in nature than we had previously thought. We hope that this environment is not permanent and we are working very hard to build a great company in a very difficult operating environment. And if conditions do change we feel like we are going to be in good spot to take advantage.

Based on our elevated charge-off levels this year and especially this quarter and our expectation that conditions will remain challenging and charge-off levels will remain elevated. It was necessary for us to raise our allowance for credit losses to 23.5% from 21.5%. This non-cash charge will not affect our efforts to help everyone of our customer succeed and our cash-on-cash returns are very attractive even with higher loss rates.

As discussed in our press release we last adjusted the allowance in April of 2012 and prior to that it was last adjusted in October of 2006. Once again our cash-on-cash returns are very attractive and we’re aggressively managing the expense side of the business and our efforts to be efficient and best-in-class with both our finance business and our dealership business. Our diluted EPS for the quarter was $0.68 excluding the effect of the increase in the allowance.

At the end of the quarter, our total debt was $114 million. We had $29 million in additional availability under our revolving credit facility. Our current debt-to-equity ratio was 54% and our debt to finance receivables ratio was 28%. We did repurchase 200,000 shares or 2.2% of the outstanding shares under our share repurchase program during the quarter and we did plan to allocate capital to our share repurchase program in the future. Our first priority will be to continue to grow the business in a healthy manner. We continue to keep an eye on the competitive landscape and future decisions on capital allocations will take this into account.

Now I’ll turn it back over to Hank.

Hank Henderson - President and Chief Executive Officer

Right, and thanks, Jeff. I think the best news that we do have an extremely, experienced and capable team with an excellent track record and knows how to create positive change in both the sales and collection fronts. And I can tell you that all are intensely focused on moving things in the right direction at every location.

We’re extremely fortunate to have such dedicated associates and we’re greatly appreciative of all their hard work taking great care of our customers and we have great confidence in their ability. Despite the extra challenges presently we feel very confident about our future. We’ve been able to grow efficiently and profitably for many years, we’ve done so but not just looking at the next quarter or even just the next year, but with our eye constantly on where we want to be five years from now and making sure we’re doing the right things today to get us there.

In these past five years we’ve grown our receivables from about $225 million to almost $400 million today, increased our active customer count by 20,000 and we’re now selling almost 1,000 more units per month. I’d say that’s pretty impressive so while it’s true that we’re feeling some additional pressures from competition these days and I can’t really recall the time when we weren’t feeling some sort of pressure from somewhere. We do have an excellent team that continues to get better and better on what they do and our opportunity for these next five years is vast and viable as it was in these past five.

We will continue to remain focused on the success of our customers so that we can earn the repeat business. And this is a core value of our company that had gotten us to where we are today and we fully understand that our future success relies greatly on our ability to stay true to that value.

So that concludes our prepared remarks. We’d like to move on to your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Kyle Joseph of Stephens. Your line is now open.

Kyle Joseph - Stephens

Good morning guys, and thanks for taking my questions.

Hank Henderson

Hi, Kyle.

Kyle Joseph - Stephens

In terms of the same-store sales decrease so we saw a increase in the second quarter. Is that being driven by would you say competition or was it more so the weather during the quarter, I know it’s probably hard to quantify there, but can you give us your thoughts on that?

Hank Henderson

I think there were probably three things that play, definitely the competition. And again as Jeff described earlier more at our larger – some of our larger stores that did play in the past sold some of our – what for us would be our more high-end cars. So it’s where we have sold some of those that we feel the effects of competition more. Certainly, weather across was – we had a lot more weather this year than last. And also as Jeff mentioned, we didn’t really get any tax money in January this time that creates a few sales or as last year we saw a little bit of that. So I think you had a few things at play that accounted for some of the lower sales in this recent quarter.

Kyle Joseph - Stephens

Alright, thanks. And I know you did mention that no tax dollars came in, but we saw delinquencies actually go down a bit year-over-year, is it optimistic for a bit of a credit recovery or what drove that?

Jeff Williams

I have such a small change that can be – is little is just on the day of the month that the quarter ended on. So, we don’t really put much value on that slight decrease on the 30 plus category. Although it was positive, it may have just related to the day of the week that the quarter ended on.

Kyle Joseph - Stephens

Got it. Thank you. So and then in terms of the provision going forward, will you expect it to stay around the 26 area?

Jeff Williams

I think that yes, as we look at what’s happened the last 9 months to 12 months, we do consider that the levels we are seeing now are going to be what we should expect at them in the future.

Kyle Joseph - Stephens

Okay. And then we saw you guys start buying back more shares this quarter, has anything changed in terms of your capital allocation strategies or thoughts there?

Jeff Williams

No. We continue to look at allocating capital to the repurchase program that it makes some sense. And we are going to continue to look at that as a good way to build value for our shareholders and no real changes on our strategy.

Kyle Joseph - Stephens

Alright, thanks very much for answering my questions.

Operator

Thank you. Our next question comes from John Rowan of Sidoti & Company. Your line is now open.

John Rowan - Sidoti & Company

Good morning guys.

Hank Henderson

Good morning John.

John Rowan - Sidoti & Company

When a loan defaults, what’s the typical month in which that happens? And has that changed at all over the past year?

Jeff Williams

It’s generally right around the tenth month on average. And it’s been pretty consistent over the last couple of years. It maybe has gone up just a little bit, but it’s around $15 million.

John Rowan - Sidoti & Company

The reason I ask is you said that the severity of your charge-offs has gone up and we are in a period where we have longer loan durations and the average down payment hasn’t changed much, delinquencies have actually gone down. But you said the severity is up, because wholesale prices are weak. I am just trying to understand if maybe there is also a little increase in severity, because you have longer loan terms and there is less equity in the vehicle throughout the lifetime of the loan given that there hasn’t been a big shift in the typical default period for a loan?

Jeff Williams

Yes, that certainly is. The two components of the increase in severity are lower wholesale values and repo and then the other component will certainly be a little longer term. So, more outstanding principal at the loss point. So, but the bigger factor this quarter was the decreased wholesale values.

John Rowan - Sidoti & Company

And then Hank, you talked a little bit about loan terms that you are basically unwilling to match that you are seeing in the market. I was wondering if you could give us an example of the types of loan terms that you think that your competitors are using that you think decreased the consumer’s ability to compete a loan cycle and own a car?

Hank Henderson

Yes, obviously. Several of our managers shared with us some of the deals that they say that they know where they have lost some customers to. And we also know with our customer just longer term is going to mean more opportunity, more exposure to an event happening. And so when we see with some of our customers, they go out and then sign up for some 60 month terms. We just feel like that’s not very practical. So, I mean, there is an extreme difference between what we are talking about. So it’s not like we could step up a little bit and match those. There are some pretty extreme term lengths out there that we are hearing about.

John Rowan - Sidoti & Company

For the 60-month terms that you are seeing, I mean, that’s on a comparable vehicle as far as age and mileage go versus what you are selling, I mean, obviously kind of (indiscernible) life?

Hank Henderson

Well, not for that particular example. I would think that, when we hear about those 60 months, those are on some lighter model, lower mileage vehicles, but I can’t tell you we are hearing comparable vehicles of 48 months fairly common.

John Rowan - Sidoti & Company

Okay, thank you very much.

Hank Henderson

Okay, thank you.

Operator

Thank you. Our next question comes from Jordan Hymowitz of Philadelphia Financial. Your line is now open.

Jordan Hymowitz - Philadelphia Financial

Thanks guys. Couple of questions. Well, can you quantify the lower wholesale values? What was the old recovery rate you’re getting a year ago, two years ago on wholesale and what are you getting today?

Jeff Williams

It was around 32% last year and it’s down to around 30% this year.

Jordan Hymowitz - Philadelphia Financial

Okay. And what’s the frequency of loss if that’s a severity.

Jeff Williams

Well, frequency of losses on a static tool basis is unfortunately it’s going to be above 40%. And in the last 15 months, it’s been above that.

Jordan Hymowitz - Philadelphia Financial

So, 40% would result in a 28% net number with a 30% recovery ratio?

Jeff Williams

It’s about 40%, yes.

Jordan Hymowitz - Philadelphia Financial

Okay. Second is the net charge-off number, is it 26%, is that right? Is it 6.7% and then you have to annualize that?

Jeff Williams

The charge-off percentage for nine months is 19.8%.

Jordan Hymowitz - Philadelphia Financial

No, for the quarter?

Jeff Williams

6.7%.

Jordan Hymowitz - Philadelphia Financial

Right so...

Jeff Williams

Now there is some seasonality, that’s not necessary. You can’t annualize one quarter. Each quarter is a little bit different.

Jordan Hymowitz - Philadelphia Financial

But you hit the December quarter like an average quarter, because the first quarter is a better quarter and I guess the fourth quarter is not a worse quarter. Okay, that makes sense.

Jeff Williams

Yes.

Jordan Hymowitz - Philadelphia Financial

Okay. And final question is I guess the CFPB made some sort of acquisition against the different buy here/pay here company regarding disparate impact charges from minorities on the retail pricing for buy here/pay here, are you familiar with that and do you have any sense of what procedures and policies you put in place in that regard?

Jeff Williams

I guess you are referring to LI.

Jordan Hymowitz - Philadelphia Financial

Yes. Well, all I want is the indirect company, but from what I understand there is a buy here/pay here company that’s private that the CFPB charged actually they were using disparate impact on the actual retail markup of the cars?

Jeff Williams

No, we are not familiar with that. I can tell you that our pricing of our car is based on what we pay for it, there is no negotiations, it’s one price and the interest rate we charge on all of the customers is the same. So, we are not exposed to some of those issues.

Hank Henderson

Yes. And they are both the same across the board in all markets so, there’s no vary...

Jordan Hymowitz – Philadelphia Financial

Okay, thank you.

Hank Henderson

Thank you.

Jeff Williams

Thanks.

Operator

Thank you. Our next question comes from Nick Zulovich of SubPrime. Your line is now open.

Nick Zulovich - SubPrime

Thank you very much gentlemen. I just wanted to circle back to the competition question, which metric do you see it putting more pressure on the getting the amount of down payment or lengthening of term maybe outside competition, which metric do you think that’s putting more pressure on it and why?

Hank Henderson

I don’t think our primary pressure that we are feeling today is much from those. I think that we are fairly more on the law side right now, I think than specifically on the sales side, but if we focus just on the sales, I think it’s probably the payment amount is the most attractive the customers that we are having difficulty competing with.

Nick Zulovich - SubPrime

Which we would like to return.

Hank Henderson

Yes, exactly.

Nick Zulovich - SubPrime

Okay. And as far as acquiring inventory there has been a lot of talk on the upper end of the wholesale market that off-lease volumes are going to increase this year and beyond, have you all started to see any trickle down that some of the lower end inventory might be become more readily available on the wholesale side, how much have you all seen that or what are your projections to acquire inventory?

Hank Henderson

Actually, as Jeff mentioned earlier, we have been able to bring down our average purchase price a bit and some of that is a conscious effort to offer some cheaper cars on some of our stores, but given the typical seasonality we have seen in years passed as prices tend to go up more this time of the year. We haven’t seen as much of that. So actually, I think we are really strong solid on the inventory side. We haven’t seen any big changes.

Nick Zulovich - SubPrime

Okay. And finally, just in light of adjustments and this year’s tax season just what are your expectations for how this year’s tax season might shake out?

Hank Henderson

Well, I think we are on pace, sounded you a little better than last. And we have talked about the last few years, I think each year we are getting little better at it. Our process gets smooth and certainly over time some customers have done it with this before. They have had a good experience to come back. I think year-to-year, the actual numbers that we will do ourselves will improve over last year.

Jeff Williams

We really try to look out for these customers too during tax time and we realize they have other commitments, other obligations. And so we try to make sure that any special payments that we have out there are manageable and can allow them to get some other things that squared up if they need to.

Nick Zulovich - SubPrime

Very good. Thank you gentlemen.

Hank Henderson

Thank you.

Jeff Williams

Thank you.

Operator

Thank you. Our next question comes from Quin Mathews of Qkm. Your line is now opened.

Quin Mathews - Qkm

Good morning.

Hank Henderson

Good morning.

Quin Mathews - Qkm

First question, more of a macro question, I mean, obviously this is a tough environment and presumably in our better markets economy picked up and normalized interest rates, but what would happen if we move to a high inflation environment. I mean, will that kind of be a worst case scenario for you guys higher interest rates I would assume you have a cap whether it be legal or just kind of structural of what you can charge your customers on an interest rate and certainly high inflation environment would not be good for a lower income customer. Any comments on if we entered an economy of high inflation?

Jeff Williams

We really just have interest rate cap issue in the state of Arkansas, which is capped at 17%. We currently have $400 million of receivables and only $100 million of debt. So the interest rate increase on our debt would be more than offset by the increase they might charge on the receivable side in states other than the Arkansas. And we also get some benefit as a company from a lower interest rate, we have more customer success, better customers consider that lower rate to be a very positive thing. So we don’t necessarily work off a true interest spread by any means and higher inflationary environment will hopefully mean customer wages are going up and some of this excess capital in the market would find other places to land. So there are some real positives for us in a higher interest rate environment.

Quin Mathews - Qkm

Okay. When you look at are you seeing whether it be any of your sales team or store level managers, attrition to competition is – I mean is there a frustration level that you are seeing that’s above normal with people leaving the competition if they seek short-term opportunity?

Hank Henderson

No. We typically don’t hire people that have been in the car business. So we don’t typically have people that go back and forth between dealers or anything like that. So that’s not been any issue for us.

Quin Mathews - Qkm

Okay. And then when it comes to increased charge-offs, I mean, obviously a portion of that’s going to be macroeconomic, people losing wages, weather related, but how much of that – can you quantify how much is people realizing that they can go and get a better deal with competition and lower their payment, so they are dropping their payments or defaulting with you guys and moving to competition?

Hank Henderson

No, I can’t exactly quantify that for you, but I can and will certainly tell you that it’s very real. We actually have a handful of dealers and again primarily, this is against some of our older stores, bigger stores that we have sold cars more in the high-end. And now we actually have had some dealers who have attracted customers to actually leave our car on their dealership. We have one particular store in these past few months. They have picked up four, five cars a month off of another dealer’s lot. Obviously that is wrong, but so we know specifically this has happened.

Quin Mathews - Qkm

Okay. And then on those bigger dealerships that are seeing the pressure, I mean, would you say that’s largely demographic that the competition was going to larger populated areas that you guys are – I mean, even though they are small relative to bigger cities, but they are going to higher demographic, higher populated areas, and that’s why you are seeing the competition or is it something else that’s driving the competition at those bigger stores?

Jeff Williams

Yes. I am not sure what it is about these areas that makes them unique or have higher competition than others, maybe it’s just more dealers in the area would be my guess, but we certainly know that we see – we are seeing the effects of the competition more in some areas where we have more aggressive dealers using this type of financing that’s available than in others. I mean, we have number of stores that have seen double-digit growth year-to-year, but I don’t think they are feeling the pressure. We have couple of areas, where we have a few stores in and they are down a little bit year-to-year because of the additional tax, but as far as an overall trend, what makes them different is not certain.

Hank Henderson

And the indirects, they do have field sales reps and they have added staff, so it would be a natural assumption that a lot of those staff and efforts are going into some more highly populated areas.

Quin Mathews - Qkm

Okay. I hopped on the call late. You guys didn’t get on with the issue to guidance moving forward for this calendar year, did you?

Hank Henderson

No.

Quin Mathews - Qkm

Okay. And then lastly just to understand the connection clearly between the provisions of the charge-off in your allowance. Since you have increased that percentage of the provision taking that hit to the allowance that space static until you change it. So I mean, we should see the elevated provisions and the lower earnings on a kind of everything else being equal as far as revenues going forward until you change that provision either up or down, correct?

Jeff Williams

Yes, that’s just an estimated allowance percentage that if the pool were to run out, what do we expect to lose on net charge-offs going forward? Once you make an adjustment like we did this quarter, whether that reserve is 23.5 or 21.5, there is not a huge effect on earnings in forward periods from a change in that reserve amount. Of course, it does have a big effect on a one-time basis, but down from that point forward, it’s not a huge item for us.

Quin Mathews - Qkm

Okay, alright. I appreciate that. Thank you.

Jeff Williams

Thank you.

Operator

Thank you. Our next question comes from Jean Neustadt of U.S. Capital. Your line is now open.

Jean Neustadt - U.S. Capital

Hello, gentlemen. I just like to ask you all proper questions about your buyback and how far in the future you think you are going to take that, shares have gotten down to very few shares now? And also about stopping that buyback and then instituting a dividend?

Jeff Williams

Well, we have always felt like the best thing we can do for long-term shareholders is to buyback stock. And as long as we consider to be a good value on a long-term basis, as we have the capital that we can allocate to those purposes, we consider a share repurchase to be better than a cash dividend simply because it’s going to reward those folks that are there for the long-term.

Jean Neustadt - U.S. Capital

I’ve been in the stock long-term, but it’s starting to get very illiquid, if you hadn’t noticed. And I don’t know the returning dollars to shareholders and as valuable with your shares down to 8 million, 9 million shares. Have you all considered reversing that?

Jeff Williams

No, we had not.

Jean Neustadt - U.S. Capital

Maybe you should.

Jeff Williams

Okay.

Jean Neustadt - U.S. Capital

Thank you.

Jeff Williams

Thank you.

Operator

Thank you. Our next question comes from Dan Furtado of Jefferies. Your line is now opened.

Dan Furtado - Jefferies

Good morning, Hank and Jeff. Thank you for the opportunity.

Hank Henderson

Good morning, Dan.

Dan Furtado - Jefferies

So I guess on the competition side, if you were to stratify your portfolio into thirds, top, middle, bottom, would you say that the competition is equal in most of those or are you seeing more pressure coming down from the top end or how would you characterize that.

Hank Henderson

Definitely, more from the top and again as we just said earlier in some of our areas, I’ll be specific on one. Central Arkansas is one of the more populated areas where we have a few stores, and we know that in particular area we have excellence toward excellent managers that are around the long time and as an example that’s a market that we’re feeling additional competition from this lot of dealerships in that area and so and it also says our older stores, all the ones that are sold for us what would be our high end, more expensive cars and the further up we go that’s what we feel more of the pressure from the competition. So, we have a number towards that have grown very well from year-to-year that don’t seem to clearly affect spot as much. But a lot of our – as a percentage a lot of our volumes come from our bigger stores and it so happens that’s what we thought a lot of it.

Dan Furtado – Jefferies

Got you. And so taking that from looking at the loss rate, or expected loss rate, I mean, is it fair to characterize what you’re seeing right now is in essence relative stability in loss rates in these three different kind of spectrums or segments? It’s just that the top end is going away from you, or are you seeing weakening in the other two? You know what I’m saying it’s more of a mix shift, or is it an organic weakening of credit across this whole spectrum?

Hank Henderson

I think we felt that suspended really across the spectrum it’s more pronounced and may be just quantify that a little bit.

Jeff Williams

Yes, we are seeing weaknesses across all age categories as I mentioned earlier, none of our lots are immune to some of these higher charge-offs its, but the fact that our older large represents in a 70% of our business that’s where most of the increases is coming from that.

Dan Furtado – Jefferies

Right. I was just wondering if maybe what’s happening here is these three different kind of segments each have their own intrinsic loss rates and those intrinsic loss rates aren’t really changing, but instead you’re losing more customers from the lowest loss rate category at the top end, but it seems like that’s not entirely the correct way to think about this?

Hank Henderson

No, unfortunately it’s not.

Dan Furtado – Jefferies

Okay, thanks for the clarity on that guys.

Hank Henderson

Thank you, Dan.

Operator

Thank you. And our next question comes from Joe Segrave of Benchmark Auto Sales. Your line is now opened.

Joe Segrave - Benchmark Auto Sales

Good morning, guys. Thanks for taking my call. I have a question. As the money, you talk about competition often in the segment that came out, and as money is pouring into our marketplace in the likes of Wells Fargo buying deeper and deeper, what is the cutoff point you see there, how much of a squeeze are we going to anticipate? Are they going to start buying 450 Beacons with $2000 down, or do you see that cut off staying in the 550 plus Beacon range?

Hank Henderson

Well, we’re not really good at predicting that size of the market, because it’s the part of the market we’ve not been in the past and so we are certainly not experts on it. So, I would actually tell you we are far enough to (indiscernible) I would say it’s already going down with further then we would have expected and as far as the long-term prospect and that will certainly I’m hearing of some deals that are impractical and there is a level that’s taking place that’s certainly not sustainable. I think the end question is for the long-term is it going to be more of an element of that left around for the long-term. But as where the cut off is I really don’t know.

Joe Segrave – Benchmark Auto Sales

Good and I understand that’s a hard question to predict because you can’t – you don’t have you can predict the future completely. But I see a trend more and more towards them believing that technology allows them to buy deeper and deeper. And we are seeing levels of banks buying deep as deep as they were in 2007 before the crash. And I don’t believe that technology eliminates the need for collection and effective collection. And I just I wanted to pick your brain on that, as how you see that playing out long-term this technology eventually, does it give them the boldness to buy deeper than they ever have in the past and deeper than we have ever considered they might?

Hank Henderson

Well, I don’t I think it’s obviously has given the boldness, but now I am entirely with you. We don’t realize there is any amount of technology that’s going to make this viable for the long haul.

Jeff Williams

Our very best customers have a couple of three modifications during the term of their contracts, they have got an issue with the car, an issue with their personal financial situation and they need some local help with that, whether its repair or whatever, so that’s hard to do unless you got bricks and mortar out in these communities.

Hank Henderson

I agree with that. In reflection, in fact I agree with you there. I think that the challenging market coming up and I think that the bonus there that they are having they are looking at numbers and they are saying alright if I can get $300,000 down on this vehicle that puts me less than average black book and I am going to buy that deal. Because if I have to reclaim my asset and take it to auction I can get out of it and relatively minimize my losses because my repossession rates are lower. Everything about the calls associated with it is completely lower for the likes of Wells Fargo to get into our business more and more. And it scares me that long-term is that the trend that we are going to see and that we are going to continually have to go through a lower and lower down payment on a lesser and lesser car because with $2,000 down on a 480 beacon you can go buy a car at your local Toyota store.

Jeff Williams

It all comes back to customer success. We are going to do whatever it takes to get most of our customers across the finish line successfully completing their contract, if other folks don’t share that viewpoint and that’s what we are going to have to deal with for a while.

Hank Henderson

Right. And so in terms of prediction of how long I mean do we see another crash coming out, if they can’t make money, if Wells Fargo can’t make money of 1% on their loans, I have actually spoken with them and they have told us that they don’t – they are not interested in the 760 plus beacon. They want that 550 to 650 beacon because they can charge 18% interest on it or whatever it is in your respective state and because they can actually make $1200 on that finance rate. Do we see – do we foresee them getting to another crash which ultimately is good for our business, it’s good for the buy here or pay here industry.

Jeff Williams

Yes, it’s like I said, we are just really, we are not experts on their business. We know that even with their presence, we still have very a viable business and a good number of repeat customers and so we will continue to keep our head down and do what we do best and let the chips fall where they may with those guys.

Joe Segrave – Benchmark Auto Sales

Yes sir. Thank you for your time.

Hank Henderson

Thank you.

Operator

Thank you. And our final question comes from Jim Fowler of Harvest Capital. Your line is now opened.

Jim Fowler - Harvest Capital

Hi, gentlemen. I am sure I am the only person on this call that doesn’t know what that last gentlemen was speaking – referring to when he was talking about beacon, could you just take one second and describe that. I thought that was very interesting but I didn’t know exact what he is referring to? Thank you.

Hank Henderson

He is talking about credit scoring.

Jim Fowler - Harvest Capital

So was that as – is that a auto-related credit score that’s different than say an Experian or how does it come about?

Jeff Williams

We don’t use beacon scores, we look at FICOs and Experian credit report, so we wouldn’t have any comment on that.

Jim Fowler - Harvest Capital

But how does one get a beacon score?

Hank Henderson

We don’t use this.

Jim Fowler - Harvest Capital

Okay, but how does one use – how does one get one I mean is it a (indiscernible) or is it a service or…?

Hank Henderson

I really can’t speak to that. We don’t use them. We don’t do that type of modeling for our customers. We have our own systems. And so I’m sorry, I really couldn’t help you with that.

Jim Fowler - Harvest Capital

Okay, great. Thanks guys.

Hank Henderson

Alright, thank you.

Operator

Thank you. And at this time I am not showing any further questions. I would like to turn the call back to management for any closing comments.

Hank Henderson - President and Chief Executive Officer

Alright, well, thank you all for joining us today and thank you for your questions. As we said we have been at this business a long time and we do have a good core group of loyal customers. We will continue to do our very best to take good care of them. We have got a strong team, we know what we need to do, and so we will get about the business of doing just that. So thank you all for your time and have a great day.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program and you may all disconnect. Everyone have a wonderful day.

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