CRMT - America's Car-Mart: Significant Overhaul Of Operations Expected To Bear Fruit

2023-03-28 15:56:50 ET

Summary

• America's Car-Mart, Inc. missed earnings estimates once more in fiscal Q3 2023.
• Management continues to double down on investments in people, inventory, digital and procurement in an effort to gain market share.
• Forward-looking estimates need to stabilize for the market to price America's Car-Mart, Inc. shares higher here.

Intro

We wrote about America's Car-Mart, Inc. ( CRMT ) back in early January, post the company's second-quarter numbers where a pretty significant earnings miss (EPS of $0.48) was announced. America's Car-Mart's recent Q3 numbers also disappointed, with earnings of $0.23 per share coming in below the consensus estimate of $0.26. Surprisingly, though, shares find themselves up just under 10% since our January commentary. The question then becomes if the market is pricing in improved trading conditions for America's Car-Mart going forward or if the retailer's poor profitability trends will finally make themselves known on the technical chart.

If we go to the long-term technical chart, for example, we can see that no significant technical damage has been done of yet, as the pattern of long-term higher highs and higher lows remains intact. We acknowledge that the short-interest ratio (13%+) has remained elevated for quite some time now, but that bounce off support in the fall of last year was crucial, as we see below.

Better Efficiency Needed

Although earnings are expected to contract by 70%+ this year, consensus expects a strong bounce back next year, with $5.58 per share expected to be a 32% increase over fiscal 2023 (which ends this coming April). This is why investors need to look beyond near-term profitability trends (which have been poor) and see how the company's ongoing investments could potentially beat those forward estimates in due time.

As noted in previous commentary, America's Car-Mart, Inc.'s low gross margin (Q3 print of 33.6%) is definitely a cause for concern, especially given the retailer's high operating costs. In fact, the retailer's much higher 5-year average gross margin percentage of 38%+ really demonstrates how recent trading conditions have impacted the company's profitability. Suffice it to say, management knows that better productivity & efficiency are needed in-house in order to get the company's return on capital numbers back in double-digit territory. (current ROC comes in at a mere 6.13%). Capital needs to be turned over at a much faster clip than what we have been used to.

Investments

In order to right the ship in this context, America's Car-Mart's new "Loan Origination System" is expected to move the needle in a number of ways. By digitalizing this area, much-improved streamlining should take place, as technology will do away with previous manual procedures. Initial trends have been very promising in the dealerships where the system was installed initially so it will be interesting to see how trends stack here for the full company say in 6 to 12 months' time.

Furthermore, the investment behind the company's LOS ties in with the ERP initiative (Enterprise & Resource Planning) as well as the CRM (Customer Relationship Management) system. Again, given that close to 50% of the retailer's customers come back to purchase a vehicle once more from the dealerships, we see this number increasing once the CRM system is going at full throttle. More dealerships and more contact points where the customer can engage with America's Car-Mart inevitably should lead to more valuable data and more opportunities over time for the retailer.

Balance Sheet & Cash Flow Risk

Suffice it to say, if trading conditions stack up for the retailer, higher highs are definitely possible. The problem is if they do not - and here is where downside risk would enter into the equation. For one, although the CEO talked up the company's ever-growing book value per share and shareholder equity on the latest earnings conference call, long-term debt continues to rise & receivables now account for $1.03 billion of the company's total amount of assets ($1.384 billion). Although the net charge-off rate came in under 6% for the third quarter, any uptick in this metric would result in this line item coming in for extra scrutiny.

Furthermore, operating cash flow came in a negative $30.7 million in Q3, which means investments continue to be financed by external capital. We acknowledge that CRMT's strong earnings growth earmarked for next year should bring cash-flow generation back into the black, but as mentioned, the retailer will need trading conditions to cooperate especially surrounding the areas of inflation, and interest rates.

Conclusion

Although near-term results have been poor, America's Car-Mart, Inc. management continues to look to the future with respect to sustained volume growth and long-term investment in the SG&A area. Some stability surrounding the company's forward-looking projections will be beneficial for the America's Car-Mart, Inc. share price here. We look forward to continued coverage.

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