America's Car-Mart, Inc. (CRMT), a seller of used cars, is largely dependent upon selling service contracts to generate a profit for each vehicle sold.

With average retail sales price per unit roughly flat year-over-year (YoY), Car-Mart recently implemented a new, more aggressive revenue recognition policy for its service contracts, which effectively obscured the true health of its used car sales.

The majority of customers who buy a vehicle from Car-Mart also purchase service contracts that cover the cost to repair certain vehicle components and assemblies.

In addition to increasing the price for service contracts, Car-Mart also changed how it accounts for the contracts, which significantly inflated performance. Rather than recognize revenue over the term of the service contract— as it did previously— Car-Mart has significantly accelerated the recognition of service contract revenue:

“...management determined that service contract revenue should be recognized over a nine-month term for each 12,000 miles, which effectively resulted in a 25.0% acceleration of the timing of revenue recognition…”

For the year ended April 30, 2025, the change inflated:

—Sales by $13.2 million, or 1.16%
—Net profit $7.1 million, or 65.7%
—Earnings per share $1.04, or 55.3%

The disclosure was made in a belatedly filed annual report in which Car-Mart admitted that though it routinely extends loan terms for subprime customers, it hasn’t been telling investors:

“During the preparation of the Company's Annual Report on Form 10-K for the year ended April 30, 2025, management identified material omissions of required disclosures…related to loan modifications for borrowers experiencing financial difficulty. The previously issued financial statements have been restated to include such disclosures.”

The disclosures reveal loan modifications impact $436.1 million, or 28.9%, of Car-Mart’s gross finance receivables as of April 30, 2025.

Regardless, Car-Mart says none of the above mentioned matters requires the company to claw back bonuses awarded to executives over the last two years.

DuDil first flagged Car-Mart’s accounting in December 2022 after the company inflated sales by recognizing charge-offs as sales rather than reductions to receivables.

With an Enterprise Value (EV) of approximately $1.13 billion, Car-Mart is priced as if it will grow annual sales to more than $3.26 billion, up from an estimated $1.39 billion in FY2026. To justify its current share price of $34.55 our Reverse DCF— which quantifies investor expectations embedded in the current share price— indicates Car-Mart must:

—Grow sales 10% annually between FY28-FY35, faster than the company’s estimated FY26 and FY27 sales growth of 0% and 9.6%, respectively
—Increase NOPAT margin to 6.5%, versus our FY25 estimate of 0.76% and three-year average estimate of (0.31%)
—Increase Invested Capital (IC) Turns to 1.5 up from our FY25 estimate of 0.95 and three-year average estimate of 1.01

Notably, the current share price also implies Car-Mart increases Return on Invested Capital (ROIC) to 9.75% from ourFY25 estimate of 0.72% and three-year average estimate of (0.31%):