CRMT - America's Car-Mart: Down But Not Out

Summary

• America's Car-Mart, Inc. reported a hefty earnings miss for the second quarter.
• Forward-looking earnings revisions continue to get dialed down.
• America's Car-Mart, Inc. shares have lost their long-term moving averages. Procurement & Loan Origination must improve to turn over capital faster.

Intro

If we pull up a chart of America's Car-Mart, Inc. ( CRMT ), we can see that a long-term MACD sell signal in 2021 was later underscored by a crossing over of the faster 10-month moving average beneath the corresponding 40-month average in early 2022. These two phenomena have shifted America's Car-Mart into bear market territory, and the worrying aspect from a bullish perspective is that the long-term MACD histogram is showing little signs that a sustained countermove to the upside is on the cards any time soon. Furthermore, the company's short-interest of over 15% demonstrates that there are plenty of speculators that see more downside in this name.

Q2 Earnings

In mid-November of last year, America's Car-Mart, Inc. announced its fiscal second-quarter earnings numbers where we saw a substantial earnings miss (EPS of $0.48) on revenues of almost $352 million. The worrying trend in the report was the declining gross margin (18.74%), which came in below the 12-month trailing number of 20%+. Any sustained downtick in the company's gross margin will not be good for the share price due to how low a base the company is working off. SG&A costs also grew by some $5.7 million in the quarter, as labor costs spiked in cost compared to last year. In fact, the net profit tally of $3.1 million resulted in the net profit margin barely surpassing 1% for the quarter. Suffice it to say, margins are really tight at present in America's Car-Mart, which has been affecting consensus earnings estimates in upcoming quarters, as we see below.

Nevertheless, management was resolute in terms of trusting their capability to adapt to the ever-changing market conditions on their recent fiscal Q2 earnings call , which definitely would have comforted existing shareholders. In fact, as we see from the technical chart above, shares back in 2016 and 2019 (both years when shares lost their long-term averages) were able to bounce back and make fresh higher highs soon thereafter. Suffice it to say, a sustained turnaround can still happen swiftly in this cycle by endeavoring to keep customers on the road and by upholding the company's strong culture to the best of the company's ability.

Higher Rates Leading To Higher Costs

A few trends, though, need to take place for this to happen. Tighter credit conditions from higher interest rates on one hand will likely result in more defaults among customers as disposable income decreases right across the market. Furthermore, since close to 50% of the company's debt is variable, a rising interest rate environment also poses a risk to the company's balance sheet due to the rising cost of capital across the board.

However, rising interest rates could also turn out to be a blessing in disguise in that America's Car-Mart's competition (which may not be as financially strong) will struggle to compete in a market where costs are rising. Therefore, as rates continue to rise, America's Car-Mart market share could also rise as a result due to "value" and "service" being the top priorities among prospective buyers of new vehicles.

Other trends that must improve for America's Car-Mart to return to a pattern of higher highs is to improve the procurement side of the business and improve the standard of prospects that turn up at the dealerships. Management is focused on providing vehicles for the dealership that are ready to sell, so vehicles can be turned over at a far faster clip. This really is the key for the company in that (because margins are so thin) profits must be turned over at a much faster clip in order to boost the company's return on invested capital.

Loan Origination

This element of "speed" can also be seen in the company's transition from its existing ALIS system to the new LOS (Loan Origination System). The new system is faster and more expansive with respect to how it generates prospects. Furthermore, the "shift" to online vetting means the business end of things can be focused on at the dealerships. Suffice it to say, a greater number of pre-qualified prospects is the goal here, so it will be interesting to see if the investment in this space can pay off sooner rather than later.

Conclusion

Therefore, to sum up, the management of America's Car-Mart, Inc. remains resolute in confronting the difficult trading conditions in this industry at present. America's Car-Mart, Inc. shares may have fallen below their key long-term moving averages, but history has demonstrated that shares can recover. We look forward to continued coverage.

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