Business Context and Reporting Period
Company: CARMAX, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 31, 2009 (First 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 May 31, 2009. The company also operates CarMax Auto Finance (CAF) to provide financing for vehicle purchases.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2010 (May 31, 2009) | Q1 2009 (May 31, 2008) |
|---|---|---|
| Net Sales and Operating Revenues | $1,834,300 | $2,208,763 |
| Gross Profit | $276,237 | $282,714 |
| Gross Margin | 15.1% | 12.8% |
| CarMax Auto Finance (Loss) Income | $(21,636) | $9,819 |
| Net Earnings | $28,748 | $29,558 |
| Diluted EPS | $0.13 | $0.13 |
| Cash and Cash Equivalents | $133,580 | $11,891 |
| Total Debt (Short-term + Long-term) | $417,572 | N/A (Balance Sheet data not provided for prior year) |
| Net Cash Used in Operating Activities | $(79,417) | $79,356 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 17% to $1.83 billion, driven by a 15% drop in used vehicle revenues and a 29% drop in wholesale vehicle revenues. This reflects a 13% decline in used vehicle unit sales and a 25% decline in wholesale unit sales due to reduced customer traffic and appraisal volume.
- Profitability Resilience: Despite lower sales, Net Earnings remained relatively stable, declining only 3% to $28.7 million. Gross Profit margin improved to 15.1% from 12.8%, as a $347 increase in gross profit per retail unit offset the volume decline.
- CAF Loss: CarMax Auto Finance reported a loss of $21.6 million compared to income of $9.8 million in the prior year. This was primarily due to a $40.4 million charge related to increased funding costs and valuation adjustments on loans originated in previous periods, alongside a decline in loan origination volume.
- Expense Management: Selling, General, and Administrative (SG&A) expenses decreased to $206.2 million from $243.0 million, aided by the suspension of store growth and reduced advertising spend.
- Cash Flow Reversal: Operating cash flow swung from a $79.4 million inflow in the prior year to a $79.4 million outflow, driven by increased inventory levels and a significant rise in the retained interest in securitized receivables.
Guidance, Outlook, and Risks
- Outlook: Management stated they cannot make a meaningful projection of fiscal 2010 sales or earnings due to the unprecedented decline in automotive industry sales and volatility in the asset-backed securitization market.
- Capital Expenditures: Estimated at approximately $20 million for fiscal 2010, focused on maintenance rather than expansion, as store growth remains suspended.
- Funding Risks: The company's warehouse facility for auto loans requires renewal. Management anticipates higher funding costs upon renewal or replacement, which could materially impact CAF income. A 30-day extension was negotiated in July 2009.
- 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. The company cannot estimate the potential loss.
- Market Risks: Significant exposure to changes in credit spreads, prepayment rates, and loss rates affecting the fair value of retained interest in securitized receivables (Level 3 assets).
Investor Verification Checklist
- CAF Funding Costs: Verify the actual renewal terms and interest rates of the warehouse facility, as higher costs are expected to impact future earnings.
- Inventory Levels: Monitor inventory turnover and valuation, as inventory increased by $77.9 million in the quarter, creating cash flow pressure.
- Delinquency Rates: Track the 31+ days past due accounts, which rose to 3.11% of managed receivables, reflecting recessionary pressures on loan performance.
- Store Growth Resumption: Watch for announcements regarding the resumption of store openings, which is currently suspended pending economic recovery.
- Legal Settlements: Monitor the status of the California class action lawsuit for any potential financial impact.