Business Context and Reporting Period
Company: CARMAX, INC.
Filing Type: Form 10-K (Annual Report)
Period Ended: February 29, 2008
Business Overview: CarMax is the nation's largest retailer of used vehicles, operating 89 used car superstores in 41 metropolitan markets as of the fiscal year-end. The company utilizes a "no-haggle" pricing model and sells used vehicles, new vehicles (4% of retail mix), and wholesale vehicles through on-site auctions. It also provides financing through CarMax Auto Finance (CAF) and sells extended service plans.
Key Financial Metrics
| Metric | Fiscal 2008 | Fiscal 2007 |
|---|---|---|
| Net Sales and Operating Revenues | $8,199.6 million | $7,465.7 million |
| Gross Profit | $1,072.4 million | $971.1 million |
| CarMax Auto Finance (CAF) Income | $85.9 million | $132.6 million |
| Net Earnings | $182.0 million | $198.6 million |
| Diluted Earnings Per Share (EPS) | $0.83 | $0.92 |
| Net Cash Provided by Operating Activities | $79.5 million | $136.8 million |
| Total Assets | $2,333.2 million | $1,885.6 million |
| Total Debt (Short-term + Long-term) | $327.8 million | $185.5 million |
| Inventory | $975.8 million | $836.1 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 10% to $8.20 billion, driven by a 12% increase in used vehicle unit sales (377,244 units) and a 16% expansion in the store base (12 new stores opened).
- Profitability Decline: Despite revenue growth, net earnings decreased 8% to $182.0 million. This was primarily due to a 35% decline in CAF income.
- CAF Income Impact: CAF income dropped to $85.9 million from $132.6 million due to disruptions in global credit markets, increased funding costs, higher net credit losses, and a change in the discount rate used to value retained interest (increased from 12% to 17%).
- Comparable Store Sales: Comparable store used unit sales grew 3%, a slowdown from the 9% growth in fiscal 2007, attributed to declining consumer confidence and a slowing automotive retail industry.
- Inventory Investment: Inventory increased 17% ($139.7 million) to support store growth and a test to increase on-site vehicle inventory by 50-100 cars per store.
Guidance, Outlook, and Risks
Fiscal 2009 Outlook
- Store Openings: Plans to open approximately 14 new superstores (7 production, 7 non-production), expanding the base by 16%.
- Revenue: Anticipates total revenue growth between 7% and 14%.
- Comparable Store Sales: Expects comparable store used unit sales to range from -2% to +5%.
- Earnings Per Share: Projects diluted EPS in the range of $0.78 to $0.94.
- CAF Expectations: Expects CAF gain percentage to be well below the normalized range of 3.5% to 4.5% due to continued credit market stress and higher funding costs.
Key Risks and Contingencies
- Credit Market Disruption: Reliance on securitization programs to fund auto loans; disruptions could increase funding costs or curtail lending.
- Economic Conditions: Sensitivity to consumer credit availability, gasoline prices, and general economic sentiment.
- Litigation: A putative class action lawsuit filed in Maryland regarding the disclosure of prior rental history for vehicles; the company cannot estimate the potential loss.
- Seasonality: Sales are typically strongest in spring/summer and lowest in the fall quarter.
Investor Verification Checklist
- CAF Funding Costs: Verify the impact of the 17% discount rate and widening credit spreads on future CAF income and retained interest valuations.
- Inventory Levels: Monitor the success of the inventory test (50-100 additional cars per store) and its effect on cash flow and depreciation risk.
- Comparable Store Growth: Track the ability to achieve the wide guidance range (-2% to 5%) for comparable store sales in a softening economy.
- Debt Covenants: Review compliance with financial covenants in the warehouse facility and revolving credit agreement, particularly regarding fixed charge coverage and tangible net worth.
- Litigation Status: Monitor developments in the Maryland class action lawsuit regarding rental history disclosures.