# AMERICAS CARMART INC (CRMT) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from AMERICAS CARMART INC's 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/799850/000117184324003950/crmt20240430_10k.htm
Accession: 0001171843-24-003950
Filing date: 2024-07-15
Report date: 2024-04-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/CRMT/
All MD&A years: /company/CRMT/mda/
Previous year: /company/CRMT/mda/fy2023/ (FY 2023)
Next year: /company/CRMT/mda/fy2025/ (FY 2025)

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto appearing in Item 8 of this Annual Report on Form 10-K.

Overview

America’s Car-Mart, Inc., a Texas corporation (the “Company”), is one of the largest publicly held automotive retailers in the United States focused exclusively on the “Integrated Auto Sales and Finance” segment of the used car market. References to the Company include the Company’s consolidated subsidiaries. The Company’s operations are principally conducted through its two operating subsidiaries, America’s Car Mart, Inc., an Arkansas corporation (“Car-Mart of Arkansas”), and Colonial Auto Finance, Inc., an Arkansas corporation (“Colonial”). Collectively, Car-Mart of Arkansas and Colonial are referred to herein as “Car-Mart.” The Company primarily sells older model used vehicles and provides financing for substantially all of its customers. Many of the Company’s customers have limited financial resources and would not qualify for conventional financing as a result of limited credit histories or past credit problems. As of April 30, 2024, the Company operated 154 dealerships located primarily in small cities throughout the South-Central United States.

Car-Mart has been operating since 1981. While Car-Mart has grown its revenues between approximately 3.5% and 31.2% per year over the last ten years preceding 2024 (average 12.0%), revenue for the fiscal year ended April 30, 2024, declined slightly compared to fiscal 2023 primarily due to an 8.8% decrease in retail units sold. The decrease was partially offset by a 5.7% increase in the average retail sales price and an 18.8% increase in interest income.

The Company earns revenue from the sale of used vehicles, and in most cases a related service contract and an accident protection plan product, as well as interest income and late fees from the related financing. The Company’s cost structure is more fixed in nature and is sensitive to volume changes. Revenue can be affected by our level of competition, which is influenced to a large extent by the availability of funding to the sub-prime automobile industry, together with the availability and resulting purchase cost of the types of vehicles the Company purchases for resale. Revenues can also be affected by the macro-economic environment. Down payments, contract term lengths and credit scoring are critical to helping customers succeed and are monitored closely by corporate management at the point of sale. After the sale, collections, delinquencies, and charge-offs are crucial elements of the Company’s evaluation of its financial condition and results of operations and are monitored and reviewed on a continuous basis. Management believes that developing and maintaining a relationship with its customers and earning their repeat business is critical to the success and growth of the Company and can serve to offset the effects of increased competition and negative macro-economic factors.

The Company focuses on the benefits of excellent customer service and its “local” face-to-face offering in an effort to help customers succeed, while continuing to enhance the Company’s digital services and offerings to meet growing demands for an integrated digital-online sales and service experience. The Company, over recent years, has focused on providing a good mix of vehicles in various price ranges to increase affordability for customers.

The purchase price the Company pays for its vehicles can also have a significant effect on revenues, liquidity and capital resources. Because the Company bases its selling price on the purchase cost of the vehicle, increases in purchase costs result in increased selling prices. As the selling price increases, it becomes more difficult to keep the gross margin percentage and contract term in line with historical results because the Company’s customers have limited incomes, and their car payments must remain affordable within their individual budgets. Decreases in the overall volume of new car sales, particularly domestic brands, lead to decreased supply and generally increased prices in the wholesale used car market. Also, expansions or constrictions in consumer credit, as well as general economic conditions, can have an overall effect on the demand and the resulting purchase cost of the types of vehicles the Company purchases for resale.

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The COVID-19 global pandemic and the resulting macroeconomic effects have negatively impacted the availability and prices of the vehicles the Company purchases. Over the past three years, the reduction in new car production and fewer off-lease vehicles have negatively impacted the availability of used vehicle inventory and resulted in higher purchase costs. The Company constantly reviews and adjusts purchasing avenues to ensure an appropriate flow of vehicles. While the Company anticipates that the availability of used vehicles will remain constricted and keep purchase costs elevated in the near future, any decline in overall market pressures affecting the availability and costs of used vehicles could result in lower inventory purchase costs and present an opportunity for the Company to purchase slightly newer, lower mileage vehicle for its customers.

The Company consistently focuses on collections. Each dealership is responsible for its own collections with supervisory involvement of the corporate office. Over the last five fiscal years, the Company’s provision for credit losses as a percentage of sales has ranged from a low of approximately 19.31% in fiscal 2021 to 36.48% in fiscal 2024 (average of 26.36%). Credit loss results improved substantially in fiscal 2021 due to a lower frequency of losses and lower severity of loss amounts relative to the principal balance as the CARES Act enhanced unemployment and stimulus funds, combined with the Company’s commitment to working with customers, aided customers’ ability to make their vehicle payments. The improvement in credit losses as a percentage of sales for fiscal 2021 was further accelerated by the Company’s decision during the fourth quarter of fiscal 2021 to reduce the allowance for credit losses back to 23.55% of finance receivables, net of deferred revenue, which resulted in a $14.2 million pretax decrease in the provision for credit losses. The fiscal year 2022 credit losses began to normalize to pre-pandemic levels but were still below historical levels despite the increase in the average retail sales price. During fiscal year 2023, credit losses exceeded pre-pandemic levels, partially driven by the lack of federal stimulus payments in the current fiscal year as compared to prior fiscal years due to the expiration of the CARES Act and the Consolidated Appropriations Act of 2021, and partially driven by the current macro-economic environment at that time. During fiscal 2024, the provision for credit losses as a percentage of sales increased to 36.5%, primarily due to the $28 million increase in provision for credit losses during the three months ended October 31, 2023. The allowance for credit losses as a percentage of finance receivables, net of deferred revenue and pending accident protection plan (“APP”) claims, increased from 23.91% at April 30, 2023 to 26.04% at October 31, 2023 due to the implementation of the third-party software to assist in calculating the allowance for credit losses as well as the performance of the loan portfolio during the first six months of fiscal 2024. Based on the Company’s current analysis of credit losses, the allowance for credit losses at April 30, 2024 decreased to 25.32% of finance receivables, net of deferred revenue and pending APP claims, which was primarily driven by changes in the underwriting process and refinement to the underwriting guidelines due to the implementation of the Company’s new loan origination system. Following the implementation of our new loan origination system (LOS), we have experienced a notable decrease in the frequency and loss rate in charge-offs for loans originated through the LOS as compared to loans that were originated during the same period and the same dealership state using the legacy system. All the underwriting information for loans originated through the LOS is centrally located in the system, allowing dealerships to view internal scores, down-payment percentages, pre-qualification credit reports and other customer information.  Historically, dealerships have had to obtain this information from several sources. These changes to the underwriting process and refinement to our underwriting guidelines facilitate better-informed underwriting decisions due to all the information being readily available in a single location.

Historically, credit losses, on a percentage basis, tend to be higher at new and developing dealerships than at mature dealerships. Generally, this is because the management at new and developing dealerships tends to be less experienced in making credit decisions and collecting customer accounts and the customer base is less seasoned. More mature dealerships have more repeat customers and, on average, repeat customers are a better credit risk than non-repeat customers. Credit losses and charge-offs can also be impacted by market and economic factors, including a competitive used vehicle financing environment and macro-economic conditions such as inflation in the price of childcare, insurance, rent, gasoline, groceries, and other staple items. Negative macro-economic issues, however, do not always lead to higher credit loss results for the Company because the Company provides basic affordable transportation which in many cases is not a discretionary expenditure for customers.

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The Company continuously looks for ways to operate more efficiently, improve its business practices and adjust underwriting and collection procedures. The Company has a proprietary credit scoring system which enables the Company to monitor the quality of contracts. Corporate office personnel monitor proprietary credit scores and work with dealerships when the distribution of scores falls outside of prescribed thresholds. The Company also uses credit reporting and the use of global positioning system (“GPS”) units on vehicles. Additionally, the Company’s training department continuously strengthens its training for collections.  The Company’s collections department and support staff oversee collections and provide timely oversight and additional accountability on a consistent basis. Collections growth is included in quarterly earnings reports. The Company believes that the proper execution of its business practices is the single most important determinant of its long-term credit loss experience.

Over the last five fiscal years, the Company’s gross margin as a percentage of sales has ranged from a high of approximately 40.2% in fiscal 2021 to a low of 33.5% in fiscal 2023 (average of 36.9%). The gross margin percentage increased in fiscal 2024 to 34.7%. The Company’s initiatives around inventory life cycle efficiencies and a decrease in wholesale losses also contributed to the increase in gross profit percent. The total gross dollars per retail unit sold increased from the prior fiscal year by $593, primarily as a result of the Company selling on average a higher priced vehicle in fiscal 2024. The Company’s gross margin is based upon the cost of the vehicle purchased, with lower-priced vehicles typically having higher gross margin percentages but lower gross profit dollars. Gross margin is also affected by the percentage of wholesale sales to retail sales, which relates for the most part to repossessed vehicles sold at or near cost. The Company plans to continue to focus on improving gross margin dollars in the near term, as demonstrated by the increases during fiscal 2024 as well as continuing to focus on improving wholesale results through its partnership with reconditioning companies, cost controls, and operational improvement around the acquisition and disposal of vehicles.

Hiring, training and retaining qualified associates is critical to the Company’s success. The Company’s ability to add new dealerships and implement operating initiatives is dependent on having a sufficient number of trained managers and support personnel. Excessive turnover, particularly at the dealership manager level, could impact the Company’s ability to add new dealerships and to meet operational initiatives. The landscape for hiring remains very competitive. The Company has continued to add resources to recruit, train, and develop personnel, especially personnel targeted to fill dealership manager positions. The Company expects to continue to invest in the development of its workforce.

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Consolidated Operations

(Operating Statement Dollars in Thousands)

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[[/GREPCENT_TABLE]]

Fiscal 2024 Compared to Fiscal 2023

Total revenues decreased $6.5 million, or 0.5%, in fiscal 2024, as compared to revenue growth of 17.6% in fiscal 2023, principally as a result of declines in revenue from (i) dealerships that operated a full twelve months in both fiscal years ($13.8 million), and (ii) dealerships that were closed during or after the year ended April 30, 2023 ($14.9 million), partially offset by revenue growth from (iii) dealerships opened or acquired after April 30, 2023 ($22.2 million). The decline in revenue for fiscal 2024 is attributable to an 8.8% decrease in retail units sold, largely reflecting the challenging macroeconomic environment for our customers, partially offset by an 18.8% increase in interest and other income and a 5.7% increase in the average retail sales price. Interest income increased approximately $36.9 million compared to fiscal 2023, due to the $187.9 million increase in average finance receivables.

Cost of sales, as a percentage of sales, decreased to 65.3% compared to 66.5% in fiscal 2023, resulting in an increase in the gross margin percentage to 34.7% of sales in fiscal 2024 from 33.5% of sales in fiscal 2023. On a dollar basis, our gross margin per retail unit sold increased by $593 in fiscal 2024 compared to fiscal 2023. The average retail sales price for fiscal 2024 was $19,113, a $1,033 increase over the prior fiscal year, with over half of the increase attributable to vehicle price and the remaining related to ancillary products. As purchase costs increase, the margin between the purchase cost and the sales price of the vehicles we sell generally narrows on a percentage basis because the Company must offer affordable prices to our customers. The Company initiated a strategic partnership with an industry leader and implemented initiatives around vehicle reconditioning efforts, transportation and scaling are expected to provide a better volume of affordable units.

Selling, general and administrative expenses, as a percentage of sales increased to 15.5% in fiscal 2024 from 14.7% for fiscal 2023. Selling, general and administrative expenses are, for the most part, more fixed in nature.  In dollar terms, selling, general and administrative expenses increased $2.8 million from fiscal 2023. The increase resulted from increased collections costs due primarily to a higher frequency of repossessions and increased spending in professional services around improvements in technology, as well as operating in a higher inflationary environment, which was partially offset by operational improvements and cost-cutting measures implemented in fiscal 2024. These efforts resulted in the lowest percentage change in annual selling, general and administrative expenses in over five years at just a 1.5% increase.

31

Provision for credit losses as a percentage of sales increased to 36.5% for fiscal 2024 compared to 29.3% for fiscal 2023. The provision for credit losses as a percentage of sales was higher during the current year due to the growth in the balance of finance receivables, net of deferred revenue of $61.7 million, coupled with a decrease in sales of $43.4 million. An increase in net charge-offs also contributed to the higher provision. Net charge-offs as a percentage of average finance receivables increased to 27.2% for fiscal 2024 compared to 23.3% for the prior year. The Company experienced continued increases in both the frequency and severity of losses, with the frequency increase accounting for over 80% of the increase as the Company’s customers continue to face pressures on higher average costs of everyday items. Severity was also higher due to the longer terms and lower recovery values. The increased frequency and severity of losses was partially mitigated by improved collection results from loans originated using our new LOS system compared to our outstanding loans originated under our legacy system. Approximately 20% of the portfolio balance of April 30, 2024 originated under the new LOS system.

Interest expense for fiscal 2024 as a percentage of sales increased to 5.6% in fiscal 2024 from 3.2% in fiscal 2023. The increase in interest expense is primarily due to the higher interest rates in 2024 as well as the higher average borrowings in fiscal 2024 ($730.3 million in fiscal 2024 compared to $568.3 million for fiscal 2023). 60% of the increase in interest expense is attributable to the higher interest rates in 2024 and 40% is attributable to the increase in borrowings.

Fiscal 2023 Compared to Fiscal 2022

Total revenues increased $209.9 million, or 17.6%, in fiscal 2023, as compared to revenue growth of 31.2% in fiscal 2022, principally as a result of (i) revenue growth from dealerships that operated a full twelve months in both fiscal years ($196.7 million), and (ii) revenue from stores opened or acquired during or after the year ended April 30, 2022 ($15.3 million), partially offset by (iii) decreased revenue from dealerships closed during or after the year ended April 30, 2022 ($2.1 million). The increase in revenue for fiscal 2023 is attributable to (i) a 10.4% increase in average retail sales price, (ii) a 4.9% increase in retail units sold and (iii) a 29.2% increase in interest and other income, due to the $289.2 million increase in average finance receivables.

Cost of sales, as a percentage of sales, increased to 66.5% compared to 63.4% in fiscal 2022, resulting in a decrease in the gross margin percentage to 33.5% of sales in fiscal 2023 from 36.6% of sales in fiscal 2022. On a dollar basis, our gross margin per retail unit sold increased by $72 in fiscal 2023 compared to fiscal 2022. The average retail sales price for fiscal 2023 was $18,080, a $1,708 increase over the prior fiscal year, reflecting the high demand for used cars, especially in the market we serve. As purchase costs increase, the margin between the purchase cost and the sales price of the vehicles we sell generally narrows on a percentage basis because the Company must offer affordable prices to our customers. Demand for the vehicles we purchase for resale remained high during fiscal 2023 and the supply continued to be restricted primarily due to lower levels of new car production. The inflationary environment during fiscal 2023 also contributed to the lower gross margin percentage due to increased costs of vehicle parts, shop labor rates and transport services.

Selling, general and administrative expenses, as a percentage of sales decreased to 14.7% in fiscal 2023 from 15.0% for fiscal 2022. Selling, general and administrative expenses are, for the most part, more fixed in nature. During fiscal 2023 we continued investments in inventory procurement, technology and digital areas as well as investing in key additions to our leadership team. In dollar terms, selling, general and administrative expenses increased $20.6 million from fiscal 2022. These investments are expected to be leveraged, creating efficiencies in the business allowing us to serve more customers in future years.

Provision for credit losses as a percentage of sales increased to 29.3% for fiscal 2023 compared to 22.9% for fiscal 2022. Net charge-offs as a percentage of average finance receivables increased to 23.3% for fiscal 2023 compared to 18.3% for the prior year. The stimulus payments during fiscal 2022 had positive impacts on collections and net charge-off metrics, while in fiscal 2023, the absence of stimulus payments, added inflationary pressures and the current macro-economic environment had a negative impact on collections and net charge-off metrics. Net charge offs began to normalize to pre-pandemic levels in late fiscal 2022 and continued to normalize during fiscal 2023. The primary driver was an increased frequency of losses; however, the relative severity of losses also increased.

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Interest expense for fiscal 2023 as a percentage of sales increased to 3.2% from 1.1% in fiscal 2022. The increase in interest expense is primarily due to the higher interest rates in 2023 as well as the higher average borrowings in fiscal 2023 ($568.3 million in fiscal 2023 compared to $331.6 million for fiscal 2022). 71% of the increase in interest expense is attributable to the higher interest rates in 2023 and 29% is attributable to the increase in borrowings.

Financial Condition

The following table sets forth the major balance sheet accounts of the Company at April 30, 2024, 2023 and 2022 (in thousands):

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[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(1)","Prepaid expenses and other assets at April 30, 2022, reflects an immaterial reclassification of approximately $6.0 million of capitalized implementation costs related to a cloud-computing arrangement previously recorded in Property and equipment, net, and did not impact operating income."]]
[[/GREPCENT_TABLE]]

The following table shows receivables growth compared to revenue growth during each of the past three fiscal years. For fiscal year 2024, growth in finance receivables, net of deferred revenue, of 4.9% exceeded revenue decline of 0.5%, due primarily to the increases in term lengths of our installment sales contracts as the Company strives to keep payments affordable for our customers. The Company currently anticipates that the growth in finance receivables will generally be slightly higher than overall revenue growth on an annual basis due to overall term length increases in our installment sales contracts, partially offset by improvements in underwriting and collection procedures in an effort to reduce credit losses. The average term for installment sales contracts at April 30, 2024 was 47.9 months, compared to 46.3. months for April 30, 2023.

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[[/GREPCENT_TABLE]]

At fiscal year-end 2024, inventory decreased 1.7% ($1.8 million), compared to fiscal year-end 2023. The decrease in inventory reflects the Company’s initiatives around inventory life cycle efficiencies from procurement, reconditioning, wholesale efficiencies and repairs after the sale. Annualized inventory turns for fiscal year-end 2024 were 7.0 consistent with 7.1 for the prior year. The Company strives to improve the quality of the inventory and maintain adequate turns while maintaining inventory levels to ensure an adequate supply of vehicles, in volume and mix, and to meet sales demand. 

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Property and equipment, net, decreased by approximately $1.3 million as of April 30, 2024 as compared to fiscal 2023. The Company incurred approximately $6.1 million in expenditures during fiscal year 2024, primarily related to remodeling of existing locations. These expenditures were offset by $6.9 million in depreciation expense during fiscal 2024.

Accounts payable and accrued liabilities decreased by approximately $5.9 million at April 30, 2024 as compared to April 30, 2023 primarily due to lower accounts payable related to decreased inventory and sales activity.

Deferred revenue increased $312,000 at April 30, 2024 over April 30, 2023, primarily resulting from the increase in average retail sales price as well as the increased terms on the service contracts, partially offset by the decrease in retail unit sold.

Deferred income tax liabilities, net, decreased approximately $21.5 million on April 30, 2024, compared to April 30, 2023. As of April 30, 2024, the Company had an expected federal net operating loss carryforward of $83 million, which may be carried forward indefinitely until the loss is fully recovered.

The Company had $553.6 million and $471.4 million of non-recourse notes payable outstanding related to asset-backed term funding transactions as of April 30, 2024 and 2023, respectively. These notes accrue interest at fixed rates with a weighted average rate of 9.0% as of April 30, 2024.

The Company also maintains a revolving line of credit with a group of lenders with available borrowings based on and secured by eligible finance receivables and inventory. Interest under the revolving credit facilities is payable monthly at an interest rate determined based on the Company’s consolidated leverage ratio for the preceding fiscal quarter. The current applicable interest rate under the credit facilities is generally the Secured Overnight Financing Rate (SOFR) plus 3.50%.  Borrowings on the Company’s revolving credit facilities fluctuate primarily based upon a number of factors including (i) net income, (ii) finance receivables changes, (iii) funds available from asset-backed securitization offerings and/or warehouse facilities, (iv) income taxes, (v) capital expenditures, and (vi) common stock repurchases. At April 30, 2024 and 2023 the Company had $200.8 million and $167.2 million, respectively, in outstanding borrowings under the revolving credit facilities.

Historically, income from continuing operations, as well as borrowings on the revolving credit facilities, have funded the Company’s finance receivables growth, capital asset purchases, and common stock repurchases. The Company also utilizes the securitization market and has recently entered into a warehouse facility to increase its borrowing capacities, with issuances of asset-backed non-recourse notes which may cause the revolving line of credit to fluctuate between securitization issuances.  The overall increase in total borrowings during fiscal 2024 was made to support an increase in finance receivables, with longer terms, and a growing customer base. This was partially offset by the payoff of the April 2022 asset-backed notes in the third quarter of fiscal 2024.

During fiscal 2024, the Company grew finance receivables by $62.0 million, decreased inventory by $1.8 million, and purchased investments and fixed assets of $11.0 million with a $115.8 million increase in total debt and a $89.4 million increase in debt, net of cash (a non-GAAP Measure). See “Non-GAAP Financial Measures” below for a reconciliation of debt, net of cash, to the most directly comparable GAAP financial measure. These investments reflect our commitment to providing the necessary inventory and facilities to support a growing customer base.

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Liquidity and Capital Resources

The following table sets forth certain historical information with respect to the Company’s Statements of Cash Flows (in thousands):

[[GREPCENT_TABLE]]
[["","","Years Ended April 30,"],["","","2024","","","2023","","","2022"],["Operating activities:"],["Net income","","$","(31,393",")","","$","20,432","","","$","95,014"],["Provision for credit losses","","","423,406","","","","352,860","","","","238,054"],["Losses on claims for accident protection plan","","","34,504","","","","25,107","","","","21,871"],["Depreciation and amortization","","","6,871","","","","5,602","","","","4,033"],["Amortization of debt issuance costs","","","5,139","","","","5,461","","","","775"],["Stock based compensation","","","4,174","","","","5,314","","","","5,496"],["Deferred income taxes","","","(21,507",")","","","8,866","","","","8,750"],["Finance receivable originations","","","(1,079,946",")","","","(1,161,132",")","","","(1,009,858",")"],["Finance receivable collections","","","455,828","","","","434,458","","","","417,796"],["Accrued interest on finance receivables","","","(792",")","","","(1,188",")","","","(1,559",")"],["Inventory","","","139,186","","","","133,047","","","","51,057"],["Accounts payable and accrued liabilities","","","(9,338",")","","","8,621","","","","5,167"],["Deferred accident protection plan revenue","","","(1,229",")","","","17,150","","","","21,850"],["Deferred service contract revenue","","","1,540","","","","24,542","","","","30,645"],["Income taxes, net","","","6,301","","","","(8,984",")","","","(424",")"],["Other(1)","","","(6,642",")","","","(5,884",")","","","(7,845",")"],["Total","","","(73,898",")","","","(135,728",")","","","(119,178",")"],["Investing activities:"],["Purchase of investments","","","(4,815",")","","","(5,549",")","","","(1,574",")"],["Purchase of property and equipment(1)","","","(6,146",")","","","(22,106",")","","","(15,796",")"],["Proceeds from sale of property and equipment","","","316","","","","84","","","","20"],["Total","","","(10,645",")","","","(27,571",")","","","(17,350",")"],["Financing activities:"],["Debt facilities, net","","","27,330","","","","119,580","","","","(186,037",")"],["Non-recourse debt, net","","","83,381","","","","72,900","","","","399,994"],["Change in cash overdrafts","","","823","","","","-","","","","(1,802",")"],["Purchase of common stock","","","(365",")","","","(5,196",")","","","(34,698",")"],["Dividend payments","","","(40",")","","","(40",")","","","(40",")"],["Exercise of stock options, including tax benefits and issuance of common stock","","","(173",")","","","1,502","","","","(1,195",")"],["Total","","","110,956","","","","188,746","","","","176,222"],["Increase in cash, cash equivalents, and restricted cash","","$","26,413","","","$","25,447","","","$","39,694"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(1)","Prepaid expenses and other assets at April 30, 2022, reflects an immaterial reclassification of approximately $6.0 million of capitalized implementation costs related to a cloud-computing arrangement previously recorded in Property and equipment, net, and did not impact operating income."]]
[[/GREPCENT_TABLE]]

The primary drivers of operating profits and cash flows include (i) top line sales (ii) interest income on finance receivables, (iii) gross margin percentages on vehicle sales, and (iv) credit losses, a significant portion of which relates to the collection of principal on finance receivables. Historically, most of the cash generated from operations has been used to fund finance receivables growth, capital expenditures and common stock repurchases. To the extent finance receivables growth, common stock repurchases, and capital expenditures exceed income from operations, the Company has increased borrowings under our revolving credit facilities and secured additional funding through the issuance of asset-backed non-recourse notes.

35

Cash flows used in operating activities for fiscal 2024 compared to fiscal 2023 decreased primarily as a result of (i) an increase in the provision for credit losses and (ii) a decrease in finance receivable originations, partially offset by an (iii) increase in cash used for accounts payable and accrued liabilities and (iv) a net loss.

Cash flows used in operating activities for fiscal 2023 compared to fiscal 2022 increased primarily as a result of (i) an increase in finance receivable originations and (ii) a decrease in deferred revenue, partially offset by an increase in (iii) finance receivable collections.

The purchase price the Company pays for a vehicle has a significant effect on liquidity and capital resources. Because the Company bases its selling price on the purchase cost for the vehicle, increases in purchase costs result in higher selling prices. As the selling price increases, it generally becomes more difficult to keep the gross margin percentage and contract term in line with historical results because the Company’s customers have limited incomes, and their car payments must remain affordable within their individual budgets. Several external factors can negatively affect the purchase cost of vehicles. Decreases in the overall volume of new car sales, particularly domestic brands, lead to decreased supply in the used car market. Also, constrictions in consumer credit, as well as general economic conditions, can increase overall demand for the types of vehicles the Company purchases for resale as used vehicles become more attractive than new vehicles in times of economic instability. A negative shift in used vehicle supply, combined with strong demand for used vehicles, results in increased used vehicle prices and thus higher purchase costs for the Company.

Sustained macro-economic pressures affecting our customers have helped keep demand high in recent years for the types of vehicles we purchase. This strong demand for used vehicles, coupled with modest levels of new vehicle sales in recent years, have led to a generally ongoing tight supply of used vehicles available to the Company in both quality and quantity. Wholesale prices continued to soften in calendar year 2024 but remain high compared to the last several years.  The Company expects the tight used vehicle supply and strong demand for the types of vehicles we purchase to continue to keep purchase costs and resulting sales prices elevated for the short term but anticipates that an increase in marketplace wages for our customers could enhance affordability.

The Company has devoted significant efforts to improving its purchasing processes to ensure adequate supply at appropriate prices which includes the new partnership with an industry leader, expanding its purchasing territories to larger cities in close proximity to its dealerships and forming relationships with reconditioning partners to reduce purchasing costs. The Company has also increased the level of accountability for its purchasing agents including updates to sourcing and pricing guidelines. The Company continues to build relationships with national vendors that can supply a large quantity of high-quality vehicles.  

The Company’s liquidity is also impacted by our credit losses. Macro-economic factors such as unemployment levels and general inflation on core and discretionary items can significantly affect our collection results and ultimately credit losses. Currently, as our customers look to cover rising costs of non-discretionary items, such as childcare, insurance, groceries and gasoline, it may impact their ability to make their car payments. The Company has made improvements to its business processes via the implementation of the loan origination system during the last two years to strengthen controls and provide stronger infrastructure to support its collections efforts. The Company continues to strive to reduce credit losses in spite of the current economic challenges and continued competitive pressures by improving deal structures. Management continues to focus on improved execution at the dealership level, specifically as related to working individually with customers concerning collection issues.

The Company’s collection results, credit losses and liquidity are also affected by the availability of funding to the sub-prime auto industry. In recent years, increased competition as well as the increasing used car prices resulting from the availability of funding to the sub-prime auto industry has contributed to the Company reducing down payments and lengthening contract terms for our customers, which negatively pressured collection percentages and credit losses and increased our need for external sources of liquidity. During fiscal years 2023 and 2024, the availability of credit to the Company’s customer base was somewhat dampened but remained near recent historical levels. The Company believes that the amount of credit available for the sub-prime auto industry, even with it tightening in 2023 and 2024, will remain relatively consistent with levels in recent years, which management expects will contribute to continued demand for most, if not all, of the vehicles the Company purchases for resale.

36

The Company’s business model relies on leasing the majority – approximately 86% as of April 30, 2024 – of the properties where its dealerships are located. At April 30, 2024 the Company had $82.9 million of operating lease commitments, including $23.8 million of non-cancelable lease commitments under the lease terms, and $59.1 million of lease commitments for renewal periods at the Company’s option that are reasonably assured. Of the $82.9 million in lease obligations, $42.4 million of these commitments will become due in more than five years. The Company expects to continue to lease the majority of the properties where its dealerships are located.

The Company’s revolving credit facilities generally restrict distributions by the Company to its shareholders. The distribution limitations under the credit facilities allow the Company to repurchase the Company’s stock if either: (a) the aggregate amount of such repurchases after September 30, 2021 does not exceed $50 million, net of proceeds received from the exercise of stock options, and the total availability under the credit facilities is equal to or greater than 20% of the sum of the borrowing bases, in each case after giving effect to such repurchases (repurchases under this item are excluded from fixed charges for covenant calculations), or (b) the aggregate amount of such repurchases does not exceed 75% of the consolidated net income of the Company measured on a trailing twelve month basis; provided that immediately before and after giving effect to the stock repurchases, at least 12.5% of the aggregate funds committed under the credit facilities remain available. Thus, although the Company does routinely repurchase stock, the Company is limited in its ability to pay dividends or make other distributions to its shareholders without the consent of the Company’s lenders.

At April 30, 2024, the Company had approximately $5.5 million of cash on hand and $73.4 million of availability under its revolving credit facilities (see Note F to the Consolidated Financial Statements in Item 8). On a short-term basis, the Company’s principal sources of liquidity include income from operations, proceeds from non-recourse notes payable issued under asset-back securitization transactions, warehouse facilities, borrowings under its revolving credit facilities, and other potential financing sources. On a longer-term basis, the Company expects its principal sources of liquidity to consist of income from operations, funding from asset-back securitization transactions, warehouse facilities, borrowings under revolving credit facilities or fixed interest term loans, and other potential financing sources. In February 2024, the Company entered into Amendment No. 6 to its revolving credit agreement (see Note F to the Consolidated Financial Statements) which extends the term of the Company’s revolving credit facilities to September 30, 2025, and reduces the total permitted borrowings from $600 million to $340 million. The reduction in the facility size relates primarily to the Company’s utilization of funding from recent issuances of asset-backed non-recourse notes, as well as two lenders withdrawing from the facility in connection with the Amendment. In July 2024, the Company entered into Amendment No. 7 to its revolving credit agreement to allow for, among other things, the entry into an amortizing warehouse agreement with recourse against the Company with respect to up to 10% of the aggregate amount borrowed under the warehouse facility and to amend the fixed charge coverage ratio under the credit agreement.

The Company expects to use cash from operations and borrowings to (i) grow its finance receivables portfolio, (ii) purchase fixed assets of approximately $6 million in the next 12 months as we complete facility updates and general fixed asset requirements, (iii) repurchase shares of common stock when favorable conditions exist and (iv) reduce debt to the extent excess cash is available. The Company projects total interest payments of 69.6 million over the next twelve months as of April 30, 2024, and approximately $34.5 million to be paid thereafter based on its current total outstanding debt facilities as of the date of this report.

In July 2024, the Company entered into a $150 million amortizing warehouse agreement backed by a portion of its finance receivables.  The warehouse facility accrues interest at a rate of SOFR plus 350 basis points, with payments of principal and interest due monthly and a scheduled maturity date of  July 12, 2026. The company primarily plans to use the funds from the warehouse facility to pay down the current revolving loan balance. The Company believes it will have adequate liquidity to continue to grow its revenues and satisfy its capital needs for the foreseeable future.

Off-Balance Sheet Arrangements

The Company has two standby letters of credit relating to insurance policies totaling $3.9 million at April 30, 2024.

Other than its letters of credit, the Company is not a party to any off-balance sheet arrangement that management believes is reasonably likely to have a current or future effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

37

Related Finance Company Contingency

Car-Mart of Arkansas and Colonial do not meet the affiliation standard for filing consolidated income tax returns, and as such they file separate federal and state income tax returns. Car-Mart of Arkansas routinely sells its finance receivables to Colonial at what the Company believes to be fair market value and is able to take a tax deduction at the time of sale for the difference between the tax basis of the receivables sold and the sales price. These types of transactions, based upon facts and circumstances, have been permissible under the provisions of the Internal Revenue Code as described in the Treasury Regulations. For financial accounting purposes, these transactions are eliminated in consolidation and a deferred income tax liability has been recorded for this timing difference. The sale of finance receivables from Car-Mart of Arkansas to Colonial provides certain legal protection for the Company’s finance receivables and, principally because of certain state apportionment characteristics of Colonial, also has the effect of reducing the Company’s overall effective state income tax rate. The actual interpretation of the Regulations is in part a facts and circumstances matter. The Company believes it satisfies the material provisions of the Regulations. Failure to satisfy those provisions could result in the loss of a tax deduction at the time the receivables are sold and have the effect of increasing the Company’s overall effective income tax rate as well as the timing of required tax payments.

The Company’s policy is to recognize accrued interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company had no accrued penalties or interest as of April 30, 2024.

Critical Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of America requires the Company to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the Company’s estimates. The Company believes the most significant estimate made in the preparation of the Consolidated Financial Statements in Item 8 relates to the determination of its allowance for credit losses, which is discussed below. The Company’s accounting policies are discussed in Note B to the Consolidated Financial Statements in Item 8.

The Company maintains an allowance for credit losses on an aggregate basis at a level it considers sufficient to cover estimated losses expected to be incurred on the portfolio at the measurement date in the collection of its finance receivables currently outstanding. At April 30, 2024, the weighted average contract term was 47.9 months with 36.1 months remaining. The allowance for credit losses at April 30, 2024 of $331.3 million, was 25.32% of the principal balance in finance receivables of $1.4 billion, less unearned accident protection plan revenue of $51.8 million, unearned service contract revenue of $68.9 million and, pending APP claims of $6.4 million. The Company increased the allowance for credit losses as a percentage of finance receivables from 23.91% at April 30, 2023 to 25.32% at April 30, 2024.

The allowance for credit losses represents the Company’s expectation of future net charge-offs at the measurement date. The allowance takes into account quantitative and qualitative factors such as historical credit loss experience, with consideration given to changes in contract characteristics (i.e., average amount financed, greater than 30-day delinquencies, term, and interest rates), credit quality trends, collateral values, current and forecasted inflationary economic conditions, underwriting and collection practices, concentration risk, credit review, and other external factors. The allowance for credit losses is reviewed at least quarterly by management with any changes reflected in current operations.

38

The allowance for credit losses is a critical accounting estimate for the following reasons:

[[GREPCENT_TABLE]]
[["","\u25cf","estimates relating to the allowance for credit losses require management to project future loan performance, including cash flows, prepayments, and charge-offs;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the allowance for credit losses is influenced by factors outside of management\u2019s control such as industry and business trends, geopolitical events and the effects of laws and regulations as well as economic conditions including, but not limited to, inflation; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","judgment is required to determine whether the model used to generate the allowance for credit losses produces results that appropriately reflect a current estimate of lifetime expected credit losses."]]
[[/GREPCENT_TABLE]]

Because management’s estimate of the allowance for credit losses involves a high degree of qualitative judgment, such as the subjectivity of the assumptions used, there is uncertainty inherent in such estimates. Changes in these estimates could significantly impact the allowance and provision for credit losses.

Recent Accounting Pronouncements

Occasionally, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies which the Company will adopt as of the specified effective date. Unless otherwise discussed, the Company believes the implementation of recently issued standards which are not yet effective will not have a material impact on its consolidated financial statements upon adoption.

In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, Financial Instruments – Credit Losses. The guidance changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. This guidance will affect the Company’s vintage disclosures related to current-period gross write-offs by year of origination for financing receivables.  The amendments in this update are effective for fiscal years beginning after December 15, 2022. The Company adopted this standard on May 1, 2023, under a prospective basis. In regard to installment sale contract modifications, management notes that the Company primarily modifies a customer’s installment sale contract to allow for insignificant payment delays.  This type of modification is generally done to account for payday changes for the customer and minor vehicle repairs.

In October 2023, the FASB issued an accounting pronouncement (ASU 2023-06) related to disclosure or presentation requirements for various subtopics in the FASB’s Accounting Standards Codification (“Codification”). The amendments in the update are intended to align the requirements in the Codification with the U.S. Securities and Exchange Commission's (“SEC”) regulations and facilitate the application of GAAP for all entities. The effective date for each amendment is the date on which the SEC removal of the related disclosure requirement from Regulation S-X or Regulation S-K becomes effective, or if the SEC has not removed the requirements by June 30, 2027, this amendment will be removed from the Codification and will not become effective for any entity. Early adoption is prohibited. We do not expect this update to have a material impact on our consolidated financial statements.

In December 2023, the FASB issued an accounting pronouncement (ASU 2023-09) related to income tax disclosures. The amendments in this update are intended to enhance the transparency and decision usefulness of income tax disclosures primarily through changes to the rate reconciliation and income taxes paid information. This update is effective for annual periods beginning after December 15, 2024, though early adoption is permitted. We plan to adopt this pronouncement for our fiscal year beginning May 1, 2025, and we do not expect it to have a material effect on our consolidated financial statements.

39

Non-GAAP Financial Measure

This Annual Report on Form 10-K contains financial information determined by methods other than in accordance with generally accepted accounting principles (GAAP). We present debt, net of cash, and an adjusted debt to finance receivables ratio, each a non-GAAP financial measure, as supplemental measures of our financial condition. Debt, net of cash, is defined as total debt minus total cash, cash equivalents, and restricted cash on the balance sheet. The adjusted debt to finance receivables ratio is defined as the ratio of total debt, net of total cash, cash equivalents, and restricted cash divided by the outstanding principal balance of our finance receivables. We believe debt, net of cash, and the adjusted debt to finance receivables ratio are useful measures to monitor leverage and evaluate balance sheet risk. These measures should not be considered in isolation or as substitutes for reported GAAP results because they exclude certain items as compared to similar GAAP-based measures, and such measures may not be comparable to similarly-titled measures reported by other companies. We strongly encourage investors to review our consolidated financial statements included in this Annual Report on Form 10-K in their entirety and not rely solely on any one, single financial measure.  The reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures as of April 30, 2024, are provided in the table below.

[[GREPCENT_TABLE]]
[["","","April 30, 2024","","","April 30, 2023"],["Debt:"],["Revolving lines of credit, net","","$","200,819","","","$","167,231"],["Non-recourse notes payable, net","","","553,629","","","","471,367"],["Total debt","","$","754,448","","","$","638,598"],["Cash:"],["Cash and cash equivalents","","$","5,522","","","$","9,796"],["Restricted cash from collections on auto finance receivables","","","88,925","","","","58,238"],["Total cash, cash equivalents, and restricted cash","","$","94,447","","","$","68,034"],["Debt, net of total cash","","$","660,001","","","$","570,564"],["Principal balance of finance receivables","","$","1,435,388","","","$","1,373,372"],["Ratio of debt to finance receivables","","","52.6","%","","","46.5","%"],["Ratio of debt, net of total cash, to finance receivables","","","46.0","%","","","41.5","%"]]
[[/GREPCENT_TABLE]]