Business Context and Reporting Period
Company: CARMAX, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 31, 2007 (First Quarter of Fiscal 2008)
Business Overview: CarMax is the largest retailer of used vehicles in the United States, operating 80 used car superstores and seven new car franchises as of May 31, 2007. The company utilizes a "no-haggle" pricing model and provides financing through its subsidiary, CarMax Auto Finance (CAF).
Key Financial Metrics
| Metric | Q1 2008 (May 31, 2007) | Q1 2007 (May 31, 2006) |
|---|---|---|
| Net Sales and Operating Revenues | $2,147.1 million | $1,885.1 million |
| Gross Profit | $284.2 million (13.2% margin) | $248.3 million (13.2% margin) |
| CarMax Auto Finance (CAF) Income | $37.1 million | $32.4 million |
| Net Earnings | $65.4 million | $56.8 million |
| Diluted Earnings Per Share (EPS) | $0.30 | $0.27 |
| Net Cash Provided by Operating Activities | $75.4 million | $48.1 million |
| Total Assets | $1,977.2 million | $1,885.6 million (Feb 28, 2007) |
| Total Liabilities | $648.8 million | $638.2 million (Feb 28, 2007) |
| Short-term Debt | $3.7 million | $3.3 million (Feb 28, 2007) |
| Long-term Debt (excl. current) | $33.5 million | $33.7 million (Feb 28, 2007) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 14% year-over-year, driven primarily by a 17% increase in used vehicle sales revenue ($1.71 billion) and a 6% increase in wholesale vehicle sales revenue.
- Unit Sales: Total used vehicle unit sales rose 15% to 96,766 units, reflecting a 6% increase in comparable store sales and the addition of three new superstores. New vehicle unit sales declined 5% due to softer industry trends.
- Profitability: Net earnings increased 15% to $65.4 million. Gross profit per retail unit increased modestly to $2,801 from $2,783.
- CAF Performance: CAF income grew 14% to $37.1 million, aided by an improved gain percentage on loans sold (4.2% vs. 3.4% prior year) and growth in managed receivables.
- Expense Management: Selling, General, and Administrative (SG&A) expenses as a percentage of revenue increased slightly to 10.0% from 9.9%, attributed to planned strategic and operational initiatives.
- Credit Quality: Past due accounts (31+ days) as a percentage of managed receivables increased to 1.97% from 1.43%, and annualized net credit losses rose to 0.64% from 0.38%, reflecting expanded credit offers and economic trends.
Guidance, Outlook, and Risks
Guidance and Outlook
- Fiscal 2008 EPS: Management expects diluted net earnings per share in the range of $1.03 to $1.14.
- Comparable Store Sales: Expected comparable store used vehicle unit growth is projected between 3% and 9% for fiscal 2008.
- Expansion: The company plans to open 13 superstores in fiscal 2008 (3 opened in Q1, 10 remaining). Capital expenditures are estimated at approximately $300 million for the fiscal year.
Risks and Contingencies
- Legal Proceedings: A putative class action lawsuit was filed on June 12, 2007, in Maryland alleging failure to disclose prior rental history of vehicles. The company is unable to estimate potential losses at this stage.
- Securitization Covenants: The company relies on securitization facilities for funding. While compliant as of May 31, 2007, failure to meet financial covenants or performance triggers could restrict access to capital.
- Market Risks: Exposure to interest rate fluctuations (managed via swaps) and credit risk associated with automobile loan receivables.
Investor Verification Checklist
- Store Expansion Execution: Verify the timeline and cost of the remaining 10 planned superstore openings for fiscal 2008.
- Credit Loss Trends: Monitor the trajectory of past due accounts and net credit loss rates, which have increased year-over-year.
- Legal Exposure: Track the status of the Maryland class action lawsuit regarding vehicle rental history disclosures.
- Securitization Capacity: Confirm the renewal or expansion of the warehouse facility and public securitization programs, which are critical for funding CAF operations.
- SG&A Leverage: Assess whether SG&A expenses will stabilize as a percentage of revenue as sales growth continues.