Business context and reporting period
CarMax, Inc. filed this Form 10-K for the fiscal year ended February 28, 2021 (FY2021), with FY2020 as the primary comparable period. CarMax operates used-vehicle retail, wholesale auctions and vehicle financing through CarMax Sales Operations and CarMax Auto Finance (CAF). It operated 220 stores in 106 U.S. television markets at year-end. The filing describes significant COVID-19 effects, especially store restrictions and weaker demand early in the year, followed by recovery and the nationwide rollout of its omnichannel platform.
Financial performance and condition
| Metric | FY2021 | FY2020 / change |
|---|---|---|
| Net sales and operating revenues | $18.95 billion | $20.32 billion; down 6.7% |
| Gross profit / gross margin | $2.379 billion / 12.6% | $2.722 billion / 13.4%; gross profit down 12.6% |
| Net earnings / net margin | $746.9 million / 3.9% | $888.4 million / 4.4%; earnings down 15.9% |
| Diluted earnings per share | $4.52 | $5.33; down 15.2% |
| CAF income | $562.8 million | $456.0 million; up 23.4% |
| SG&A expense | $1.899 billion | $1.940 billion; down 2.1% |
| Net cash from operating activities | $667.8 million | Used $236.6 million |
| Capital expenditures | $164.5 million | $331.9 million |
Used retail units fell 9.7% to 751,862; comparable-store used units declined 11.7%. Used gross profit per unit was $2,113, down 3.3%, while SG&A per used unit rose 8.4% to $2,525. Wholesale units declined 8.6%, but wholesale gross profit per unit increased 1.8% to $993. CAF’s total interest margin rose to 6.1% from 5.7%, principally reflecting lower funding costs.
At February 28, 2021, cash and cash equivalents were $132.3 million; cash, cash equivalents and restricted cash together were $771.9 million. The $1.45 billion revolving facility was undrawn and fully available. Total debt was $15.10 billion, including $13.76 billion of non-recourse notes principally secured by CAF auto loans; debt excluding non-recourse notes was approximately $1.33 billion. Auto loans receivable, net, were $13.49 billion and inventory was $3.16 billion, up 10.9% from the start of the year. Operating cash flow comparisons are affected by CAF receivables and related non-recourse funding flows.
Material changes and unusual items
- COVID-19-related closures, occupancy limits and softer traffic weighed on retail sales, especially in the first quarter. Sales improved later in the year, though weather, tax-refund timing and inventory constraints affected February.
- CarMax completed its nationwide omnichannel rollout in the second quarter and moved wholesale auctions online. It also completed a nationwide online instant appraisal rollout in the fourth quarter.
- CAF income improved despite lower loan originations, reflecting higher interest margin and a lower annual provision for loan losses. The ending loan-loss allowance was $411.1 million, or 2.97% of managed receivables; FY2021 adoption of CECL increased the opening allowance by $202.0 million and reduced opening retained earnings by $153.3 million after tax.
- FY2021 diluted EPS included an estimated $0.19 one-time benefit from $40.3 million of net Takata-airbag settlement proceeds. The proceeds also contributed to lower reported SG&A.
- CarMax repurchased $229.9 million of stock during FY2021. Repurchases were paused during the initial pandemic response and resumed in September. No common-stock dividends were paid, and the company said none were planned for the foreseeable future.
Outlook, management commentary and risks
Management expects FY2022 capital expenditures of approximately $350 million, including more than $100 million for technology, and plans to open ten stores. It expects marketing spending to remain elevated, with similar per-unit expense levels to the second half of FY2021. Management said it expected used gross profit per unit to remain above $2,000 for the next quarter and would continue selective pricing and marketing tests. It expects to leverage SG&A when comparable-store used-unit growth is 5%–8% on a two-year stacked basis, with growth toward the higher end needed during the planned investment period. These are management expectations, not a full-year sales or EPS forecast.
By the end of FY2021, about 25% of customers were eligible to complete an online purchase independently; management targeted that capability for most customers by mid-FY2022. In March 2021, CarMax agreed to acquire Edmunds for a transaction implying $404 million enterprise value, inclusive of its initial investment, using cash and equity. Closing was anticipated in June 2021, subject to customary conditions; management expected an immaterial FY2022 EPS impact.
Principal risks include continued COVID-19 effects, intense online and traditional competition, used-vehicle supply and price volatility, CAF credit losses and funding access, dependence on third-party finance and product providers, execution of omnichannel investments, cybersecurity and privacy incidents, regulatory compliance, and litigation. The CAF loss allowance depends on uncertain forecasts and assumptions; auditors identified its assessment as a critical audit matter. The company reported compliance with debt covenants, effective disclosure controls and effective internal control over financial reporting. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether post-year-end retail sales momentum and market-share gains continued, and whether FY2021’s depressed comparable sales base distorts subsequent growth rates.
- Whether gross profit per used unit remains above management’s stated $2,000 near-term expectation as pricing tests and elevated marketing proceed.
- CAF allowance adequacy and subsequent delinquencies, charge-offs, recoveries and payment behavior, considering CECL’s longer-term estimates and pandemic uncertainty.
- Funding-market access, warehouse-facility renewals, securitization costs, and the distinction between non-recourse CAF debt and corporate debt.
- Actual FY2022 store openings, capital expenditures, omnichannel adoption, and the cost and integration progress of the Edmunds acquisition.
- Potential effects of unresolved legal matters, including the Sabanovich wage-and-hour case and the remaining Ford Takata settlement fund; the filing does not provide a clear estimate of any potential Ford recovery.