Serving the subprime used car market
America’s Car-Mart was founded in Rogers, Arkansas in 1981 by Bill Fleeman who converted a Dog ‘N Suds fast food restaurant into a car dealership. From the outset, his business model was to provide financing to “credit-challenged” customers who must have reliable basic transportation. In the early days, the company was known to accept nearly anything of value as a trade-in in lieu of a down payment, including “cows, horses, ostriches, pigs, birds, dogs, a llama and a python.” 1
Car-Mart was profitable in every year of its existence as a private company. In 1999, Mr. Fleeman was suffering from terminal cancer and sold the business to Crown Group for $41 million. Crown Group was a publicly traded holding company that soon divested its other businesses and was renamed America’s Car-Mart.
Over the past four decades, Car-Mart has grown from a single location into a network of 154 dealerships concentrated in the south-central United States. Most dealerships are located in small cities with a population of 50,000 or less. Typically, small cities lack the scale needed for widespread public transit and residents must rely almost exclusively on automobiles for essential transportation. 2
Today, Car-Mart’s core value proposition is to “keep you on the road” by providing an assortment of modestly priced used vehicles that can be financed on flexible terms to customers who have impaired credit and limited funds for a down payment.
The majority of Car-Mart customers are unable to obtain traditional auto financing due to very low credit scores. Car-Mart examines a customer’s payroll stubs and overall budget and makes credit decisions using a proprietary process. Since dealership managers are responsible for collections and compensated accordingly, decision making authority at the dealership level is matched with accountability.
Of course, this comes at a cost. Most people would consider Car-Mart’s 16.5% interest rate on a car loan to be ludicrously high, but individuals with limited funds and poor credit who must have transportation to get to work have found Car-Mart’s value proposition compelling, at least compared to their other options. 3
Car-Mart’s high interest rates are necessary due to the high level of defaults that occur when running a business catering to individuals lacking a financial safety net. In the fiscal year that ended on April 30, 2022, net charge-offs were 20.2% of the average principal balance during the year, and this figure is actually quite a bit below the ten year average of 26.4%. Car-Mart’s core demographic benefited from the pandemic-era stimulus programs which helped keep defaults below average.
While job loss can lead to failure to pay installment loans as scheduled, it is also common for Car-Mart customers to simply stop paying if their car breaks down. For this reason, the company has incentives to sell vehicles that management believes can last at least as long as the typical term of a loan, which is currently 42.9 months.
Traditional auto retailing, especially in the used vehicle market, is focused on the initial sales transaction. But given the ongoing payment relationship with customers, Car-Mart must take a longer-term view to be successful. Selling a clunker that immediately breaks down is counterproductive since it will likely result in the customer ceasing payments and the repossession of impaired inventory.
Car-Mart is a relatively simple business that has performed well over many decades through a variety of economic environments. In this article, we will take a look at the company’s business model and unit economics and then drill down into its operating track record with a focus on how financing has represented a major advantage. Finally, we will look at the company’s balance sheet with a focus on how it funds installment loans and how repurchases have played an important role in recent years.