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, 2016, the Company operated 143 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 30 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. Over the last five fiscal years, the Company’s
annual credit losses as a percentage of sales have ranged from a low of 21.1% in fiscal 2012 to a high of 28.5% in fiscal 2016
(average of 25.1%). Fiscal 2015 credit losses as a percentage of sales were 25.5%. The fiscal 2016 annual credit losses as a percentage
of sales were 27.6% excluding the effect of the increase in the allowance for credit losses made in the second quarter of fiscal
2016. 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 (via an assigned corporate office purchasing agent) 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 has made significant infrastructure
investments during the last five years in order to improve performance of existing dealerships and to support growth of its dealership
count. The Company ended fiscal 2016 with 143 locations, a net increase of two locations over the prior year-end, and intends to
add new dealerships selectively in what it considers to be good, solid communities, subject to favorable operating performance.
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 $10,361 per unit in fiscal 2016. 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 31.6 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 Manager in Training Program 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, 2016, the Company’s debt to equity ratio (Revolving credit facilities divided by
Total equity on the Consolidated Balance Sheet) was 0.47 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 (with the assistance of a corporate office buyer)
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 three or as many as 28
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, buyer, 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, 2016, 2015 and 2014:
|
|
Years Ended April 30,
|
|
|
2016
|
|
2015
|
|
2014
|
Dealerships at beginning of year
|
|
|
141
|
|
|
|
134
|
|
|
|
124
|
|
New dealerships opened/acquired
|
|
|
6
|
|
|
|
7
|
|
|
|
10
|
|
Dealerships closed
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dealerships at end of year
|
|
|
143
|
|
|
|
141
|
|
|
|
134
|
|
Below is a summary of dealership locations by
state as of April 30, 2016, 2015 and 2014:
|
|
As of April 30,
|
Dealerships by State
|
|
2016
|
|
2015
|
|
2014
|
Arkansas
|
|
|
37
|
|
|
|
38
|
|
|
|
38
|
|
Oklahoma
|
|
|
25
|
|
|
|
26
|
|
|
|
24
|
|
Missouri
|
|
|
19
|
|
|
|
18
|
|
|
|
18
|
|
Alabama
|
|
|
15
|
|
|
|
15
|
|
|
|
14
|
|
Texas
|
|
|
12
|
|
|
|
14
|
|
|
|
14
|
|
Kentucky
|
|
|
12
|
|
|
|
12
|
|
|
|
11
|
|
Georgia
|
|
|
10
|
|
|
|
6
|
|
|
|
4
|
|
Tennessee
|
|
|
6
|
|
|
|
6
|
|
|
|
5
|
|
Mississippi
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
Indiana
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Iowa
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
143
|
|
|
|
141
|
|
|
|
134
|
|
Dealerships are typically located in smaller
communities. As of April 30, 2016, 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
buyers, although dealership managers are authorized to purchase vehicles as needed. A buyer will purchase vehicles for one to four
dealerships depending on the size of the dealerships. Buyers 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 Director of Purchasing. 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 buyers purchase
vehicles between six and 12 years of age with 90,000 to 140,000 miles, and pay between $3,000 and $7,000 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, Chrysler 300, Ford Taurus,
Ford Fusion, Dodge Ram Pickup, Ford Explorer and the Ford F-150 Pickup. The Company sells a significant number of trucks and sport
utility vehicles. The Company’s buyers inspect and test-drive almost every vehicle they purchase. Buyers 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 25 to 75 vehicles depending on the 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 and mark-up percentages on parts. Substantially
all 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 substantially all 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 in local newspapers,
on the radio, on television and on the internet. In addition, the Company periodically conducts promotional sales campaigns in
order to increase sales.
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, 2016 typically include down
payments ranging from 0% to 17% (average of 7%), terms ranging from 18 months to 42 months (average of 31.6 months), and a
fixed annual interest rate of 15% (weighted average of 14.9%). Subsequent to year-end, in May 2016 the Company increased its
retail installment sales contract interest rate from 15.0% to 16.5% in response to continued high levels of credit
losses.
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 Support 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. 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 two days late are sent a notice in the mail. Accounts three days late are
contacted by telephone. Notes from each telephone contact are electronically maintained in the Company’s computer system.
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. Other than the extension of time, concessions
are not granted to customers 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 currently
intends to add new dealerships selectively in what it considers to be good, solid communities, subject to favorable operating performance.
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.
The facility may be of a modular nature or an existing structure. 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 is 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 are
profitable within the first year of opening.
Corporate Office Oversight and Management.
The corporate office, based in Bentonville, Arkansas, consists of area operations managers, regional vice presidents, regional
purchasing directors, a purchasing director, a sales director, a director of collection services, a support operations officer,
a director of audit and compliance and compliance auditors, a director of human resources, 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 agings 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. More recently, funding for the deep subprime
automobile market has 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 recent history
.
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. 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 four fiscal years. The Company expects this pattern to continue in future years.
If conditions arise that impair vehicle sales
during the first, third 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 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, 2016, the Company, including
its consolidated subsidiaries, employed approximately 1,420 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 good.
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, 2016:
Name
|
Age
|
|
Position with the Company
|
|
|
|
|
William H. Henderson
|
52
|
|
Chief Executive Officer and Director
|
|
|
|
|
Jeffrey A. Williams
|
53
|
|
President, Chief Financial Officer, Secretary and Director
|
William H. Henderson
has served as Chief
Executive Officer of the Company since October 2007 and served as President of the Company from May 2002 to March 2016. Mr. Henderson
has also served as a director of the Company since September 2002. From 1999 until May 2002, Mr. Henderson served as Chief Operating
Officer of Car-Mart. From 1992 through 1998, Mr. Henderson served as General Manager of Car-Mart. From 1987 to 1992, Mr. Henderson
primarily held the positions of District Manager and Regional Manager at Car-Mart.
Jeffrey A. Williams
has served as President
of the Company since March 2016 and as Chief Financial Officer and Secretary of the Company since October 2005. Mr. Williams has
also served as a director of the Company since August 2011. 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.
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.
From time to time, 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
would 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 would 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 during
the economic recession of 2008 decreased dramatically from peak sales years. While sales levels for new vehicles have risen steadily
since 2009 and new vehicle sales returned to near pre-recession levels during fiscal 2016, the reduced new car sales have had and
could continue to have a significant negative effect on the supply of vehicles available to the Company in future periods.
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.
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 31% 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.
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 fund 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.
The capital and credit markets have remained
somewhat constricted as a result of adverse economic conditions that caused the failure and near failure of a number of large financial
services companies in recent years. While the adverse conditions in recent years have not impaired the Company’s ability
to access the credit markets and finance its operations, there can be no assurance that there will not be a future deterioration
in the financial markets. If the capital and credit markets experience disruptions and the availability of funds remains low, 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. Due to the decline in
operating results during fiscal 2016 caused by the difficult competitive environment and elevated credit losses, the Company elected
to defer additional dealership openings in order to focus on making operational improvements to ensure all existing lots are performing
at a high level. Management expects to return to expansion efforts in the future after overall operating performance improves.
If our overall operating performance does not improve, management may be unable to devote the resources necessary to implement
its expansion plans or may determine that its focus should continue to be on efforts to improve the Company’s existing business
in lieu of further dealership openings.
-
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 have decreased dramatically from peak sales years. While sales levels for new vehicles have risen steadily since
2009, new vehicle sales volumes are just now back to pre-recession levels. 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 four fiscal years. The Company expects this pattern to continue in future years.
If conditions arise that impair vehicle sales
during the first, third or fourth fiscal quarters, the adverse effect on the Company’s revenues and operating results for
the year could be disproportionately large.
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, including bank account 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.