Rogers based America’s Car-Mart Inc. is expected to post a double-digit profit decline and double-digit sales increase in the second quarter of fiscal 2023 as the evolving auto market has an offsetting impact on used car dealership Buy here, pay here.
After the market close on November 16, Car-Mart is expected to report a decline in earnings per share to $2.17 for the period ended October 31, from $3.33 for the same period last year, based on consensus by four analysts. Revenue is expected to increase 13.3% to $326.72 million from $288.3 million.
In an earnings preview, equity analyst John Hecht and shareholders Matthew Hurwit, Sagiv Hartmayer and Ibrahim Kargbo, all of Jefferies LLC, expect sales to increase as a result of higher used car prices, despite falling sales volumes. They are expecting cost of sales of $189 million for a gross margin of 35.7%, down 1.74 percentage points from the same period last year. SG&A expenses are expected to increase 19% to $44 million.
According to the analysts, loss rates are expected to increase by 0.78 percentage points, “at higher frequency and severity, resulting in a provision expense of $84 million, up 37% (YoY).” “Combined, this translates to total spend of $326 million, up 26% (YoY).”
Vehicle sales are expected to increase by 2.5% year-on-year to around 15,000 vehicles. The median selling price is expected to rise 15% to about $18,600 “as pricing continues to be more resilient than expected and constantly impacted by inflation and supply chain disruptions,” the analysts said.
According to analysts, high used car prices have hurt Car-Mart’s financial results in recent quarters. “Despite the difficult market environment, (Car-Mart) remains competitive against indirect lenders and other (buy here, pay here) operators. Credit trends have been normalizing on a regular basis, and we may see increasing pressure on the heavy side of the equation as used car prices normalize.
“We believe the current macroeconomic backdrop underscores (Car-Mart’s) value proposition as an affordable used car dealership,” the analysts added. “We anticipate market share gains as customers from above (car-marts) typical credit box flow to company properties while traditional lenders tighten underwriting.”
According to the analysts, the developing used car market is expected to have adverse effects on Car-Mart, such as: B. a flattening of used car prices. At the same time, the tighter credit environment should support sales.
According to the Mannheim Used Car Value Index, wholesale prices for used cars fell by 2.2% in October compared to September. It was the fifth consecutive monthly decline. The October index is down 10.6% from the same month in 2021.
Jonathan Smoke, Cox Automotive’s chief economist, said the decline in wholesale prices this fall has been above average for the first time.
“It’s happening while supply is balanced, and it appears because rising interest rates are hurting affordability,” Smoke said, adding that demand for new vehicles has improved while demand for used vehicles has fallen.
Dealertrack metrics show that new retail sales as of November 5 are down 10% from the same time last year, while used retail sales were down 13%. According to vAuto data, the supply of new vehicles increased by six days and the stocks of used vehicles decreased by three days.
Studying the US auto finance industry, analysts at Jefferies said: “There is a cycle underway in auto finance. A combination of normalizing lending, softening sales despite persistently low inventories, affordability issues, rising rates and fading residual value support will impact margins, volumes and provisions for the outlook. Residual values are falling at an unprecedented rate. The risks are increasing.”
The analysts said industry sales volumes are expected to be impacted for the remainder of 2022 due to affordability and supply issues. In the second quarter, the average new-car loan rose 12% to nearly $40,000, while the average used-car loan rose 25% to $27,000. The average monthly payment for new car loans increased from $582 to $667, while the average for used cars increased from $440 to $515.
According to the analysts, loan maturities have increased to accommodate larger loan amounts, which creates more risks. Credit normalization is expected to accelerate and appear to deteriorate in some non-Prime categories. The average loan-to-value ratio for used vehicles increased by 0.03 percentage points to 8.62%. Rates for the used subprime and deep subprime segments declined 0.48 percentage points and 0.29 percentage points, respectively.
“The easy days are in the rearview mirror,” the analysts said. “But the sentiment is set for challenging times, and the stock values also reflect the narrative.”
Analysts lowered Car-Mart’s 12-month price target to $68 from $105 while keeping a Hold rating on the stock.
Car-Mart (NASDAQ: CRMT) shares closed at $65 on Wednesday (Nov. 9), down $1.44, or 2.1%. Over the past 52 weeks, the stock has ranged between $58.67 and $129.50.