CRMT - NASDAQ

Good morning, and welcome to America's Car-Mart's First Quarter Fiscal Year 2026 Earnings Conference Call for the period ending July 31, 2025. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jonathan Collins, Chief Financial Officer. Jonathan, please go ahead.

Good morning. I'm Jonathan Collins, the company's Chief Financial Officer. Welcome to America's Car-Mart's First Quarter Fiscal Year 2026 Earnings Call for the period ending July 31, 2025. Joining me on the call today is Doug Campbell, our company's President and CEO; and Jamie Fischer, our COO. We issued our earnings release earlier this morning and the supplemental materials are on our website. We will post a transcript of our prepared remarks following this call and the Q&A session will be available through the webcast. During today's call, certain statements we make may be considered forward-looking and inherently involve risks and uncertainties that could cause actual results to differ materially from management's present view. These statements are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. The company cannot guarantee the accuracy of any forecast or estimate nor does it undertake any obligation to update such forward-looking statements. For more information, including important cautionary notes please see Part 1 of the company's annual report on Form 10-K for the fiscal year ended April 30, 2025, and our current and quarterly reports furnished to or filed with the Securities and Exchange Commission on Forms 8-K and 10-Q. As a note, the comparisons that we will cover will be for the first quarter of fiscal 2026 versus the first quarter of fiscal 2025, unless otherwise noted. Doug, I'll turn it over to you now.

Thanks, Jonathan, and good morning everyone. As outlined in our release this morning, the quarter reflects steady progress on the fundamentals we control. Gross margin expanded to 36.6%, interest income increased 7.5% and total collections rose by 6.2%, while we stay disciplined on volume to protect returns and affordability. Demand remains solid. Credit applications were up about 10% year-over-year. The website traffic was flat year-over-year, but we are seeing a higher conversion rate from consumers completing applications, indicating there's a higher level of intent. This dynamic really started to play out in July and has continued since. I'll allow Jamie to provide more color on this in a moment. Although demand was solid, we paced volume as tariffs and wholesale pricing created temporary constraints. We saw a knock-on effect from tariffs which drove a $500 per unit increase in the procurement cost during the quarter. This is incremental to the $300 I called out last quarter, but the increases we are seeing have since smoothed out. This has ultimately put downward pressure on the inventory capacity under our current capital facility. We're actively evaluating actions to expand that capacity so it's not a limiting factor to sales going forward. There are a few themes driving the momentum we're seeing on some of the aforementioned items. First, underwriting and pricing quality with LOS V2 now lying across our entire footprint. Embedded risk-based pricing is now better aligning expected returns with customer profiles. The new scorecard is delivering exactly what we designed it to do, shifting mix towards our highest ranked customers and away from lowest tiers. During the quarter, 15% more of our volume came from ranks 5 through 7, while bookings in some of our lowest ranks were reduced by nearly 50%. This higher quality mix historically drives lower loss frequency and severity, faster breakeven, stronger returns on invested capital and lower downstream costs, all of which improved expected unit economics over the life of the loan. As a result, we expect originations from the quarter to generate stronger returns even on lower overall volumes, given the concentration of customers with stronger credit profiles and better unit economics. Second, payment experience and portfolio health. Our upgraded Pay Your Way platform is resonating with our consumers. Since the late June launch, we've already seen a shift from in-store to online payments. and recurring payment enrollments have nearly doubled, enhancing the convenience for our customers and supporting a more consistent payment behavior and collections efficiency. Both LOS V2 and Pay Your Way were originally scheduled to be implemented throughout the fiscal year. We pulled these initiatives forward which will enable us to unlock SG&A savings, I have Jonathan expand upon in a minute. Third, capital efficiency and funding. We continue to strengthen our securitization platform. On August 29, we closed our 2025-3 securitization, a $172 million issuance at an overall weighted average coupon of 5.46%, an 81 basis point improvement when compared to our May 2025 deal and our fourth consecutive improvement in the overall weighted average coupon. Since our 2024-1 issuance, the team has improved on the overall coupon by over 400 basis points, 75% of which is related to tightening spreads. Strong capital markets receptivity to our new collections platform is paving the way for more incremental reductions in the cost of our capital and lowering financing costs associated with our securitization platform. At this point, I'd like to turn the call over to Jamie to review our operational performance for the quarter. Jamie?

Thanks, Doug, and good morning, everyone. Total revenue for the quarter was $341.3 million, a decrease of 1.9% from the prior year, primarily resulting from fewer retail units sold. This was partially offset by a 7.5% increase in interest income, supported by a larger portfolio and more payments collected year-over-year. Growth in the receivables base reflects disciplined originations as well as the benefit of our expanding footprint from acquisition locations. As highlighted on our last call, wholesale pricing pressures began to emerge late in the prior quarter. That trend continued into Q1 with procurement costs rising an incremental $500 per unit. At the same time, we were deliberately focused on quality vehicles and a stronger mix to better serve the needs of our higher rent customers. The combination of these two factors created additional strain on our ability to expand sales volumes. And as a result, volumes declined 5.7% to 13,568 units compared to 14,391 units a year ago. The average selling price of vehicles, excluding ancillary products decreased by $144 year-over-year reflecting that much of the inventory sold in the quarter had been acquired before the most recent procurement cost increases. We also realized margin benefits from the ancillary product price increases taken in Q3 of last fiscal year which continue to flow through as favorable year-over-year variance. Combined with strong attachment rates and disciplined vehicle pricing, these actions contributed to gross margin improvement to 36.6%, a 160 basis point increase over the prior year quarter. Gross margin also benefited from improved wholesale retention as well as favorable trends in post-sale vehicle repairs, both in frequency and severity. Looking ahead, we expect average selling prices, excluding ancillary products, to have a positive effect on revenue and the company will remain disciplined on its approach to gross margin rate. Turning to demand. As Doug previously mentioned, credit applications were up 10% year-over-year for the quarter, underscoring the strength of customer need for our offering. We saw a sharp uptick in July with a 26.5% increase in applications year-over-year. That growth spanned all customer rings from our strongest profiles to those with more challenged credit with an overall average FICO score slightly up from prior year averages and was driven by strategic marketing and customer outreach strategy. The month of August maintain that same level of elevated application flow and we are pleased to see September has started just as strong. As we've said before, when the macro environment tightens and traditional credit access becomes more constrained, our business is positioned to grow. The past 60 days have been a positive indication of that dynamic. Because of the aforementioned surge in applications and constraints on inventory available for sale, our LOS V2 played a critical role in actively steering our field teams towards booking the best rate customers. As a result, we ensure that the vehicles we did have were placed into the healthiest part of the portfolio. I'll now turn it over to Jonathan to cover the remainder of our results.

Thank you, Jamie. Operating expenses for SG&A totaled $51.4 million, a 10.1% increase from $46.7 million in the prior year. Roughly 2/3 of this increase was related to payroll growth, including strategic hires in areas like finance and accounting and 1/3 was driven by technology investments such as the rollout of LOS V2 and Pay Your Way. We expect to unwind approximately half of total SG&A growth in the back half of the year. Notably, the implementation of the upgraded Pay Your Way technology is expected to guide a shift towards a more modernized collection infrastructure, which will deliver approximately 5% annual cost savings over time. These efforts are expected to drive SG&A efficiency, improve operational performance and move us closer to our target of mid-16% SG&A as a percentage of retail sales. On the collection side, performance remained robust with total collections rising 6.2% to $183.6 million. This improvement highlights the effectiveness of the Pay Your Way platform and the expanding adoption of digital payment channels, resulting in a higher average collection per active customer, $585 this quarter compared to $562 in the same period last year. The strength in collections underscores the quality of the portfolio and the success of recent operational enhancements. On the credit side, net charge-offs as a percentage of average finance receivables rose slightly to 6.6% from 6.4% last year. Approximately 50% of this increase was due to softer sales, which muted the growth in the denominator and 50% due to higher loss frequency and some severity in legacy pools, which affected the numerator. Delinquencies greater than 30 days were 3.8% at the end of the quarter, representing a 30 basis point increase. Our allowance for credit losses improved to 23.35% compared to 25% at July 31, 2024. Sequentially, the allowance increased slightly from 23.25% at April 30, 2025, resulting in a $3 million increase to the allowance which was driven equally by portfolio growth as well as by the frequency and severity of loss. Our portfolio quality continues to strengthen with nearly 72% of the portfolio dollars originated under enhanced underwriting standards and our top 3 customer ranks increasing by 790 basis points during the quarter versus fiscal 2025 average. The average originating term for new contracts was 44.9 months, up 0.6 months from last year. And our weighted average total contract term for the portfolio stood at 48.3 months, a modest increase of 0.2 months compared to last year. The weighted average age was 12.6 months, a 5% improvement over the prior year's quarter. Importantly, our active customer account grew by 1.4% to almost 104,700 customers, reflecting the resilience and ongoing strength of our portfolio. Debt to finance receivables and debt net of cash to finance receivables were 51.1% and 43.1%, respectively, both improved from last year. Interest expense decreased by 6.9% to $17 million as we continue to benefit from the improvement in our securitization platform. During the quarter, we successfully completed a $216 million term securitization at a weighted average interest rate of 6.27%. After the quarter ended, we also finalized our 2025-3 securitization, raising $172 million at a weighted average interest rate of 5.46%. While there is still room for further improvement, we are encouraged by the progress our platform has made so far. Market interest in our securitizations remains high with the Class A notes almost 8x oversubscribed and the Class B notes nearly 16x oversubscribed on our most recent transaction. Strong demand, combined with favorable operating performance within our portfolio, has significantly improved the pricing of our notes. Notably, our most recent transaction marks the fourth consecutive improvement in our overall weighted average coupon, and we have reduced our weighted average spread by 308 basis points since our 2024-1 transaction. In our last transaction, 21 out of 26 investors who had previously participated in our securitization chose to invest again, which demonstrates the continued confidence they have on our platform. As Doug highlighted earlier, I'm also very encouraged by the impact that our upgraded Pay Your Way platform and our broader collections modernization will have on our ABS platform and future cost of capital as enhanced payment consistency and less of a reliance on field operations should support a stronger outlook from our rating agencies and unlock more favorable terms on upcoming securitizations. I'd also like to address several important operational disclosures. First, as previously communicated, our annual report on Form 10-K was filed after a brief delay. The delay was related to the prior adoption of enhanced contract modification disclosures. These disclosures provide additional detail on the frequency and nature of modifications, their impact on our portfolio performance and our approach to managing risk in this area. We believe these enhanced disclosures will provide greater transparency and help investors better understand the dynamics of our receivables and credit performance. Further, we have taken significant steps to remediate the associated material weakness including enhanced oversight, additional training and the implementation of new review procedures. We are committed to maintaining strong controls and transparency, and we will continue to update stakeholders on our progress. Second, I want to highlight the capital constraint impacting our working capital and inventory management. Currently, we faced both a low advance rate of 30% and a cap of $30 million on our inventory advances under our revolving credit facility. While these limits have existed in the past, the significant rise in vehicle prices since COVID has amplified their impact, putting ongoing pressure on our ability to expand retail sales and manage working capital efficiently. We are actively exploring alternative financing solutions to address these constraints and unlock additional capacity to serve our qualified customer demand. Looking ahead, our focus remains on disciplined execution, portfolio quality and capital efficiency. The successful rollout of LOS V2 and risk-based pricing is already driving measurable improvements in deal quality and cash flow predictability. As we continue to diversify our funding sources and optimize our balance sheet, I'm confident that we are well positioned to support both near-term performance and long-term growth. Finally, I want to thank our finance and operations teams for their commitment and agility in a dynamic environment. Their dedication is critical to our success. With that, I'll turn the call back over to Doug for closing remarks before we move to Q&A.

Thank you, Jonathan. To summarize, this quarter, we kept our focus on the fundamentals we control. We expanded gross margin, increased interest income and improved collections while being disciplined on volume as tariffs and wholesale pricing temporarily pressurized inventory capacity under our current facility. LOS V2 and the new scorecard are doing the work we intended, shifting mix towards our highest ranked customers under better pricing structures powered by risk-based pricing. And Pay Your Way is an upgrade that's laying the groundwork for more consistent payment behavior, operational efficiency and a lower cost of capital. Looking ahead, our priorities are clear: quality, growth with affordability, serving more customers and protecting returns. Payment and collections modernization, continuing to scale digital adoption; and third, our capital structure and capacity evaluating actions to expand inventory capacity, so demand, not financing mechanics determines our sales trajectory. I'm proud of the team's execution and grateful to our associates for keeping our customers on the road every day. Operator, let's open the line for questions. Thank you.

[Operator Instructions] Our first question is going to come from the line of Kyle Joseph with Stephens.

Just on the unit volume decline. I know you guys talked about applications being really strong, particularly in July. But Doug, I think you highlighted some increased procurement costs in the quarter. Just wondering what you've seen kind of subsequent to the quarter end in terms of procurement cost, and I recognize that you guys are doing what you can in terms of financing solutions in order to manage working capital as well.

Yes, thanks for the question. So I think subsequent to the quarter, we've seen the pricing smooth out. It's been sort of in that same exact range. In fact, it's come down a couple of bucks, but that's nominal. And on a positive note, we've seen the same sort of demand we saw in July sort of flow through August. And as Jamie mentioned, our September is off to a great start. I think this sort of goes towards -- we speak about our business where when things tighten, another people tighten consumers come to us from the top. And we've certainly seen that based on the overall volume of applications and the quality of applications coming to us.

Got it. And then shifting to credit. I appreciate that the new -- loans under the new LOS are over 70% of the portfolio. But as that back book wanes, you kind of expect some credit tailwinds, but we've seen increases in [ DQs] and [ NCOs ]. So I appreciate the color you gave on charge-offs in terms of frequency and severity and portfolio size. But just given [ DQs ] are up, give us your sense for how quickly you would expect that to stabilize with the new LOS systems?

Yes. The portfolio is weighted with mostly this new underwriting in place. And so I would expect, like now we sort of have like our normal cadence and normal seasonality as it relates to [ NCOs ]. And so we would typically see a couple of basis points change as we sort of go in and through the year. So to me, this is just sort of more normal. Over the last several quarters, we've obviously experienced the benefit of LOS sort of building the portfolio up. Now it represents the majority of the portfolio. And I think we should expect sort of the normal seasonal fluctuations within [ NCOs ]. And certainly, where we're at today is well within our operating range.

Got it. Last question, probably, Jonathan. But just on the G&A, was up in the quarter. It sounds like there is a pull forward of investments, but just kind of expectations for the cadence of G&A, it sounds like should the second quarter be kind of in line with the first quarter and then we really start to see some of the benefits of the investments you've been making. Is that kind of the right cadence of expenses?

Yes, that's right. I think in the second half, we'll see roughly half of the increase from this quarter unwind as we start to kind of finish the implementation of some of the technologies that we've pulled forward. I think there's also a broader story around some of the technologies that we're rolling out will modernize, for example, Pay Your Way that will modernize our collections infrastructure that will generate an additional tailwind and we put that about 5% of SG&A costs. And as we continue to roll out the system and test the system we should start seeing that benefit in the next fiscal year. And then finally, all of those pieces combined will help us get towards our ultimate goal, which is about mid-16% SG&A as a percentage of sales.

[Operator Instructions] Our next question is going to come from the line of John Hecht with Jefferies.

Some of it's related to what Kyle was just asking, But the -- you have the temporary impact from tariffs. We look at this as just sort of a onetime step function change in inventory pricing? Or will this be a spike up and then the cost will go down? I guess the just question is what are you guys anticipating in terms of used car pricing? And like to call it, the duration of how long that will affect the system?

Sure. I would say that the wholesale pricing, obviously, post-tax season, we should have had some sort of normal seasonality fall in pricing. We didn't experience that. I think the industry is contending with what is today represents a 5% or 6% increase relative to the prior year. I would expect that through the balance of the year now that the effects of tariffs are sort of known that we get some seasonality and pricing decline in the back half, all other things being equal, if you procure the same asset, et cetera. So this is really just a period of sort of managing through what that is today, but it does sort of lend itself to this other question around our capital structure with which we highlighted there. And really, I'll let Jonathan sort of unpack a little bit about how we think about that and how we can leverage and create opportunity there.

Yes. If I just unpack. We currently, as you're aware, John, we have a revolving line of credit. We manage that -- we leverage that to manage our working capital, but really, the way we think about it is from a seasoning of AR and timing of entering into the ABS market. And if I just unpack that logic a little bit we have two components within our ABL, one is an inventory borrowing base, the other one is an AR borrowing base. And I shared some metrics in the prepared remarks, 30% advance rate and $30 million cap that doesn't cover our full inventory. And to the degree that we see continued pressure on pricing, that chews up the desired cushion that we would want to have in ABL that allows us to season our receivables, which in turn allows us to go into the ABS market, achieve better rates, achieve better structures, et cetera. So what we're trying to do during the quarter is really just navigate that and what we're laser-focused on is a financial solution to unlock capacity there.

Okay. And then a follow-up question, that's very helpful by the way. Follow-up question is the -- sorry, my phone was cutting out. You guys -- there's still very high demand from the consumer, but I guess it's tough to complete the transactions given supply constraints and macro factors and so forth. I guess, you guys are positioning yourself to be very like resourced and strong during a recovery period. So what factors should we look for in terms of seeing green shoots maybe for the dissipation of some of these headwinds?

Sure. I think with the release of LOS V2, which went live on May 8 that's like our second iteration for the LOS. If you go back in time, you remember, when we first launched LOS, it was around deal structures on our customer ranks 1 through 4 and tightening the credit box. The second iteration is more about identifying and properly identifying risk and more accurately identifying risk and with more granularity than we've had in the past. LOS V2 has a new scorecard embedded. And so I would expect us to continue to sort of continue to get favorability. My hope would be that similar to what we had in terms of a step change in the credit quality that we've had over the last 1.5 years that it's another step in that right direction. As an example, if you look year-over-year from Q1 '25 to Q1 '26, the average FICO score change was about 20 points in origination quarter-over-quarter. And you can see that distribution, there was a new chart we included in the presentation in our supplemental slide pack that shows us more heavily weighting these 5 to 7 ranked customers. And typically, we talked about the volume of applications that Jamie mentioned earlier, we're really pleased with what we're seeing there. It's really important given that we're seeing more growth at the top of the funnel and equal growth at the bottom, but more growth with these better qualified customers that we maintain the asset quality. We're not going to be able to capitalize on that opportunity unless we have the right asset to match what the consumers' needs are.

Thank you. And I'm showing no further questions on the phone lines and you guys can move to your Q&A queue from the web questions.

Thank you. We do have a couple of questions. One is related to the deal structures that rolled out with LOS V2. So what we did on deal structures while with LOS V2, we took our 7 ranked consumers, they're getting a slight rate break and a slight down payment break. So you can see overall average down payments came down a little bit during the quarter in the aggregate. That is because we gave the most flexibility to these customers who present the least amount of risk. If I look at sort of the bottom 2 or 3 ranks of customers, they actually put 13% more down on average. They had $2,000 less financed. They had overall higher average originating rates because our 1 and 2 ranked customers saw 200 and 100 basis point increases in the originating rates and those terms that we've originated for those consumers were 4 months shorter. So the return profile on those consumers are going to be much stronger. That does not show up in the distribution of how those consumers appeared in the chart. That's the risk-based pricing factor on top of that. And so that's obviously going to drive more positive returns. There's another question here on consumer health. How would you characterize the existing health of the consumer. Jamie, if you want to take that one?

Yes, I'll take that one. I'd certainly say with credit tightens, people come to us, and we are the place where credit challenge -- is for the landing spot for our credit challenge customers. And as we've seen that demand increase, I think it's an indication that our consumer base is strained. However, it's generally our mission, keeping our customers on the road, I think our customer base is always in a spot of being challenged with what's happening in the macro environment. And so that's part of the reason why we pulled our LOS V2 forward, was our ability to not only tighten on the bottom end but be able to attract more of those higher customers with a stronger credit profile in the tightened environment externally. What also gives us comfort is that although they are probably more constrained today than they were a year ago, our structures with the rollout of LOS, our structures are much better today than they were a year ago, with as Jonathan mentioned 72% of the portfolio now made up of LOS, tighter underwritten customers.

There's another one here. The 30-day delinquencies were up 30 basis points. Is that a sign that the consumer is strained? Listen, I think, as Jamie mentioned, our consumer base is always strained that's sort of our specialty, but it is a leading indicator on how we think about delinquencies. When I think about maybe the impact that happened during the quarter, take for a moment and consider the fact that we did roll out our new payment system. And so that did a couple of things. Like any technology that sort of had its first bumps over the first couple of weeks, but more importantly, there was a certain subset of customers who had automatic recurring payments structured and set up. To the extent that like they need to reenroll in our new system that obviously would cause some timing delays there. And so we certainly had our challenge is getting them reenrolled, but that happened in very, very short order. And we highlighted in the release there that not only did we get that cured, we actually now have doubled the amount of customers enrolled in recurring payments. And so that is going to be a key unlock for how we manage and how much work it takes to manage the portfolio. I'd add sort of since then, delinquencies have come back into sort of a more daily normalized range of between 3.4, 3.6. We actually ended August at 2.8%. So we feel really good about where that sits both from recency and 30-day delinquency standpoint. And that 30-day delinquency measurement is a point in time. So there is a little bit of to unpack there. So I appreciate the question. I don't think we have anything more in the queue. Yes, I don't think we have anything more in queue, anything else?

No.

All right. Again, I want to thank all of our associates for their hard work during the quarter. Thank you to our shareholders and Board for their support and to the field. Our customers are always counting on you. Let's get after it in the quarter. Thank you very much and thank you for joining the call and believing in America's Car-Mart.