America’s Car-Mart president and chief executive officer William “Hank” Henderson cheered one specific financial metric after the buy-here, pay-here dealership chain wrapped up its 2014 fiscal year on April 30. And Henderson did so even though the way Car-Mart reached that achievement arrived via what some observers might consider a negative.

During the fourth quarter, Car-Mart’s average down payment jumped 100 basis points to 9.7 percent — the highest point in six years — according to Henderson. But the company reached that level at a price, since retail sales dipped 1.9 percent in Q4, which turned out to be about three sales per month per store.

“That is significant for us,” Henderson said about the rise in down payments when Car-Mart conducted its quarterly conference call with investment analysts. “We believe we’re working toward improving our overall customer success rates was the right thing to do.

“I cannot emphasize enough what a big deal this is for us and our customers,” he continued. “We are well aware of the impact of higher down payments on overall customer success so we are extremely pleased with our results in this particular area.

“Obviously, we would have like to have seen more sales in the quarter, but we’re pleased with our improvement in the quality of deals,” Henderson went on to say. “We feel like it was the right decision for this time. As long as we’ve been in business, we’ve had to make adjustments in this area, always looking for the right balance.”

Impact of Competition

Like smaller, private BHPH operators, Henderson discussed how Car-Mart also is getting pinched by competition from franchised dealerships that have relationships with special finance companies willing to make deals with customers with sotf credit histories.

Henderson acknowledged that several customers who have purchased multiple vehicles from Car-Mart locations chose to walk away and book a deal for a new vehicle or a gently used model.

“A lot of our folks have been with us a long time. With the aggressive deals out there, we’re seeing new cars or higher-end used cars with zero down, no payments for 90 days, and those are getting financed at 72 months or longer,” he said. “It’s a long time before they reach that equity point. Just knowing our customer base, this is not a good situation for them. They are attracted sometimes to drop what they have and go to a new-car dealer.

“We’ve actually had occasions where we’ve had to go pick up our car at a newcar dealership where the dealer has said, just leave it here and we’ll put you in this. We know that’s a bad situation,” Henderson continued.

And instead of the trend diminishing, Henderson indicated that the situation actually intensified since the beginning of the calendar year.

“It’s actually worse recently because people did have some money in hand so they could put a down payment down somewhere. And in some cases it was zero down so they could just keep their money,” he said.

And some of that potential money likely was due on a Car-Mart contract. Henderson mentioned 95 percent of customers currently in the portfolio receive a federal income tax refund of about $4,500. In order to keep monthly payments low and terms shorter, Car-Mart often structures deals where customers make additional, larger payments stemming from that tax refund money.

“In some cases, they thought, we could go over here and get this car for zero down and not even make our special payment over here at Car-Mart and go spend the money on something else. It did cost us some losses,” Henderson said.

One analyst asked Henderson the same question many other BHPH operators are probably pondering, too. When will the trends change?

“We would like to know that, too,” Henderson said. “We’ve seen this cycle before, but I will have to say that this cycle has lasted longer than what we’ve seen before. Other times by now we would have already seen the pullback. I can’t really tell you for sure what the mechanism is going to cause a pullback, but we know from experience that it typically does happen. It may be the case where it’s reduced, but in reality I don’t know when it’s going to let up.”

Company Investment and Additional Stores

Henderson highlighted that the company made several investment moves during the past fiscal year beyond just adding more stores to its network, which now stands at 134.

Car-Mart deployed $3 million to attach GPS devices to its entire inventory and pushed more than $1 million into its operational sofware. The company managed to make these moves while reducing its debt by $2.5 million.

“All in all, these accomplishments refect that we are continuing on the right direction for our long-term plans, and we are extremely well positioned and well prepared for any pullback by the competition we may see in the future,” Henderson said.

During the past fiscal year, Car-Mart opened 10 new locations. Henderson mentioned a couple of those new lots enjoyed record-setting retail sales starts.

“While we do learn from our mistakes, we also like to learn from our successes and do our best to repeat this and continue to have great starts for our new locations,” he said.

Car-Mart is about to open new dealerships in Alabama and Tennessee as a part of its growth strategy for its 2015 fiscal year.

“We remain committed to continuing to grow our dealership count into the future, but given the current market dynamics we will be even more selective as we move forward,” Henderson said. “The new-store openings should be right at eight, a little less than the 10 percent new-store pace we’d like to see if conditions were more favorable.”

Director Retirement

Henderson also touched on the imminent retirement of one of Car-Mart’s directors, Bill Sams, who has been the company’s board since March of 2005.

Sams currently manages his personal investments and is a general partner of Marlin Sams Fund. From 1981 until 2000, Sams was the president and chief investment offcer of FPA Paramount Fund as well as executive vice president of both First Pacifc Advisors. He started his career in 1966 in the mutual fund industry.

Sams is also currently on the board of directors of Unif and INX.

“He will certainly be missed. On behalf of myself and all of us, Bill, we thank you for our confidence in us and believing in us throughout our ups and downs,” Henderson said. “We thank you for your years of service as a director. You’ve helped us navigate these past several years and continue to grow our company the right way. Your contributions are greatly appreciated.”