This Annual Report on Form 10-K and the documents
incorporated by reference in this Annual Report on Form 10-K contain “forward-looking statements” within the meaning
of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address the Company’s future objectives,
plans and goals, as well as the Company’s intent, beliefs and current expectations regarding future operating performance,
and can generally be identified by words such as “may”, “will”, “should”, “could”,
“believe”, “expect”, “anticipate”, “intend”, “plan”, “foresee”
and other similar words or phrases. Specific events addressed by these forward-looking statements include, but are not limited
to:
These forward-looking statements are based on
the Company’s current estimates and assumptions and involve various risks and uncertainties. As a result, you are cautioned
that these forward-looking statements are not guarantees of future performance, and that actual results could differ materially
from those projected in these forward-looking statements. Factors that may cause actual results to differ materially from the Company’s
projections include those risks described elsewhere in this report, as well as:
The Company undertakes no obligation to update
or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are cautioned
not to place undue reliance on these forward-looking statements, which speak only as of the dates on which they are made.
Item 1. Business
Business and Organization
America’s Car-Mart, Inc., a Texas corporation
initially formed in 1981 (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, 2018, the Company operated 139 dealerships
located primarily in small cities throughout the South-Central United States.
Business Strategy
In general, it is the Company’s objective
to continue to expand its business using the same business model that has been developed and used by Car-Mart for over 36 years.
This business strategy focuses on:
Collecting Customer Accounts.
Collecting
customer accounts is perhaps the single most important aspect of operating an Integrated Auto Sales and Finance used car business
and is a focal point for dealership level and corporate office personnel on a daily basis. The Company measures and monitors the
collection results of its dealerships using internally developed delinquency and account loss standards. Substantially all associate
incentive compensation is tied directly or indirectly to collection results.
The Company
has a director of collection services and support staff at the corporate level to work with field operators to improve credit results.
This team monitors efficiencies and the effectiveness of account representatives as they work to improve customer success rates.
Over the last five fiscal years, the Company’s annual credit losses as a percentage of sales have ranged from a low of 25.5%
in fiscal 2015 to a high of 28.7% in fiscal 2017 (average of 27.6%). The Company’s credit loss as a percentage of sales was
27.7% in fiscal 2018. See Item 1A. Risk Factors for further discussion.
Maintaining a Decentralized Operation.
The Company’s dealerships will continue to operate on a decentralized basis. Each dealership is ultimately responsible for
buying and selling its own vehicles, making credit decisions and collecting the contracts it originates in accordance with established
policies and procedures. Most customers make their payments in person at one of the Company’s dealerships. This decentralized
structure is complemented by the oversight and involvement of corporate office management and the maintenance of centralized financial
controls, including monitoring proprietary credit scoring, establishing standards for down-payments and contract terms, and an
internal compliance function.
Expanding Through Controlled Organic Growth.
The Company plans to continue to expand its operations by increasing revenues at existing dealerships and opening new dealerships.
The Company will continue to view organic growth as its primary source for growth. The Company continues to make significant infrastructure
investments in order to improve performance of existing dealerships and to support growth of its dealership count. The Company
added three new dealerships during the year while also closing four under-performing dealerships. The Company ended fiscal 2018
with 139 locations, a decrease of one location over the prior year-end, but the Company does intend to add new dealerships selectively
in what it considers to be good, solid communities, subject to favorable operating performance and available general manager talent
to run these dealerships. These plans, of course, are subject to change based on both internal and external factors.
Selling Basic Transportation.
The Company
will continue to focus on selling basic and affordable transportation to its customers. The Company’s average retail sales
price was $10,604 per unit in fiscal 2018. By selling vehicles at this price point, the Company is able to keep the terms of its
installment sales contracts relatively short (overall portfolio weighted average of 32.5 months), while requiring relatively low
payments.
Operating in Smaller Communities.
The
majority of the Company’s dealerships are located in cities and towns with a population of 50,000 or less. The Company believes
that by operating in smaller communities it experiences better collection results. Further, the Company believes that operating
costs, such as salaries, rent and advertising, are lower in smaller communities than in major metropolitan areas.
Enhanced Management Talent and Experience.
It has been the Company’s practice to try to hire honest and hardworking individuals to fill entry level positions, nurture
and develop these associates, and attempt to fill the vast majority of its managerial positions from within the Company. By promoting
from within, the Company believes it is able to train its associates in the Car-Mart way of doing business, maintain the Company’s
unique culture and develop the loyalty of its associates by providing opportunity for advancement. The Company has recently focused,
however, to a larger extent on looking outside of the Company for associates possessing requisite skills and who share the values
and appreciate the unique culture the Company has developed over the years. The Company has been able to attract quality individuals
via its General Manager Recruitment and Advancement team as well as other key areas such as Human Resources, Purchasing, Collections,
Information Technology, Legal, Compliance and Portfolio Analysis. Management has determined that it will be increasingly difficult
to grow the Company without looking for outside talent. The Company’s operating success, as well as the challenging macro-economic
environment, has positively affected recruitment of outside talent in recent years, and the Company currently expects this trend
to continue.
Cultivating Customer Relationships.
The
Company believes that developing and maintaining a relationship with its customers is critical to the success of the Company. A
large percentage of sales at mature dealerships are made to repeat customers, and the Company estimates an additional 10% to 15%
of sales result from customer referrals. By developing a personal relationship with its customers, the Company believes it is in
a better position to assist a customer, and the customer is more likely to cooperate with the Company should the customer experience
financial difficulty during the term of his or her installment contract. The Company is able to cultivate these relationships as
the majority of its customers make their payments in person at one of the Company’s dealerships on a weekly or bi-weekly
basis.
Business Strengths
The Company believes it possesses a number of
strengths or advantages that distinguish it from most of its competitors. These business strengths include:
Experienced and Motivated Management.
The
Company’s executive operating officers have significant experience in the industry and an average tenure of over 15 years.
Several of Car-Mart’s dealership managers have been with the Company for more than 10 years. Each dealership manager is compensated,
at least in part, based upon the net income of his or her dealership. A significant portion of the compensation of senior management
is incentive based and tied to operating profits.
Proven Business Practices.
The Company’s
operations are highly structured. While dealerships are operated on a decentralized basis, the Company has established policies,
procedures and business practices for virtually every aspect of a dealership’s operations. Detailed online operating manuals
are available to assist the dealership manager and office, sales and collections personnel in performing their daily tasks. As
a result, each dealership is operated in a uniform manner. Further, corporate office personnel monitor the dealerships’ operations
through weekly visits and a number of daily, weekly and monthly communications and reports.
Low Cost Operator.
The Company has structured
its dealership and corporate office operations to minimize operating costs. The number of associates employed at the dealership
level is dictated by the number of active customer accounts each dealership services. Associate compensation is standardized for
each dealership position. Other operating costs are closely monitored and scrutinized. Technology is utilized to maximize efficiency.
The Company believes its operating costs as a percentage of revenues, and per unit sold, are among the lowest in the industry.
Well-Capitalized / Limited External Capital
Required for Growth.
As of April 30, 2018, the Company’s debt to equity ratio (Revolving credit facilities and notes
payable divided by Total equity on the Consolidated Balance Sheet) was 0.66 to 1.0, which the Company believes is lower than many
of its competitors. Further, the Company believes it can fund a significant amount of its planned growth from net income generated
from operations. Of the external capital that will be needed to fund growth, the Company plans to draw on its existing credit facilities,
or renewals or replacements of those facilities.
Significant Expansion Opportunities.
The
Company generally targets smaller communities in which to locate its dealerships (i.e., populations from 20,000 to 50,000), but
is also operating in larger cities such as Tulsa, Oklahoma; Lexington, Kentucky; Springfield, Missouri and Little Rock, Arkansas.
The Company believes there are numerous suitable communities within the eleven states in which the Company currently operates and
other contiguous states to satisfy anticipated dealership growth for the next several years. As previously discussed, the Company
plans to continue to add new dealerships going forward depending upon operational success. Existing dealerships will continue to
be analyzed to ensure that they are producing desired results and have potential to provide adequate returns on invested capital.
Operations
Operating Segment.
Each dealership is
an operating segment with its results regularly reviewed by the Company’s chief operating decision maker in an effort to
make decisions about resources to be allocated to the segment and to assess its performance. Individual dealerships meet the aggregation
criteria for reporting purposes under the current accounting guidance. The Company operates in the Integrated Auto Sales and Finance
segment of the used car market. In this industry, the nature of the sale and the financing of the transaction, financing processes,
the type of customer and the methods used to distribute the Company’s products and services, including the actual servicing
of the contracts as well as the regulatory environment in which the Company operates, all have similar characteristics. Each of
our individual dealerships is similar in nature and only engages in the selling and financing of used vehicles. All individual
dealerships have similar operating characteristics. As such, individual dealerships have been aggregated into one reportable segment.
Dealership Organization.
Dealerships
are operated on a decentralized basis. Each dealership is responsible for buying and selling vehicles, making credit decisions,
and servicing and collecting the installment contracts it originates. Dealerships also maintain their own records and make daily
deposits. Dealership-level financial statements are prepared by the corporate office on a monthly basis. Depending on the number
of active customer accounts, a dealership may have as few as one or as many as 23 full-time associates employed at that location.
Associate positions at a large dealership may include a dealership manager, assistant dealership manager, manager trainee, office
manager, assistant office manager, service manager, purchasing agent, collections personnel, salesmen and dealership attendants.
Dealerships are generally open Monday through Saturday from 9:00 a.m. to 6:00 p.m. The Company has both regular and satellite dealerships.
Satellite dealerships are similar to regular dealerships, except that they tend to be smaller and sell fewer vehicles.
Dealership Locations and Facilities.
Below is a summary
of dealerships operating during the fiscal years ended April 30, 2018, 2017 and 2016:
|
|
Years Ended April 30,
|
|
|
2018
|
|
2017
|
|
2016
|
Dealerships at beginning of year
|
|
|
140
|
|
|
|
143
|
|
|
|
141
|
|
New dealerships opened
|
|
|
3
|
|
|
|
-
|
|
|
|
6
|
|
Dealerships closed
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dealerships at end of year
|
|
|
139
|
|
|
|
140
|
|
|
|
143
|
|
Below is a summary of dealership locations by
state as of April 30, 2018, 2017 and 2016:
|
|
As of April 30,
|
Dealerships by State
|
|
2018
|
|
2017
|
|
2016
|
Arkansas
|
|
|
35
|
|
|
|
36
|
|
|
|
37
|
|
Oklahoma
|
|
|
25
|
|
|
|
25
|
|
|
|
25
|
|
Missouri
|
|
|
18
|
|
|
|
19
|
|
|
|
19
|
|
Alabama
|
|
|
15
|
|
|
|
15
|
|
|
|
15
|
|
Texas
|
|
|
12
|
|
|
|
12
|
|
|
|
12
|
|
Kentucky
|
|
|
12
|
|
|
|
11
|
|
|
|
12
|
|
Georgia
|
|
|
9
|
|
|
|
9
|
|
|
|
10
|
|
Tennessee
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
Mississippi
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
Indiana
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Iowa
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
139
|
|
|
|
140
|
|
|
|
143
|
|
Dealerships are typically located in smaller
communities. As of April 30, 2018, approximately 75% of the Company’s dealerships were located in cities with populations
of less than 50,000. Dealerships are located on leased or owned property between one and three acres in size. When opening a new
dealership, the Company will typically use an existing structure on the property to conduct business, or purchase a modular facility
while business at the new location develops. Dealership facilities typically range in size from 1,500 to 5,000 square feet.
Purchasing.
The Company purchases vehicles
primarily from wholesalers, new car dealers, individuals and auctions. The majority of vehicle purchasing is performed by the Company’s
purchasing agents, although dealership managers are authorized to purchase vehicles as needed. A purchasing agent will purchase
vehicles for one to three dealerships depending on the size of the dealerships. Purchasing agents report to the dealership manager,
or managers, for whom they make purchases, and to a regional purchasing director. The regional purchasing directors report to the
regional vice presidents of operations. The Company centrally monitors the quantity and quality of vehicles purchased and continuously
compares the cost of vehicles purchased to outside valuation sources and holds responsible parties accountable for results.
Generally, the Company’s purchasing agents
purchase vehicles between 6 and 12 years of age with 90,000 to 140,000 miles, and pay between $3,000 and $11,000 per vehicle. The
Company focuses on providing basic transportation to its customers. The Company generally does not purchase sports cars or luxury
cars. Some of the more popular vehicles the Company sells include the Chevrolet Impala, Chevrolet Malibu, Dodge Charger, Chrysler
Mini-Van, Ford Focus, Ford Taurus, Ford Fusion, Dodge Ram Pickup and the Ford F-150 Pickup. The Company sells a significant number
of trucks and sport utility vehicles. The Company’s purchasing agents inspect and test-drive almost every vehicle they purchase.
Purchasing agents attempt to purchase vehicles that require little or no repair as the Company has limited facilities to repair
or recondition vehicles.
Selling, Marketing and Advertising.
Dealerships
generally maintain an inventory of 20 to 90 vehicles depending on the size and maturity of the dealership and the time of the year.
Inventory turns over approximately 9 to 10 times each year. Selling is done principally by the dealership manager, assistant manager,
manager trainee or sales associate. Sales associates are paid a commission for sales that they make in addition to an hourly wage.
Sales are made on an “as is” basis; however, customers are given an option to purchase a service contract which covers
certain vehicle components and assemblies. For covered components and assemblies, the Company coordinates service with third party
service centers with which the Company typically has previously negotiated labor rates. The vast majority of the Company’s
customers elect to purchase a service contract when purchasing a vehicle. Additionally, the Company offers its customers to whom
financing is extended a payment protection plan product. This product contractually obligates the Company to cancel the remaining
amount owed on a contract where the vehicle has been totaled, as defined in the plan, or the vehicle has been stolen. This product
is available in most of the states in which the Company operates and the vast majority of financed customers elect to purchase
this product when purchasing a vehicle in those states.
The Company’s objective is to offer its
customers basic transportation at a fair price and treat each customer in such a manner as to earn his or her repeat business.
The Company attempts to build a positive reputation in each community where it operates and generate new business from such reputation
as well as from customer referrals. The Company estimates that approximately 10% to 15% of the Company’s sales result from
customer referrals. The Company recognizes repeat customers with silver, gold and platinum plaques representing the purchase of
5, 10 and 15 vehicles, respectively. These plaques are prominently displayed at the dealership where the vehicles were purchased.
For mature dealerships, a large percentage of sales are to repeat customers.
The Company primarily advertises using local
newspapers, radio, television, internet and social media. In addition, the Company periodically conducts promotional sales campaigns
in order to increase sales. The Company uses an outside marketing firm and has recently hired a Director of Digital Experience
in order to broaden and increase the Company’s usage of digital and social media channels as a part of its marketing strategy.
Underwriting and Finance.
The Company provides
financing to substantially all of its customers who purchase a vehicle at one of its dealerships. The Company only provides financing
to its customers for the purchase of its vehicles, and the Company does not provide any type of financing to non-customers. The
Company’s installment sales contracts as of April 30, 2018 typically include down payments ranging from 0% to 20% (average
of 6.4%), terms ranging from 18 months to 42 months (average of 32.5 months), and a fixed annual interest rate of 15% or 16.5%,
based on the Company’s contract interest rate as of the contract origination date (weighted average of 16.3%). The Company
increased its interest rate on all originating contracts to 16.5% from 15% beginning in May 2016.
The Company requires that payments be made on
a weekly, bi-weekly, semi-monthly or monthly basis, scheduled to coincide with the day the customer is paid by his or her employer.
Upon the customer and the Company reaching a preliminary agreement as to financing terms, the Company obtains a credit application
from the customer which includes information regarding employment, residence and credit history, personal references and a detailed
budget itemizing the customer’s monthly income and expenses. Certain information is then verified by Company personnel. After
the verification process, the dealership manager makes the decision to accept, reject or modify (perhaps obtain a greater down
payment or suggest a lower priced vehicle) the proposed transaction. In general, the dealership manager attempts to assess the
stability and character of the applicant. The dealership manager who makes the credit decision is ultimately responsible for collecting
the contract, and his or her compensation is directly related to the collection results of his or her dealership. The Company provides
centralized support to the dealership manager in the form of a proprietary credit scoring system used for monitoring and other
supervisory assistance to assist with the credit decision. Credit quality is monitored centrally by corporate office personnel
on a daily, weekly and monthly basis.
Collections.
All of the Company’s
retail installment contracts are serviced by Company personnel at the dealership level. A majority of the Company’s customers
make their payments in person at the dealership where they purchased their vehicle; however, in an effort to make paying convenient
for its customers, the Company offers a variety of payment options. Customers can send their payments through the mail, set up
ACH auto draft, make mobile and online payments, and make payments at certain money service centers. Each dealership closely monitors
its customer accounts using the Company’s proprietary receivables and collections software that stratifies past due accounts
by the number of days past due. The vice presidents of operations and the area operations managers routinely review and monitor
the status of customer collections to ensure collection activities are conducted in compliance with applicable policies and procedures.
In addition, the Field Operations Officer oversees the collections department and provides timely oversight and additional accountability
on a consistent basis. The Company also has a Director of Collection Services who assists with managing the Company’s servicing
and collections practices and provides additional monitoring and training and has a team dedicated to helping ensure collection
practices are being carried out efficiently and effectively, and is responsible for minimizing collections staff turnover. The
Company believes that the timely response to past due accounts is critical to its collections success.
The Company has established standards with respect
to the percentage of accounts one and two weeks past due, 15 or more days past due and 30 or more days past due (delinquency standards),
and the percentage of accounts where the vehicle was repossessed or the account was charged off that month (account loss standard).
The Company works very hard to keep its delinquency
percentages low and not to repossess vehicles. Accounts three days late are contacted by telephone. Notes from each telephone contact
are electronically maintained in the Company’s computer system. The Company also utilizes text messaging notifications which
allows customers to elect to receive payment reminders and late notices via text message.
The Company attempts to resolve payment delinquencies
amicably prior to repossessing a vehicle. If a customer becomes severely delinquent in his or her payments, and management determines
that timely collection of future payments is not probable, the Company will take steps to repossess the vehicle. Periodically,
the Company enters into contract modifications with its customers to extend or modify the payment terms. The Company only enters
into a contract modification or extension if it believes such action will increase the amount of monies the Company will ultimately
realize on the customer’s account and will increase the likelihood of the customer being able to pay off the vehicle contract.
At the time of modification, the Company expects to collect amounts due including accrued interest at the contractual interest
rate for the period of delay. No other concessions are granted to customers, beyond the extension of additional time, at the time
of modification. Modifications are minor and are made for pay day changes, minor vehicle repairs and other reasons. For those vehicles
that are repossessed, the majority are returned or surrendered by the customer on a voluntary basis. Other repossessions are performed
by Company personnel or third party repossession agents. Depending on the condition of a repossessed vehicle, it is either resold
on a retail basis through a Company dealership or sold for cash on a wholesale basis, primarily through physical or online auctions.
New Dealership Openings.
Senior management,
with the assistance of the corporate office staff, will make decisions with respect to the communities in which to locate a new
dealership and the specific sites within those communities. New dealerships have historically been located in the general proximity
of existing dealerships to facilitate the corporate office’s oversight of the Company’s dealerships. The Company intends
to add new dealerships selectively in what it considers to be good, solid communities, subject to favorable operating performance
of existing dealerships and availability of qualified managers. Recently, the Company has opened new dealerships under experienced
top performing general managers and may continue to do so in order to grow and leverage the talents of these experienced managers.
The Company’s approach with respect to
new dealership openings has been one of gradual development. The manager in charge of a new dealership is normally a recently promoted
associate who was an assistant manager at a larger dealership and in most cases participated in the formal manager-in-training
program. The corporate office provides significant resources and support with pre-opening and initial operations of new dealerships.
Historically, new dealerships have operated with a low level of inventory and personnel. As a result of the modest staffing level,
the new dealership manager performs a variety of duties (i.e., selling, collecting and administrative tasks) during the early stages
of his or her dealership’s operations. As the dealership develops and the customer base grows, additional staff are hired.
Monthly sales levels at new dealerships are
typically substantially less than sales levels at mature dealerships. Over time, new dealerships gain recognition in their communities,
and a combination of customer referrals and repeat business generally facilitates sales growth. Historically, sales growth at new
dealerships could exceed 10% per year for a number of years, whereas mature dealerships typically experience annual sales growth
but at a lower percentage than new dealerships. Due to continual operational initiatives, the Company is able to support higher
sales levels, and recently the Company has raised its volume expectation level of new locations somewhat as infrastructure improvements
related to new dealership openings have improved.
New dealerships are generally provided with
approximately $1.5 million to $2.5 million in capital from the corporate office during the first few years of operation. These
funds are used principally to fund receivables growth. After this start-up period, new dealerships can typically begin generating
positive cash flow, allowing for some continuing growth in receivables without additional capital from the corporate office. As
these dealerships become cash flow positive, a decision is made by senior management to either increase the investment due to favorable
return rates on the invested capital, or to deploy capital elsewhere. This limitation of capital to new, as well as existing, dealerships
serves as an important operating discipline. Dealerships must be profitable in order to grow and typically new dealerships can
be profitable within the first year of opening.
Corporate Office Oversight and Management.
The corporate office, based in Bentonville, Arkansas, consists of regional vice presidents, area operations managers, regional
purchasing directors, a sales director, a field operations officer, a director of collection services, a support operations officer,
a director of audit and compliance and compliance auditors, a director of human resources, a director of general manager recruitment
and development, associate and management development personnel, accounting and management information systems personnel, administrative
personnel and senior management. The corporate office monitors and oversees dealership operations. The corporate office receives
operating and financial information and reports on each dealership on a daily, weekly and monthly basis. This information includes
cash receipts and disbursements, inventory and receivables levels and statistics, receivables aging and sales and account loss
data. The corporate office uses this information to compile Company-wide reports, plan dealership visits and prepare monthly financial
statements.
Periodically, area operations managers, regional
vice presidents, compliance auditors and senior management visit the Company’s dealerships to inspect, review and comment
on operations. The corporate office assists in training new managers and other dealership level associates. Compliance auditors
visit dealerships to ensure policies and procedures are being followed and that the Company’s assets are being safe-guarded.
In addition to financial results, the corporate office uses delinquency and account loss standards and a point system to evaluate
a dealership’s performance. Also, bankrupt and legal action accounts and other accounts that have been written off at dealerships
are handled by the corporate office in an effort to allow dealership personnel time to focus on more current accounts.
The Company’s dealership managers meet
monthly on an area, regional or Company-wide basis. At these meetings, corporate office personnel provide training and recognize
achievements of dealership managers. Near the end of every fiscal year, the respective area operations manager, regional vice president
and senior management conduct “projection” meetings with each dealership manager. At these meetings, the year’s
results are reviewed and ranked relative to other dealerships, and both quantitative and qualitative goals are established for
the upcoming year. The qualitative goals may focus on staff development, effective delegation, and leadership and organization
skills. Quantitatively, the Company establishes unit sales goals and profit goals based on invested capital and, depending on the
circumstances, may establish delinquency, account loss or expense goals.
The corporate office is also responsible for
establishing policy, maintaining the Company’s management information systems, conducting compliance audits, orchestrating
new dealership openings and setting the strategic direction for the Company.
Industry
Used Car Sales.
The market for used car
sales in the United States is significant. Used car retail sales typically occur through franchised new car dealerships that sell
used cars or independent used car dealerships. The Company operates in the Integrated Auto Sales and Finance segment of the independent
used car sales and finance market. Integrated Auto Sales and Finance dealers sell and finance used cars to individuals with limited
credit histories or past credit problems. Integrated Auto Sales and Finance dealers typically offer their customers certain advantages
over more traditional financing sources, such as less restrictive underwriting guidelines, flexible payment terms (including scheduling
payments on a weekly or bi-weekly basis to coincide with a customer’s payday), and the ability to make payments in person,
an important feature to individuals who may not have a checking account.
Used Car Financing.
The used automobile financing industry is served by traditional lending sources such as banks, savings and loans, and captive finance
subsidiaries of automobile manufacturers, as well as by independent finance companies and Integrated Auto Sales and Finance dealers.
Many loans that flow through the more traditional sources have historically ended up packaged in the securitization markets. Despite
significant opportunities, many of the traditional lending sources have not historically been consistent in providing financing
to individuals with limited credit histories or past credit problems. Management believes traditional lenders have historically
avoided this market because of its high credit risk and the associated collections efforts. Management believes that there was
constriction in the financing sources that existed for the deep sub-prime automobile market after the financial crisis in 2008.
Since the Company does not rely on securitizations as a financing source, it was largely unaffected by the credit constrictions
during the crisis and was able to continue to grow its revenue level and receivable base. Beginning in 2012, funding for the deep
subprime automobile market increased significantly. Management attributes the increase to the ultra-low interest rate environment
combined with the historical credit performance of the used automobile financing market during and after the recession. Management
expects the availability of consumer credit within the automotive industry to continue to be higher over the near and mid-term
when compared to historical trends
.
Competition
The used automotive retail industry is fragmented
and highly competitive. The Company competes principally with other independent Integrated Auto Sales and Finance dealers, as well
as with (i) the used vehicle retail operations of franchised automobile dealerships, (ii) independent used vehicle dealers, and
(iii) individuals who sell used vehicles in private transactions. The Company competes for both the purchase and resale of used
vehicles. The increased funding to the used automobile industry has led to increased competitive pressures which have been the
primary contributors to the Company’s decision in recent periods to allow longer term lengths and slightly lower down payments
in connection with our customer financing contracts, as well as to the higher charge-off levels experienced by the Company in recent
periods.
Management believes the principal competitive
factors in the sale of its used vehicles include (i) the availability of financing to consumers with limited credit histories or
past credit problems, (ii) the breadth and quality of vehicle selection, (iii) pricing, (iv) the convenience of a dealership’s
location, (v) the option to purchase a service contract and a payment protection plan, and (vi) customer service. Management believes
that its dealerships are not only competitive in each of these areas, but have some distinct advantages, specifically related to
the provision of strong customer service. The Company’s local face-to-face presence allows it to serve customers at a higher
level by forming strong personal relationships.
Seasonality
Historically, the Company’s third fiscal
quarter (November through January) has been the slowest period for vehicle sales. Conversely, the Company’s first and fourth
fiscal quarters (May through July and February through April) have historically been the busiest times for vehicle sales. Therefore,
the Company generally realizes a higher proportion of its revenue and operating profit during the first and fourth fiscal quarters.
Tax refund anticipation sales efforts during the Company’s third fiscal quarter have increased sales levels during the third
fiscal quarter in some past years; however, due to the timing of actual tax refund dollars in the Company’s markets, these
sales and collections have primarily occurred in the fourth quarter in each of the last five fiscal years. The Company expects
this pattern to continue in future years.
If conditions arise that impair vehicle sales
during the first or fourth fiscal quarters, the adverse effect on the Company’s revenues and operating results for the year
could be disproportionately large.
Regulation and Licensing
The Company’s operations are subject to
various federal, state and local laws, ordinances and regulations pertaining to the sale and financing of vehicles. Under various
state laws, the Company’s dealerships must obtain a license in order to operate or relocate. These laws also regulate advertising
and sales practices. The Company’s financing activities are subject to federal laws such as truth-in-lending and equal credit
opportunity laws and regulations as well as state and local motor vehicle finance laws, installment finance laws, usury laws and
other installment sales laws. Among other things, these laws require that the Company limit or prescribe terms of the contracts
it originates, require specified disclosures to customers, restrict collections practices, limit the Company’s right to repossess
and sell collateral, and prohibit discrimination against customers on the basis of certain characteristics including age, race,
gender and marital status.
The Company’s consumer financing and collection
activities are also subject to oversight by the federal Consumer Financial Protection Bureau (“CFPB”), which has broad
regulatory powers over consumer credit products and services such as those offered by the Company. Under a CFPB rule adopted in
2015, the Company’s finance subsidiary, Colonial, is deemed a “larger participant” in the automobile financing
market and is therefore subject to examination and supervision by the CFPB.
The states in which the Company operates impose
limits on interest rates the Company can charge on its installment contracts. These limits have generally been based on either
(i) a specified margin above the federal primary credit rate, (ii) the age of the vehicle, or (iii) a fixed rate. Management believes
the Company is in compliance in all material respects with all applicable federal, state and local laws, ordinances and regulations;
however, the adoption of additional laws, changes in the interpretation of existing laws, or the Company’s entrance into
jurisdictions with more stringent regulatory requirements could have a material adverse effect on the Company’s used vehicle
sales and finance business.
Employees
As of April 30, 2018, the Company, including
its consolidated subsidiaries, employed approximately 1,504 full time associates. None of the Company's employees are covered by
a collective bargaining agreement and the Company believes that its relations with its employees are positive.
Available Information
The Company’s website is located at www.car-mart.com.
The Company makes available on this website, free of charge, access to its annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and all amendments to those reports, as well as proxy statements and other information the Company
files with, or furnishes to, the Securities and Exchange Commission (“SEC”) as soon as reasonably practicable after
the Company electronically submits this material to the SEC. The information contained on the website or available by hyperlink
from the website is not incorporated into this Annual Report on Form 10-K or other documents the Company files with, or furnishes
to, the SEC.
Executive Officers of the Registrant
The following table provides information regarding
the executive officers of the Company as of April 30, 2018:
Name
|
Age
|
|
Position with the Company
|
|
|
|
|
Jeffrey A. Williams
|
55
|
|
President, Chief Executive Officer, Secretary and Director
|
|
|
|
|
Vickie D. Judy
|
52
|
|
Chief Financial Officer
|
Jeffrey A. Williams
has served as Chief
Executive Officer of the Company since January 2018, President of the Company since March 2016, as a director since 2011 and as
Secretary of the Company since October 2005. Before becoming President in March 2016, Mr. Williams served as Chief Financial Officer
and Vice President Finance of the Company since October 2005. Mr. Williams is a Certified Public Accountant and prior to joining
the Company, his experience included approximately seven years in public accounting with Arthur Andersen & Co. and Coopers
and Lybrand LLC in Tulsa, Oklahoma and Dallas, Texas. His experience also includes approximately five years as Chief Financial
Officer and Vice President of Operations of Wynco, LLC, a nationwide distributor of animal health products. Mr. Williams’
qualifications to serve on the Board include his financial and operational experience.
Vickie D. Judy
has served as Chief Financial
Officer of the Company since January 2018.
Before becoming Chief Financial Officer in January
2018, Ms. Judy served a Principal Accounting Officer since March 2016 and Vice President of Accounting since August 2015. Since
joining the Company in May 2010, Ms. Judy has also served as Controller and Director of Financial Reporting. Ms. Judy is a Certified
Public Accountant and prior to joining the Company her experience included approximately five years in public accounting with Arthur
Andersen & Co. and approximately 17 years at National Home Center, Inc., a home improvement products and building materials
retailer, most recently as Vice President of Financial Reporting.
Item 1A. Risk Factors
The Company is subject to various risks. The
following is a discussion of risks that could materially and adversely affect the Company’s business, operating results,
and financial condition.
The Company may have a higher risk
of delinquency and default than traditional lenders because it finances its sales of used vehicles to credit-impaired borrowers
.
Substantially all of the Company’s automobile
contracts involve financing to individuals with impaired or limited credit histories, or higher debt-to-income ratios than permitted
by traditional lenders. Financing made to borrowers who are restricted in their ability to obtain financing from traditional lenders
generally entails a higher risk of delinquency, default and repossession, and higher losses than financing made to borrowers with
better credit. Delinquency interrupts the flow of projected interest income and repayment of principal from a contract, and a default
can ultimately lead to a loss if the net realizable value of the automobile securing the contract is insufficient to cover the
principal and interest due on the contract or if the vehicle cannot be recovered. The Company’s profitability depends, in
part, upon its ability to properly evaluate the creditworthiness of non-prime borrowers and efficiently service such contracts.
Although the Company believes that its underwriting criteria and collection methods enable it to manage the higher risks inherent
in financing made to non-prime borrowers, no assurance can be given that such criteria or methods will afford adequate protection
against such risks. If the Company experiences higher losses than anticipated, its financial condition, results of operations and
business prospects could be materially and adversely affected.
The Company’s allowance for credit losses may not be sufficient
to cover actual credit losses, which could adversely affect its financial condition and operating results.
When applicable, the Company has to recognize
losses resulting from the inability of certain borrowers to pay contracts and the insufficient realizable value of the collateral
securing contracts. The Company maintains an allowance for credit losses in an attempt to cover credit losses inherent in its contract
portfolio. Additional credit losses will likely occur in the future and may occur at a rate greater than the Company has experienced
to date. The allowance for credit losses is based primarily upon historical credit loss experience, with consideration given to
delinquency levels, collateral values, economic conditions and underwriting and collections practices. This evaluation is inherently
subjective as it requires estimates of material factors that may be susceptible to significant change. If the Company’s assumptions
and judgments prove to be incorrect, its current allowance may not be sufficient and adjustments may be necessary to allow for
different economic conditions or adverse developments in its contract portfolio which could adversely affect the Company’s
financial condition and results of operations.
A reduction in the availability or access to sources of inventory
could adversely affect the Company’s business by increasing the costs of vehicles purchased.
The Company acquires vehicles primarily through
wholesalers, new car dealers, individuals and auctions. There can be no assurance that sufficient inventory will continue to be
available to the Company or will be available at comparable costs. Any reduction in the availability of inventory or increases
in the cost of vehicles could adversely affect gross margin percentages as the Company focuses on keeping payments affordable to
its customer base. The Company could have to absorb cost increases. The overall new car sales volumes in the United States decreased
dramatically from peak sales years during the economic recession of 2008 and did not return back to pre-recession levels until
fiscal 2016. The reduction in new car sales had a significant negative effect on the supply of vehicles at appropriate prices available
to the Company in recent years. Any future decline in new car sales could further adversely affect the Company’s access to
and costs of inventory.
The used automotive retail industry is fragmented and highly
competitive, which could result in increased costs to the Company for vehicles and adverse price competition. Increased competition
on the financing side of the business could result in increased credit losses.
The Company competes principally with other
independent Integrated Auto Sales and Finance dealers, and with (i) the used vehicle retail operations of franchised automobile
dealerships, (ii) independent used vehicle dealers, and (iii) individuals who sell used vehicles in private transactions. The Company
competes for both the purchase and resale, which includes, in most cases, financing for the customer, of used vehicles. The Company’s
competitors may sell the same or similar makes of vehicles that Car-Mart offers in the same or similar markets at competitive prices.
Increased competition in the market, including new entrants to the market, could result in increased wholesale costs for used vehicles
and lower-than-expected vehicle sales and margins. Further, if any of the Company’s competitors seek to gain or retain market
share by reducing prices for used vehicles, the Company would likely reduce its prices in order to remain competitive, which may
result in a decrease in its sales and profitability and require a change in its operating strategies. Increased competition on
the financing side puts pressure on contract structures and increases the risk for higher credit losses. More qualified applicants
have more financing options on the front-end, and if events adversely affecting the borrower occur after the sale, the increased
competition may tempt the borrower to default on their contract with the Company in favor of other financing options, which in
turn increases the likelihood of the Company not being able to save that account.
The used automotive retail industry operates in a highly regulated
environment with significant attendant compliance costs and penalties for non-compliance.
The used automotive retail industry is subject
to a wide range of federal, state, and local laws and regulations, such as local licensing requirements and laws regarding advertising,
vehicle sales, financing, and employment practices. Facilities and operations are also subject to federal, state, and local laws
and regulations relating to environmental protection and human health and safety. The violation of these laws and regulations could
result in administrative, civil, or criminal penalties against the Company or in a cease and desist order. As a result, the Company
has incurred, and will continue to incur, capital and operating expenditures, and other costs of complying with these laws and
regulations. Further, over the past several years, private plaintiffs and federal, state, and local regulatory and law enforcement
authorities have increased their scrutiny of advertising, sales and finance activities in the sale of motor vehicles. Additionally,
the Company’s finance subsidiary, Colonial, is deemed a “larger participant” in the automobile finance market
and is therefore subject to examination and supervision by the CFPB, which has broad regulatory powers over consumer credit products
and services such as those offered by the Company.
Inclement weather can adversely impact the Company’s operating
results.
The occurrence of weather events, such
as rain, snow, wind, storms, hurricanes, or other natural disasters, which adversely affect consumer traffic at the Company’s
automotive dealerships, could negatively impact the Company’s operating results.
Recent and future disruptions in domestic
and global economic and market conditions could have adverse consequences for the used automotive retail industry in the future
and may have greater consequences for the non-prime segment of the industry.
In the normal course of business, the used automotive
retail industry is subject to changes in regional U.S. economic conditions, including, but not limited to, interest rates, gasoline
prices, inflation, personal discretionary spending levels, and consumer sentiment about the economy in general. Recent and future
disruptions in domestic and global economic and market conditions could adversely affect consumer demand or increase the Company’s
costs, resulting in lower profitability for the Company. Due to the Company’s focus on non-prime customers, its actual rate
of delinquencies, repossessions and credit losses on contracts could be higher under adverse economic conditions than those experienced
in the automotive retail finance industry in general. The Company is unable to predict with certainty the future impact of the
most recent global economic conditions on consumer demand in our markets or on the Company’s costs.
The Company’s business is geographically concentrated; therefore, the Company’s
results of operations may be adversely affected by unfavorable conditions in its local markets.
The Company’s performance is subject to
local economic, competitive, and other conditions prevailing in the eleven states where the Company operates. The Company provides
financing in connection with the sale of substantially all of its vehicles. These sales are made primarily to customers residing
in Alabama, Arkansas, Georgia, Kentucky, Mississippi, Missouri, Oklahoma, Tennessee and Texas with approximately 30% of revenues
resulting from sales to Arkansas customers. The Company’s current results of operations depend substantially on general economic
conditions and consumer spending habits in these local markets. Any decline in the general economic conditions or decreased consumer
spending in these markets may have a negative effect on the Company’s results of operations.
The Company’s success depends upon the continued contributions
of its management teams and the ability to attract and retain qualified employees.
The Company is dependent upon the continued
contributions of its management teams. Because the Company maintains a decentralized operation in which each dealership is responsible
for buying and selling its own vehicles, making credit decisions and collecting contracts it originates, the key employees at each
dealership are important factors in the Company’s ability to implement its business strategy. Consequently, the loss of the
services of key employees could have a material adverse effect on the Company’s results of operations. In addition, when
the Company decides to open new dealerships, the Company will need to hire additional personnel. The market for qualified employees
in the industry and in the regions in which the Company operates is highly competitive and may subject the Company to increased
labor costs during periods of low unemployment.
The Company’s business is dependent upon the efficient
operation of its information systems.
The Company relies on its information systems
in managing its sales, inventory, consumer financing, and customer information effectively. The failure of the Company’s
information systems to perform as designed, or the failure to maintain and continually enhance or protect the integrity of these
systems, could disrupt the Company’s business, impact sales and profitability, or expose the Company to customer or third-party
claims.
Security breaches, cyber-attacks or fraudulent activity could result in damage to the Company's operations or lead to reputational
damage.
Our information and technology systems are vulnerable
to damage or interruption from computer viruses, network failures, computer and telecommunications failures, infiltration by unauthorized
persons and security breaches, usage errors by our employees, power outages and catastrophic events such as fires, tornadoes, floods,
hurricanes and earthquakes. A security breach of the Company's computer systems could also interrupt or damage its operations or
harm its reputation. In addition, the Company could be subject to liability if confidential customer information is misappropriated
from its computer systems. Any compromise of security, including security breaches perpetrated on persons with whom the Company
has commercial relationships, that result in the unauthorized release of its users’ personal information, could result in
a violation of applicable privacy and other laws, significant legal and financial exposure, damage to the Company's reputation,
and a loss of confidence in the Company's security measures, which could harm its business. Any compromise of security could deter
people from entering into transactions that involve transmitting confidential information to the Company's systems and could harm
relationships with the Company's suppliers, which could have a material adverse effect on the Company's business. Actual or anticipated
attacks may cause the Company to incur increasing costs, including costs to deploy additional personnel and protection technologies,
train employees, and engage third-party experts and consultants. Despite the implementation of security measures, these systems
may still be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive
problems. The Company may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of
cyber-attacks.
Most of the Company's customers provide personal
information when applying for financing. The Company relies on encryption and authentication technology to provide security to
effectively store and securely transmit confidential information. Advances in computer capabilities, new discoveries in the field
of cryptography or other developments may result in the technology used by the Company to protect transaction data being breached
or compromised.
In addition, many of the third parties who provide
products, services, or support to the Company could also experience any of the above cyber risks or security breaches, which could
impact the Company's customers and its business and could result in a loss of customers, suppliers, or revenue.
Changes in the availability or cost of capital and working capital
financing could adversely affect the Company’s growth and business strategies, and volatility and disruption of the capital
and credit markets and adverse changes in the global economy could have a negative impact on the Company’s ability to access
the credit markets in the future and/or obtain credit on favorable terms.
The Company generates cash from income from
continuing operations. The cash is primarily used to fund finance receivables growth. To the extent finance receivables growth
exceeds income from continuing operations, generally the Company increases its borrowings under its revolving credit facilities
to provide the cash necessary to fund operations. On a long-term basis, the Company expects its principal sources of liquidity
to consist of income from continuing operations and borrowings under revolving credit facilities and/or fixed interest term loans.
Any adverse changes in the Company’s ability to borrow under revolving credit facilities or fixed interest term loans, or
any increase in the cost of such borrowings, would likely have a negative impact on the Company’s ability to finance receivables
growth which would adversely affect the Company’s growth and business strategies. Further, the Company’s current credit
facilities contain various reporting and financial performance covenants. Any failure of the Company to comply with these covenants
could have a material adverse effect on the Company’s ability to implement its business strategy.
If the capital and credit markets experience
disruptions and / or the availability of funds become restricted, it is possible that the Company’s ability to access the
capital and credit markets may be limited or available on less favorable terms which could have an impact on the Company’s
ability to refinance maturing debt or react to changing economic and business conditions. In addition, if negative global economic
conditions persist for an extended period of time or worsen substantially, the Company’s business may suffer in a manner
which could cause the Company to fail to satisfy the financial and other restrictive covenants under its credit facilities.
The Company’s growth strategy is dependent upon the following
factors:
|
•
|
Favorable
operating performance.
Our ability to expand our business through additional dealership openings is dependent on a sufficiently
favorable level of operating performance to support the management, personnel and capital resources necessary to successfully
open and operate new locations.
|
|
•
|
Availability
of suitable dealership sites
. Our ability to open new dealerships is subject to the availability of suitable dealership sites
in locations and on terms favorable to the Company. If and when the Company decides to open new dealerships, the inability to
acquire suitable real estate, either through lease or purchase, at favorable terms could limit the expansion of the Company’s
dealership base. In addition, if a new dealership is unsuccessful and we are forced to close the dealership, we could incur additional
costs if we are unable to dispose of the property in a timely manner or on terms favorable to the Company. Any of these circumstances
could have a material adverse effect on the Company’s expansion strategy and future operating results.
|
|
•
|
Ability
to attract and retain management for new dealerships
. The success of new dealerships is dependent upon the Company being able
to hire and retain additional competent personnel. The market for qualified employees in the industry and in the regions in which
the Company operates is highly competitive. If we are unable to hire and retain qualified and competent personnel to operate our
new dealerships, these dealerships may not be profitable, which could have a material adverse effect on our future financial condition
and operating results.
|
|
•
|
Availability
and cost of vehicles
. The cost and availability of sources of inventory could affect the Company’s ability to open new
dealerships. The overall new car sales volumes in the United States decreased dramatically from peak sales years during the economic
recession of 2008 and did not return back to pre-recession levels until fiscal 2016. This could potentially have a significant
negative effect on the supply of vehicles at appropriate prices available to the Company in future periods. This could also make
it difficult for the Company to supply appropriate levels of inventory for an increasing number of dealerships without significant
additional costs, which could limit our future sales or reduce future profit margins if we are required to incur substantially
higher costs to maintain appropriate inventory levels.
|
|
•
|
Acceptable
levels of credit losses at new dealerships
. Credit losses tend to be higher at new dealerships due to fewer repeat customers
and less experienced associates; therefore, the opening of new dealerships tends to increase the Company’s overall credit
losses. In addition, new dealerships may experience higher than anticipated credit losses, which may require the Company to incur
additional costs to reduce future credit losses or to close the underperforming locations altogether. Any of these circumstances
could have a material adverse effect on the Company’s future financial condition and operating results.
|
The Company’s business is subject to seasonal fluctuations.
Historically, the Company’s third fiscal
quarter (November through January) has been the slowest period for vehicle sales. Conversely, the Company’s first and fourth
fiscal quarters (May through July and February through April) have historically been the busiest times for vehicle sales. Therefore,
the Company generally realizes a higher proportion of its revenue and operating profit during the first and fourth fiscal quarters.
Tax refund anticipation sales efforts during the Company’s third fiscal quarter have increased sales levels during the third
fiscal quarter in some past years; however, due to the timing of actual tax refund dollars in the Company’s markets, these
sales and collections have primarily occurred in the fourth quarter in each of the last five fiscal years. The Company expects
this pattern to continue in future years.
If conditions arise that impair vehicle sales
during the first or fourth fiscal quarters, the adverse effect on the Company’s revenues and operating results for the year
could be disproportionately large.