America’s Car-Mart’s stock plunged over 17% on Tuesday after the used auto retailer reported a shocking $4.30 per share loss in its fiscal second quarter. The surprising loss was driven by a sharp rise in loan defaults and credit losses as inflation weighs on its vulnerable customer base.
With losses mounting, an uncertain economic outlook, and no profit guidance from management, is America’s Car-Mart’s beaten-down stock a buy post-earnings crash or is there more disappointment ahead?
Q2 Results Badly Miss Expectations
Heading into the quarterly results, analysts were modeling a profit of $0.78 per share on revenue of $363.7 million. The Bentonville, Arkansas-based company badly lagged estimates on both fronts.
While sales of $361.6 million narrowly missed projections, the real shock was the magnitude of losses during what is normally one of its most profitable quarters. The $4.30 per share loss compares to a profit of $0.48 per share in the same quarter last year.
Behind the Unexpected Losses
While a 3% year-over-year rise in revenue and expanded gross margins point to some underlying operational strength, surging credit losses drove the unexpected losses.
The used auto dealer, which caters largely to subprime borrowers, saw the percentage of receivables written off due to defaults jump 140 basis points from a year ago to 7.2% – indicating its financially constrained customers are struggling amid high inflation.
This led management to significantly increase its allowance for future potential credit issues, resulting in a $3.40 per share after-tax charge this quarter alone. Adding operational losses led to the overall massive $4.30 per share net loss.
Through the first six months of its Fiscal 2024, America’s Car-Mart has now lost $3.65 per share compared to a profit of $1.02 per share over the same period last year.
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No Guidance Offered Amid Uncertainty
On the earnings call, CEO Doug Campbell stated that “persistent inflationary pressures impacted existing customers” but noted he expects the issues to be “shorter term in nature.”
However, he declined to provide any specific guidance or reassurances about profitability amid an uncertain economic backdrop for the company’s vulnerable customer segment.
Without concrete guidance on a return to profitability from management,expectations for positive earnings in the coming quarters look increasingly doubtful. Through two quarters, America’s Car-Mart is highly unlikely to achieve the consensus analyst estimate of $3.11 per share profit for the full Fiscal 2024 year.
This Means More Disappointment Ahead
Between surging loan losses, no profit guidance from management, and already massive losses this year that make positive full-year earnings nearly impossible, all signs point to further disappointment ahead.
The beaten-down stock may appear cheap at 7 times trailing earnings after plunging over 40% year-to-date. However, with the core business under pressure and profits not on the horizon, that multiple could still prove optimistic.
For shareholders in this once high-flying consumer lender targeting subprime used auto buyers, more pain likely lies ahead as its vulnerable customer base struggles with high inflation and rising loan defaults. The promise of a quick rebound looks unlikely at this point without strong guidance from management.
Risks Remain Elevated
While a stabilization of inflation and economic growth could ease financial strains and credit headwinds down the line, the near-term risks for investors appear tilted firmly to the downside.
As Wedbush analyst Seth Basham, who slashed his price target after the results, noted: “We believe a challenging consumer environment will cause more negative estimate revisions from CRMT and other deep subprime lenders in the coming months.”
Until inflation and credit losses clearly ease and management can regain profit momentum,expect America’s Car-Mart’s stock to remain stalled out. For now, it’s best to avoid this high-risk name despite seeming “cheap” amid all the uncertainty facing its extremely financially constrained borrower base.
The steep post-earnings sell-off reflects these legitimate concerns over eroding credit quality and elusive profits in the coming quarters. Risk-tolerant investors may see today’s large plunge as a buying opportunity, but should brace for potentially more disappointment before a sustainable turnaround emerges.