Expansion of Gross Profit Margin at America's Car Mart

America's Car-Mart (NASDAQ:CRMT) announced its earnings for the first quarter of fiscal year 2026, which ended on July 31, 2025. The gross margin expanded by 160 basis points year-over-year to 36.6%, while interest income increased by 7.5%. On the other hand, due to rising costs and capital constraints, the number of vehicles sold decreased by 5.7% compared to the same period last year. This quarter saw improvements in securitized funding, the rollout of a new loan issuance system (LOS V2) that currently covers approximately 72% of receivables, and early adoption of digital recovery tools. Below, we will examine in detail the strategic improvements, risks posed by limitations in inventory funding, and changes in the portfolio's credit mix that may affect the long-term outlook.

Pricing discipline boosts gross margin at America's Car-Mart

Total revenue (GAAP) decreased by 1.9% year-on-year to $341.3 million. This was mainly due to a reduction in sales volume, despite procurement costs increasing by $500 per unit, the average selling price excluding ancillary products decreased by $144 year-on-year. Strengthening of ancillary product pricing and strict reviews contributed to a 160 basis point improvement in gross margin, and a decrease in loss frequency on high-quality loans also provided a tailwind.

"Combined with high attachment rates and disciplined vehicle pricing, these measures improved the gross margin to 36.6%, representing an increase of 160 basis points year-on-year. The gross margin also benefits from favorable trends in both the improvement of wholesale retention rates and the frequency and severity of post-sale vehicle repairs." -- Jamie Z. Fisher, COO

The expansion of this profit margin demonstrates the company's ability to maintain profitability despite inflationary pressures and a decrease in sales volume, highlighting its operational flexibility in a challenging environment.

Restrictions on capital equipment hinder inventory growth at America’s Car-Mart

Post-pandemic wholesale vehicle price inflation, along with a 30% prepayment rate and a fixed cap of $30 million on revolving credit lines, is creating constraints on working capital and inventory expansion. While customer demand remains strong, these restrictions are suppressing the ability to grow sales during a period of rising procurement costs, exceeding the traditional inventory financing structure of the industry.

"Currently, we are facing both a low advance payment rate of 30% and a cap of $30 million under the revolving credit line for inventory prepayments. These restrictions have existed in the past, but the significant rise in vehicle prices since COVID has amplified their impact, placing ongoing pressure on our ability to expand retail sales and manage working capital efficiently. We are actively exploring alternative financing solutions to address these constraints and unlock additional capacity to meet qualified customer demand." -- Jonathan Collins, CFO

Unless alternative inventory financing is secured, these capital constraints pose a risk of limiting short-term sales growth and may weaken competitiveness amid persistently high vehicle prices.

America's Car Mart Shifts to Lending for High Credit Tier

The loan mix has tilted towards higher credit tiers, with transaction volume from customer ranks 5 to 7 increasing by 15%, while reservations from lower ranks decreased by about 50%. Credit applications increased by 10% compared to the same period last year, and the average issuance FICO score rose by 20 points year-on-year from Q1 2025 to Q1 2026, strengthening the weighted average portfolio quality under the new screening criteria to 72%.

"LOS V2 is currently operational at all our locations, and the integrated risk-based pricing has improved the alignment between expected returns and customer profiles. The new scorecard is functioning as we designed, enabling a mix shift of top-ranked customers and a departure from the lowest ranks. In this quarter, trading volume from ranks 5 to 7 increased by 15%, while bookings from some of the lowest ranks decreased by approximately 50%." -- Douglas Campbell, President and CEO

This intentional quality improvement of the portfolio enhances long term credit performance and future cash flow outlook, reducing risk exposure during economic downturns.

Future Outlook

The management expects that about half of the surge in SG&A in the second half of fiscal 2026 will be resolved, aiming to bring the proportion of SG&A in retail sales down to the mid-16% range through technology-driven efficiencies, including Pay Your Way. The company is actively pursuing alternative inventory financing solutions, but has not provided specific sales guidance for future quarters. The management continues to focus on ensuring that growth accompanied by credit quality, modernization of collections, and future sales are determined by demand rather than funding constraints.

As far as I can see, America's Car Mart is responding wisely even in a tough environment. The expansion of gross profit margin is commendable, but the capital constraints hindering growth are a concern. The shift towards high credit tiers is a good thing in the long term, but in the short term, it comes at the cost of a decrease in sales volume. Whether the management can quickly resolve this funding issue will determine their future growth.