Shareholders of America’s Car-Mart would probably like to forget the past six months even happened. The stock dropped 22.5% and now trades at $47.48. This may have investors wondering how to approach the situation.
Is there a buying opportunity in America’s Car-Mart, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Even with the cheaper entry price, we’re cautious about America’s Car-Mart. Here are three reasons why you should be careful with CRMT and a stock we’d rather own.
With a strong presence in the Southern and Central US, America’s Car-Mart (NASDAQ:CRMT) sells used cars to budget-conscious consumers.
Same-store sales show the change in sales for a retailer’s e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.
America’s Car-Mart’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat.
At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.
America’s Car-Mart has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 20.3% gross margin over the last two years. Said differently, America’s Car-Mart had to pay a chunky $79.74 to its suppliers for every $100 in revenue.
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
America’s Car-Mart burned through $38.97 million of cash over the last year, and its $871.1 million of debt exceeds the $8.01 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the America’s Car-Mart’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
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