CarMax, Inc. — Form 10-Q Summary
Reporting period: Three months ended May 31, 2020 (CarMax fiscal 2021 first quarter). Comparative period: three months ended May 31, 2019. CarMax operates used-vehicle retail and wholesale businesses and CarMax Auto Finance (CAF).
Financial results and position
| Metric | Quarter ended May 31, 2020 | Prior-year quarter / comparison |
|---|---|---|
| Net sales and operating revenues | $3.229 billion | Down 39.8% from $5.366 billion |
| Gross profit / gross margin | $354.2 million / 11.0% | Down 52.3%; margin was 13.8% |
| CAF income | $51.0 million | Down 56.1% from $116.0 million |
| SG&A | $373.7 million | Down 23.7%; 11.6% of revenue versus 9.1% |
| Earnings before taxes | $4.2 million | $351.3 million |
| Net earnings / diluted EPS | $5.0 million / $0.03 | $266.7 million / $1.59 |
| Net cash from operating activities | $1.250 billion | $43.2 million; adjusted operating cash flow, a non-GAAP measure, was $811.3 million versus $401.4 million |
| Cash and cash equivalents | $658.0 million at May 31 | $58.2 million at February 29, 2020 |
Retail used-vehicle units fell 39.8%, comparable-store units fell 41.8%, and wholesale units fell 47.6%. Used gross profit per unit was $1,937, down 12.6%; wholesale gross profit per unit was $978, down 6.2%. Operating cash flow benefited substantially from a $947.0 million inventory reduction and changes in auto-loan receivables; it should not be read as a simple measure of recurring earnings or cash generation.
CAF provision for loan losses was $122.0 million, including an $84.0 million increase in estimated lifetime losses on existing loans related largely to COVID-19 economic conditions. The allowance was $437.2 million, or 3.32% of ending managed receivables, compared with $147.0 million, or 1.14%, a year earlier. CarMax adopted CECL on March 1, 2020, recording a $202.0 million opening allowance increase and a $153.3 million after-tax reduction to retained earnings.
Total debt was $14.880 billion, including $13.175 billion of non-recourse notes primarily supported by CAF auto loans. Corporate borrowings and financing obligations, excluding non-recourse notes, were approximately $1.705 billion. The company reported $1.08 billion of unused capacity on its $1.45 billion revolving facility and said it was in compliance with financial covenants. Restricted cash from auto-loan collections was $480.6 million.
Material changes and unusual items
- COVID-19 disruption: Store closures, operating restrictions, and weaker demand materially reduced sales. At the early-April trough, used-vehicle sales were down more than 75%. More than 80% of quarter days were affected by closures, limited operations, or occupancy restrictions.
- Sales recovery noted after quarter-end: By May 31 all stores were open, though more than half remained under restrictions or limited operations. Comparable unit sales were within 10% of the prior year during the first two weeks of June, and web traffic was up year over year during that period. These are management’s interim observations, not a full-quarter result.
- Liquidity and cost actions: CarMax drew on its revolver, paused share repurchases and store expansion/remodels, reduced inventory and advertising, implemented a hiring freeze and furloughed more than 15,000 associates. It spent approximately $30 million supporting associates; about 90% of furloughed associates had been recalled by the filing date.
- One-time benefit: A $40.3 million Takata-airbag settlement recovery was recorded in SG&A and contributed $0.18 to diluted EPS. CarMax remained eligible for a separate Ford settlement, for which it could not estimate a gain.
- Share repurchases: The company repurchased 515,500 shares for $54.1 million during the quarter, all in March, then paused the program. About $1.51 billion remained authorized and available.
Outlook, risks, and contingencies
Management provided no quantified earnings or sales guidance. It expected to complete rollout of its omni-channel experience in the second quarter of fiscal 2021 and anticipated service inefficiencies as vehicle reconditioning and inventory production returned toward normal. Store expansion and remodels were paused, with the decision to be revisited later in the fiscal year. Management said it believed liquidity was sufficient to support operations and continued digital investment, while emphasizing that the duration and effects of the pandemic remained uncertain.
Key uncertainties include COVID-19 effects on consumer demand, store operations and funding markets; CAF credit losses and recoveries; used-vehicle prices and inventory sourcing; securitization and warehouse funding costs or availability; and execution of digital initiatives. Payment extensions and suspended repossessions affected loan servicing; management cautioned that the lower reported delinquency rate was largely attributable to extensions. CarMax paused CAF Tier 3 lending and adjusted underwriting.
California wage-and-hour matters included a proposed global settlement of three cases for an immaterial amount already accrued; a separate case remained outside that settlement. A California hazardous-waste settlement was approved in June 2020 and involved an immaterial payment and injunctive relief. CarMax was also in settlement discussions with the EPA concerning an accidental petroleum discharge at a store; management did not expect a material adverse effect. The filing reported controls and procedures as effective and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether sales, comparable-store trends, and gross profit per unit sustained the improvement described for early June, and how restrictions affected subsequent operations.
- Whether CAF credit performance deteriorated beyond the quarter’s estimates; review allowance coverage, charge-offs, recoveries, payment extensions, and the economic assumptions underlying CECL.
- How much of reported operating cash flow reflects temporary inventory and receivables movements, and whether liquidity remains adequate as inventory and sales recover.
- The funding terms, capacity, and renewal risk of CAF warehouse facilities and asset-backed securitizations, separately from corporate debt.
- Whether the Takata recovery and any future settlement proceeds are nonrecurring, and the status and eventual cost of pending legal and environmental matters.