CarMax, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Three and six months ended August 31, 2020. Comparisons are with the corresponding 2019 periods. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless stated otherwise.
Business context and results
CarMax operates used-car retail and wholesale businesses and CarMax Auto Finance (CAF). At quarter-end it operated 220 used-car stores in 106 U.S. markets and two new-car franchises. Its online and in-store omnichannel rollout was completed during the quarter.
| Metric | Q2 FY2021 | Q2 FY2020 | First six months FY2021 | First six months FY2020 |
|---|---|---|---|---|
| Net sales and operating revenue | $5,372 million (+3.3%) | $5,201 million | $8,601 million (-18.6%) | $10,567 million |
| Gross profit | $752 million (+8.5%); 14.0% margin | $693 million; 13.3% margin | $1,106 million (-22.9%); 12.9% margin | $1,436 million; 13.6% margin |
| CAF income | $147 million (+29.0%) | $114 million | $198 million (-13.9%) | $230 million |
| Net earnings | $297 million (+27.0%); 5.5% margin | $234 million; 4.5% margin | $302 million (-39.7%); 3.5% margin | $500 million; 4.7% margin |
| Diluted earnings per share | $1.79 (+27.9%) | $1.40 | $1.83 (-38.8%) | $2.99 |
| Net cash from operating activities | Not presented as a quarterly figure in the supplied filing text | $890 million | $(125) million |
Financial position, cash flow and debt
- At August 31, cash and cash equivalents were $712 million; current assets were $4.33 billion and current liabilities $1.60 billion. Cash, cash equivalents and restricted cash together totaled $1.37 billion.
- Total debt was $15.29 billion, including $13.38 billion of non-recourse notes secured by auto loans. Other listed debt included $576 million drawn on the revolving facility, a $300 million term loan, $500 million of senior notes and $533 million of financing obligations. The company reported compliance with applicable financial covenants.
- On September 16, 2020, after quarter-end, CarMax used cash on hand to repay the outstanding revolving-credit borrowings. The facility had $874 million of unused capacity at August 31.
- First-half operating cash flow improved to $890 million from cash used of $125 million a year earlier, substantially reflecting a $189 million decrease in auto loans receivable versus a $721 million increase in the prior period. Management cautioned that movements in loans and related non-recourse funding can make reported operating and financing cash flows fluctuate without equivalent effects on overall liquidity.
- Capital expenditures were $92 million in the first half, down from $171 million. First-half financing cash flow was a use of $86 million, including $231 million of net payments on non-recourse notes and $54 million of share repurchases.
Material changes and drivers
- Q2 used-unit sales increased 3.9% to 217,330; comparable-store used-unit sales rose 1.2%. Wholesale-unit sales increased 5.1%. By contrast, first-half used-unit sales fell 18.7%, with comparable-store sales down 21.0%, reflecting first-quarter closures and restrictions and weaker demand during the pandemic.
- Q2 used gross profit per unit increased to $2,214 from $2,183; wholesale gross profit per unit rose to $1,086 from $928. First-half used gross profit per unit declined to $2,108 from $2,200, reflecting early-period pricing and inventory adjustments. Management said major used-unit gross-profit pressures appeared to have eased, but results remain dependent on sales and economic recovery.
- Q2 SG&A increased 2.0% to $490 million; first-half SG&A decreased 11.0% to $864 million, reflecting lower activity and cost actions. Q2 expense included higher share-based compensation and advertising, partly offset by lower overhead.
- First-half results included a $40.3 million Takata-airbag settlement recovery, which management said benefited diluted EPS by $0.18. It is a one-time item, not an ongoing operating contribution.
- CAF’s allowance for loan losses was $433 million, or 3.23% of managed receivables, versus $150 million, or 1.15%, a year earlier. The increase includes the $202 million adoption-of-CECL adjustment recorded at the start of the fiscal year, plus provisions reflecting lifetime-loss estimates and COVID-related economic uncertainty. CAF income rose in Q2 as lower loan-loss provision and funding costs supported results, but fell for the first half as provisions increased.
- CAF delinquencies were 2.62% of managed receivables at August 31, compared with 3.55% at February 29. Management noted that payment extensions peaked in April and subsequently declined; repossessions and late fees had been temporarily suspended or waived earlier in the pandemic.
Outlook, risks and contingencies
- Management said the duration and severity of COVID-19 and its effects on consumer demand, operations, profitability, liquidity and credit losses remain uncertain. All stores were open at August 31, although many continued to face occupancy restrictions. Sales recovered from the early-April trough; comparable used-unit sales were positive in July and August, and the trend continued through September.
- CarMax resumed its store-expansion strategy and share repurchases after quarter-end and anticipated opening eight to ten stores in fiscal 2022. It planned higher year-over-year marketing spending in the second half of fiscal 2021 and continued investment in omnichannel, customer experience and vehicle acquisition. No specific earnings or revenue forecast was provided.
- Management reported liquidity and access to capital sufficient to support operations and planned investments for the foreseeable future, while emphasizing caution amid economic uncertainty. Its target adjusted debt-to-total-capital ratio is 35%–45%; the ratio was modestly below that range in Q2 after netting accumulated cash, under the company’s stated calculation.
- Key risks include pandemic-related disruption, used-car price and inventory volatility, higher CAF credit losses, access and cost of securitization or warehouse funding, competition, and successful execution of omnichannel initiatives. Warehouse-facility renewals could affect funding cost, structure or capacity.
- CarMax reached a global settlement of three California wage-and-hour cases for an immaterial amount that was fully accrued; a separate California case remains. A California hazardous-waste matter was settled for an immaterial payment. The company also disclosed an EPA agreement, subject to final acceptance after public comment, involving a $119,440 civil penalty for an accidental petroleum discharge. It received $40.3 million from several Takata-airbag settlement funds and could not estimate any potential recovery from the remaining Ford fund.
Important facts for investors to verify
- Whether the post-quarter sales recovery and inventory rebuild continued, and how comparable used-unit sales and gross profit per unit evolved.
- Whether CAF’s elevated allowance adequately captures lifetime credit losses as economic conditions and vehicle recovery values change; monitor delinquencies, charge-offs and provision levels.
- Funding availability and cost for CAF, including warehouse capacity and renewal terms, alongside the distinction between non-recourse debt and corporate obligations.
- How much future earnings reflect recurring operations versus the $40.3 million settlement recovery and other pandemic-related or temporary effects.
- Execution of planned marketing, omnichannel investment and fiscal 2022 store openings, and any material updates to legal or regulatory matters.