Markets

Car-Mart Drives Easy in Tough Economic Times

By David Phillips

Updated on: December 15, 2008 / 10:44 AM EST / MoneyWatch

AutoNation and CarMax, two of the largest U.S. auto retailers, could learn from America's Car-Mart, which focuses on the "buy here/pay here" segment of the used car market. Contrary to what franchised auto dealerships are forecasting, the Bentonville, Arkansas-based chain continues to record higher sales and operating profits. For the second-quarter of fiscal 2009 ended October 31, Car-Mart reported year-on-year growth in net income of 11 percent to $3.9 million, on a six-percent rise in sales to $72 million.All the more remarkable, considering Car-Mart's 91 automotive dealerships primarily sell older model, used vehicles and provides financing for substantially all of its customers -- most of whom are higher risk, non-prime borrowers, as detailed in the 2008 regulatory 10-K filing:

The Company's installment sales contracts typically include down payments ranging from 0% to 17% (average of 7%), terms ranging from 12 months to 36 months (average of 27.3 months), and annual interest charges ranging from 6% to 19% (average of 12.8% at April 30, 2008). The Company requires that payments be made on a weekly, bi-weekly, semi-monthly or monthly basis to coincide with the day the customer is paid by his or her employer.

Whereas competitors, such as AutoNation and CarMax, currently face difficulty in moving trucks and sport utility vehicles off their lots, due to changing consumer buying patterns and/or restricted access in obtaining auto financing, Car-Mart is finding success in selling basic and affordable transportation. Against a backdrop of rising unemployment, Car-Mart's decision to not focus on luxury or sports cars is paying dividends. The average car sold in 2008 cost $8,690, and was between three and ten years of age with 80,000 to 130,000 miles on the odometer.

Lending money to sub-prime borrowers is not without challenges. For the three months ended October 31, provision for credit losses was 22 percent of net sales! Car-Mart, however, operates a decentralized business strategy, with each dealership responsible for making customer credit decisions and collecting on the loans it originates. And, substantially all associate incentive compensation is tied directly -- or indirectly -- to collection results. Historically, credit losses, on a percentage basis, tend to be higher at new and developing stores (under six years of age), for those dealerships tend to have more inexperienced managers (in making credit decisions and collecting on customer loans) and less repeat (reliable) customers.

On average, accounts more than 56 days past due are considered delinquent. For the October-end quarter, net charge-offs as a percentage of average finance receivables was 6.2 percent, down 50 basis points from the prior year. By comparison, one of the largest U.S. used-vehicle retailers, CarMax, reported a delinquency rate (of 31 days past due) in October of only 3.76 percent -- yet auto analysts project same-store used vehicle sales in coming months to continue to fall.

Going forward, although Car-Mart's delinquency trends are likely to go higher -- given rising unemployment -- consumer demand (and sales) for its Honda Accords, Ford Escorts, etc., should more than offset anticipated losses from credit-impaired borrowers.