HOW DOES SOMEONE WITH NO BANK ACCOUNT AND POOR CREDIT BUY A CAR?

Carmart, the used car retailer, targets specifically people with very poor credit worthiness. Most transactions are done in cash and many loan payments are due on the recipient’s payday. Carmart will even cash checks for free to incentivize customers to make Carmart their first stop on payday. Another tactic is trading in anything, the former-CEO jokes “we’ll trade for horses, mules… we even trade for a four-legged chicken once”.

ISN’T IT RISKY TO GIVE LOANS TO PEOPLE WITHOUT SAVINGS?

Yes. In their most recent Quarter (ending July 2024) they made $348 million in revenue but lost $121 million in charge offs, loans that aren’t repaid. That means about 1 in every $4 they should make isn’t paid back to them. Something they price in by provisioning almost $100 million dollars for that very purpose every quarter.

WHAT’S THE UPSIDE? WHY BOTHER?

A more established used car retailer who targets people with better credit like CarMax (KMX) gets $2,347 of gross profit per car sold. Carmart makes $6,996. This can be interpreted as Carmart taking advantage of customers that don’t have many options. However, the length of their average loan being only 30 months instead of many years does prevent customers from paying many extra thousands of dollars in the long term.

WHERE WILL THE COMPANY GO?

Carmart is in a period of stagnation over the past 7 years; they’ve only opened 13 stores bringing their total to 156. Across these locations they sold 14,391 vehicles over the past quarter (compared to CarMax which sold 211,132 vehicles across ~250 stores). Their paths to profitability are reducing charge-offs and increasing their gross per unit which could improve if new cars are expensive and used cars cheap. The price has recently sunk to $43/share as a second public offering is made to raise money. If this new cash is deployed effectively…