Business Context and Reporting Period
Company: CARMAX, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 31, 2009 (Second Quarter of Fiscal 2010)
Business Overview: CarMax is the largest retailer of used vehicles in the United States, operating 100 used car superstores and six new car franchises as of August 31, 2009. The company utilizes a no-haggle pricing model and provides financing through its subsidiary, CarMax Auto Finance (CAF). Store growth was temporarily suspended in December 2008 due to economic conditions.
Key Financial Metrics
| Metric | Three Months Ended Aug 31, 2009 | Six Months Ended Aug 31, 2009 |
|---|---|---|
| Net Sales and Operating Revenues | $2,076.7 million | $3,911.0 million |
| Gross Profit | $314.5 million (15.1% margin) | $590.8 million (15.1% margin) |
| CarMax Auto Finance (CAF) Income | $72.1 million | $50.5 million |
| Selling, General & Administrative (SG&A) | $218.1 million (10.5% of sales) | $424.3 million (10.9% of sales) |
| Net Earnings | $103.0 million | $131.7 million |
| Diluted Earnings Per Share (EPS) | $0.46 | $0.59 |
| Cash and Cash Equivalents | $122.3 million | $122.3 million (Balance Sheet) |
| Total Debt | $379.5 million | $379.5 million (Balance Sheet) |
| Inventory | $790.1 million | $790.1 million (Balance Sheet) |
Material Changes vs. Prior Comparable Period
- Revenue Growth: Net sales increased 13% in the quarter and decreased 3% year-to-date compared to the prior year. Used vehicle revenues rose 16% in the quarter, driven by a 10% increase in unit sales and a 6% increase in average selling price.
- Profitability Surge: Net earnings increased significantly to $103.0 million in the quarter from $14.0 million in the prior year quarter. Gross profit increased 23% to $314.5 million.
- CAF Performance: CAF reported income of $72.1 million, a substantial turnaround from a loss of $7.1 million in the prior year quarter. This improvement was driven by favorable mark-to-market adjustments on retained subordinated bonds ($28.5 million) and improved funding terms.
- Expense Management: SG&A expenses decreased to $218.1 million from $225.1 million in the prior year quarter, despite higher sales volume, due to reduced advertising and growth-related expenses.
- Cash Flow: Operating cash flow turned negative, using $51.3 million in the first half of fiscal 2010, compared to providing $218.9 million in the prior year. This shift was due to increased inventory levels and retained interest in securitized receivables.
Guidance, Outlook, and Risks
- Outlook: Management stated they cannot make meaningful projections for fiscal 2010 sales or earnings due to recession-related market conditions. Capital expenditures are estimated at approximately $20 million for the fiscal year, focused on maintenance rather than new store openings.
- Liquidity: The company maintains a $700 million revolving credit facility with $245.6 million available as of August 31, 2009. A $1.2 billion warehouse facility for auto loans was renewed in August 2009.
- Key Risks:
- Securitization Market: Disruptions in the asset-backed securitization market could impact funding costs and availability for CAF.
- Valuation Assumptions: CAF income is sensitive to assumptions regarding prepayment rates, loss rates, and discount rates used to value retained interests in securitized receivables.
- Legal Proceedings: A putative class action lawsuit regarding meal/rest breaks and overtime in California remains pending, though several claims have been dismissed or stayed.
- Accounting Changes: The company is evaluating the impact of new FASB standards (SFAS 166 and 167) regarding transfers of financial assets and consolidation of variable interest entities, expected to be adopted in fiscal 2011.
Investor Verification Checklist
- CAF Adjustments: Verify the sustainability of CAF income, noting that $36.2 million of the quarterly income was driven by non-recurring mark-to-market adjustments and funding cost benefits.
- Inventory Levels: Monitor the $86.9 million increase in inventory and its impact on future cash flow and potential markdowns if demand softens.
- Delinquency Rates: Review the increase in past due accounts (31+ days) to 3.79% of managed receivables, reflecting recessionary pressures on credit quality.
- Store Growth Suspension: Confirm the timeline for resuming store openings, as capital spending is currently limited to maintenance.
- Legal Exposure: Track the status of the California class action lawsuit, specifically the appeal regarding overtime claims.