Customer Repo

Customer Repo

CORPORATE STRATEGY by Mark Gordon | Managing Editor

A Sarasota auto-related business hopes to plug up its quarterly and yearly losses by buying a competitor. Big potential brings big risks.

Carl Ritter created a neat little plan to grow his software and consulting business in 2004. The idea, in laboratory-like fashion, was to see how the company's theories and philosophies worked in the real world.

Ritter's company, CarBiz, was almost 10 years old, but it was still a bit player on the edges of the auto industry. It designed software and consulted with dealers in what's known as the "buy here, pay here" sector of the car sales industry.

Think used car lots on the corners of busy intersections, selling a variety of vehicles with exclamation-point heavy taglines such as "Take Home Today" or "No Job, No Credit, No Problem." Buy here, pay here defines car dealerships that both sell the used car and provide financing for the buyer, which tend to be subprime lenders.

Ritter, CarBiz's chief executive officer, moved slowly. The first three CarBiz branches debuted in Palmetto, Tampa and St. Petersburg over a few months. Things went so well that late in 2006, Ritter the scientist hatched a plan he called 15 in 2010. He wanted the company to be operating 15 dealerships by 2010, all in Florida.

A year into the plan, the one thing Ritter has determined with scientific certainty is that plans change: Instead of opening a manageable 15 statewide dealerships over four years, the company bought 26 nationwide dealerships over one day in an $18.5 million, debt-laden deal with a financially troubled competitor last month.

To pay for the purchase of Rockford, Ill.-based Calcars, CarBiz obtained a $30 million loan from its financing partners in a separate deal. "We accomplished our 15 in 2010 goal a little early," says Ritter. "But frankly, it was a hell of a deal."

Now CarBiz is primed for quick change and, Ritter hopes, fast growth.

The former goal is important, analysts and others in the industry who follow the company say, because CarBiz is currently on the bottom end of the industry in terms of customer awareness. The latter goal, just as integral, is also CarBiz's number one lingering challenge: Despite its now 12 years of existence, CarBiz, a publicly traded company, has regularly produced meager earnings with just as meager a share price.

"At one point in time, they had been ridiculed by dealers," says Greg Goebel, president of industry trade publication Auto Dealer Monthly, who once worked in Sarasota for a competing firm. He also once owned shares of CarBiz. "But the fact that they are still here today is a testament to the company."

Looming challenges

The Calcars deal raises the possibility Ritter's laboratory will get messy. Calcars runs the fourth largest chain of buy here, pay here dealerships in the country and CarBiz now has its 100 employees in six states, including Ohio, Nebraska, Illinois and Kentucky. All of those workers will need to be integrated into the CarBiz dealership system, from customer service practices to its 401(k) program to uniforms.

What's more, as part of the deal, CarBiz is taking over Calcars' $27 million outstanding loan portfolio - a portfolio dominated with consumers in the lower end of the financial spectrum.

"There's a risk there," says Ken Shilson, president of the National Alliance of Buy Here, Pay Here Dealers. "No one knows how the portfolio will collect."

And finally, looming over the Calcars deal, there's this: CarBiz, by just about every financial measurement has struggled for several years. For instance, it lost $2.7 million in its 2007 second quarter, which ended July 31. For its most recent fiscal year, it lost $1.3 million on $3.2 million in revenues. The numbers weren't much better in 2006 and 2005, either.

Even Ritter admits the company's balance sheets and income statements over the past few years have been "ridiculous." And that's not meant as a compliment.

Still, fresh of the Calcars deal, Ritter exudes confidence. The company long ago outgrew its office on Tamiami Trail near the Sarasota Bradenton International Airport, and is expected to move into a newly-built headquarters nearby early next year. Ritter also projects that based on the Calcars deal, CarBiz will have $10 million in revenues by the first quarter of its 2008 fiscal year, $40 million on an annual basis and will finally be able to "deliver real earnings."

Missed payments

CarBiz essentially has two strategies working together to reach Ritter's goals. One is the integration of the Calcars purchase, while the other is a more standard strategy of diversifying revenue streams.

Overall, CarBiz took over 26 Calcars dealerships. It will close three and operate the others through a combination of in-house Sarasota-based management consultants and employees at the actual dealership. Don Miller, one of the Sarasota-based CarBiz managers overseeing some of the integrated dealerships, says the biggest change will be going to a weekly numbers check from what was once a monthly process. The change, Miller says, will cut as much 5% from the company's loan losses.

"Things happen in this business on a weekly business," says Miller. "If you wait until the end of the month, things could be getting pretty bad."

Miller's referring to the potential of loans going unpaid. While Ritter acknowledges that "it's inevitable that we will have payments that are missed," he nonetheless is trying to implement a strong customer-first approach.

When things go bad, says Ritter, he wants CarBiz to "repossess the customer, not the car." As such, Ritter's designed the company's loan system around making sure the initial deal the customer signs for a car is both a good price and structured so that he has every chance to pay it back.

In addition to bringing the CarBiz system and culture to the former Calcars employees, Ritter says he has to bring in more managers and employees to Sarasota to handle the growth. Says Ritter: "When you take a quantum leap like we do, even if you've been building a bench, it's not big enough."

Ritter says he recently hired three people from business-related programs at Manatee Community College and also travels to MBA schools nationwide for employees.

Growth prospects

Ritter, a native of Canada, founded CarBiz in 1995 after working as a an executive for a new car franchise in his homeland. Ritter, and the company, moved to Sarasota in 2002. One of the initial struggles was to transfer the company from the Canadian stock exchange to an American stock exchange, a process that took 18 months and cost $1 million. It was Ritter's first introduction into business vs. bureaucracy, American-style.

Ritter's roots, in software and business consulting, is the second part of CarBiz's corporate strategy. The company will continue selling its software products, consulting services and other finance products, even to competitors.

It's a $50 billion industry, says Ritter, and he's comfortable selling services to a competitor if it means CarBiz's reach grows. "I'd rather make one dollar from every [industry] transaction," says Ritter, "as opposed to a few hundred dollars in limited transactions."

In addition to multiple revenue streams, Ritter is monitoring the entire alternative financial services market as a source for growing the company. That market, with companies such as Tampa-based AmScott, is on the verge of a consolidation similar to what could happen in the buy here, pay here auto industry.

That leaves Ritter with one final challenge: Should he look for other acquisitions and growth targets now, while industry deals are on the forefront and CarBiz has money to spend? Or should he continue leading a company-wide focus on absorbing the Calcars deal and growing organically?

"We don't want to rush into deals," says Ritter, "but we want to utilize capital while it's there."

AT A GLANCE

CARBIZ

Headquarters: Sarasota

CEO: Carl Ritter

FY 2007 Revenues: $3.2 million

Stock symbol: CBZFF.OB

Recent stock price: $0.20

52-week stock-price range: N/A

Price-earnings ratio (trailing 12 months): N/A

Earnings per-share (trailing 12 months): $-0.11

Market capitalization: $12.94 million

Profit margin: -193.94%

BY THE NUMBERS (all the numbers are in the thousands)

Income Statement

Period Ending April 30, 2007 July 31, 2007 %Change

Total Revenue 881 943 .07%

Cost of Revenue 416 519 25%

Gross Profit 465 425 -.08%

Operating expenses

Research and Development - -

Selling General and Administrative 679 1,564 130%

Operating income or loss 177 -1,531 N/A

Income from Continuing Operations

Total other income/expenses net 679 -1,079 N/A

Earnings before interest and taxes 850 -2,563 N/A

Interest expense 90 149 66%

Income before tax 760 -2,712 N/A

Income tax expense - -

Net income 760 -2,712 N/A

Balance Sheet

Period Ending April 30, 2007 July 31, 2007

Assets

Cash and cash equivalents 344 91 -74%

Short-term investments - -

Net receivables 387 444 15%

Inventory 128 145 13%

Other current assets 138 129 -.06%

Total current assets 997 810 -19%

Long-term investments 87 147 69%

Property plant and equipment 61 60 -.02%

Deferred long-term asset charges 777 819 .05%

Total assets 1,922 1,836 -.04%

Liabilities

Accounts Payable 549 516 -.04%

Short/Current long-term debt 4,907 7,535 54%

Other current liabilities 134 121 -10%

Total current liabilities 5,589 8,172 46%

Long-term debt 9 7 -22%

Minority interest 212 205 -.03%

Total liabilities 5,824 8,389 44%

Stockholders' Equity

Common stock 16,274 16,274 0

Retained earnings -26,073 -28,785 N/A

Capital Surplus 6,283 6,343 .010%

Other stockholder equity -385 -385 N/A

Total stockholder equity -3,902 -6,553 N/A

Net tangible assets -3,902 -6,553 N/A

Cash flow

Period Ending April 30, 2007 July 31, 2007

Operating activities 104 59 -43%

Adjustments to net income -1,028 1,497 N/A

Changes in accounts receivables -82 -131 N/A

Changes in liabilities -420 20 N/A

Changes in inventories -60 -17 N/A

Changes in other operating activities 27 11 -59%

Total cash flow from operating activities -700 -1,273 N/A

Total cash flows from financing activities 1,096 678 -38%

Change in cash and cash equivalents 276 -252 N/A

Source: Yahoo! Finance, SEC

REVIEW SUMMARY

Business: CarBiz, Sarasota

Industry: Automotive, Finance

Key: The company has the potential to grow revenues 10-fold after buying a national chain of used car dealerships.