America's Car Mart's 'Re-Retail' Plan: A Dangerous Game To Play

I want to make a brief comment on America's Car-Mart's (CRMT) results. I know you are capable of reading the press release, so I won't go into the loss but encouraging decline in 30 day delinquency trends they reported this quarter.

In general, I think management is moving in the right direction. They have slowed their expansion, to get control of their operations. They are putting in better systems and processes, an issue most good retailers/consolidators run into a few years after they have gone public and are still at a rather early stage of consolidating such a fragmented market. And they are tightening their lending standards to reduce risk. All good things, and probably why you saw the stock rise (despite rather lousy results). Over time, I hope this moves them from a "decentralized" emphasis, to one that focuses on bringing better systems and processes that empower their store managers (in such a people oriented business it has to be a "win win").

However, I was concerned with one strategy they brought up on the conference call, which was their intent to "re-retail" more of the cars they repossess. In other words, when a customer defaults on a loan (which is about 20% to 30% of the time), instead of shipping the vehicle off to an auction, the store manager simply "re-retails" it back on their lot. First of all this is not as easy as it sounds as you've got various state regulations. But at the end of the day, I think this strategy invites problems.

There are simply too many games that can be played "horse swapping," "churning," and all sorts of other things that make it so large buy here pay here dealer groups need to have checks on their store managers when valuing used vehicles. So allowing the store manager to "re-retail" the vehicle increases the risk that more games are played with "asset valuation." Not entirely comparable (since they are a franchised retailer), but I can tell you that when Lithia (LAD) simply started telling their store managers where they had to send their used wholesale vehicles, wholesale gross profits went from a loss to a profit.

Yes, you want the systems and processes that you offer the dealership to empower the store manager. But when you are trying to control risk, particularly given America Car-Mart's situation and market, they need to be controlling the wholesaling of the vehicle more (in my opinion), not inviting more games that can be played by allowing the store manager to re-retail repossessed vehicles.

Copart (CPRT) said on their conference call yesterday morning that about 15% of their vehicles came from markets like buy here pay here, and that (buy here pay here) is going to be an area of growth. I know Copart and America's Car-Mart are trying some things out, but I think cutting deals with auction houses like Copart (and of course Manheim/Adesa) for their wholesales could be good move in helping to improve controls. Not "re-retailing" more repossessed vehicles.

CRMT 1-yr chart: