Oct 8, 2022Liked by The Rational Walk

What do you think about their skyrocketing interest expense? They used to spend about $7M in interest expenses in a year. Currently, they spent that amount in a quarter and I wouldn't be surprised if it goes up even more.

A lot of their growth has been financed with debt in the last 2 years. They had ~$230M of debt in 2021 and now it's over $500M. So, they are being hit from both sides: more debt and higher interest rates.

I think it's something you might have missed in your analysis of the latest results.

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Sep 17, 2022·edited Sep 17, 2022Author

"What are some of the problems that could occur in the used car industry if used car prices start to decline precipitously?"

In addition to the items mentioned, I am not sure why I did not include the most obvious potential problem: depreciating inventory.

Inventory has increased a lot in recent years and stood at $145.2 million as of 7/31/22 compared to $36.4 million at 4/30/20 before all of this used car inflation.

Car-Mart is doing more business today than pre-pandemic in terms of unit volume but clearly the balance sheet increase in inventories is mostly attributable to inflation. If there is deflation that occurs in a gradual manner, that's probably ok. But if there is large deflation -- like 10-20% in a month or two -- then perhaps Car-Mart's gross margins will decline significantly and/or a charge for an inventory write-down will occur.

Perhaps investor skepticism regarding the valuation of inventory accounts for the current modest discount to tangible book value.

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