CarMax, Inc. — Form 10-Q Summary
Business context and period: CarMax operates used-vehicle retail and wholesale businesses and CarMax Auto Finance (CAF). This unaudited report covers the three months ended May 31, 2023, the first quarter of fiscal 2024; comparisons are with the three months ended May 31, 2022. The company operated 241 stores in 109 U.S. markets.
Financial performance
| Metric | Q1 FY2024 | Prior-year comparison |
|---|---|---|
| Net sales and operating revenue | $7.687 billion | Down 17.4% from $9.312 billion |
| Gross profit / gross margin | $817.4 million / 10.6% | Down 6.6%; margin was 9.4% |
| CAF income | $137.4 million | Down 32.8% from $204.5 million |
| Net earnings | $228.3 million | Down 9.5% from $252.3 million |
| Diluted EPS | $1.44 | Down 7.7% from $1.56 |
| Operating cash flow | $(185.3) million | Compared with $531.0 million provided |
| Capital expenditures | $136.7 million | Compared with $94.8 million |
- Used-vehicle revenue fell 14.4%, reflecting 9.6% fewer units sold and a 5.5% lower average selling price. Comparable-store used unit sales declined 11.4%.
- Wholesale revenue declined 28.5%, as unit sales fell 13.6% and average selling price fell 17.9%. Used and wholesale gross profit per unit remained near prior-year levels at $2,361 and $1,042, respectively.
- SG&A fell 14.8% to $559.8 million. This included a $59.3 million Takata settlement benefit; excluding it, SG&A declined 5.7% and was 75.7% of gross profit, versus 75.0% a year earlier. Reported SG&A was 68.5% of gross profit.
- CAF interest and fee income rose to $400.5 million from $346.7 million, but interest expense increased to $142.6 million from $48.8 million. Total interest margin declined to 6.1% from 7.5%, and the loan-loss provision rose to $80.9 million from $57.8 million.
- CAF credit indicators weakened: allowance for loan losses was $535.4 million, or 3.11% of managed receivables, versus 2.85% a year earlier; annualized net credit losses were 1.24% versus 0.83%, and past-due accounts were 5.15% versus 4.06%. Management cited customer hardship and macroeconomic uncertainty.
Financial position and liquidity
- At May 31, cash and cash equivalents were $264.2 million; restricted cash was $671.3 million, including $506.5 million from auto-loan collections. Inventory was $4.08 billion, up $355.1 million since fiscal year-end.
- Total debt, including $16.78 billion of non-recourse notes payable and financing obligations, was $18.70 billion. Balance-sheet long-term debt was $1.91 billion, with $12.3 million current; the $2.00 billion revolving facility was undrawn and fully available. The company reported $1.36 billion of unused warehouse-facility capacity.
- Operating cash use reflected increased inventory and auto loans receivable. Management noted that auto-loan growth is substantially funded through non-recourse debt, so cash-flow presentation can fluctuate without a corresponding effect on overall liquidity.
- CarMax was in compliance with applicable financial covenants. Its adjusted debt-to-capital ratio, net of cash and calculated using the company’s specified methodology, was below its 35%–45% target range.
Outlook, commentary and risks
- Management said vehicle affordability challenges, inflation, higher interest rates, tighter lending standards and low consumer confidence continued to pressure sales. It is aligning staffing, marketing and other costs with sales, tightening CAF underwriting, slowing store growth and keeping share repurchases paused.
- Management’s initial goal is annual SG&A as a percentage of gross profit in the mid-70% range. It expects low-single-digit gross profit growth in fiscal 2024 to support SG&A leverage, with cost actions from the prior fiscal year also expected to help. Per-unit advertising spend is expected to remain at a similar annual level to fiscal 2023.
- Fiscal 2024 capital expenditures are estimated at approximately $450 million. CarMax plans five store openings for the year and its first offsite production location in Atlanta.
- Long-term targets disclosed in the filing include selling 2.0–2.4 million vehicles through retail and wholesale channels and generating $33–$45 billion in revenue by fiscal 2026, and exceeding 5% share of the U.S. market for used vehicles aged 0–10 years by the end of calendar 2025. Management cautioned that macroeconomic conditions could prevent achievement.
- The $59.3 million Takata-related settlement received in April was an unusual benefit, equivalent to $0.28 of diluted EPS. A California wage-and-hour/PAGA matter remains unresolved; the company said it could not reasonably estimate a potential loss. It also remains eligible for possible future recoveries related to other Takata settlements, but could not estimate any gain.
- In June 2023, after quarter-end, CarMax amended and extended its $2.00 billion revolving credit facility to June 2028, with options for two one-year extensions and up to $750 million of additional commitments, subject to lender approval.
- Key risks include weaker consumer demand, vehicle-price volatility and inventory availability, rising CAF credit losses, higher funding costs or reduced access to securitization and warehouse funding, competition, and execution of growth and omni-channel initiatives. Management reported no material change in market-risk disclosures or risk factors from its latest annual report.
Important facts for investors to verify
- Whether used-vehicle sales and comparable-store trends continue improving, and whether affordability constraints ease.
- CAF delinquency, charge-off, recovery and allowance trends, alongside funding costs and interest-margin performance.
- Operating cash flow and inventory changes, interpreting them alongside CAF loan growth and non-recourse funding.
- Progress toward expense-leverage goals and fiscal 2024 capital-spending and store-opening plans; distinguish recurring results from the Takata settlement benefit.
- Availability and renewal terms of warehouse funding, covenant compliance, and any material developments in the California litigation.