'We Trade For Anything': America's Car-Mart Reports

We Trade For Anything!

Car-Mart trades for Anything of Value, from electronics, to household appliances, to even Farm Animals, making it even more affordable to drive away today!

Source: America's Car-Mart Website. Company Info Section. "What Sets Us Apart" section.

America's Car-Mart Fiscal 2007 Results (and a look back)
Some things just make me chuckle (like today's opening quote). In all fairness, the "we trade for anything" statement is part of a more serious commitment the company emphasizes on its website about what sets America's Car-Mart (CRMT) apart. The statement rattles off everything from the company's commitment to quality to a 72 hour 100% satisfaction return policy. And of course, that the company will trade for anything!

As you probably know, America's Car-Mart reported fiscal (a fancy word for financial) 2007 earnings on June 28. When most people talk about a year, they are referring to a calendar year (ending Decmber 31st). For Car-Mart, their fiscal year ends on April 30, 2007.

As I often discuss, a long term perspective is best. And America's Car-Mart has a 25-year history, so the company certainly has experience in the space. But as far as the financial markets being familiar with it? I think we're all still learning.

I should point out that only about 6 years ago America's Car-Mart was a part of a bigger conglomerate called the Crown Group, which owned America's Car-Mart, Premium Auto Acceptance Corporation (Paaco), and a 70% interest in Smart Choice (well along with some gaming business and stuff).

In October 2001, the company made the decision to sell all of its subsidiaries except Car-Mart. They also relocated the corporate headquarters from Texas to Bentonville, Arkansas where Car-Mart is based.

As I have discussed on numerous occasions (especially Hertz Rent A Car), whenever you have spin-offs or major structural shifts in the business model, no matter how hard the accountants try, there is bound to be "noise" in the data.

Keeping this limitation in mind, however, I thought I would provide some statistics from yesterday's fiscal year end results versus last fiscal year, as well as compared to the year ending April 30, 2001 (FY01).

A difficult fiscal year: "to strive, to seek, to find, and not to yield"

This year has been a difficult one operationally for Car-Mart. But we believe the hard work and difficult decisions we have been making will serve us well going forward. We expected to return to quarterly and long term profitability in this fourth quarter as our numerous initiatives began to take hold. We aren't done yet. Nor have all things we've been doing gained traction. But we do know we are on the right track.

Source: Skip Falgout, CEO, America's Car Earnings Conference Call, June 28, 2007

I think Mr. Falgout's opening remarks appropriately describe the year. And as he has discussed on previous calls, the poor fiscal 2007 results appear to be driven by: 1) a difficult industry environment, and 2) an overly aggressive expansion strategy (one they have put a halt to).

You don't know how refreshing it is to hear a CEO point to strategic mishaps (like expanding too aggressively) as being the cause of poor financial results versus just blaming everything on the gas prices or the California housing market.

Every good retailer (and almost every good business) that I have observed (in the 10+ years of writing investment research) at one point or another tries to bite off more than they can chew. It is human nature. We think we can do it all. And often times we find out that we need to slow down.

Yet it is that same confidence. That same sense of enthusiasm that makes most of the best entrepreneurs and business leaders in the world look back and say: "you know if I knew what I know now, I never would have thought I could have pulled this off."

So as investors, we should expect management teams to take risks. Because it is the willingness "to strive, to seek, to find and not to yield" (Ulysses by Alfred Lord Tennyson) that causes some of the greatest advances and innovations in business. And thus some of the greatest returns for shareholders.

I know a little cheesey. But it's Friday, play along. The point I am making is that we as investors should appreciate and respect the open and candid nature of management teams when they talk about risks taken, failed, and what they are doing to improve the results.

It is this recognition (of what has gone wrong), that I think can create great investment opportunities, as strategic blunders (if I may be a little politically incorrect) are often magnified (and revealed) when the industry turns south.

So if you know the company is a good company. But appears bad because they made a strategic mistake (but at least recognizes the mistake versus just blaming California) you buy into the weakness, because unless the industry is in some secular (structural/long term) decline (like MP3 devices replacing DVD players or something), when the industry comes out of the weakness, the industry leaders have often learned from their mistakes and benefit disproportionately in the upswing.

Now there are two questions we need to ask ourselves in this regard:

1) What is the state of the industry?

2) Is America's Car-Mart an industry leader?

What is the state of the industry?
Funny you should ask, because that very question came up on the conference call.

Question: What do you see as the overall industry environment in terms of competitors? Are they struggling, are they seeing the same credit problems that you've seen?

Response: That's what we hear. Of course it's just anecdotal. But yeah, most of the people we talk to they certainly have said that these past couple years have been the toughest they've had in business. And I would tell you for the smaller guys it is more and more difficult for them. And it certainly is much more difficult for people to enter the market because it just costs so much more to get going.

Source: Hank Henderson, President, America's Car-Mart. Fiscal fourth quarter earnings conference call June 28, 2007

And I will confirm that these are similar comments I heard from folks at the National Alliance of Buy Here Pay Here Dealers (NABD) Convention in May. But I also saw a fair amount of optimism from larger more sophisticated dealer groups, and those "trying to get to the next level" (however you want to interpret that).

And there is something else you need to take note of (and something I have been observing first hand) and that is new entrants in the market place. Throughout the NABD conference I heard comments like: "you wouldn't have seen these folks at this conference 5 years ago." And most of the time "these folks" meant franchised dealers.

Richard Greene of SubPrime Auto Finance News had a great article on this very topic (obviously from the buy here pay here dealers perspective, however). Take the following two paragraphs:

Ray Lyle, president of Nice Cars, of Chattanooga, Tenn., said, "In our area in southeast Tennessee and north Georgia, we've seen an increase of interest in buy-here, pay-here, both from franchise dealers and others. But what I've not seen is an increase in the learning level to be successful in the buy-here, pay-here business."

"There are people who want to come into this industry who don't know what they're doing but have a pocketful of money," he noted.

Source: SubPrime Auto Finance News. June 28, 2007

And this actually runs right in line with a note I wrote a couple quarters ago when America's Car-Mart started to turn down. I said this could become interesting. Because when you have problems in a highly fragmented market, it creates opportunities.

Opportunities for leaders in the industry to rationalize market share, and even opportunities for players with capital (private equity, franchised dealers, related industries) to become involved in what I think is a highly overlooked 8+year old vehicle market.

But I also said, you have to know what you are doing, otherwise "you could get your head handed to you."

Now I already published the speech that I gave at the NABD as well as some of the highlights. All of those notes can be found on my website www.autoretailstocks.com.

The real question becomes, if the industry is ripe for rationalization (consolidation), where fewer, more sophisticated stores and organizations control a greater share of the market, is America's Car-Mart going to be one of those companies to do the job? In other words, is Car-Mart an industry leader? (And I am not referring to size).

Is Car-Mart an industry leader?
I'll skip to the chase. I don't know.

But to put Car-Mart's metrics (the table I provided earlier) into perspective a little, in 2006, according to the National Alliance of Buy Here Pay Here Dealers [NABD], NCM Associates, and Subprime Analytics 2006 benchmarks (granted a slightly different time period), they said things like industry average finance receivables as a % of total assets have also been trending down (to 87% in 2006).

But average unit sold per buy here pay here dealership (according to the benchmarks) were 1,350 (versus Car-Mart's 274 in FY07). And the NCM benchmarks clearly show an uptrend in units per store. Now Car-Mart operates in smaller markets, so you should expect different productivity measurements.

But I guess what surprised me was that even when you look at Car-Mart's results in FY06 (which was a bit more normalized if not better than what they should have been because they were making loans at unsustainable rates), units per store are lower than what they were in FY01.

Although I should point out, that with the exception of Car-Max, who has gone from roughly 3,863 used vehicle units sold per store per year in fiscal 2001 (their fiscal period ends February), to 4,266 used vehicle units sold per store in fiscal 2007, the bulk of the public franchised dealers have exhibited double digit declines (per store) in the used vehicle category over the last 6 years.

Kind of strange (in my opinion) that there has been a secular (long-term) downtrend in used vehicle productivity per store (as the market itself seems to be consolidating). But that is what my data suggests.

Nonetheless, a long-term trend for declining store unit productivity does leave me concerned that Car-Mart is truly building a competitive model.

Another troubling statistic: operating income per unit. Sure, we can shrug off FY07's lousy operating income per unit. But where I get concerned was that even when you look at FY06 (the more "normalized" period) operating income per unit was down.

It just seems to me that when you go from 47 stores to 85/92 stores (depending which fiscal year you are looking at), there should be some operating leverage. Some "economy of scale." You should be able to spread various costs like administrative, human resources, and accounting costs across a larger base. You should benefit from a lower cost of capital (what it costs you to borrow money on the loans you are making). And you should benefit from being able to adopt standardized best practices and processes. Otherwise, why are you in business?

Because clearly someone who owns the store (who has his/her own money on the line) is going to be 10x more motivated than someone sending the profits "up to corporate." So the benefits. The economies of scale, if you will, need to offset, some of the entrepreneurial spirit that you lose from being a part of a larger organization.

Now like I said, there is probably a lot of noise in the data (because of the structural change in the company at the time). But they are worth noting, nonetheless, because it does leave some questions about if management is really creating a competitive model.

Or if some other player like a J.D. Byrider (which is more of a franchise), Drive Time, private equity, or franchised auto retailer is likely to "crack the code" and show 1 + 1 can equal three (another expression for creating economies of scale).

I still think the market is ripe for consolidation/rationalization. Or at least for related industries to add value in the space like repair shops or franchises (similar to Byrider) to offer "support functions." Because the ability to do everything yourself (the "Jack of all trades) in today's economy does not seem efficient or what creates real economic value for shareholders.

So I think only time will tell if America's Car-Mart is truly an industry leader, or one that just got lucky with access to capital and will be usurped by some of the other players I just mentioned (or some unknown private equity group or franchised dealer).

What I can say, is that while this is only one of three management teams in the entire autoretailstocks index I have not met (and the other two were either just appointed or recently became a public company), I do think they said a lot of the "right things" on the conference call.

CRMT 1-yr chart: