CRMT Bear Case: How to lose money owning car dealerships
CRMT Q1 2023 Earnings Analysis
On August 17th, 2022, America’s Car-Mart (Ticker: CRMT) announced its Q1 2023 quarterly resulted for the 3-month period ended July 31st, 2022.
My goal is to use this quarterly earnings release as an example case study on the bear case for CRMT and to help better clarify how CRMT makes (and loses) money. Ideally, I’ll have a better understanding of the material risks for the car dealership industry by the end. It won’t all be negative, but I do want to cover the downside risks.
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How CRMT Management Presents the Results
You can learn a lot from how a management team chooses to present bad news. Case in point below is the first paragraph of the earnings press release.
Note the focus: Higher sales volumes, higher revenue numbers. No mention of bottom line results (which were terrible). There is a discussion of industry headwinds and an explanation of where that is hitting them: costs. However, the immediate focus is on spinning a positive message.
Charge offs are everything in the low-quality car loan business
Language is important.
5.6% charge offs from 4.3% charge offs is an increase of 30% YoY. Yet, percentage terms don’t show up anymore. Instead, it’s framed in terms of historic averages. Which is a good way of framing it. It makes it clear that this isn’t an abnormal result. Prior results are abnormal. However, we’ll use that information when assessing value and sustainable profits later on. Similar to our coverage of Parks! America’s Q3 earnings release what we see here is a statement that recent amazing results are not expected to continue.
The upside plan: Productivity Growth per Store
A brief aside for the positive upside scenarios here. The company’s goal is to grow per-store performance by focusing on productivity. This is great news if they can pull it off. A 50% boost in revenue per store should lead to much higher (possibly +100% or more in earnings per store over current levels).
There is obviously a lot of risk in them achieving this goal, but this is clearly their plan. That’s why they highlight growing revenue at the beginning. It’s also why the loan length is growing. That’s how they’re supporting these high prices and still being willing to sell high volume of cars despite headwinds.
Capital Allocation: CRMT regularly operates with negative cash flow as it grows
If you’re going to make a bear case for CRMT, it begins and ends with negative cash flow from operations.