America's Car-Mart, Inc.

Thank you for standing by and welcome to America's Car Mart second quarter 2024 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentations, there will be a question and answer session. To ask a question at that time, please press star 11 on your telephone. As a reminder, today's call is being recorded. I will now turn the call over to your host, Ms. Vicki Judy, America's Car Mart CFO. Please begin.

Thank you and welcome to America's Car Mart's second quarter 2024 earnings call. Joining me today is Doug Campbell, who took over as our company's CEO on October 1st, 2023. We've issued our news release earlier this morning and it is available on our website. We've updated our reporting format with a simplified look, providing an efficient and easy comparison of important metrics against the prior corresponding quarter and commentary about our results. In addition, we will post the transcript of our prepared remarks following this call. And we are also going to be posting some slides to our website, some supplementary materials. We are having some technical difficulties this morning, but those should be up shortly. And those will help further illustrate many of the talking points that we're going to cover in our call today. The Q&A session will be available through the webcast after the call. We believe that this process will help enhance how we share our quarterly results with you, and we welcome your feedback. During today's call, certain statements we make may be considered forward-looking and inherently involve risk 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, 2023, and our current and quarterly reports furnished to or filed with the Securities and Exchange Commission on Forms 8K and 10Q. I will now turn it over to Doug for his introductory comments about our second quarter.

Good morning, and thank you for joining us and for your interest in our company. First, I'd like to thank our associates for their relentless focus on keeping our customers on the road. I also appreciate all the many messages I've received on my appointment as CEO. It means a lot, so thanks for that. I want to take a moment to recognize the passing of Hank Henderson, one of our board members and CEO prior to Jeff Williams. His contributions here at the company and in the community to his family will leave an indelible mark. He was a valued board member and a long-time shareholder. His pointed advice to me about the opportunity to be a CEO has a different meaning today. So thank you, Hank. During the quarter, we identified someone with a similar profile that has a long-term view of the business. As such, we recently added Jonathan Bubba, from Nantahala Capital Management to our board. He brings many years of experience within specialty finance, including subprime installment lending, pawn lending, and lease-to-own retail. He is a shareholder as well, and we're excited to have him join our board. Now, I'd like to address a quarter. If I'm on the other end of this call, I'd have a lot of questions about the results, and particularly credit losses. I'd ask you to bring into context that GAAP accounting requires us to report our results as a retailer with an accounts receivable balance of almost $1.5 billion originated over the last four years. As the business grows, the impact of reserves and credit adjustments on our portfolio originated over a four-year period becomes even larger in relation to the quarterly results. The way we measure our business is the cash we collect over time relative to the money that we put out on the street. And if you look over time, we've never had a pool of loans in which we earn cumulative cash returns less than 50% in excess of the cash outlay over the life of the contracts. What has changed is that it takes longer to recognize it. But 10 years ago, we put $1 out on the street and get approximately $1.60 back over time. And that's still the case. Let me also tell you why I came to Cardmark. Over the last five or six fiscal years, the business has generated almost $600 million in free cash flow. The companies repurchased $156 million in shares, grown the net AR balance by $739 million, funded various capital expenditures of almost $78 million, while funding increased inventory of $79 million in a growing business. They've been able to do this because of the underlying pools of receivables that the company has originated. have consistently produced cash flows in excess of the cost to operate the business over time. This remains the case. Additionally, this segment of automotive is large and a growing part of our industry. The ability to really help consumers who have little to no access to credit from an industry leader with a great track record and an abundance of opportunity made it attractive. Especially when you consider the opportunity to feather in my skill set and industry best practices with CarMart's unique culture, it has the power to take the business to the next level. And that's what I'm focused on. Today we reported revenue increase of 2.8%. That was primarily driven from a 23% increase in interest income. Sales volumes were down 4.6%, but sales revenue only saw a decline of 0.4%. The muted sales revenue was a product of a 5.6% increase in the quarterly average selling price moving from $18,025 to $19,035 year-over-year. Approximately 40% of this increase was related to the vehicle's selling price, but 60% was related to the increased revenue for ancillary products. Sequentially, the quarterly average selling price was relatively flat. As far as sales volumes, we finished the quarter with 15,162 units versus 15,885 units sold last year. August and September had respectable volumes and collectively posted a gain in sales year over year, but October sales results were down. Several items contributed to the sales decline witnessed in October, and I'll talk about that now here. Web traffic was consistent and still posted gains year over year, and online credit applications for the quarter were also positive by 19%, yet there was a decrease in showroom traffic. Additionally, launching several states onto our new loan origination system, or LOS, was a contributing factor I'll speak to more in a minute. Overall, we're trying to balance sales volume with our new system, onboarding new stores, and introducing new underwriting guidelines. We spent the better part of last year rolling out the consumer application portal for our LOS, which allows the consumer to apply faster, have a soft credit pool during the application process, and get a response via text as to the status of their application, as well as centralized appointment settings. We're now in the second phase of our LOS rollout, which is related to underwriting and how sales are being originated. During the quarter, we onboarded three additional states, bringing the total to five states, which accounts for about 45% of our revenue at quarter end. We started out the fiscal year rolling out the dealer-facing portion of this tool. As a reference, our legacy system had limited ability to influence outcomes, but served as a stable platform to originate deals and manage associated costs. Our original intent was to roll the system out with similar underwriting rules as our legacy system, Alice, allowing users to learn the system over time, but giving us enhanced data and visibility. However, with a backdrop of increasing credit losses, we made the strategic decision to implement new underwriting rules, which primarily sought to decrease terms and increase down payments. The initial results were very positive. When looking at originating terms, we finished at 44.1 months for the quarter. While this is up year over year, it's down sequentially by 0.6 months. It's the largest decrease we've seen since July 2019. The originating terms during the quarter for our legacy system were approximately 44 months and 42 months on the new LOS. Originating terms were both down in both systems and both trended downward throughout the quarter. Average down payments for the quarter were 4.9% and relatively flat when viewed sequentially. but down 30 basis points year-over-year. Yet when comparing the two originating systems, we collected nearly a point more in down payment on the new LOS, generating 5.5% down and 4.6% in ALIS. This demonstrates how effective the system is, and our teams are pushing for improved deal structures, despite the seasonality we normally see with cash down payment percentages. The benefits of LOS are no longer theoretical. It's deployed in about half our stores already, and we couldn't think of a more opportune time to begin testing its capabilities. These combined results show that we can more quickly and precisely adjust parameters. As with any new system, there are growing pains. We're projecting to have the LOS completely rolled out in the third quarter prior to tax season. Ultimately, we're striving to achieve higher volumes with better deal structures to help our customers be more successful, and we're confident the investment will have long-term positive impacts. While adding a level of sophistication to our underwriting is critical, a large part of our result is a function of our servicing efforts after the sale, which we must continue to execute at a high level. The gross margin initiatives we are focused on continue to bear fruit and improve materially year over year. Sequentially, there was a small decrease, but this was a function of the sales miss I discussed earlier. We also continue to improve the age and mileage of vehicles we're purchasing compared to the prior year. During the quarter, we were able to bring down our purchase cost average of vehicles, despite the UAW strike and any noise it created. If you reference slide four in the supplemental material on the website, I've included two charts. In the first chart, I put our purchase cost average up against Cox's MMR index, which tracks price movement throughout the year on a set basket of goods. We're improving our timing here, which ultimately will reduce how we own that vehicle relative to a given book value at the time of contract origination. It's evident we're moving with the market better, despite us doing this with lead times of three to four weeks. The second chart shows during the same period that we've improved the quality of the assets by purchasing newer and lower mileage vehicles. These are material changes, which lower repair costs during initial reconditioning and while under a service contract, contributing to better gross margins. When combined with the inventory procurement and remarketing management processes implemented last year, We're delivering operational improvements for our customers and the company. We've made great strides in both our procurement and remarking capabilities, and a key driver going forward will be our ability to resell more of these vehicles that are repossessed. The opportunity today is considerable and continues to grow as newer vehicles cycle through our portfolio. We've engaged a national provider to perform reconditioning and improve vehicle quality, which will in turn help drive the overall average cost down improve gross margin, reduce credit loss, and enhance cash flow. We will launch this during the third quarter. This is also critically important to addressing the affordability headwinds for our consumers. I want to touch on net charge-offs and overall credit losses. Although the macro environment has seen some cooling of inflation over the quarter, the lingering financial and psychological effects of the worst bout of inflation in four decades continues to impact our consumers. Goods and services are still far pricier than they are just three years ago, with the economic inflationary pressures on our customers now more prevalent in all areas of their lives. Things like higher energy costs, food, housing, and auto insurance, just to name a few. This is the largest contributing factor that drove an increase to the frequency of losses during the quarter of 24%. The unit losses on repossessions peaked in September and came down slightly in October, Our 30-day-plus delinquencies also improved during that same timeframe, which are both positive signs, but we remain cautiously optimistic about this movement. I will now turn things over to Vicki on more details on the financials.

Thank you, Doug. In my commentary, the comparisons that I will cover will be the second quarter of 2024 versus second quarter of 2023, unless otherwise noted. Our revenues for the second quarter were $361.6 million, up 2.8% from last year's prior period. The year-over-year increase is primarily due to the 23% higher interest income. As Doug mentioned, we did have a decrease in unit volumes. Our sales volumes became more challenging as we moved throughout the quarter, and most of this decline came in the last month of the quarter. Although we did have some operational challenges as we implemented our new LOS, There was also a dampening in the overall used vehicle market because of continued affordability challenges for our consumer. When combined, the softness in the market, the continued elevated vehicle prices, and onboarding stores to the LOS, we have less predictability in short-term sales volumes than we would have otherwise expected to have. With that said, the application volumes remain robust. Our LOS onboarding will be completed in the third quarter and the work we are doing to improve affordability should mitigate some of these challenges. The gross profit dollars per retail unit sold improved by 11.5% and the gross profit percentage increased 220 basis points, a result of the initiatives around inventory lifecycle efficiencies from the procurement, reconditioning, wholesaling efforts, and repairs after the sale. Sequentially, gross profit dollars improved slightly by 1% and the gross margin percentage was 30 basis points lower, primarily due to the lower sales volumes in October. We expect further improvements in our gross margin percentage as volumes improve and we scale and fully operationalize our initiatives. Due to our operational efficiencies, our inventory dollars decreased $16.5 million from the prior year quarter. Quarterly inventory turns improved to 7.1 compared to 6.7 annualized. SG&A was $44.9 million, or 14.9% of sales, up from the prior year quarter of $42.9 million, but down sequentially 1.6 million from $46.5 million. The primary reduction sequentially was a $3.2 million stock reduction in stock-based compensation, partially offset by increased costs in collection expenses and professional fees related to the implementation of our new technologies. Since the quarter end, we have made adjustments to our operating expense structure. First, we reduced the size of our corporate workforce by 10% through a series of strategic decisions. We've also limited hiring, reduced our marketing spend, and curtailed the use of some professional services. We will continue to evaluate spend at both the dealership and the corporate level, and we're committed to driving cost efficiencies in the business and implementing cost savings initiatives over the next quarter. That, when combined with our technology and business investments, we expect to provide SG&A cost leveraging opportunities as we move forward. However, we continue to serve an expanding customer base with over 104,000 customers, a 6% increase over the prior year quarter. SG&A per average account improved and was $424 compared to $439 in the prior year and $449 sequentially. On to credit losses. Our net charge-offs as a percentage of average finance receivables were 7.2% versus 5.8%. This compares to our prior 10-year average for second quarters of 6.2%, and that includes the positive COVID periods. As a comparison to pre-COVID periods, our average net charge-offs for the five-year period pre-pandemic were 7% for second quarters. the frequency of losses accounted for over two-thirds of the credit loss increase. Severity was also higher than usual, caused by some rapid vehicle depreciation exhibited last year that made some of the originations in the calendar year of 21 and 22 pools experience both higher frequency and severity of losses.

That's a great point, Vicki. If you reference chart one on slide five, We've indexed wholesale prices back to 2017 to show what happens over a three-year period with price in a normalized environment. I specifically called out two points to illustrate what happens with price between an origination and a default as an example. In chart one, the periods I've identified for origination and default show approximately a 9% or 10% reduction in depreciation. Chart two reflects the wholesale price movement from 2021 to 2023 year to date. I've shown similar timing of origination and defaults, and it clearly shows the price degrading in excess of 25%. This is why severity is more pronounced than normal. This is not a dynamic that's specific to Carmar, but an industry-wide issue, which most lenders will have to contend with at some point.

Yeah, thank you, Doug. Because of the nature of our contracts being shorter, it's our belief that we are witnessing some of this first. Many industry metrics which measure delinquency and default rates, which have historically moved in tandem, now show delinquencies continuing to rise without defaults moving at a similar rate. As a management team, we've decided not to deviate from our historical collection practices because of our deep experience in dealing with subprime customers. The good news is that we are through the largest percentage of losses expected from these pools. While these pools are challenging, nonetheless, they produce over 50% cash on cash returns and approximately a 35% IRR. As a result of the increased losses and our quarterly analysis, the company did increase the allowance for credit loss from 23.91% to 26.04% sequentially. resulting in a $28 million charge to the provision expense. It's an earnings per share loss of $3.40 after tax. The structural changes to our portfolio over recent years, driven by higher vehicle costs and longer term links, as well as the current economic state of our continue to drive an increase in the provision for credit losses. As our allowance represents an expectation of losses on a $1.5 billion portfolio, the result of a change can have a large impact on any period's quarterly earnings, especially based on a retail business's sales in a given quarter. Our pools have consistently produced positive cash on cash returns and attractive IRRs. As vehicle prices have risen, in terms of increase from approximately 30 months to approximately 44 months, our time to break even has been pushed out and IRRs have declined, although still at very good returns. Please refer to slides three and six on our website to see how these pools have performed over time. Our accounts, 30 plus days past due, were 3.6%, consistent with last year's quarter, and improved from 4.4% sequentially. As a percentage of accounts receivable, our total dollars past due improved 213 basis points sequentially. This is especially important given that the quarter closed on a Tuesday, which is historically the highest delinquency day of the week. The average originating contract term for the quarter was 44.1 months compared to 42.6 months and improved sequentially from 44.7. The lower delinquencies should result in improved losses over the next quarter. Our weighted average contract term for the entire portfolio, including modifications, was 47.3 months compared to 44.8 for the prior year quarter and 46.9 sequentially. The weighted average age of the portfolio improved to 10.8 months. The percentage of our portfolio held by the highest credit quality customers continues to improve compared to the prior year and was flat sequentially. You should expect us to be more aggressive on capital allocation going forward. During this quarter, we closed another location, bringing the total to three for the fiscal year. We will be adding a newly acquired dealership during the third quarter, moving capital from underperforming stores to higher performing assets which has cascading benefits throughout the company. We will continue to review and monitor capital invested in each dealership and other investments to maximize returns. Our interest expense continues to significantly impact our earnings potential. Over 60% of the increase is due to higher interest rates, with the remaining a result of an increase in average borrowing. The company's total securitized non-recourse notes payable was $489 million, net of $90 million in restricted cash related to these notes. We are also currently considering redeeming our first series of asset-backed non-recourse notes issued in April of 2022 as we have satisfied the conditions to repurchase the securitized receivable under the terms of the notes subject to notification to the note holders. This will free up some well-seasoned collateral. At quarter end, we had $4.3 million in unrestricted cash and approximately $86 million in additional availability under our revolving credit facilities based on our current borrowing base of receivables and inventory. Access to capital with our $600 million revolving credit facility, a successful securitization program, and an active shelf registration gives us flexibility and a distinct advantage over many competitors. Many competitors may experience even more pressure in accessing capital in the future. Our non-recourse securitized notes represent the bulk of our funding, and our cost of funds fluctuate with the level of interest rates and credit spreads. We've summarized the key drivers and their impact on EPS in the quarter on slide seven. In conclusion, we remain committed to growth and prudent financial management. We're focused on delivering value to our shareholders through strategic investments, operational efficiency, and a steadfast dedication to keep our customers on the road. Thanks, and I'll let Doug close us out.

Thanks, Vicki. We continue to optimize our footprint and leverage our investments in technology and infrastructure. Our ERP implementation begins next calendar year, which will reduce the need for several manual and redundant processes. We are excited to have Central Auto Sales as a new addition to our dealership group that we expect to close in December. We're actively evaluating several opportunities in our market geographies to acquire productive stores which offer operators an exit strategy and continue their great work on servicing customers in their communities. This last acquisition has sales volume on par with our largest stores in the country, and we're excited to have some new partners help us grow. Before we take questions, I want to reiterate that our team is extremely focused on executing our strategy for the back half of fiscal year 2024. Overall, we believe our keen focus on operational efficiencies, reducing costs, and prudent capital management will enhance our competitive advantages. The overall macro environment remains challenging for Car Mart's core customers, both existing and prospective, but they need the service we provide. While we're disappointed to show a loss during the current quarter, the underlying cash-generative nature of our business continues to position us for long-term profitable growth. Now, we'll open up the line for questions. Operator, please provide instructions to do so.

Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 11 on your telephone. Again, to ask a question, please press star 11. We do ask that you please limit yourself to one question and a follow-up. Thank you. One moment for our first question. Our first question comes from the line of John Rowan of Janie Montgomery Scott. Your line is open.

Good morning. Doug, I want to echo your sentiment on Hank, especially since I'm going to reference him here in one of my questions. You mentioned that the cash-on-cash return is still the same at 1.6 times than it was historically for the company. I just want to make sure I understand that metric correctly and whether or not we have to adjust it for timing because you say it's the same, but it's taking – at a 45, 44-month duration, it's taking 50% longer to get to that return. I remember my first meeting with Hank, and when he was CEO and Jeff was CFO, he said, we're never going over a 30-month duration. Is that still the right metric to look at given how much longer it's taking to collect the cash?

Yeah, so that's an undiscounted return, John. So again, putting $1 out and getting $1.60 back When you discount that back for the time and the longer terms, you know, that's when I was mentioning the IRRs, which are certainly lower, but still very positive. And if you think about, you know, the last couple of years, and I think we've talked about this on a few calls, you know, we could have chosen just to sit out of the market and not serve these customers. But we chose to go ahead and participate. extend the term. We're really working on the quality of the vehicle and have improved that since that COVID period time. So again, you know, overall and over time, it's still a good return on the output of those pools.

Yeah, John, I'd also echo Vicki's sentiments and appreciate your commentary about Hank. I'm sure if you went back in time and asked him, hey, Can you envision a day we're going to sell 60-plus thousand cars at $19,000 apiece? You probably would have pushed back on that, too. But the environment has changed. And I think with other large competitors closing, it creates opportunity for us as well. And we're feeling ourselves out for what that right term is. And I think that's why it's so important to have these new initiatives like the LOS that will enable us to drive that and have some centralized thought about what terms should be and how we can actually get there.

Okay. Your press release did mention some underwriting changes in October impacting volume. What were those? I mean, obviously with the rollout of the LOS, should we look for a reduction in originating term? Obviously, the average contract term was up pretty sharply sequentially. I assume there was a heightened level of modifications in there since the originating term came down. Can you just kind of break those two pieces out and what the underwriting changes were?

Yeah, as I mentioned before, the underwriting changes primarily focused around term and down payment. We had made some mild adjustments at the very beginning of the quarter. And as we saw credit losses change, we pulled back and really wanted to focus on highly rated customers and down payment. We weren't sure how much effect that would have on sales or really what we could execute on. And we were really surprised by the results. I think we're still trying to figure out what that right term is, because what we need to balance is that and sales volumes. Historically, we've served the customer that we underwrite, and it provides a good return. But now, we really are able to dial in and really focus on highly rated customers. And to us, that's the real upside of the opportunity to try and augment the portfolio. So we're trying to juggle all that while continuing to onboard the remaining stores, if that adds any clarity, John.

Okay. And did you address whether or not there was increased modifications?

We have not seen an increase in modifications compared to historical trends, no. And I think the overall portfolio term was up 0.4 months, including those modifications. So again, yes, we are working with our customers in this environment, same as we have historically. But I think we mentioned, too, that we're also ensuring that anything that's not going to be a producing asset or the consumer's not able to keep making payments, we're not kicking those down the road. We're taking our lumps as we go here.

Yeah. One more thing on that. It's one of the things that Vicki called out. When you look at delinquency rates and default rates and the divergence of those two, which historically have moved in tandem, our experience in working with these customers says that continue to run our play. Our deep experience, we have to trust our playbook in saying things don't materially get better over time working with this tranche of customers, and we've got to cycle through these through our portfolio if that's what it means. And so we're staying focused on running our play.

Okay. And then just two more. I'll lump them into one question. What's the outlook for share repurchases? Obviously, given the loss you reported here, are you anywhere close to any amortization events in the ABS facilities?

Yeah, so share repurchases will continue to be part of our capital allocation as we look ahead. We do want to ensure that we're taking advantage of the opportunities that we have in front of us right now in these acquisitions and not miss out on any of those in the current market. But repurchases will continue to be a part of that. On the ABL side, we are working on our renewal. of our ABL currently. We have a good relationship with our banks. We keep them updated on our business and very transparent with them. They understand our business.

Yeah, but I mean, there's got to be a covenant in there. I just want to make sure you're not close to a covenant that sort of is a turbo amortization.

Yeah, no, we have... We have availability triggers that we watch and review closely. And as I mentioned, we have 86 million of additional availability at the end of October. And we're not expecting to trip any covenant triggers there. And then we have our ABS that we're going to call here in the next 30 days or so or less this month in December, which will bring some additional collateral into that ABL pool. And then we're also looking at another securitization later in the month. So we've got flexibility there. And then, as I mentioned to you, we also have our active shelf out there should we need to use some other type of funding in the future.

OK. Thank you. Thank you, Joan.

Thank you. One moment, please.

Our next question comes from the line of Vincent of Stevens. Your line is open.

Good morning. Thanks for taking my questions. First on credit, so appreciate all the detail you gave with that. So the 30 days, accounts 30 days past due came down quarter to quarter, yet the credit provisions went up. And so I'm curious what changed in your thinking that drove the credit provisions higher. In the press release, it says higher credit provisions were one time. So I'm wondering if the higher credit provisions is related to, say, one-time higher credit losses that we experienced this quarter, and so reserves should come down as the back book of the portfolio comes down over time? Or is the consumer deteriorating further going forward, so we should expect to keep this higher credit reserve rate going forward? Thank you.

Sure. So a large piece of that credit reserve analysis is just based on actual losses that have happened. And so when you see an increase of losses in the quarter like we saw, that's going to roll through the entire portfolio with an expectation that some piece of that continues. So some of it's just a math equation that results in that higher output. You know, as we look at our delinquencies, as we look at the pools that we have out there, yes, there would be some expectation that, you know, as we move forward here, that that would be able to be reduced at some point in time in the future. But we've got to work through what's currently in our portfolio, and we'll continue to review that quarterly.

Yeah. I'd add also, You know, the increase in those unit losses during the quarter was really, really sharp. Again, I mentioned peaking in September, coming down in October, and then, you know, again, most recently in November it came down yet again. So we're encouraged by that, but, you know, it's tough for us to sort of gauge where that's going to end up. But us keeping our delinquencies in line and seeing positive trends in terms of the unit losses, those are really good indicators. you know, we got to see what sort of pans out. The environment is still challenged for our consumers, and that doesn't seem to be going away anytime soon. We're doing everything we can to help them be successful.

Okay, that's very helpful. And I guess maybe to put it another way, is there a way to say that, hey, your underwriting has changed such that you're targeting a certain loss rate that's lower than where we are now? Maybe if you could give some detail of what I understand that the current book or the portfolio that was written this past year is probably in the tough spot, but trying to get a sense of the forward portfolio that you are writing going forward, are you targeting something that's lower than where the back portfolio is?

Yeah, so there's a couple of drivers there, Vincent. I think about it this way. If we're targeting higher down payments and better rated customers, I would expect the loss rate to come down, especially when you feather in the fact that we're really focused on the asset, right, and how it performs in the portfolio. We should drive better recovery rates, right, but all that remains to be seen. We have to prove that out, but we're doing all the things to sort of get us to that future place. So, you know, you're 100% right that I think that's where we're headed and that's where we want to be focused on. We don't know what that means yet, right? We need to get these cars cycled through and keep more of these cars and help drive cheaper cars into our portfolio also, which help with default rates. So there's a lot going on, but we're trying to do all of those things to drive a differentiated results here than we've experienced recently.

Vincent, I would also add to that that, you know, it is a subprime consumer and we're working to structure the deals for success as best we can. But as you know, these consumers live paycheck to paycheck, and that's why our servicing after the sale and how we help them through those events after the sale are so important in how we service them. So, you know, again, we have to keep that in mind, the consumer that we're dealing with and the aspect of that.

Okay, that's helpful. Thank you. And then... Separately on the sales activity, so the sales per store per month declining this quarter, I was wondering if you could give specifically October, since that seems to be the weakest in the quarter, and then how much of the impact was driven by the onboarding of the LOS system? You've gotten a lot of stores now within that, so I'm just wondering maybe what sales would have been without that onboarding, and just generally how you expect sales to be going forward. Is there still more pressure and plus your tighter underwriting or the changes you're making now, we can see some sales growth going forward. Thank you.

Yeah, I think Vicky touched on that in her remarks there about there being less predictability today. And I think that's really driven by, partially by the rollout of the LOS. Our teams and our stores are learning to use the system it's new we haven't changed it in over a decade and so there's a learning curve there which which does impact some productivity right we're aware of that the best thing we can do is continue to roll it out roll it out quickly to support the stores as best as we can and then get that behind us in addition to that there was some softness in the environment and what we're trying to do is reconcile okay we were up again in online credit apps 19 Our unique visitors to our website was also up 23%. So, like, there's no shortage of demand, right? What we're trying to do is balance the right customers in our portfolio and roll out this new system. There was a little bit of softness in showroom traffic, and so we're trying to figure out, is that an us problem, right, or is that driven by the environment? And it's really, really early to tell. It was a sort of sharp drop off in October, and so, you know, it sort of remains to be seen. We're trying to give ourselves some elasticity on the sales volume for the third quarter here Because it's important to us to get the right customers in our portfolio. And that's the most important thing we're really focused on.

And there is still the affordability challenge. I think Cox has come out that there's somewhere around 50% of the market that may be setting out due to affordability. So the improvements that we're working on in terms of the vehicle should help with that also.

Yeah, I think... That's a great point, Vicki. I touched on that, the ability to sell more of our repossessions. When we do that, our early indicators and our pilot is we can shave a couple thousand dollars off the transaction price for our consumer. We can generate demand when we scale that. That's why it's so important, and we're really focused on that. That does roll out here in the third quarter. I'm not really answering your question directly, but these are all the things that are in play. We know we can drive some of that. We know the top-side demand is really strong, and we know we're also looking at underwriting restrictions and guidelines and trying to balance all of that with onboarding new stores. So I wish I could give you a more clear answer, but it's not on the demand side.

Okay, understood, and that's very helpful. Thanks very much. Thank you, Vincent.

Thank you. One moment, please. Our next question comes from the line of Kyle Joseph of Jefferies. Your line is open.

Hey, good morning. Thanks for taking my questions. Just a few more on credit, if you will. I think you referenced that we're back at pre-pandemic average loss rates for the second quarter, but if we look back at pre-pandemic reserve levels, I think they were more in the 24.5%, 25% range. Obviously, you're above that now. Is that a function of the portfolio duration or just the uncertain outlook? And then kind of in addition to that, any specific macro changes that trigger the reserve or is it more just a function of performance and the enduring inflation?

Yeah, I would say that most of it is based on the performance. The severity is a piece of that increased reserve as well. And then there are qualitative factors such as the inflationary environment that also play into that. So it's a combination of all of those things, Kyle, that causes that reserve to need to be at a higher percentage.

I got it. And then, yeah, I think this was referenced earlier, but obviously early stage DQs continue to perform well. So is this, you know, the back book and then, you know, is it just, ongoing inflation that's driving less curing back books?

Yeah, I think that's a piece of it, just the consumer and the environment they're in. But I think where we ended the quarter, especially, you know, like I said, closing on a Tuesday, which is typically our highest delinquency day of the week, And then looking at both our 30-plus being lower as well as our less than 30-day delinquencies being lower was a really positive sign.

Got it. Thanks very much for taking my questions.

Thank you. Thank you. I'm showing no further questions at this time. Let's turn the call back over to Doug Campbell for any closing remarks.

I'd like to thank everybody for joining the call. We have obviously a lot going on, a lot of positive things for our company. We're really excited about our future and really focused on some of these high line items like our ERP and our LOS, which are tech investments that we've made over the last couple of years, all of which will help our customers be more successful. I think the affordability is a key part of this equation. And knowing that we have a path to help engineer more affordable vehicles for our consumers and generate demand despite the external environment is also a big piece of that. And then lastly, we're really excited about our acquisition posture. We were able to get one of these done. And when you can add stores that are on par with some of your largest stores in the country, how can you not be excited about that? And the other ones that are in our pipeline, some of them are two and three times the size of that. So we couldn't be more excited about our future. I appreciate everybody for joining the call, and thank you very much for your interest in America's Car Mart.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect.

Have a great day. Hello. Thank you. Thank you.

Thank you for standing by and welcome to America's Car Mart second quarter 2024 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentations, there will be a question and answer session. To ask a question at that time, please press star 11 on your telephone. As a reminder, today's call is being recorded. I will now turn the call over to your host, Ms. Vicki Judy, America's Car Mart CFO. Please begin.

Thank you and welcome to America's Car Mart's second quarter 2024 earnings call. Joining me today is Doug Campbell, who took over as our company's CEO on October 1st, 2023. We've issued our news release earlier this morning and it is available on our website. We've updated our reporting format with a simplified look, providing an efficient and easy comparison of important metrics against the prior corresponding quarter and commentary about our results. In addition, we will post the transcript of our prepared remarks following this call. And we are also going to be posting some slides to our website, some supplementary materials. We are having some technical difficulties this morning, but those should be up shortly. And those will help further illustrate many of the talking points that we're going to cover in our call today. The Q&A session will be available through the webcast after the call. We believe that this process will help enhance how we share our quarterly results with you, and we welcome your feedback. During today's call, certain statements we make may be considered forward-looking and inherently involve risk 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, 2023, and our current and quarterly reports furnished to or filed with the Securities and Exchange Commission on Forms 8K and 10Q. I will now turn it over to Doug for his introductory comments about our second quarter.

Good morning, and thank you for joining us and for your interest in our company. First, I'd like to thank our associates for their relentless focus on keeping our customers on the road. I also appreciate all the many messages I've received on my appointment as CEO. It means a lot, so thanks for that. I want to take a moment to recognize the passing of Hank Henderson, one of our board members and CEO prior to Jeff Williams. His contributions here at the company and in the community to his family will leave an indelible mark. He was a valued board member and a long-time shareholder. His pointed advice to me about the opportunity to be a CEO has a different meaning today. So thank you, Hank. During the quarter, we identified someone with a similar profile that has a long-term view of the business. As such, we recently added Jonathan Bubba, from Nantahala Capital Management to our board. He brings many years of experience within specialty finance, including subprime installment lending, pawn lending, and lease to own retail. He is a shareholder as well, and we're excited to have him join our board. Now, I'd like to address the order. If I'm on the other end of this call, I'd have a lot of questions about the results, and particularly credit losses. I'd ask you to bring into context that GAAP accounting requires us to report our results as a retailer with an accounts receivable balance of almost $1.5 billion originated over the last four years. As the business grows, the impact of reserves and credit adjustments on our portfolio originated over a four-year period becomes even larger in relation to the quarterly results. The way we measure our business is the cash we collect over time relative to the money that we put out on the street. And if you look over time, we've never had a pool of loans in which we earn cumulative cash returns less than 50% in excess of the cash outlay over the life of the contracts. What has changed is that it takes longer to recognize it. But 10 years ago, we put $1 out on the street and get approximately $1.60 back over time. And that's still the case. Let me also tell you why I came to Cardmark. Over the last five or six fiscal years, the business has generated almost $600 million in free cash flow. The companies repurchased $156 million in shares, grown the net AR balance by $739 million, funded various capital expenditures of almost $78 million, while funding increased inventory of $79 million in a growing business. They've been able to do this because of the underlying pools of receivables that the company has originated. have consistently produced cash flows in excess of the cost to operate the business over time. This remains the case. Additionally, this segment of automotive is large and a growing part of our industry. The ability to really help consumers who have little to no access to credit from an industry leader with a great track record and an abundance of opportunity made it attractive. Especially when you consider the opportunity to feather in my skill set and industry best practices with CarMart's unique culture, It has the power to take the business to the next level, and that's what I'm focused on. Today, we reported revenue increase of 2.8%. That was primarily driven from a 23% increase in interest income. Sales volumes were down 4.6%, but sales revenue only saw a decline of 0.4%. The muted sales revenue was a product of a 5.6% increase in the quarterly average selling price moving from $18,025 to $19,035 year-over-year. Approximately 40% of this increase was related to the vehicle's selling price, but 60% was related to the increased revenue for ancillary products. Sequentially, the quarterly average selling price was relatively flat. As far as sales volumes, we finished the quarter with 15,162 units versus 15,885 units sold last year. August and September had respectable volumes and collectively posted a gain in sales year over year, but October sales results were down. Several items contributed to the sales decline witnessed in October, and I'll talk about that now here. Web traffic was consistent and still posted gains year over year, and online credit applications for the quarter were also positive by 19%, yet there was a decrease in showroom traffic. Additionally, launching several states onto our new loan origination system, or LOS, was a contributing factor I'll speak to more in a minute. Overall, we're trying to balance sales volume with our new system, onboarding new stores, and introducing new underwriting guidelines. We spent the better part of last year rolling out the consumer application portal for our LOS, which allows the consumer to apply faster, have a soft credit pool during the application process, and get a response via text as to the status of their application, as well as centralized appointment settings. We're now in the second phase of our LOS rollout, which is related to underwriting and how sales are being originated. During the quarter, we onboarded three additional states, bringing the total to five states, which accounts for about 45% of our revenue at quarter end. We started out the fiscal year rolling out the dealer-facing portion of this tool. As a reference, our legacy system had limited ability to influence outcomes, but served as a stable platform to originate deals and manage associated costs. Our original intent was to roll the system out with similar underwriting rules as our legacy system, Alice, allowing users to learn the system over time, but giving us enhanced data and visibility. However, with a backdrop of increasing credit losses, we made the strategic decision to implement new underwriting rules, which primarily sought to decrease terms and increase down payments. The initial results were very positive. When looking at originating terms, we finished at 44.1 months for the quarter. While this is up year over year, it's down sequentially by 0.6 months. It's the largest decrease we've seen since July 2019. The originating terms during the quarter for our legacy system were approximately 44 months and 42 months on the new LOS. Originating terms were both down in both systems and both trended downward throughout the quarter. Average down payments for the quarter were 4.9% and relatively flat when viewed sequentially. but down 30 basis points year-over-year. Yet when comparing the two originating systems, we collected nearly a point more in down payment on the new LOS, generating 5.5% down and 4.6% in ALIS. This demonstrates how effective the system is, and our teams are pushing for improved deal structures, despite the seasonality we normally see with cash down payment percentages. The benefits of LOS are no longer theoretical. It's deployed in about half our stores already, And we couldn't think of a more opportune time to begin testing its capabilities. These combined results show that we can more quickly and precisely adjust parameters. And with any new system, there are growing pains. We're projecting to have the LOS completely rolled out in the third quarter prior to tax season. Ultimately, we're striving to achieve higher volumes with better deal structures to help our customers be more successful. And we're confident the investment will have long-term positive impacts. While adding a level of sophistication to our underwriting is critical, a large part of our result is a function of our servicing efforts after the sale, which we must continue to execute at a high level. The gross margin initiatives we are focused on continue to bear fruit and improve materially year over year. Sequentially, there was a small decrease, but this was a function of the sales miss I discussed earlier. We also continue to improve the age and mileage of vehicles we're purchasing compared to the prior year. During the quarter, we were able to bring down our purchase cost average of vehicles, despite the UAW strike and any noise it created. If you reference slide four in the supplemental material on the website, I've included two charts. In the first chart, I put our purchase cost average up against Cox's MMR index, which tracks price movement throughout the year on a set basket of goods. We're improving our timing here, which ultimately will reduce how we own that vehicle relative to a given book value at the time of contract origination. It's evident we're moving with the market better, despite us doing this with lead times of three to four weeks. The second chart shows during the same period that we've improved the quality of the assets by purchasing newer and lower mileage vehicles. These are material changes, which lower repair costs during initial reconditioning and while under a service contract, contributing to better gross margins. When combined with the inventory procurement and remarketing management processes implemented last year, We're delivering operational improvements for our customers and the company. We've made great strides in both our procurement and remarking capabilities, and a key driver going forward will be our ability to resell more of these vehicles that are repossessed. The opportunity today is considerable and continues to grow as newer vehicles cycle through our portfolio. We've engaged a national provider to perform reconditioning and improve vehicle quality, which will in turn help drive the overall average cost down improve gross margin, reduce credit loss, and enhance cash flow. We will launch this during the third quarter. This is also critically important to addressing the affordability headwinds for our consumers. I want to touch on net charge-offs and overall credit losses. Although the macro environment has seen some cooling of inflation over the quarter, the lingering financial and psychological effects of the worst bout of inflation in four decades continues to impact our consumers. Goods and services are still far pricier than they are just three years ago, with the economic inflationary pressures on our customers now more prevalent in all areas of their lives. Things like higher energy costs, food, housing, and auto insurance, just to name a few. This is the largest contributing factor that drove an increase to the frequency of losses during the quarter of 24%. The unit losses on repossessions peaked in September and came down slightly in October, Our 30-day-plus delinquencies also improved during that same timeframe, which are both positive signs, but we remain cautiously optimistic about this movement. I will now turn things over to Vicki on more details on the financials.

Thank you, Doug. In my commentary, the comparisons that I will cover will be the second quarter of 2024 versus second quarter of 2023, unless otherwise noted. Our revenues for the second quarter were $361.6 million, up 2.8% from last year's prior period. The year-over-year increase is primarily due to the 23% higher interest income. As Doug mentioned, we did have a decrease in unit volumes. Our sales volumes became more challenging as we moved throughout the quarter and most of this decline came in the last month of the quarter. Although we did have some operational challenges as we implemented our new LOS, There was also a dampening in the overall used vehicle market because of continued affordability challenges for our consumer. When combined, the softness in the market, the continued elevated vehicle prices, and onboarding stores to the LOS, we have less predictability in short-term sales volumes than we would have otherwise expected to have. With that said, the application volumes remain robust. Our LOS onboarding will be completed in the third quarter and the work we are doing to improve affordability should mitigate some of these challenges. The gross profit dollars per retail unit sold improved by 11.5% and the gross profit percentage increased 220 basis points, a result of the initiatives around inventory lifecycle efficiencies from the procurement, reconditioning, wholesaling efforts, and repairs after the sale. Sequentially, gross profit dollars improved slightly by 1% and the gross margin percentage was 30 basis points lower, primarily due to the lower sales volumes in October. We expect further improvements in our gross margin percentage as volumes improve and we scale and fully operationalize our initiatives. Due to our operational efficiencies, our inventory dollars decreased $16.5 million from the prior year quarter. Quarterly inventory turns improved to 7.1 compared to 6.7 annualized. SG&A was $44.9 million, or 14.9% of sales, up from the prior year quarter of $42.9 million, but down sequentially 1.6 million from $46.5 million. The primary reduction sequentially was a $3.2 million stock reduction in stock-based compensation partially offset by increased costs in collection expenses and professional fees related to the implementation of our new technologies. Since the quarter end, we have made adjustments to our operating expense structure. First, we reduced the size of our corporate workforce by 10% through a series of strategic decisions. We've also limited hiring, reduced our marketing spend, and curtailed the use of some professional services. We will continue to evaluate spend at both the dealership and the corporate level, and we're committed to driving cost efficiencies in the business and implementing cost savings initiatives over the next quarter. That, when combined with our technology and business investments, we expect to provide SG&A cost leveraging opportunities as we move forward. However, we continue to serve an expanding customer base with over 104,000 customers, a 6% increase over the prior year quarter. SG&A per average account improved and was $424 compared to $439 in the prior year and $449 sequentially. On to credit losses. Our net charge-offs as a percentage of average finance receivables were 7.2% versus 5.8%. This compares to our prior 10-year average for second quarters of 6.2%, and that includes the positive COVID periods. As a comparison to pre-COVID periods, our average net charge-offs for the five-year period pre-pandemic were 7% for second quarters. the frequency of losses accounted for over two-thirds of the credit loss increase. Severity was also higher than usual, caused by some rapid vehicle depreciation exhibited last year that made some of the originations in the calendar year of 21 and 22 pools experience both higher frequency and severity of losses.

That's a great point, Vicki. If you reference chart one on slide five, We've indexed wholesale prices back to 2017 to show what happens over a three-year period with price in a normalized environment. I specifically called out two points to illustrate what happens with price between an origination and a default as an example. In chart one, the periods I've identified for origination and default show approximately a 9% or 10% reduction in depreciation. Chart two reflects the wholesale price movement from 2021 to 2023 year to date. I've shown similar timing of origination and defaults, and it clearly shows the price degrading in excess of 25%. This is why severity is more pronounced than normal. This is not a dynamic that's specific to Carmar, but an industry-wide issue, which most lenders will have to contend with at some point.

Yeah, thank you, Doug. Because of the nature of our contracts being shorter, it's our belief that we are witnessing some of this first. Many industry metrics which measure delinquency and default rates, which have historically moved in tandem, now show delinquencies continuing to rise without defaults moving at a similar rate. As a management team, we've decided not to deviate from our historical collection practices because of our deep experience in dealing with subprime customers. The good news is that we are through the largest percentage of losses expected from these pools. While these pools are challenging, nonetheless, they produce over 50% cash on cash returns and approximately a 35% IRR. As a result of the increased losses and our quarterly analysis, the company did increase the allowance for credit loss from 23.91% to 26.04% sequentially. resulting in a $28 million charge to the provision expense. It's an earnings per share loss of $3.40 after tax. The structural changes to our portfolio over recent years, driven by higher vehicle costs and longer term links, as well as the current economic state of our customer, continue to drive an increase in the provision for credit losses. As our allowance represents an expectation of losses on a $1.5 billion portfolio, the result of a change can have a large impact on any period's quarterly earnings, especially based on a retail business's sales in a given quarter. Our pools have consistently produced positive cash on cash returns and attractive IRRs. As vehicle prices have risen, and terms have increased from approximately 30 months to approximately 44 months, Our time to break even has been pushed out and IRRs have declined, although still at very good returns. Please refer to slides three and six on our website to see how these pools have performed over time. Our accounts, 30 plus days past due, were 3.6%, consistent with last year's quarter, and improved from 4.4% sequentially. As a percentage of accounts receivable, our total dollars past due improved 213 basis points sequentially. This is especially important given that the quarter closed on a Tuesday, which is historically the highest delinquency day of the week. The average originating contract term for the quarter was 44.1 months compared to 42.6 months and improved sequentially from 44.7. The lower delinquencies should result in improved losses over the next quarter. Our weighted average contract term for the entire portfolio, including modifications, was 47.3 months compared to 44.8 for the prior year quarter and 46.9 sequentially. The weighted average age of the portfolio improved to 10.8 months. The percentage of our portfolio held by the highest credit quality customers continues to improve compared to the prior year and was flat sequentially. You should expect us to be more aggressive on capital allocation going forward. During this quarter, we closed another location, bringing the total to three for the fiscal year. We will be adding a newly acquired dealership during the third quarter, moving capital from underperforming stores to higher performing assets which has cascading benefits throughout the company. We will continue to review and monitor capital invested in each dealership and other investments to maximize returns. Our interest expense continues to significantly impact our earnings potential. Over 60% of the increase is due to higher interest rates, with the remaining a result of an increase in average borrowing. The company's total securitized non-recourse notes payable was $489 million, net of $90 million in restricted cash related to these notes. We are also currently considering redeeming our first series of asset-backed non-recourse notes issued in April of 2022 as we have satisfied the conditions to repurchase the securitized receivable under the terms of the notes subject to notification to the note holders. This will free up some well-seasoned collateral. At quarter end, we had $4.3 million in unrestricted cash and approximately $86 million in additional availability under our revolving credit facilities based on our current borrowing base of receivables and inventory. Access to capital with our $600 million revolving credit facility, a successful securitization program, and an active shelf registration gives us flexibility and a distinct advantage over many competitors. Many competitors may experience even more pressure in accessing capital in the future. Our non-recourse securitized notes represent the bulk of our funding, and our cost of funds fluctuate with the level of interest rates and credit spreads. We've summarized the key drivers and their impact on EPS in the quarter on slide seven. In conclusion, we remain committed to growth and prudent financial management. We're focused on delivering value to our shareholders through strategic investments, operational efficiency, and a steadfast dedication to keep our customers on the road. Thanks, and I'll let Doug close us out.

Thanks, Vicki. We continue to optimize our footprint and leverage our investments in technology and infrastructure. Our ERP implementation begins next calendar year, which will reduce the need for several manual and redundant processes. We are excited to have Central Auto Sales as a new addition to our dealership group that we expect to close in December. We're actively evaluating several opportunities in our market geographies to acquire productive stores which offer operators an exit strategy and continue their great work on servicing customers in their communities. This last acquisition has sales volume on par with our largest stores in the country, and we're excited to have some new partners help us grow. Before we take questions, I want to reiterate that our team is extremely focused on executing our strategy for the back half of fiscal year 2024. Overall, we believe our keen focus on operational efficiencies, reducing costs, and prudent capital management will enhance our competitive advantages. The overall macro environment remains challenging for Car Mart's core customers, both existing and prospective, but they need the service we provide. While we're disappointed to show a loss during the current quarter, the underlying cash-generative nature of our business continues to position us for long-term profitable growth. Now, we'll open up the line for questions. Operator, please provide instructions to do so.

Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 11 on your telephone. Again, to ask a question, please press star 11. We do ask that you please limit yourself to one question and a follow-up. Thank you. One moment for our first question. Our first question comes from the line of John Rowan of Janie Montgomery Scott. Your line is open.

Good morning. Doug, I want to echo your sentiment on Hank, especially since I'm going to reference him here in one of my questions. You mentioned that the cash-on-cash return is still the same at 1.6 times than it was historically for the company. I just want to make sure I understand that metric correctly and whether or not we have to adjust it for timing because you say it's the same, but it's taking – at a 45, 44-month duration, it's taking 50% longer to get to that return. I mean, I remember my first meeting with Hank, and when he was CEO and Jeff was CFO, he said, we're never going over a 30-month duration. Is that still the right metric to look at given how much longer it's taking to collect the cash?

Yeah, so that's an undiscounted return, John. So again, putting $1 out and getting $1.60 back When you discount that back for the time and the longer terms, you know, that's when I was mentioning the IRRs, which are certainly lower, but still very positive. And if you think about, you know, the last couple of years, and I think we've talked about this on a few calls, you know, we could have chosen just to sit out of the market and not serve these customers. But we chose to go ahead and participate. extend the term. We're really working on the quality of the vehicle and have improved that since that COVID period time. So again, you know, overall and over time, it's still a good return on the output of those pools.

Yeah, John, I'd also echo Vicki's sentiments and appreciate your commentary about Hank. I'm sure if you went back in time and asked him, hey, Can you envision a day we're going to sell 60-plus thousand cars at $19,000 apiece? You probably would have pushed back on that, too. But the environment has changed. And I think with other large competitors closing, it creates opportunity for us as well. And we're feeling ourselves out for what that right term is. And I think that's why it's so important to have these new initiatives like the LOS that will enable us to drive that and have some centralized thought about what terms should be and how we can actually get there.

Okay. Your press release did mention some underwriting changes in October impacting volume. What were those? I mean, obviously with the rollout of the LOS, should we look for a reduction in originating term? Obviously, the average contract term was up pretty sharply sequentially. I assume there was a heightened level of modifications in there since the originating term came down. Can you just kind of break those two pieces out and what the underwriting changes were?

Yeah, as I mentioned before, the underwriting changes primarily focused around term and down payment. We had made some mild adjustments at the very beginning of the quarter. And as we saw credit losses change, we pulled back and really wanted to focus on highly rated customers and down payment. We weren't sure how much effect that would have on sales or really what we could execute on. And we were really surprised by the results. I think we're still trying to figure out what that right term is, because what we need to balance is that and sales volumes. Historically, we've served the customer that we underwrite, and it provides a good return. But now, we really are able to dial in and really focus on highly rated customers. And to us, that's the real upside of the opportunity to try and augment the portfolio. So we're trying to juggle all that while continuing to onboard the remaining stores, if that adds any clarity, John.

Okay. And did you address whether or not there was increased modifications?

We have not seen an increase in modifications compared to historical trends, no. And I think the overall portfolio term was up 0.4 months, including those modifications. So again, yes, we are working with our customers in this environment, same as we have historically. But I think we mentioned, too, that we're also ensuring that anything that's not going to be a producing asset or the consumer's not able to keep making payments, we're not kicking those down the road. We're taking our lumps as we go here.

Yeah. One more thing on that. It's one of the things that Vicki called out. When you look at delinquency rates and default rates and the divergence of those two, which historically have moved in tandem, our experience in working with these customers says continue to run our play. Our deep experience, we have to trust our playbook in saying things don't materially get better over time working with this tranche of customers, and we've got to cycle through these through our portfolio if that's what it means. And so we're staying focused on running our play.

Okay. And then just two more. I'll lump them into one question. What's the outlook for share repurchases? Obviously, given the loss you reported here, are you anywhere close to any amortization events in the ABS facilities?

Yeah, so share repurchases will continue to be part of our capital allocation as we look ahead. We do want to ensure that we're taking advantage of the opportunities that we have in front of us right now in these acquisitions and not miss out on any of those in the current market. But repurchases will continue to be a part of that. On the ABL side, we are working on our renewal. of our ABL currently. We have a good relationship with our banks. We keep them updated on our business and very transparent with them. They understand our business.

Yeah, but I mean, there's got to be a covenant in there. I just want to make sure you're not close to a covenant that sort of is a turbo amortization.

Yeah, no, we have... We have availability triggers that we watch and review closely. And as I mentioned, we have 86 million of additional availability at the end of October. And, you know, we're not expecting to trip any covenant triggers there. And then we have our ABS that we're going to call here in the next 30 days or so or less this month in December, which will bring some additional collateral into that ABL pool And then we're also looking at another securitization later in the month. So we've got flexibility there. And then, as I mentioned to you, we also have our active shelf out there should we need to use some other type of funding in the future.

OK. Thank you. Thank you, Joan.

Thank you. One moment, please.

Our next question comes from the line of Vincent of Stevens. Your line is open.

Good morning. Thanks for taking my questions. First on credit, so appreciate all the detail you gave with that. So the 30 days, accounts 30 days past due came down quarter over quarter, yet the credit provisions went up. And so I'm curious what changed in your thinking that drove the credit provisions higher. In the press release, it says higher credit provisions were one time. So I'm wondering if the higher credit provisions is related to, say, one-time higher credit losses that we experienced this quarter, and so reserves should come down as the back book of the portfolio comes down over time? Or is the consumer deteriorating further going forward, so we should expect to keep this higher credit reserve rate going forward? Thank you.

Sure. So a large piece of that credit reserve analysis is just based on actual losses that have happened. And so when you see an increase of losses in the quarter like we saw, that's going to roll through the entire portfolio with an expectation that some piece of that continues. So some of it's just a math equation that results in that higher output. You know, as we look at our delinquencies, as we look at the pools that we have out there, yes, there would be some expectation that, you know, as we move forward here, that that would be able to be reduced at some point in time in the future. But we've got to work through what's currently in our portfolio, and we'll continue to review that quarterly.

Yeah. I'd add also, You know, the increase in those unit losses during the quarter was really, really sharp. Again, I mentioned peaking in September, coming down in October, and then, you know, again, most recently in November it came down yet again. So we're encouraged by that, but, you know, it's tough for us to sort of gauge where that's going to end up. But us keeping our delinquencies in line and seeing positive trends in terms of the unit losses, those are really good indicators. you know, we got to see what sort of pans out. The environment is still challenged for our consumers, and that doesn't seem to be going away anytime soon. We're doing everything we can to help them be successful.

Okay, that's very helpful. And I guess maybe to put it another way, is there a way to say that, hey, your underwriting has changed such that you're targeting a certain loss rate that's lower than where we are now? Maybe if you could give some detail of what I understand that the current book or the portfolio that was written this past year is probably in the tough spot, but trying to get a sense of the forward portfolio that you are writing going forward, are you targeting something that's lower than where the back portfolio is?

Yeah, so there's a couple of drivers there, Vincent. I think about it this way. If we're targeting higher down payments and better rated customers, I would expect the loss rate to come down, especially when you feather in the fact that we're really focused on the asset, right, and how it performs in the portfolio. We should drive better recovery rates, right, but all that remains to be seen. We have to prove that out, but we're doing all the things to sort of get us to that future place. So, you know, you're 100% right that I think that's where we're headed and that's where we want to be focused on. We don't know what that means yet, right? We need to get these cars cycled through and keep more of these cars and help drive cheaper cars into our portfolio also, which help with default rates. So there's a lot going on, but we're trying to do all of those things to drive a differentiated results here than we've experienced recently.

Vincent, I would also add to that, that, you know, it is a subprime consumer and we're working to structure the deals for success as best we can. But as you know, these consumers live paycheck to paycheck, and that's why our servicing after the sale and how we help them through those events after the sale are so important in how we service them. So, you know, again, we have to keep that in mind, the consumer that we're dealing with and the aspect of that.

Okay. Okay, that's helpful. Thank you. Separately on the sales activity, so the sales per store per month declining this quarter, I was wondering if you could give specifically October, since that seems to be the weakest in the quarter, and then how much of the impact was driven by the onboarding of the LOS system? You've gotten a lot of stores now within that, so I'm just wondering maybe what sales would have been without that onboarding? and just generally how you expect sales to be going forward. Is there still more pressure and plus your tighter underwriting or the changes you're making now, we can see some sales growth going forward. Thank you.

Yeah, I think Vicky touched on that in her remarks there about there being less predictability today. And I think that's really driven by, partially by the rollout of the LOS. Our teams and our stores are learning to use the system it's new we haven't changed it in over a decade and so there's a learning curve there which which does impact some productivity right we're aware of that the best thing we can do is continue to roll it out roll it out quickly to support the stores as best as we can and then get that behind us in addition to that there was some softness in the environment and what we're trying to do is reconcile okay we were up again in online credit apps 19 Our unique visitors to our website was also up 23%. So, like, there's no shortage of demand, right? What we're trying to do is balance the right customers in our portfolio and roll out this new system. There was a little bit of softness in showroom traffic, and so we're trying to figure out, is that an us problem, right, or is that driven by the environment? And it's really, really early to tell. It was a sort of sharp drop off in October, and so, you know, it sort of remains to be seen. We're trying to give ourselves some elasticity on the sales volume for the third quarter here Because it's important to us to get the right customers in our portfolio. And that's the most important thing we're really focused on.

And there is still the affordability challenge. I think Cox has come out that there's somewhere around 50% of the market that may be setting out due to affordability. So the improvements that we're working on in terms of the vehicle should help with that also.

Yeah, I think... That's a great point, Vicki. I touched on that, the ability to sell more of our repossessions. When we do that, our early indicators and our pilot is we can shave a couple thousand dollars off the transaction price for our consumer. We can generate demand when we scale that. That's why it's so important, and we're really focused on that. That does roll out here in the third quarter. I'm not really answering your question directly, but these are all the things that are in play. We know we can drive some of that. We know the top-side demand is really strong, and we know we're also looking at underwriting restrictions and guidelines and trying to balance all of that with onboarding new stores. So I wish I could give you a more clear answer, but it's not on the demand side.

Okay, understood, and that's very helpful. Thanks very much. Thank you, Vincent.

Thank you.

One moment, please. Our next question comes from the line of Kyle Joseph of Jefferies. Your line is open.

Hey, good morning. Thanks for taking my questions. Just a few more on credit, if you will. I think you referenced that we're back at pre-pandemic average loss rates for the second quarter, but if we look back at pre-pandemic reserve levels, I think they were more in the 24.5%, 25% range. Obviously, you're above that now. Is that a function of the portfolio duration or just the uncertain outlook? And then kind of in addition to that, any specific macro changes that trigger the reserve or is it more just a function of performance and the enduring inflation?

Yeah, I would say that most of it is based on the performance. The severity is a piece of that increased reserve as well. And then there are qualitative factors such as the inflationary environment that also play into that. So it's a combination of all of those things, Kyle, that causes that reserve to need to be at a higher percentage.

I got it. And then, yeah, I think this was referenced earlier, but obviously early stage DQs continue to perform well. So is this, you know, the back book and then, you know, is it just ongoing inflation that's driving less curing back books?

Yeah, I think that's a piece of it, just the consumer and the environment they're in. But I think where we ended the quarter, especially, you know, like I said, closing on a Tuesday, which is typically our highest delinquency day of the week, And then looking at both our 30-plus being lower as well as our less than 30-day delinquencies being lower was a really positive sign.

Got it. Thanks very much for taking my questions.

Thank you. Thank you. I'm showing no further questions at this time. Let's turn the call back over to Doug Campbell for any closing remarks.

I'd like to thank everybody for joining the call. We have obviously a lot going on, a lot of positive things for our company. We're really excited about our future and really focused on some of these high line items like our ERP and our LOS, which are tech investments that we've made over the last couple of years, all of which will help our customers be more successful. I think the affordability is a key part of this equation. And knowing that we have a path to help engineer more affordable vehicles for our consumers and generate demand despite the external environment is also a big piece of that. And then lastly, we're really excited about our acquisition posture. We were able to get one of these done. And when you can add stores that are on par with some of your largest stores in the country, how can you not be excited about that? And the other ones that are in our pipeline, some of them are two and three times the size of that. So we couldn't be more excited about our future. I appreciate everybody for joining the call, and thank you very much for your interest in America's Car Mart.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.