America’s Car-Mart's outgoing CEO, Hank Henderson.
Hank Henderson expected to have some relief by now.
Henderson, the CEO of America’s Car-Mart of Bentonville, has seen the competitive environment in the used-car financing market frustrate his company for more than three years now. Last month, Car-Mart reported a loss of $485,000 for the second quarter of fiscal 2016.
The earnings loss is not ideal — and the company’s stock has dipped, too — but Henderson said Car-Mart isn’t struggling. It’s just that the company has continued to tighten up its underwriting in an environment that Henderson said offers too many flashy but ill-advised deals.
Car-Mart CFO Jeff Williams said dealers and third-party financiers offer loans to buyers with poor credit that look good because the monthly payments are low. However, Williams and Henderson said, the long length of the contracts results in car buyers making payments long after the vehicle has lost its value.
“In three years, they owe $13,000 for a car that is worth $4,000,” Williams said.
This scenario isn’t new to Car-Mart, which said it offers 28-month deals in which the value of the loan is closer in line with the purchase price of the car.
“We’ve been through cycles like this before over the years where we’ve seen financing loosen up,” Henderson said. “This is just the first time it has ever gone this deep and stayed around this long. The real story for us is we feel like there are a lot of nonsensical things going on out there with the length of terms and all that. We’re going to stick closer to our game plan.”
Henderson is confident the game plan will work. That doesn’t avoid short-term pain in the meantime.
It would help if Car-Mart could know how long the short term is going to be. A year ago, Henderson said, he thought the financial market would have returned to a more traditional mindset, but instead the market has grown more intense over the past year.
The competitive nature of the deals means that underwriters are often willing to overlook past mistakes. A Car-Mart buyer who is struggling to make payments may as well just turn the car back in and then find another dealer willing to make him a low-payment, long-term deal regardless of his past default.
“I’ve been asked this question, ‘Is it next year when it turns, or two years?’ I don’t know,” Henderson said. “We’re still growing; we’re still creating value and doing well. Whether it’s next year when we see some relief or the year after that, I feel pretty confident. We just have to move on today like this is the way it’s going to be.”
Car-Mart’s fortunes have fluctuated with the frenetic market. In fiscal 2014 — which ended April 30, 2014 — it reported income of $21.1 million, a decrease of 34 percent from the year before. Then the company rebounded with an income increase to $29.5 million in the fiscal year that ended April 30, 2015.
Revenue rose from $489 million in fiscal 2014 to $530 million in fiscal 2015.
For the first six months of fiscal 2016, Car-Mart’s revenue was up from $261.2 million to $275.7 million, but income had dropped from $14.8 million to $4.1 million. Wall Street has noticed; Car-Mart shares started the year at $53.82 but closed at $26.01 on Dec. 1.
“They’ve been very strong historically and will continue to be,” said J.R. Bizzell, an analyst with Stephens Inc. in Little Rock. “They’re somebody that will continue to add brick-and-mortar stores and continue to grow organically by adding locations. It has been a hiccup this year.”
Bizzell said Car-Mart is being smart by playing a long game even though the end isn’t in sight. Bizzell said he doesn’t expect the financing pressure to show any easing until at least the second half of 2016.
“They’re smart guys; they do have a true pulse on the industry,” Bizzell said. “Until we see a pullback in capital flowing into that indirect auto financing market, we should continue to see some pressure around their realm. They’re frustrated. Ultimately, they’re not going to hurt themselves long term by over-competing. They effectively made the decision that they’re going to have to take the short-term hits with the understanding that over the long term, it’s the best business move.”
Lots of Miles Left
Henderson said that despite the quarterly loss — which the company said was affected by a one-time $3 million charge for credit losses — the company’s balance sheet is stronger than it was at the start of fiscal 2016. Car-Mart has paid down debt, bought back stock shares and increased receivables by $10 million.
“There’s a lot of focus just on the earnings, and there’s no question that’s very important,” Henderson said. “We’re continuing to grow the company and have real value. If that wasn’t there, then we would have problems.”
The competitive environment persists as Car-Mart finishes up improvements that Williams said cost tens of millions of dollars to upgrade the company’s internal infrastructure. Williams said the infrastructure improvements — to areas such as computer software, underwriting and personnel training — were critical for the company’s long-term growth.
“We need to see some relief on the competitive side,” Williams said. “We’ve spent years building up our infrastructure, setting up Car-Mart to increase its footprint. We have not received any benefit from that because the competition looks like a new frenzy is going on right now.”
During previous earnings conference calls, Henderson and Williams have not talked as much about competitive pressures. It remains a significant factor, though, one the company’s executives understand is the current business environment.
The effects on Car-Mart seem clear. Williams said the easy financing has eroded the importance of good credit and consequences in the marketplace.
Car-Mart opened three new stores in the second quarter but saw sales at its existing stores decline 3.4 percent. Car-Mart sold fewer vehicles overall (10,881 compared with 12,084; a decline of three per store per month) and saw its charge-offs increase from 7 percent to 7.8 percent.
“We knew it wasn’t going to be a great quarter,” Williams said. “We expected charge-offs to be lower because we came into the quarter with lower delinquencies. It was just another indication to us that competition is out of whack.”
Williams said Car-Mart has stuck to its guns, with slight modifications, for car loans — the company handles financing in-house for nearly all of the cars it sells.
“It’s a whole bunch of people chasing a limited number of customers,” Williams said. “We thought they had a pretty good deal five years ago. They don’t need these fancy long-term low interest rates. We don’t think it’s going to end well. It sure is painful on us trying to do the right thing in the interim.”
Henderson said the turbulence is also a good opportunity for Car-Mart to strengthen itself operationally.
“In the tougher, more competitive times, it makes everyone better,” Henderson said. “In the long run, this will all be a healthy thing for our business and for our customers.”
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