CARMAX INC quarterly report, Q2 FY2022

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Business context and reporting period

CarMax, Inc. filed this unaudited Form 10-Q for the quarter and six months ended August 31, 2021 (fiscal 2022). Its reportable segments are CarMax Sales Operations and CarMax Auto Finance (CAF). The company operates an omnichannel used-vehicle retail and wholesale business and finances retail customers through CAF.

Financial performance and position

  • Second quarter: Net sales and operating revenue rose 48.7% to $7.99 billion; gross profit increased 8.4% to $815.5 million. Net earnings declined 3.9% to $285.3 million, and diluted EPS fell to $1.72 from $1.79.
  • First six months: Revenue increased 82.4% to $15.69 billion, gross profit rose 57.3% to $1.74 billion, and net earnings increased 139.3% to $722.0 million. Diluted EPS was $4.35 versus $1.83. Prior-year results were affected by COVID-19, and prior-year first-half EPS included a $0.18 benefit from Takata settlement proceeds.
  • Sales and margins: Second-quarter used-vehicle units rose 6.7%, while average selling price increased 30.8% to $26,141. Wholesale units rose 41.4% and average price 47.7% to $8,701. Gross margin declined to 10.2% of revenue from 14.0%; used gross profit per unit was $2,185, down 1.3%, and wholesale gross profit per unit was $1,005, down 7.5%.
  • Expenses and CAF: Second-quarter SG&A increased 30.0% to $574.3 million; SG&A was 70.4% of gross profit versus 58.8%. CAF income rose 35.9% to $200.0 million, supported by higher interest margin and average managed receivables. CAF’s allowance for loan losses was $398.1 million, or 2.66% of managed receivables, versus 3.23% a year earlier.
  • Cash flow: First-half operating cash flow was negative $1.39 billion, compared with positive $889.8 million a year earlier. The filing attributes the change principally to growth in auto loans receivable and inventory; CAF loan funding is substantially reflected separately in financing cash flows. Investing cash outflow was $380.2 million, including $241.6 million for Edmunds net of cash acquired. Financing cash inflow was $1.77 billion.
  • Liquidity and debt: At August 31, cash and cash equivalents were $58.1 million; restricted cash was $570.6 million from auto-loan collections, with another $146.9 million of restricted cash in other assets. Total debt was $17.18 billion, including $14.98 billion of non-recourse auto-loan funding. The company had $872.7 million drawn on its $1.45 billion revolving facility and $577.3 million unused and available. It reported compliance with financial covenants and a net adjusted debt-to-capital ratio at the lower end of its 35%–45% target range.

Material changes versus prior comparable period

  • Strong sales growth reflected higher unit volumes and sharply higher vehicle prices amid robust demand and market appreciation. Management cited inventory availability and staffing as growth headwinds, but said inventory rebuilding progressed during the quarter.
  • Higher advertising, compensation, overhead, and technology investment contributed to SG&A growth. The prior-year quarter benefited from pandemic-related cost reductions estimated at $25 million to $30 million; first-half prior-year SG&A also included a $40.3 million Takata settlement benefit.
  • Edmunds was acquired on June 1, 2021 for total consideration of $401.8 million, including cash, CarMax shares, and the fair value of a previously held interest. Its results were immaterial to reported revenue and earnings; management said it was slightly accretive in Q2.
  • CarMax repurchased 2.75 million shares for $355.5 million in the first half. Remaining authorization at August 31 was $991.5 million.

Outlook, commentary, risks, and contingencies

  • Management expects fiscal 2022 capital expenditures of approximately $350 million, nearly $100 million for technology, and ten store openings for the year; five had opened by August 31. Marketing spend is expected to remain elevated during fiscal 2022.
  • Management expects Edmunds to have an immaterial impact on fiscal 2022 EPS, with potential for longer-term value creation. It stated that CarMax was on track toward long-term targets: over 5% national share of 0–10-year-old vehicles by calendar 2025, two million annual used-vehicle sales by fiscal 2026, and approximately $33 billion in fiscal 2026 revenue.
  • Online retail transactions represented 9% of Q2 retail units; about 55% of retail sales were “omni” sales involving at least one online step. Management said self-service online sales capability was available to slightly more than half of customers and was expected to reach all retail customers by fiscal year-end.
  • Key uncertainties include COVID-19 and new variants, used-vehicle prices and inventory supply, labor availability and costs, CAF credit losses, financing-market access and costs, and the execution and returns of strategic investments. Management cautioned that recent favorable credit-loss experience may not predict future performance.
  • Two new California wage-and-hour putative class actions were filed in 2021, and another PAGA notice had been submitted; the company could not reasonably estimate potential losses. It said an older wage-and-hour case was not expected to have a material adverse effect. The 90-day/4,000-mile vehicle warranty liability was $20.8 million.
  • The company reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material changes to risk factors or market-risk exposure since its latest annual report.

Important facts for investors to verify

  1. Whether elevated used-car prices, acquisition costs, and constrained inventory persist, and how they affect unit volume and per-unit gross profit.
  2. CAF portfolio performance, delinquencies, charge-offs, recoveries, and allowance assumptions as economic conditions evolve.
  3. Funding capacity and cost for CAF, including warehouse renewals, securitization-market access, and the distinction between non-recourse debt and corporate obligations.
  4. Execution and financial returns from Edmunds, omnichannel investments, marketing, technology spending, and planned store expansion.
  5. Whether the California employment matters or other contingencies develop into material liabilities; the filing does not provide a clear potential-loss estimate for the newer matters.