AMERICAS CARMART INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

The following discussion should be read in conjunction with the Company’s consolidated financial statements and accompanying notes in Item 8 of this Annual Report on Form 10-K.


Overview



America's Car-Mart, Inc., a Texas corporation (the "Company"), is one of the
largest publicly held automotive retailers in the United States focused
exclusively on the "Integrated Auto Sales and Finance" segment of the used car
market. References to the Company include the Company's consolidated
subsidiaries. The Company's operations are principally conducted through its two
operating subsidiaries, America's Car Mart, Inc., an Arkansas corporation
("Car-Mart of Arkansas"), and Colonial Auto Finance, Inc., an Arkansas
corporation ("Colonial"). Collectively, Car-Mart of Arkansas and Colonial are
referred to herein as "Car-Mart." The Company primarily sells older model used
vehicles and provides financing for substantially all of its customers. Many of
the Company's customers have limited financial resources and would not qualify
for conventional financing as a result of limited credit histories or past
credit problems. As of April 30, 2022, the Company operated 154 dealerships
located primarily in small cities throughout the South-Central United States.



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Car-Mart has been operating since 1981. Car-Mart has grown its revenues between
approximately 4% and 32% per year over the last ten years (average 11%). Growth
results from same dealership revenue growth and the addition of new dealerships.
Revenue increased 32.0% for the fiscal year ended April 30, 2022 compared to
fiscal 2021 primarily due to a 22.2% increase in average retail sales price, a
6.7% increase in units sold and a 37.4% increase in interest income. The Company
added three new dealerships in fiscal 2022.



The Company earns revenue from the sale of used vehicles, and in most cases a
related service contract and an accident protection plan product, as well as
interest income and late fees from the related financing. The Company's cost
structure is more fixed in nature and is sensitive to volume changes. Revenues
can be affected by our level of competition, which is influenced to a large
extent by the availability of funding to the sub-prime automobile industry,
together with the availability and resulting purchase cost of the types of
vehicles the Company purchases for resale. Revenues can also be affected by the
macro-economic environment. Down payments, contract term lengths and proprietary
credit scoring are critical to helping customers succeed and are monitored
closely by corporate management at the point of sale. After the sale,
collections, delinquencies and charge-offs are crucial elements of the Company's
evaluation of its financial condition and results of operations and are
monitored and reviewed on a continuous basis. Management believes that
developing and maintaining a relationship with its customers and earning their
repeat business is critical to the success and growth of the Company and can
serve to offset the effects of increased competition and negative macro-economic
factors.


The Company is focused on the benefits of excellent customer service and its “local” face-to-face offering with the goal of helping customers succeed, while continuing to improve the Company’s digital services and offerings to meet growing demands for an online retail experience. Over the past few years, the company has focused on providing a good mix of vehicles in different price ranges to increase affordability for customers.



The purchase price the Company pays for its vehicles can also have a significant
effect on revenues, liquidity and capital resources. Because the Company bases
its selling price on the purchase cost of the vehicle, increases in purchase
costs result in increased selling prices. As the selling price increases, it
becomes more difficult to keep the gross margin percentage and contract term in
line with historical results because the Company's customers have limited
incomes and their car payments must remain affordable within their individual
budgets. Decreases in the overall volume of new car sales, particularly domestic
brands, lead to decreased supply and generally increased prices in the used car
market. Also, expansions or constrictions in consumer credit, as well as general
economic conditions, can have an overall effect on the demand and the resulting
purchase cost of the types of vehicles the Company purchases for resale.



The COVID-19 pandemic and the resulting economic effects have had an impact on
the availability and prices of the vehicles the Company purchases. Over the past
two years, the reduction in new car production, fewer off-lease vehicles and
fewer repossessions in the overall market have negatively impacted the
availability of product and resulted in higher purchase costs. The Company
constantly reviews and adjusts purchasing avenues in order to obtain an
appropriate flow of vehicles. While the Company anticipates that the
availability of used vehicles will remain constricted and keep purchase costs
elevated in the near future, any decline in overall market pressures affecting
the availability and costs of used vehicles could result in lower inventory
purchase costs and present an opportunity for the Company to purchase slightly
newer, lower mileage vehicle for its customers.



The Company consistently focuses on collections. Each dealership is responsible
for its own collections with supervisory involvement of the corporate office.
Over the last five fiscal years, the Company's credit losses as a percentage of
sales have ranged from approximately 20.3% in fiscal 2021 to 28.7% in fiscal
2018 (average of 24.4%). Credit losses as a percentage of sales have steadily
improved on an annual basis in each of the past five fiscal years from a
historical high in fiscal 2018, as improvements in collection processes and
higher recovery rates on repossessions have progressively offset continuing
competitive pressures. The Company's credit loss results were temporarily
negatively impacted during the fourth quarter of fiscal 2020 by the impacts of
COVID-19, including the Company's suspension of certain collection activities
for a period of time and the Company's decision to increase the allowance for
credit losses as a result of the pandemic from 24.5% to 26.5%, resulting in a
$9.1 million pretax charge to the provision for credit losses. However, credit
loss results improved substantially in fiscal 2021 due to a lower frequency of
losses and lower severity of loss amounts relative to the principal balance as
the CARES Act enhanced unemployment and stimulus funds, combined with the
Company's commitment to working with customers, aided customers' ability to make
their vehicle payments. The improvement in credit losses as a percentage of
sales for fiscal 2021 was further accelerated by the Company's decision during
the fourth quarter of fiscal 2021 to reduce the allowance for credit losses back
to 24.5% of finance receivables, net of deferred revenue, which resulted in a
$15.1 million pretax decrease in the provision for credit losses. The fiscal
year 2022 credit losses began to normalize to pre-pandemic levels but were still
below historical levels despite the increase in the average retail sales price.
Based on the Company's current analysis of loan losses, the allowance for credit
losses remains at 24.5% at April 30, 2022.



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Historically, credit losses, on a percentage basis, tend to be higher at new and
developing dealerships than at mature dealerships. Generally, this is because
the management at new and developing dealerships tends to be less experienced in
making credit decisions and collecting customer accounts and the customer base
is less seasoned. Normally more mature dealerships have more repeat customers
and, on average, repeat customers are a better credit risk than non-repeat
customers. Credit losses and charge-offs can also be impacted by market and
economic factors, including a competitive used vehicle financing environment and
macro-economic conditions such as inflation in the price of gasoline, groceries
and other staple items and overall unemployment levels, as well as the personal
income levels of the Company's customers. Negative macro-economic issues,
however, do not always lead to higher credit loss results for the Company
because the Company provides basic affordable transportation which in many cases
is not a discretionary expenditure for customers.



In an effort to offset credit losses and to operate more efficiently, the
Company continues to look for improvements to its business practices, including
better underwriting and better collection procedures. The Company has a
proprietary credit scoring system which enables the Company to monitor the
quality of contracts. Corporate office personnel monitor proprietary credit
scores and work with dealerships when the distribution of scores falls outside
of prescribed thresholds. The Company also uses credit reporting and the use of
global positioning system ("GPS") units on vehicles. Additionally, the Company
has placed significant focus on the collection area as the Company's training
department continues to spend significant time and effort on collections
improvements. The Company's vice president of collections oversees the
collections department and provides timely oversight and additional
accountability on a consistent basis. The Company believes that the proper
execution of its business practices is the single most important determinant of
its long-term credit loss experience.



Historically, the Company's gross margin as a percentage of sales has been
fairly consistent from year to year at approximately 40% or 41% over each of the
previous five fiscal years. The Company's gross margin is based upon the cost of
the vehicle purchased, with lower-priced vehicles typically having higher gross
margin percentages but lower gross profit dollars, and is also affected by the
percentage of wholesale sales to retail sales, which relates for the most part
to repossessed vehicles sold at or near cost. The gross margin percentage
decreased in fiscal 2022 to 37.4% from 40.7% in the prior fiscal year, while
gross margin dollars per retail unit sold increased by $760, primarily as a
result of the Company selling on average a higher priced vehicle in fiscal 2022.
The Company expects that increasing vehicle purchase costs and sales prices will
continue to put pressure on its gross margin percentage over the near term as
the demand for the vehicles the Company purchases will remain high. The Company
successfully manages the business based upon gross margin dollars as
demonstrated with the increase during the last three fiscal years in the gross
margin dollars per retail unit sold.



Hiring, training and retaining qualified associates is critical to the Company's
success. The rate at which the Company adds new dealerships and is able to
implement operating initiatives is limited by the number of trained managers and
support personnel the Company has at its disposal. Excessive turnover,
particularly at the dealership manager level, could impact the Company's ability
to add new dealerships and to meet operational initiatives. The landscape for
hiring remains very competitive as the business activity and workforce
participation continue to adjust post-pandemic. The Company has continued to add
resources to recruit, train, and develop personnel, especially personnel
targeted to fill dealership manager positions. The Company expects to continue
to invest in the development of its workforce.



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                            Consolidated Operations

                   (Operating Statement Dollars in Thousands)



                                                                     % Change
                                                                 2022        2021
                             Years Ended April 30,                vs.         vs.               As a % of Sales
                       2022           2021          2020         2021        2020        2022        2021        2020
Operating
Statement:
Revenues:
Sales               $ 1,060,512     $ 808,065     $ 652,992        31.2 %      23.7 %     100.0 %     100.0 %     100.0 %
Interest and
other income            151,853       110,545        91,619        37.4        20.7        14.3        13.7        14.0
Total                 1,212,365       918,610       744,611        32.0        23.4       114.3       113.7       114.0

Costs and
expenses:
Cost of sales,
excluding
depreciation
shown below             663,631       479,153       388,475        38.5 %      23.3 %      62.6        59.3        59.5
Selling, general
and
administrative          156,130       130,855       117,762        19.3        11.1        14.7        16.2        18.0
Provision for
credit losses           257,101       163,662       162,246        57.1         0.9        24.2        20.3        24.8
Interest expense         10,919         6,820         8,052        60.1       (15.3 )       1.0         0.8         1.2
Depreciation and
amortization              4,033         3,719         3,839         8.4        (3.1 )       0.4         0.5         0.6
Gain on disposal
of property and
equipment                   149           (40 )        (114 )         -           -           -           -           -
Total                 1,091,963       784,169       680,260        39.3        15.3       103.0        97.0       104.1

Income before
income taxes        $   120,402     $ 134,441     $  64,351                                11.4 %      16.6 %       9.9 %

Operating Data
(Unaudited):
Retail units sold        60,595        56,806        52,914         6.7 %       7.4 %
Average
dealerships in
operation                   152           150           146         1.3         2.7
Average units
sold per
dealership per
month                      33.2          31.6          30.2         5.1         4.6
Average retail
sales price         $    16,649     $  13,621     $  11,793        22.2        15.5
Gross profit per
retail unit sold    $     6,550     $   5,790     $   4,999        13.1        15.8
Same store
revenue growth             30.5 %        18.7 %         9.3 %
Receivables
average yield              15.8 %        15.9 %        15.7 %




2022 Compared to 2021



Total revenues increased $293.8 million, or 32.0%, in fiscal 2022, as compared
to revenue growth of 23.4% in fiscal 2021, principally as a result of (i)
revenue growth from dealerships that operated a full twelve months in both
fiscal years ($276.7 million), and (ii) revenue from stores opened or acquired
during or after the year ended April 30, 2021 ($17.1 million), partially offset
by (iii) decreased revenue from dealerships closed during or after the year
ended April 30, 2021 ($86,000). The increase in revenue for fiscal 2022 is
attributable to (i) a 22.2% increase in average retail sales price, (ii) a 6.7%
increase in retail units sold and (iii) a 37.4% increase in interest and other
income, due to the $265.1 million increase in average finance receivables.



Cost of sales, as a percentage of sales, increased to 62.6% compared to 59.3% in
fiscal 2021, resulting in a decrease in the gross margin percentage to 37.4% of
sales in fiscal 2022 from 40.7% of sales in fiscal 2021. On a dollar basis, our
gross margin per retail unit sold increased by $760 in fiscal 2022 compared to
fiscal 2021. The average retail sales price for fiscal 2022 was $16,649, a
$3,028 increase over the prior fiscal year, reflecting the high demand for used
cars, especially in the market we serve. As purchase costs increase, the margin
between the purchase cost and the sales price of the vehicles we sell generally
narrows on a percentage basis because the Company must offer affordable prices
to our customers. Demand for the vehicles we purchase for resale has remained
high and the supply has continued to be restricted due to lower repossessions
and lower levels of new car production. While the long-term impact of COVID-19
and the ongoing microchip supply shortages on new car production and sales and
the availability of used vehicles in our market is undetermined at this time,
the Company has seen disruptions in the supply of vehicles since the beginning
of the pandemic and expects the supply to be tighter in the near-term relative
to demand, resulting in the continuation of elevated purchase costs.



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Selling, general and administrative expenses, as a percentage of sales decreased
to 14.7% in fiscal 2022 from 16.2% for fiscal 2021. Selling, general and
administrative expenses are, for the most part, more fixed in nature. However,
we have recently made increasing investments in several areas including
recruiting, training and retention, inventory procurement and management,
customer experience and digital efforts. In dollar terms, selling, general and
administrative expenses increased $25.3 million from fiscal 2021. The increase
is primarily focused on continued investments in our associates in the wages and
benefit areas and building our customer experience team and investing in
procurement. We continue to focus on controlling costs, while at the same time
ensuring a solid infrastructure to ensure a high level of support for our
customers.



Provision for credit losses as a percentage of sales increased to 24.2% for
fiscal 2022 compared to 20.3% for fiscal 2021. Net charge-offs as a percentage
of average finance receivables increased to 20.2% for fiscal 2022 compared to
19.3% for the prior year. The stimulus payments during fiscal 2021 had positive
impacts on collections and net charge-off metrics. From a long-term historical
perspective, the current fiscal year net charge-offs were much improved and
below historical levels despite the increase in the average retail sales price.
The frequency of losses increased compared to the prior year as credit losses
began to normalize to pre-pandemic levels. The Company uses several operational
initiatives (including credit reporting and the use of GPS units on vehicles) to
improve collections and continually pushes for improvements and better execution
of its collection practices. The Company believes that the proper execution of
its business practices is the single most important determinant of credit loss
experience and will continue to focus on improvements in oversight and
accountability provided by the Company's investments in our corporate
infrastructure within the collections area.



Interest expense for fiscal 2022 as a percentage of sales increased slightly to
1.0% in fiscal 2022 from 0.8% in fiscal 2021. The increase in interest expense
is primarily due to the higher average borrowings in fiscal 2022 ($331.6 million
in fiscal 2022 compared to $215.0 million for fiscal 2021).



2021 Compared to 2020



Total revenues increased $174.0 million, or 23.4%, in fiscal 2021, as compared
to revenue growth of 11.3% in fiscal 2020, principally as a result of (i)
revenue growth from dealerships that operated a full twelve months in both
fiscal years ($137.6 million), and (ii) revenue from stores opened or acquired
during or after the year ended April 30, 2020 ($36.7 million), partially offset
by (iii) decreased revenue from dealerships closed during or after the year
ended April 30, 2020 ($333,000). The increase in revenue for fiscal 2021 is
attributable to (i) a 15.5% increase in average retail sales price, (ii) a 7.4%
increase in retail units sold and (iii) a 20.7% increase in interest and other
income.



Cost of sales, as a percentage of sales, decreased slightly to 59.3% compared to
59.5% in fiscal 2020, resulting in a slight improvement in the gross margin
percentage to 40.7% of sales in fiscal 2021 from 40.5% of sales in fiscal 2020.
On a dollar basis, our gross margin per retail unit sold increased by $791 in
fiscal 2021 compared to fiscal 2020. The average retail sales price for fiscal
2021 was $13,621, a $1,828 increase over the prior fiscal year, reflecting the
high demand for used cars, especially in the market we serve. As purchase costs
increase, the margin between the purchase cost and the sales price of the
vehicles we sell generally narrows on a percentage basis because the Company
must offer affordable prices to our customers. However, during fiscal 2021, the
pressure on the cost of sales and gross margin percentages from the increase in
average purchase costs was more than offset by improved wholesale margins,
strong demand and low supply of lower priced units, and reduced repair expenses
to prepare purchased vehicles for resale. Demand for the vehicles we purchase
for resale remained high during fiscal 2021 and the supply continued to be
restricted due to lower repossessions, lower levels of new car production and
sales and additional demand due to stimulus money.



Selling, general and administrative expenses, as a percentage of sales decreased
to 16.2% in fiscal 2021 from 18.0% for fiscal 2020. Selling, general and
administrative expenses remained, for the most part, more fixed in nature. In
dollar terms, overall selling, general and administrative expenses increased
$13.1 million from fiscal 2020. The increase was primarily focused on
investments in our associates, especially building our customer experience team
and investing in procurement, combined with increased commissions due to higher
net income.



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Provision for credit losses as a percentage of sales decreased to 20.3% for
fiscal 2021 compared to 24.8% for fiscal 2020. Net charge-offs as a percentage
of average finance receivables decreased to 19.3% for fiscal 2021 compared to
23.1% for the prior year. The decrease in net charge-offs for fiscal 2021
primarily resulted from a lower frequency of losses combined with a lower
severity of losses, primarily due to improvements in collections as a result of
the stimulus money and enhanced unemployment, as well as higher recovery rates
on repossessions. As a result of the improved credit losses, improved
delinquencies at yearend, as well as our outlook for projected losses, the
Company decreased the allowance for credit losses during the fourth quarter of
fiscal 2021 from 26.5% to 24.5%, a $15.1 million pretax decrease to the
provision for credit losses. The Company believes the somewhat improved
macro-economic environment prior to the pandemic mitigated the competitive
pressures and positively impacted credit loss results for fiscal 2021.



Interest expense for fiscal 2021 as a percentage of sales decreased slightly to
0.8% in fiscal 2021 from 1.2% in fiscal 2020. Although the Company had higher
average borrowings in fiscal 2021 ($215.0 million in fiscal 2021 compared to
$179.9 million for fiscal 2020), the lower interest rates offset the interest on
the higher debt balances.



Financial Condition


The following table presents the main accounts of the Company’s balance sheet as at April 30, 20222021 and 2020 (in thousands):


                                                         April 30,
                                             2022          2021          2020
Assets:
Finance receivables, net                   $ 854,290     $ 625,119     $ 466,141
Inventory                                    115,302        82,263        36,414
Income taxes receivable, net                     274             -             -
Property and equipment, net                   51,438        34,719        30,140

Liabilities:
Accounts payable and accrued liabilities      52,685        49,486        32,846
Deferred revenue                              92,491        56,810        36,121
Income taxes payable, net                          -           150         3,841
Deferred income tax liabilities, net          28,233        20,007        12,979
Non-recourse notes payable                   395,986             -             -
Revolving line of credit                      44,670       225,924       215,568




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The following table shows receivables growth compared to revenue growth during
each of the past three fiscal years. For fiscal year 2022, growth in finance
receivables, net of deferred revenue, of 34.1% exceeded revenue growth of 32.0%.
The Company currently anticipates going forward that the growth in finance
receivables will generally be slightly higher than overall revenue growth on an
annual basis due to overall term length increases in our installment sales
contracts in recent years, partially offset by improvements in underwriting and
collection procedures in an effort to reduce credit losses. The average term for
installment sales contracts at April 30, 2022 was 42.9 months, compared to 37.3
months for April 30, 2021.



                                                             Years Ended April 30,
                                                           2022        2021       2020

Growth in finance receivables, net of deferred revenue       34.1 %     28.7 %     14.4 %
Revenue growth                                               32.0 %     23.4 %     11.3 %




At fiscal year-end 2022, inventory increased 40.2% ($33.0 million), compared to
fiscal year-end 2021, primarily due to increasing our investment in inventory
quantities to accommodate the higher sales volumes and provide customers a
quality mix of vehicles, combined with the higher cost of the vehicles we
purchase. The Company strives to improve the quality of the inventory and
maintain adequate turns while maintaining inventory levels to ensure adequate
supply of vehicles, in volume and mix, and to meet sales demand.



Property and equipment, net, increased by approximately $16.7 million as of
April 30, 2022 as compared to fiscal 2021. We incurred approximately $20.9
million in expenditures during fiscal year 2022, primarily related to technology
investments, designed to attract additional sales opportunities, and remodeling
or relocating existing locations. The net increase to property and equipment,
net, was partially offset by depreciation expense of $4.0 million and disposals
of approximately $200,000 in furniture and equipment.



Accounts payable and accrued liabilities increased by approximately $3.2 million
at April 30, 2022 as compared to April 30, 2021 primarily due to higher accounts
payable related to increased inventory and sales activity, and higher deferred
sales tax related to the increase in sales.



Deferred revenue increased $35.7 million at April 30, 2022 over April 30, 2021,
primarily resulting from the increase in sales of the accident protection plan
and service contract products, as well as the increased terms on the service
contracts.



Deferred income tax liabilities, net, increased approximately $8.2 million at
April 30, 2022 as compared to April 30, 2021, due primarily to the increase in
finance receivables, net.



On April 27, 2022, the Company completed an asset-backed securitization offering
through which an indirect subsidiary of the Company issued four classes of
non-recourse notes payable in an aggregate principal amount of $400.0 million,
with a weighted average fixed coupon rate of 5.14% per annum and scheduled
maturities through April 20, 2029. The notes are collateralized by auto loans
directly originated by us. Net proceeds from the offering (after deducting the
underwriting discount payable to the initial purchasers and other fees) were
approximately $396.0 million, a portion of which were used to pay outstanding
debt under our revolving line of credit and to make the initial deposit into a
reserve account for the notes and the remainder of which are being used for
other general purposes. See Note F for further details on these non-recourse
notes payable.



Borrowings on the Company's revolving credit facilities fluctuate primarily
based upon a number of factors including (i) net income, (ii) finance
receivables changes, (iii) income taxes, (iv) capital expenditures, (v) common
stock repurchases and (vi) other sources of financing, such as our recent
issuance of asset-backed non-recourse notes. Historically, income from
continuing operations, as well as borrowings on the revolving credit facilities,
have funded the Company's finance receivables growth, capital asset purchases
and common stock repurchases.



In fiscal 2022, the Company had a $175.0 million net increase in total debt, net
of cash, used to contribute to the funding of finance receivables growth of
$292.0 million, an inventory increase of $33.0 million, net capital expenditures
of $20.9 million and common stock repurchases of $34.7 million. These
investments reflect our commitment to providing the necessary inventory and
facilities to support a growing customer base.



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Cash and capital resources

The following table presents certain historical information regarding the company’s cash flow statements (in thousands):


                                                          Years Ended April 30,
                                                   2022            2021            2020
Operating activities:
Net income                                     $     93,307     $   104,139     $    51,343
Provision for credit losses                         257,101         163,662 

162,246

Losses on claims for accident protection
plan                                                 21,871          18,954 

17,966

Depreciation and amortization                         4,033           3,719 

3,839

Amortization of debt issuance costs                     775             391             273
Stock based compensation                              5,496           5,962           4,732
Deferred income taxes                                 8,226           7,028          (1,280 )
Finance receivable originations                  (1,009,859 )      (762,716 )      (604,497 )
Finance receivable collections                      417,796         370,254 

322 180

Accrued interest on finance receivables              (1,559 )          (269 )          (750 )
Inventory                                            50,881           5,019 

53,827

Accounts payable and accrued liabilities              5,166          14,766 

1,009

Deferred accident protection plan revenue            11,232           8,224 

3,113

Deferred service contract revenue                    24,449          12,465           1,049
Income taxes, net                                      (424 )        (3,691 )         5,788
Other                                                (2,775 )        (1,719 )            79
Total                                              (114,284 )       (53,812 )        20,917

Investing activities:
Purchase of investments                              (1,343 )             -          (4,648 )
Purchase of property and equipment                  (20,921 )        (8,952 )        (5,422 )
Proceeds from sale of property and equipment             20             694             184
Total                                               (22,244 )        (8,258 )        (9,886 )

Financing activities:
Debt facilities, net                               (186,037 )         9,965          62,377
Non-recourse debt, net                              399,994               -               -
Change in cash overdrafts                            (1,802 )         1,802          (1,274 )
Purchase of common stock                            (34,698 )       (10,616 )       (16,009 )
Dividend payments                                       (40 )           (40 )           (40 )
Exercise of stock options, including  tax
benefits and issuance of common stock                (1,195 )         4,292 

1,723

Total                                               176,222           5,403 

46,777

Increase (decrease) in cash, cash
equivalents, and restricted cash               $     39,694     $   (56,667 )   $    57,808




The primary drivers of operating profits and cash flows include (i) top line
sales (ii) interest income on finance receivables, (iii) gross margin
percentages on vehicle sales, and (iv) credit losses, a significant portion of
which relates to the collection of principal on finance receivables.
Historically, most of the cash generated from operations has been used to fund
finance receivables growth, capital expenditures and common stock repurchases.
To the extent finance receivables growth, common stock repurchases and capital
expenditures exceed income from operations we historically increased our
borrowings under our revolving credit facilities and most recently also utilized
the securitization market. During April 2022, we completed our first
asset-backed securitization transaction that diversified our funding sources.
The majority of the Company's growth has been self-funded.



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Cash flows from operations in fiscal 2022 compared to fiscal 2021 decreased
primarily as a result of (i) an increase in finance receivable originations and
(ii) an increase in inventory, partially offset by increases in (iii) finance
receivable collections and (iv) deferred revenue. Finance receivables, net,
increased by $229.2 million during fiscal 2022.



Cash flows from operations in fiscal 2021 compared to fiscal 2020 decreased
primarily as a result of (i) an increase in finance receivable originations,
(ii) an increase in inventory and (iii) a decrease in income taxes payable,
partially offset by (iv) an increase in finance receivable collections, (v) an
increase in accounts payable and accrued liabilities and (vi) an increase in
deferred revenue. Finance receivables, net, increased by $159.0 million during
fiscal 2021.



The purchase price the Company pays for a vehicle has a significant effect on
liquidity and capital resources. Because the Company bases its selling price on
the purchase cost for the vehicle, increases in purchase costs result in
increased selling prices. As the selling price increases, it generally becomes
more difficult to keep the gross margin percentage and contract term in line
with historical results because the Company's customers have limited incomes and
their car payments must remain affordable within their individual budgets.
Several external factors can negatively affect the purchase cost of vehicles.
Decreases in the overall volume of new car sales, particularly domestic brands,
lead to decreased supply in the used car market. Also, constrictions in consumer
credit, as well as general economic conditions, can increase overall demand for
the types of vehicles the Company purchases for resale as used vehicles become
more attractive than new vehicles in times of economic instability. A negative
shift in used vehicle supply, combined with strong demand, results in increased
used vehicle prices and thus higher purchase costs for the Company.



Sustained macro-economic pressures affecting our customers have helped keep
demand high in recent years for the types of vehicles we purchase. This strong
demand, coupled with modest levels of new vehicle sales in recent years, have
led to a generally ongoing tight supply of used vehicles available to the
Company in both quality and quantity. The impacts of the COVID-19 pandemic on
the business operations of auctions and wholesalers as well as slowdowns in new
car production and sales during the past fiscal year due to the pandemic and
other supply chain issues further increased the price and reduced the quantity
of used cars available for purchase by the Company. The Company expects these
effects on used vehicle supply to continue for the short term.



The Company has devoted significant efforts to improving its purchasing
processes to ensure adequate supply at appropriate prices, including expanding
its purchasing territories to larger cities in close proximity to its
dealerships and increasing its efforts to purchase vehicles from individuals at
the dealership level as well as via the internet. The Company has also increased
the level of accountability for its purchasing agents including updates to
sourcing and pricing guidelines. The Company continues to make corporate level
purchases and form relationships with national vendors that can supply a large
quantity of high-quality vehicles. Even with these efforts, the Company expects
gross margin percentages to remain under pressure over the near term.



The Company believes that the amount of credit available for the sub-prime auto
industry will remain relatively consistent with levels in recent years, which
management expects will contribute to continued strong overall demand for most,
if not all, of the vehicles the Company purchases for resale. Increased
competition resulting from availability of funding to the sub-prime auto
industry generally contributes to lower down payments and longer terms, which
can have a negative effect on collection percentages, liquidity and credit
losses when compared to historical periods. The availability of credit was
somewhat dampened for consumers during fiscal year 2022, although with the high
demand of used vehicles and related financing, the availability of credit has
loosened more recently.



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The Company's liquidity is also impacted by our credit losses. Macro-economic
factors such as unemployment levels and general inflation can significantly
affect our collection results and ultimately credit losses. Currently, as our
customers look to cover rising costs of non-discretionary items, such as
groceries and gasoline, it may impact their ability to make their car payments.
Additionally, the long-term economic impact of the COVID-19 pandemic and the
resulting effects on the Company's collections and credit loss results remains
uncertain. The Company has made improvements to its business processes within
the last few years to strengthen controls and provide stronger infrastructure to
support its collections efforts. The Company continues to strive to reduce
credit losses in spite of the current economic challenges and continued
competitive pressures by improving deal structures. Management continues to
focus on improved execution at the dealership level, specifically as related to
working individually with customers concerning collection issues.



The Company has generally leased the majority of the properties where its
dealerships are located. As of April 30, 2022, the Company leased approximately
81% of its dealership properties. At April 30, 2022, the Company had $81.9
million of operating lease commitments, including $18.0 million of
non-cancelable lease commitments under the lease terms, and $63.9 million of
lease commitments for renewal periods at the Company's option that are
reasonably assured. Of the $81.9 million total lease obligations, $48.3 million
of these commitments will become due in more than five years. The Company
expects to continue to lease the majority of the properties where its
dealerships are located.



The Company's revolving credit facilities generally restrict distributions by
the Company to its shareholders. The distribution limitations under the credit
facilities allow the Company to repurchase the Company's stock so long as
either: (a) the aggregate amount of such repurchases after September 30, 2021
does not exceed $50 million, net of proceeds received from the exercise of stock
options, and the total availability under the credit facilities is equal to or
greater than 20% of the sum of the borrowing bases, in each case after giving
effect to such repurchases (repurchases under this item are excluded from fixed
charges for covenant calculations), or (b) the aggregate amount of such
repurchases does not exceed 75% of the consolidated net income of the Company
measured on a trailing twelve month basis; provided that immediately before and
after giving effect to the stock repurchases, at least 12.5% of the aggregate
funds committed under the credit facilities remain available. Thus, although the
Company does routinely repurchase stock, the Company is limited in its ability
to pay dividends or make other distributions to its shareholders without the
consent of the Company's lenders.



At April 30, 2022, the Company had approximately $6.9 million of cash on hand
and $197.8 million of availability under its revolving credit facilities (see
Note F to the Consolidated Financial Statements in Item 8). On a short-term
basis, the Company's principal sources of liquidity include income from
operations and borrowings under its revolving credit facilities. On a
longer-term basis, the Company expects its principal sources of liquidity to
consist of income from operations and borrowings under revolving credit
facilities or fixed interest term loans. The Company's revolving credit
facilities mature in September 2024 and the Company expects that it will be able
to renew or refinance its revolving credit facilities on or before the date they
mature. The Company has also recently accessed the securitization market with an
inaugural issuance in April 2022 of $400 million in aggregate principal amount
of non-recourse asset-backed notes. The Company expects that it will continue to
access this market in diversifying and growing the business. Furthermore, while
the Company has no specific plans to issue further debt or equity securities,
the Company believes, if necessary, it could raise additional capital through
the issuance of such securities.



The Company expects to use cash from operations and borrowings to (i) grow its
finance receivables portfolio, (ii) purchase fixed assets of approximately $25
million in the next 12 months to add technology improvements and to refurbish
existing dealerships and adding new dealerships, subject to strong operating
results, (iii) repurchase shares of common stock when favorable conditions exist
and (iv) reduce debt to the extent excess cash is available. The Company
estimates that total interest payments on its outstanding debt facilities as of
April 30, 2022, are approximately $240.8 million, assuming an increase in
average total debt of approximately $212.0 million with an average annual rate
increase of approximately 2%, with approximately $28.0 million in interest
payable during fiscal 2023.



The Company believes that it will have sufficient liquidity to continue to grow its revenues and meet its capital requirements for the foreseeable future.

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Off-balance sheet arrangements

The Company has two stand-by letters of credit relating to insurance policies totaling $750,000 at April 30, 2022.

With the exception of its letter of credit, the Company is not party to any off-balance sheet arrangement which, in the opinion of management, is reasonably likely to have a current or future impact on the financial position, income or expenses, operating results, cash, capital expenditures or capital resources that are important to investors.

Related finance company



Car-Mart of Arkansas and Colonial do not meet the affiliation standard for
filing consolidated income tax returns, and as such they file separate federal
and state income tax returns. Car-Mart of Arkansas routinely sells its finance
receivables to Colonial at what the Company believes to be fair market value and
is able to take a tax deduction at the time of sale for the difference between
the tax basis of the receivables sold and the sales price. These types of
transactions, based upon facts and circumstances, have been permissible under
the provisions of the Internal Revenue Code as described in the Treasury
Regulations. For financial accounting purposes, these transactions are
eliminated in consolidation and a deferred income tax liability has been
recorded for this timing difference. The sale of finance receivables from
Car-Mart of Arkansas to Colonial provides certain legal protection for the
Company's finance receivables and, principally because of certain state
apportionment characteristics of Colonial, also has the effect of reducing the
Company's overall effective state income tax rate by approximately 250 basis
points. The actual interpretation of the Regulations is in part a facts and
circumstances matter. The Company believes it satisfies the material provisions
of the Regulations. Failure to satisfy those provisions could result in the loss
of a tax deduction at the time the receivables are sold and have the effect of
increasing the Company's overall effective income tax rate as well as the timing
of required tax payments.


The Company’s policy is to recognize accrued interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company had no penalties or interest payable to the April 30, 2022.

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Critical Accounting Estimates



The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires the Company to
make estimates and assumptions in determining the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from the Company's
estimates. The Company believes the most significant estimate made in the
preparation of the Consolidated Financial Statements in Item 8 relates to the
determination of its allowance for credit losses, which is discussed below. The
Company's accounting policies are discussed in Note B to the Consolidated
Financial Statements in Item 8.



The Company maintains an allowance for credit losses on an aggregate basis at a
level it considers sufficient to cover estimated losses expected to be incurred
on the portfolio at the measurement date in the collection of its finance
receivables currently outstanding. At April 30, 2022, the weighted average total
contract term was 42.9 months with 34.2 months remaining. The reserve amount in
the allowance for credit losses at April 30, 2022, $247.2 million, was 24.5% of
the principal balance in finance receivables of $1.1 billion, less unearned
accident protection plan revenue of $48.6 million and unearned service contract
revenue of $43.9 million. In the fourth quarter of fiscal 2021, the Company
decreased the allowance for credit losses as a percentage of finance receivables
from 26.5% to 24.5% as a result of improved credit losses and delinquencies, as
well as changes in our outlook for projected losses. The decrease resulted in a
$15.1 million pretax decrease to the provision for credit losses. The allowance
for credit losses remained at 24.5% at April 30, 2022.



The estimated reserve amount is the Company's anticipated future net charge-offs
for losses expected to be incurred on the portfolio at the measurement date. The
allowance takes into account historical credit loss experience (both timing and
severity of losses), with consideration given to recent credit loss trends and
changes in contract characteristics (i.e., average amount financed, months
outstanding at loss date, term and age of portfolio), delinquency levels,
collateral values, economic conditions and underwriting and collection
practices. The allowance for credit losses is reviewed at least quarterly by
management with any changes reflected in current operations. The calculation of
the allowance for credit losses uses the following primary factors:



? The number of units taken back or written off as a percentage of the total number of units

funded over specific historical periods ranging from one to five years.

? The average repossessed and charged net loss per unit over the last

eighteen months, separated by the number of months elapsed since the contract

original date, and adjusted for expected future average net load

loss per unit. About 50% of the unit charges that will eventually

occur in the portfolio are expected to occur within 10-12 months of the

balance sheet date. The average age of an account at charge date is 12 years

    months.



? The timing of repossession and imputed losses relative to the date of sale

(i.e. how long it takes for a repossession or charge to occur) for

seizures and allocations made during the last eighteen months.

? An adjustment over the first twelve months to reflect the significant increase

the average amount financed and the resulting monthly payment and duration

    length.




  ? A forecast of expected losses for a period of one year, including
    considerations for the impact of forecasted levels of inflation and the
    discontinuation of COVID-19 pandemic government provided benefits.




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A historical point loss rate is produced by this analysis which is then adjusted
to reflect current conditions and the Company's reasonable and supportable
forecast of expected losses for a period of one year, including the review of
static pools coupled with any positive or negative subjective factors to arrive
at an overall reserve amount that management considers to be a reasonable
estimate of losses to be incurred on the portfolio at the measurement date.
While challenging economic conditions can negatively impact credit losses, the
effectiveness of the execution of internal policies and procedures within the
collections area and the competitive environment on the lending side have
historically had a more significant effect on collection results than
macro-economic issues.



Recent accounting pronouncements



Occasionally, new accounting pronouncements are issued by the Financial
Accounting Standards Board ("FASB") or other standard setting bodies which the
Company will adopt as of the specified effective date. Unless otherwise
discussed, the Company believes the implementation of recently issued standards
which are not yet effective will not have a material impact on its consolidated
financial statements upon adoption.



Recently Adopted Accounting Pronouncements



In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform. The
pronouncement provides optional guidance for a limited period of time to ease
the potential burden of accounting for reference rate reform. This guidance is
effective for all entities as of March 12, 2020, through December 31, 2022.
During April 2022, the Company replaced LIBOR as the applicable benchmark
interest rate on its revolving line of credit with the daily simple Secured
Overnight Financing Rate ("SOFR"). The replacement of the rate to SOFR did not
have a material impact on the Company's financial position or results of
operations.



Non-GAAP Financial Measure


The reconciliation between the Company’s debt-to-equity ratio and the adjusted debt-to-equity ratio, net of cash, to shareholders’ equity for the year ending April 30, 2022is summarized in the table below.


          April 30, 2022
Debt to Equity                 0.94
Cash to Equity                 0.09
Debt net of Cash to Equity     0.85












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