Car-Mart Stays the Course in Low-Interest Environment

Hank Henderson, CEO of America’s Car-Mart Inc. of Bentonville, used the annual shareholders’ meeting on July 30 to tout the used car dealer’s navigation of a difficult competitive environment.

Car-Mart saw its income drop 34 percent in fiscal 2014, thanks in large part to competition from third-party financing — which Henderson likened to a playmate making mischief in one’s own backyard. Still, Car-Mart posted net income of $21.1 million for the fiscal year that ended April 30.

“It was still a pretty stout year,” Henderson said. “When you look back over the past year, one of the things you really have to look at, a lot of the pressures our customers had — along with crazy availability of financing — it’s about as tough as our business can ever get. At the same time, while it wasn’t growth rates as high as we have seen, we still grew the business.”

Revenue in fiscal 2014 reached $489.2 million, up 5 percent from fiscal 2013.

Car-Mart does its own financing for the used cars it sells and resisted the lure of changing its finance terms in the easy-money climate. While others offered five- and six-year terms, Car-Mart stuck with its tried-and-true business model, which includes an average term length on loans of approximately 28 months.

“We talk a lot around here about, ‘Are we doing the right things today to get us where we want to be five years from now?’” Henderson said. “We certainly don’t run our business quarter-to-quarter, but obviously we like to see good quarterly results.”

Henderson said Car-Mart’s stay-the-course strategy was affirmed when it reported first-quarter earnings on Aug. 20: net income of $7.3 million, down 3 percent from a year earlier, on a 3 percent increase in revenue, to $127 million.

Those weren’t the only important metrics, Henderson said, as the company bought back nearly 75,000 outstanding shares and paid down its debt by approximately $3 million in the quarter.

“We’ve grown fast and, like any company that is growing fast, you have to figure out how do we handle things at this level and at this level,” he said. “For us, because we are in a business where we’re financing things, the results sometime take a little longer to show up. I do know the results we saw in the first quarter, a big part of it had to do with the fact we’re doing better as a company.”

‘I Can’t Do That’

During the first-quarter conference call, Henderson and Chief Financial Officer Jeff Williams didn’t share nearly as many thoughts on their competition as they have done in previous quarters. That was by design, Henderson said.

“We’ve talked enough about it; these are the things we can control and these are the things we can affect,” Henderson said. “We would rather keep our company solid and have a slightly less growth rate during this time. We still have great returns. We haven’t seen the growth we would have liked to have if we were a little more aggressive.

“The timing was good for morale. We’ve been working as hard as ever, and it’s good to see the folks rewarded. You do the right thing and you will eventually get rewarded for it.”

That’s the backyard analogy Hen-derson mentioned at the shareholders’ meeting. Henderson said it would be easy to attract more business by stretching the payments out a few more years.

“It’s like when you’re a little kid and someone is playing in your backyard and doing something you’re not supposed to do,” Henderson said. “You say, ‘I can’t do that.’ It’s tempting and it looks fun.

“If we dramatically lowered our underwriting standards and went out sold an extra 500-1,000 cars, which we could do, it would look amazing — until the losses started running. In our business, with the short [loan] terms, it doesn’t take that long for the losses to show up.”

A year ago, Henderson said, he would have predicted that the easy-money climate would have begun to abate by now. He said that feedback from individual Car-Mart sale lots suggests that fewer sales are being lost to other financial offers.

Henderson believes many of those deals were scooped up by people who might not have bought a car otherwise, so the market is beginning to return to Car-Mart’s usual buyers.

If easy financing helps someone buy a car when otherwise it would be impossible, then it couldn’t have been a bad thing, Henderson said. It’s just something Car-Mart can’t compete with.

“I think a lot of that has settled down because, after a while, people started to think, you know signing up for a used car loan for 5-6 years is probably not the greatest idea,” Henderson said. “It’s a tough business, and we’ve been around a long time. If the competition is doing something that is close, maybe you respond with a match to compete. But when we see people signing up customers for six years on lower-end cars, there’s nothing we can do. We just figure out ways to get others.”

For instance, Car-Mart has set out to offer more selection of lower-priced cars, a price range not as affected by the third-party financing climate.

One of the most reassuring statistics Car-Mart had in its first quarter was predicted sales per stores, Henderson said. Car-Mart sold 11,482 vehicles in the first quarter, up from 10,643 in the same quarter a year ago, and each of the 134 individual stores came in very close on projections.

“When the dust all settled, we were within, in total, a half-sale per store per month,” Henderson said. “We were really, really close. That is a reflection of the improvement.”

Lots of Lots

The company opened two stores in the first quarter for a total of 136, and Henderson said the company still plans to open another eight this fiscal year. Car-Mart is being more methodical about store openings, Henderson said, as part of an internal decision to improve the support and training for store managers, a position in which the company has experienced too much turnover in recent years.

Car-Mart’s new lots — those 5 years old or younger — saw vehicle sales increase 39 percent to 24.4 per month, while lots 5-10 years old saw an increase of 2.3 percent. The company’s older lots, those more than 10 years old, saw a 2.8 percent decrease to 30.7 vehicles a month.

Henderson said the growth was toughest on the company’s oldest stores because those have the largest customer base and, oftentimes, repeat customers are looking for an upgrade with their next purchase. Car-Mart prides itself on its repeat customers — that’s what Henderson talks about in the TV commercials that he closes with the company’s slogan, “Drive Easy” — and Henderson said repeat business held steady at 33 percent of sales.

“We did have a lot of new stores that showed good growth year over year, where we took a hit on the volume was on our largest stores and also our oldest,” Henderson said. “For a time, those guys were down about 3 sales per month year over year. That doesn’t sound so bad when you talk about one store, but when you figured we have a lot of those stores, that does make a difference.”