America's Car-Mart trades at $46.37 per share and has stayed right on track with the overall market, gaining 7.8% over the last six months. At the same time, the S&P 500 has returned 8.1%.

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.

Why Do We Think America's Car-Mart Will Underperform?

We're cautious about America's Car-Mart. Here are three reasons why CRMT doesn't excite us and a stock we'd rather own.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).

America's Car-Mart’s demand has been shrinking over the last two years as its same-store sales have averaged 2.7% annual declines.

2. Low Gross Margin Reveals Weak Structural Profitability

Gross profit margins are an important measure of a retailer’s pricing power, product differentiation, and negotiating leverage.

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 21.1% gross margin over the last two years. That means America's Car-Mart paid its suppliers a lot of money ($78.88 for every $100 in revenue) to run its business.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

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 $52.61 million of cash over the last year, and its $1.35 billion of debt exceeds the $124.5 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.

We remain cautious of America's Car-Mart until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

We see the value of companies helping consumers, but in the case of America's Car-Mart, we’re out. That said, the stock currently trades at 11.9× forward P/E (or $46.37 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are more exciting stocks to buy at the moment. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.

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