Good morning, everyone. Thank you for holding, and welcome to America's Car-Mart second quarter 2018 conference call. The topic of this call will be the earnings and operating results for the company's fiscal second quarter 2018. Before we begin, I would like to remind everyone that this call is being recorded and will be available for replay for the next 30 days. The dial-in number and access information are included in last night's press release, which can be found on America's Car-Mart's website at www.car-mart.com. As you all know, some of management's comments today may include forward-looking statements which inherently involve risks and uncertainties that could cause actual results to differ materially from management's present review. These statements are made pursuant to the safe harbor provisions 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 regarding forward-looking information, please see Part 1 of the company's annual report on Form 10-K for the fiscal year ended April 30, 2017, and its current and quarterly reports furnished to or filed with the Securities and Exchange Commission on Form 8-K and 10-Q. Participating on the call this morning are Hank Henderson, the company's Chief Executive Officer, and Jeff Williams, President. Now, I'd like to turn the call over to the company's Chief Executive Officer, Hank Henderson.
Well, good morning. Thank you all for joining us. Overall, we are pleased with our results for the quarter, with net earnings of $6 million for the quarter compared with $5 million for the same time last year, which is $0.79 per share, up from $0.62 per share. Sales volume on a per store basis was relatively flat, with some store closures, revenue was down a bit. Jeff will provide the details on that in just a moment. Revenue was also slightly affected as we saw a decrease on our average retail sales price of $73. We actually consider that reduction to be a positive because as we are, as always, working to keep our vehicles affordable for our customers.
To help assure our customer success, a quality vehicle is critical, it's also imperative that we keep the transaction in a range that will equate to a payment that will fit our customer's budget without having impractical term lengths or down payment expectations that are unrealistic. We are seeing good success in our efforts to reduce repair expenses through improved inventory quality, more efficient purchasing of parts, better overall management of inventory levels and repair practices. That is reflected in an improvement in a gross margin, which was 42%, up from 41.4% for last year. We also saw some movement in the right direction on collections as well with losses as a percentage of accounts receivable at 7.5%, down from 7.7% last year. We entered the quarter in better shape than last as our over 30-day delinquencies were at 4.1% compared to 4.8%.
While we would have liked to have seen a bit of an increase with our sales, overall, we are pleased with our results for the quarter as we saw solid improvements in the other key areas of our business and with each of those contributing to increases in our bottom line. I'm going to go ahead and turn it over to Jeff now to give you some more details on our recent results.
Thank you, Hank. For the quarter, same-store revenue was up slightly, 0.6%. We did, however, see a 0.7% overall decrease in revenues, which resulted from a 2.1% decrease in sales offset by a 9.7% increase in interest income. The overall decrease in sales related to the effect of the eight dealerships that have been closed since last year. Revenues from stores in the 10-plus year age category was down 1%. Stores in the 5 to 10-year age category was up 2% to about $25 million, and revenues for stores in the less than 5-year age category was up about 6% to $27 million for the quarter. We continue to push several initiatives, especially continuing efforts with inventory improvements, good cars, good prices, with a good display at our dealerships. We believe these will help us going forward on the revenue side.
We will also continue and improve our lot level execution through training and support, better prospecting, and also continue our efforts to improve our website and social media, all in an effort to increase quality traffic and sales closure rates at our dealerships. At the end of the quarter, 31 or 22% of our dealerships were from 0 to 5 years old, 26 or 19% were from 5 to 10 years old, with the remaining 83 dealerships being 10 years old or older. Our 10-year-plus lots produced 30.3 units sold per month per lot for the quarter, compared to 30.7 for the prior year. Our lots in the 5 to 10-year category produced 26.8 compared to 26.7. Our lots in the less than 5-year category produced 24.8 compared to 23.5 for the second quarter of last year.
We do have some inconsistencies between dealerships, especially as related to our inventory processes, which is contributing to some discrepancies in productivity between dealerships. We do have room for improvement, but we are making some progress. Our average selling price decreased slightly to $10,418, 0.7% or $73 compared to the prior year, but increased $32 or 0.3% sequentially. The flattening out of our sales price has been expected. We're working hard to find higher quality vehicles for our customers at good prices. We currently anticipate flat to some very minor increasing overall sales prices for the near term. We are hopeful that prices will continue to soften compared to prior years, which will put us in a position to give our customers better cars for the same or less money.
The hurricanes may have had some minor effect on supply and prices for a few weeks, really did not have much of an impact on us. Our guys did a good job of staying out of the market temporarily and not overpaying for cars. Once again, decreasing car prices can actually be a good thing for us and doesn't necessarily mean that our overall selling prices would go down. Our down payment percentage was 5.8% compared to 5.6%. Collections as a percentage of average finance receivables was 12.2% compared to 12.6%. Our average initial originating contract term was 29.4 months compared to 29.1 for the prior year quarter, and down from 29.8 from the first quarter. Our weighted average contract term for the entire portfolio, including modifications, was 32.5 months, which was up from 31.7 at this time last year, and basically flat sequentially.
The weighted average age of the portfolio was 9.1 months, up quite a bit from 8.5 months at this time last year. For competitive reasons, our term lengths may continue to increase just a little into the future, we must always focus on affordability, better customers can and do demand lower, more affordable payments. Interest income was up $1.7 million compared to the prior year quarter due to the $21 million increase in average finance receivables. That was about half of the increase into our increase in the interest rate on our contracts, which went to 16.5% from 15% beginning in May of 2016. The weighted average interest rate for all finance receivables at the end of the quarter was approximately 16.1%. That's up from 15.5% at this time last year. For the second quarter, our gross profit margin percentage was 42% of sales.
That's up from 41.4% for the prior year and up from 41.4% for the first quarter. Our continuing focus on solid inventory management has resulted in improved gross margin percentages. We are pleased with our continuing efforts to improve the quality of our inventory and improve inventory turns and efficiencies, these efforts are having a positive effect and will continue to benefit us as we move forward. We will remain aggressive with our inventory expense management. For the quarter, SG&A as a percentage of sales was 18.2% compared to 17%. Overall SG&A dollars were up about $1.1 million from the prior year quarter. SG&A as a percentage of revenues was up to 15.9% from 15.1%, SG&A as a percentage of finance receivables was basically flat with the prior year at about 4.8%. We have added 3,100 customers since the beginning of the year.
As we've discussed, we continue to make additional investments in GM recruitment, training and advancement, collection support, and sales and marketing, our increased SG&A relates to these areas. Our plan is to leverage these investments over time as we grow the top line with increased productivity from existing dealerships, over the near term, some strategic new lot openings to take advantage of market and talent opportunities. We will always watch our costs, we'll be very frugal, we will ensure that we have an infrastructure to support our valued customers at the highest levels. For the current quarter, net charge-offs as a percentage of average finance receivables was 7.5%, down from 7.7% for the prior year quarter, up from 6.4% sequentially due to seasonality. The decrease resulted from a lower frequency of losses with severity being flat.
Excluding the eight dealerships that are closed and winding down, net charge-offs as a percentage of average finance receivables would have been 7.4% for the current quarter. We basically saw a 30 basis point improvement for the quarter in net charge-offs. Our wholesale value recovery rates continue to come under pressure, but have leveled off for the last several quarters. Our recovery rates, once again, were in that 22%-23% range. Principal collections as a percentage of average finance receivables for the quarter was 12.2% compared to 12.6% for the prior year. The decrease resulted mostly from the longer average term and the increase in our contract interest rate, offset by a slightly higher average age of receivable. The lower collections percentage from the longer term resulted in about a 40-basis-point increase in the provision for credit losses on the income statement.
As we reserve at 25% of uncollected receivables. Between the effect of the closed dealerships and the lower collections for the reasons mentioned, credit losses would have been about 60 basis points lower for the quarter. We continue to believe that we're selling a higher quality vehicle, slight improvements with age and mileage to a better credit risk customer. We believe that our customer service levels are continuing to improve, and when combined with us providing our customers affordable, dependable vehicles, we expect losses and customer success rates to improve. At the end of October, our total debt was $138 million, and we had almost $60 million in additional availability under our revolving credit facility. Our current debt to equity is 60.8%, and our debt to finance receivables is 28%. We have significant room to grow, and there's a lot of demand in the markets we serve.
We know we can improve results and consistencies with our existing dealerships, and we are recruiting, training, and supporting our future general managers at a much higher level. We repurchased 407,000 shares, or about 5.4% of our company, at an average price of about $40 for the quarter. We have now repurchased right at 46% of our company for $175 million since 2010, at an average price of about $33. In October, we amended our debt agreement to reset available share repurchases for an additional $50 million and a slight reduction in our interest rate. Additionally, our board has reauthorized an additional 1 million shares for repurchase. It is a very exciting time at Car-Mart, and our plan is to grow the business in a healthy, efficient manner and to continue to repurchase shares opportunistically. I'll turn it back over to Hank.
Thanks, Jeff. As Jeff just said, our plan is to continue to grow the business in a healthy, efficient manner. We have a lot of capacity within our existing store base to increase sales and also a lot of opportunity to grow the bottom line at many stores with simply better execution. We will also continue to open stores on a selective basis as we're confident we have the proper support in the area. As a prime example, we're opening a new store in Centerton, Arkansas, which is right here in our backyard in the northwest Arkansas MSA where we're based out of. This area has been one of the fastest-growing in the country, with now over half a million people in this corner of our state, and we needed another location to better serve the area.
Actually, that store is opening Monday, and that will put us at 141 stores. We will continue to look for other similar opportunities in areas, particularly where our strongest experienced general managers can help provide additional oversight and support to help assure the best possible opportunity for success. For the past three days here, we've had all of our area operations managers and our regional operations VPs with us here in Bentonville for some training, retraining, team building, and most importantly, for a time to pull everyone together to ensure the whole team has the same shared focus on the right things. Having everyone together has been a great reminder of what an excellent group of folks we have. The dedication, commitment, and passion this group has for our customers and our associates is very, very impressive.
The team is incredibly enthusiastic about the future of our company and the opportunities that lie ahead, we are very fortunate to have such great people. Also, as you saw in our press release, we've named Vickie Judy as our new CFO, effective January 1. Vickie has been with us for the past seven years, most recently serving as our principal accounting officer. She already has a very thorough understanding of our business and certainly the respect of everyone here. This will obviously make for a very smooth, seamless transition. We're excited for Vickie and for the company as she takes on her new role. That concludes our prepared remarks, now we would like to move on to your questions. Operator?
At this time, the participants will now answer questions from the callers. I would like to reiterate that my earlier comments regarding forward-looking statements applies both to participants' prepared remarks and to anything that may come up during the Q&A. At this time, if you do have a question, please press star then one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, if you have a question at this time, please press star then one. One moment for questions. I'm showing we have a question from the line of Vincent Caintic from Stephens. Your line is now open.
Hey, thanks. Good morning. Thanks, guys. Two questions. First, you spent time talking about training up your general managers and getting the bench filled. I'm just curious, you now have a new store in Centerton. If you add the amount of general managers that you need to train up, what's the growth opportunity? How many stores would you have? Maybe what's the trajectory to that growth from here?
That is the single factor that prevents us from adding a whole bunch of dealerships is just the talent at the GM spot. For several years, we were adding 10 to 12 dealerships a year, with the change in the industry, decided that we need to pull back and take another look at the growth plans. That's kind of where we're at now is we've got a good group of general managers. A lot of them still need some seasoning, and we're working hard to bring them up and train them up. At the same time, we do see some opportunities to leverage some of our existing manager talent and locations in some growing areas. I guess to answer your question, we don't quite know yet, but we are working very hard to get that bench filled up.
When we get to a point where we have somebody on the bench that's ready for the keys to a dealership, we won't be shy at all about opening dealerships when we have somebody ready, trained up, experienced, and wanting a dealership of their own.
I'd add there's no shortage of towns out there for us when we look at what Actually, if you look on our investor presentation, we kind of show what we have now, then there's more identified. We're at 141 now, and we could be at 200 without really stepping far outside of our footprint. It's plenty there. It's all a people thing for us.
We will not be opening dealerships without really quality folks with their name on that front door, that's what we're working so hard at right now, and we're making some good progress.
Okay, great. That's very helpful. Thank you. The second question I have, just on the used car sales environment generally. You've had your sales, some improvement there, but maybe if you could talk about the competitive environment here. I think the industry, at least some of the industry reports I see, is calling for used car sales to generally be declining over the next year or so. Don't know if you're seeing that and if there's any increased competition there. Thanks.
Not really any increased competition. If anything, maybe it's just a little bit more friendly for us on the sales side. There's just plenty of demand out there for folks looking for good, basic, affordable transportation. We just feel like if we keep executing and get the right product out front, that our sales will be fine.
Okay, great. Thanks so much.
Our next question comes from the line of John Rowan from Janney. Your line is now open.
Good morning, guys.
Morning.
Morning.
Jeff, you said the recovery rate is like 22%-23%, effectively flat. What needs to change in the market in general to get back to that? If I'm not mistaken, it's historically been in the 30% range. What kind of big levers have to move to kind of revert to a more normalized environment?
Well, the main driver of the reduction is just the fact that the car is at end of life. There's just so many cars out there. A 10-year-old Ford Taurus or 12-year-old Taurus is really not worth much at a recovery point. I think the offsets to that would be for us making sure we're buying a really good, solid, mechanically sound car at a good price, and putting our customers in that car and increasing the chance of success. The main driver of that is going to be how we handle customers and customer situations after the sale, and putting them in a better car to start with. We don't have much influence or can't have much effect on the value of a car at end of life. There's so many factors that go into that are outside of our control.
We've been able to adjust our business and kind of plow right through that issue. We've been addressing this for a couple of years now. We're hopeful that recovery % go up, but we're not counting on that. We're certainly not building that into anything as far as our plans going forward.
Can you remind me again if there's any influence on the recovery rates, based on metal pricing or if it's also kind of, maybe there's a permanent impairment in the overall recovery rate, given the increased duration, and whether or not that sticks around as competition changes?
Yeah, I think there could be an argument that the scrap prices do set a floor for a car. To your point, the longer terms and the flood of just old basic cars out in the market, the repos, and the trades, we may be permanently at a low 20s on the recovery.
Okay. Just the last question, Jeff, I think you mentioned something about a computer problem, or maybe it sounded almost like a point-of-sale issue. I wasn't sure that I understood your comment earlier in the prepared remarks. Can you maybe just review what you were talking about as far as having improvements to go in your processes in the dealerships?
We're working hard to have good cars at good prices and properly displayed out front to attract the customer at the street level. We're also working hard on training and support with our sales associates in the field, better prospecting. We've got a database with several 100,000 customers or past customers that we are prospecting more heavily and more efficiently than we have in the past. Still working on that effort. We're working on our webpage and in social media at the same time, all in an effort to attract a better customer and increase lot traffic.
Okay. I was misunderstanding. There was no type of technical-
No
system outage. I just wanted to make sure. I thought I heard that, but I just wanted to double-check. Okay, thank you very much. That's all for me.
Yeah.
Our next question comes from the line of John Hecht from Jefferies. Your line is now open.
Morning, guys. Thanks very much.
Morning.
First question is, I know you guys, there was a change in, I guess, accounting for non kind of cash-oriented income. What's the proper tax rate for you guys going forward to model in?
John, it's still about that 37.3, absent any effect from this accounting change. This is something that is going to have some effect on us going forward, but it's really almost impossible to calculate in as far as a rate. It's based on excess tax benefits from stock option exercises. Those excess benefits used to just run through the balance sheet, but now they're running through the income statement. It's all based on what options are out there, when they get exercised, but the starting point for us as effective rate would still be that 37.3.
Okay. Then, Jeff, you talked about that you guys avoided issues with respect to the hurricane and inventory costs, even implied maybe inventory costs would continue to drift a little lower. Should we think about that as lower inventory costs, consistent gross margins, but lower overall average sales prices? Or how should we think about your gross margin and your average sales price, given your outlook on inventory costs?
Well, in our business, what we would like to do when costs decrease, when the inventory costs go down, we'd like to use that as an opportunity to put our customer in a better car for the same money. We did see a slight reduction for the quarter in the sales price. Going forward, we would really like to keep that sales price about where it is, or even a little bit up, but put our customer in a much better mechanically sound car to take advantage of our purchasing strengths.
Generally speaking, I guess it sounds like your position is relatively positive on the opportunity to continue to buy good cars at relatively low and maybe even decreasing prices?
Well, as you saw, the profit stayed relatively flat, but we actually, and it was mentioned, our average year model and average miles improved a little bit through this past year. Instead of going down necessarily the cost curve, to Jeff's point, we're able to provide a little bit better car for the same dollar.
Okay. Finally, Jeff, you gave some good facts or statistics around the different vintages. Is there anything in the 5 to 8-year vintage that is a geographical thing, or is there anything in the 5 to 8-year vintage that you're focused on in order to kind of reverse the sales trends there? Is that just sort of where it kind of gets an idiosyncratic issue with that group?
Yeah. It's kind of been a little bit spotty as far as consistency between some of the older dealerships. We are working on getting a little better on inventory management. There wasn't anything that really jumped out. It was kind of the entire category was down just a little bit. We are pretty positive on the outlook for sales volumes going forward for that group of dealerships. We've had some inconsistencies with inventory, but we are working on that, and we do expect to see some improvements down the road.
Great, guys. Thank you very much.
Thank you, John.
Once again, ladies and gentlemen, if you have a question at this time, please press star then one. Our next question comes from the line of Brian Hollenden from Sidoti. Your line is now open.
Hi, thanks for taking my call.
Thank you.
With your significant share buybacks in the quarter, can you talk more broadly about your capital allocation strategy in terms of continued repurchases, any possible dividend, and then just debt paydown? Thanks.
Brian, since 2010, we've been very aggressive share repurchasers, and we're comfortable with where we're at cash flow-wise. We're comfortable that we've worked through these significant changes in the industry, very happy with our cash flows. Basically, we feel just comfortable with a little more leverage on the balance sheet and feel like for the long term, our shares, it's a good value long term, for the shares we bought and the prices we paid. We once again. If growth opportunities are out there for us, that would be our first priority for capital allocation would be to put that money out there and grow the base business, where it makes sense. That's our first priority is to grow a healthy business and grow customer count, grow receivables, grow profits from the base business.
Secondarily, we look to share repurchases, and we've been able to have our cake and eat it too and feel comfortable with the business, the leverage ratios, and just we're comfortable with a little more leverage and don't think that will get in the way of us taking advantage of business and market opportunities as we go forward.
Thank you. Does the higher customer interest rate deter potential sales?
No. We looked hard at that. We didn't make that change back in May of 2016. We didn't make that change lightly. It was all about credit losses being higher and us trying to offset higher credit losses on the risk side. That really ended up at about $8 to $10 a month on an average payment. We're not missing any sales for $8 to $10 a month. As the market gets a little tighter on the competitive side, I don't even know that we're $8 to $10 higher now. We were at the time, but I think competitive offerings have maybe creeped up above us now. It's really not much of a negative at all.
Yeah. It's still an excellent competitive rate. A lot of what we see from some of the indirects where our customers have gone and come back, because actually they've been at a higher rate. The rate's still competitive at that level.
Last one from me. Are you seeing wage inflation on the general manager side? Maybe you could just tell us a little bit, what's the turnover like of general managers? Thanks.
Yeah. There's general wage pressure kind of all over the place. One advantage we have is a retailer. There's been some disruption in the bricks and mortar retailer world out there, so that does give us a little advantage on the wage side. Generally, I think about two-thirds of our cost is wage related. We're a people business. It's all about people. Two-thirds of our costs are people costs. We're very aware of wages and wage pressures. At the same token, that does mean our customers are making more wages too. It's not all bad for us. We do have to be more productive. The way we offset wage increases is to have higher productivity levels, and that is really what we're focused on. There is some general wage pressures company-wide, not just at the general manager rank.
We're trying to address that and make sure that what we offer is competitive and we get the best people in here to serve our customers.
Thank you.
Thank you.
Thank you. At this time, I'm showing no further questions.
All right. Thank you all for joining us. We don't have any further comments. I think we all covered it for today. We will get back to work, and the plan is to continue to bring some more good news next time. Thank you all. Have a great day.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.