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Car-Mart Inc. Reports Unexpected Loss in Q2, Stock Plummets 17%

by Myfxtools
December 5, 2023
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Shares of Car-Mart Inc., a used-car retailer based in Rogers, Arkansas, experienced a 17% drop on Tuesday. The company, known as a “Buy Here Pay Here” dealership, focuses on serving subprime customers who are facing financial challenges due to high prices of essential goods.

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The unexpected loss in the fiscal second quarter had a significant impact on Car-Mart’s stock performance. According to CEO Doug Campbell, the persistent inflationary environment has adversely affected existing customers, leading to increased credit losses. As a result, the company had to raise its allowance for credit losses, impacting its financial results for the quarter.

During the quarter, Car-Mart reported a loss of $27.5 million, or $4.30 per share, compared to income of $3.1 million, or 48 cents per share, in the same period last year. Although revenue increased by 2.8% to $361.6 million, it fell short of estimates.

Net charge-offs, which represent debts unlikely to be recovered, amounted to 7.2% of average finance receivables, up from 5.8% in the previous year’s second quarter. This percentage reflects levels similar to those seen before the pandemic.

For More Information: A Tale of Two Consumers: Beneath Reports of Robust Spending, Subprime Consumers Are Showing Strains

Subprime Car Loans Impact Company’s Provision

The recent quarter saw the company allocating more funds to cover potential credit losses, resulting in a $28 million charge to the provision. This translates to a loss of $3.40 per share. The main reason behind this move was the increase in subprime customers. However, the company anticipates this impact to be temporary as car prices stabilize and even decrease over time.

Concerns Surrounding Subprime Car-Loan Rates

Investors may be growing anxious as subprime car-loan rates soar from 17% to 22%. The rise in rates raises concerns about the overall financial stability and health of the market. Should investors be worried?

During an analyst call, Campbell, the CEO since October 1, emphasized that the company’s pools of receivables consistently generate cash flows that exceed the operational costs. This remains true despite the current challenging macro environment for Car-Mart’s core customers and prospects. The company acknowledges that its services are essential to its customer base.

Campbell commented, “Although we are disappointed with the loss this quarter, our business’s underlying cash generation capacity positions us for long-term profitable growth.”

Following this announcement, other major car retailers and lenders also experienced a decline in their stocks. CarMax Inc. (KMX) dropped 5%, Carvana Co. (CVNA) fell 5.5%, Ally Financial Inc. (ALLY) decreased by 0.1%, and AutoNation Inc. (AN) saw a 3.3% decline.

Meanwhile, the S&P 500 (SPX) decreased by 0.1%.

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Tags: credit lossesinflationary environmentstock performancesubprime customersused-car retailer
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