Release Date: September 04, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Gross margin improved by 30 basis points for the quarter.
- Website traffic increased both year-over-year and sequentially, indicating strong consumer demand.
- Partnership with Cox Automotive is expected to improve affordability for consumers and gross profit margins.
- Loan origination system (LOS) is fully in place at 147 of 156 dealerships, improving sales and financing processes.
- Recent acquisitions, such as Texas Auto Center, delivered strong results, including a record month in July.
Negative Points
- Total revenues decreased by $19 million, or 5.2%, due to a decline in retail units sold.
- Average units sold per dealership per month were down 9.6%, from 34.2 to 30.9.
- Net charge-offs as a percentage of average finance receivables increased to 6.4% from 5.8%.
- Interest expense increased by $4 million, or 28.3%, due to rising rates and increased debt.
- SG&A expenses saw a slight increase, partly due to technology implementations and acquisition-related costs.
Q & A Highlights
Q: Can you explain the headwind in SG&A that's coming from your acquisitions?
A: (Vickie Judy, CFO) As we acquire these dealerships, we inherit their SG&A costs immediately, but we don't acquire their portfolio of customers right away. This means we start with the costs but without the revenue from their customer base. The recent acquisition of TAC was particularly impactful due to its size, but we expect to leverage these costs once the customer book is built out.
Q: You've mentioned the back book and LOS origination several times. Can you explain how you think about the portfolio and how it sits today?
A: (Douglas Campbell, CEO) The back book, which includes loans from fiscal years '21 through '23, now represents less than 33% of the portfolio, down from over 50% last year. The LOS-originated loans now account for about 40% of the portfolio. The fiscal year '24 originations, which are a mix of legacy and LOS, are showing improved cash-on-cash returns, indicating a positive trend.
Q: How much can your strategies to reduce the cost of car acquisition and refurbishment help with affordability?
A: (Douglas Campbell, CEO) We believe that reducing procurement costs by $500 to $800 per vehicle will significantly improve affordability and increase our addressable market. Our partnership with Cox Automotive is a key part of this strategy, allowing us to repurchase and refurbish vehicles more cost-effectively.
Q: How much of the portfolio is currently touched by the LOS system, and is there more room for improvement in credit execution?
A: (Vickie Judy, CFO) As of the end of July, 40% of our portfolio was originated through the LOS system. All our dealerships, except for nine acquired lots, are using this system. We expect continued positive impacts as more deals are originated through LOS.
Q: How is the competitive environment affecting your business, and are there more acquisition opportunities due to market stress?
A: (Vickie Judy, CFO) We see stress among smaller competitors who are struggling to access credit, which is impacting their inventory and financing capabilities. This creates acquisition opportunities for us, and we are actively analyzing several potential acquisitions that fit our footprint and cultural alignment.
Q: What are your expectations for loss rates between the fiscal 2022-2023 vintages and the newer 2024-2025 vintages?
A: (Vickie Judy, CFO) The back book from fiscal '21 to '23 is now 22 months aged and represents a smaller portion of our business. We expect better performance from the fiscal '24 and '25 vintages, with projected cash-on-cash returns improving significantly.
Q: Can you break down the SG&A expenses into normal operating expenses, technology investments, and new store acquisitions?
A: (Douglas Campbell, CEO) Our SG&A costs were relatively flat this quarter, thanks to cost-cutting measures. Technology investments add about $1 million quarterly to SG&A, but this is offset by payroll savings. Acquisitions initially add costs without immediate revenue, but we expect to leverage these costs as the customer base grows.
Q: What steps are you taking to improve underperforming stores, and how does this impact sales volume?
A: (Douglas Campbell, CEO) We restrict inventory and tighten underwriting standards at underperforming stores to manage default rates. If we see improvement, we lift these restrictions. If not, we may wind down these locations. This approach helps us focus capital on our highest-performing stores, which is beneficial for our shareholders.
Q: How much do used car prices need to come down to improve demand, and what is your visibility into sales volume growth?
A: (Douglas Campbell, CEO) We believe reducing vehicle procurement costs by $500 to $800 will significantly improve demand. Website traffic, a leading indicator, has shown strong growth, but credit applications are slightly softer. We are focused on improving affordability and expect to see benefits in sales volume as we adjust our inventory and pricing strategies.
Q: How are you managing the impact of higher interest expenses on your financials?
A: (Vickie Judy, CFO) Interest expense increased due to higher rates and increased debt. Our revolving credit facility and warehouse notes payable are floating rate debt, so we would benefit from any future rate cuts. We also have flexibility and a distinct advantage over smaller competitors due to our access to capital.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
