CarMax, Inc. — Form 10-Q Summary
Business context and reporting period. CarMax is a U.S. used-vehicle retailer with CarMax Sales Operations and CarMax Auto Finance (CAF) segments. This unaudited quarterly report covers the three and six months ended August 31, 2019 (the second quarter and first half of fiscal 2020), compared with the corresponding prior-year periods.
Key financial results
| Metric | Three months ended August 31, 2019 | Change year over year | Six months ended August 31, 2019 | Change year over year |
|---|---|---|---|---|
| Net sales and operating revenues | $5.20 billion | +9.1% | $10.57 billion | +10.6% |
| Gross profit | $693.5 million | +6.6% | $1.44 billion | +9.4% |
| Gross margin | 13.3% | 13.7% prior year | 13.6% | 13.7% prior year |
| CAF income | $114.1 million | +4.1% | $230.1 million | +2.1% |
| Net earnings | $233.6 million | +5.8% | $500.3 million | +8.9% |
| Diluted earnings per share | $1.40 | +12.9% | $2.99 | +16.3% |
Quarterly net margin was 4.5%, compared with 4.6% a year earlier; first-half net margin was 4.7%, versus 4.8%. EPS growth exceeded net earnings growth as the weighted-average diluted share count declined, reflecting share repurchases.
- Sales and units: Second-quarter used-vehicle unit sales increased 6.2%, including 3.2% comparable-store growth; first-half units rose 9.6%, including 6.3% comparable-store growth. Used-vehicle revenue increased 9.3% for the quarter and 11.1% for the half. Wholesale units rose 4.7% and 5.6%, respectively.
- Per-unit economics: Used-vehicle gross profit per unit was $2,183 in the quarter, approximately flat year over year, and $2,200 for the half, also approximately flat. Total gross margin declined to 13.3% in the quarter from 13.7%.
- CAF and credit: CAF income rose as average managed receivables grew, partly offset by higher loan-loss provisions. The allowance was $150.4 million, or 1.15% of ending managed receivables, versus 1.13% a year earlier. Annualized net credit losses were 1.29% for the quarter, up from 1.20%; past-due accounts were 3.55%, compared with 3.43% a year earlier. CAF’s net penetration rate was 42.2% in the quarter and 41.8% for the first half, both below prior-year levels.
- Cash flow and investment: First-half GAAP operating cash flow was negative $125.5 million, versus positive $110.9 million a year earlier. Management’s non-GAAP adjusted operating cash flow, which adds net issuances of non-recourse notes, was $480.6 million versus $718.4 million. Investing cash outflow was $178.9 million, including $171.3 million of capital expenditures.
- Debt and liquidity: Total debt was $14.84 billion, including $13.14 billion of non-recourse notes largely associated with CAF receivables; total debt was $14.20 billion at February 28, 2019. Cash and cash equivalents were $40.7 million, while restricted cash was $483.4 million from loan collections. The $1.45 billion revolving credit facility had $1.07 billion of unused capacity. The company reported compliance with financial covenants and funding-vehicle performance triggers.
- Capital returns: CarMax repurchased 4.48 million shares for $341.9 million in the first half. At August 31, $1.78 billion remained under the $2 billion repurchase authorization.
Material changes, outlook and risks
- Sales growth was driven by higher unit volume, comparable-store performance, newer stores and increased website traffic. Management cited strong conversion and a 16% increase in website traffic in the quarter. Higher vehicle acquisition costs and vehicle mix contributed to rising average selling prices.
- SG&A rose 6.0% in the quarter and 8.8% for the half, including investment in technology, omni-channel initiatives and the larger store base. Management expects advertising spending to increase in the second half and full fiscal 2020. With planned spending, comparable-store used-unit growth of 5%–8% is expected to be needed to leverage SG&A; management expects initiative spending growth to slow in fiscal 2021 and taper thereafter.
- Management plans 13 store openings in fiscal 2020 and a similar number in fiscal 2021, and estimates fiscal 2020 capital expenditures of approximately $350 million. The omni-channel experience was available to approximately one-third of customers by quarter-end; the company remained on track to extend it to a majority by fiscal year-end. Management cautioned that results in new markets may vary.
- Management expects adjusted operating cash flow, borrowings and funding arrangements to be sufficient for CAF, capital expenditures, repurchases and working capital for the foreseeable future. It cautioned that credit-market conditions could raise funding costs or constrain timing and capacity.
- CAF risks include higher funding costs, pressure on consumer rates and credit losses exceeding expectations. Management’s targeted lifetime net loss range for loans, excluding CAF Tier 3 originations, is 2%–2.5%; actual performance may differ with economic conditions and other factors.
- The company expects to adopt the expected-credit-loss accounting standard in fiscal 2021 and anticipates a material impact on its allowance-for-loan-loss calculation. It early adopted a fair-value disclosure update with no material financial-statement effect.
- Four California wage-and-hour putative class actions were disclosed; management believes their resolution will not materially affect the company. For an inquiry by California municipal district attorney offices concerning hazardous-waste handling, storage and disposal at certain stores, the company said it could not reasonably estimate a potential loss.
- Other identified risks include used-vehicle price and inventory trends, consumer and third-party financing availability, securitization-market access, competition, execution of omni-channel initiatives, technology and data security, litigation, seasonality, severe weather and geographic concentration. The filing reported no material change to previously disclosed risk factors or market-risk exposure.
Important facts for investors to verify
- Whether comparable-store unit growth and omni-channel performance sustain the momentum needed to support planned SG&A and advertising investment.
- Trends in CAF loss rates, delinquencies, allowance coverage, loan originations and funding costs, including the effect of credit-market conditions.
- The quality and comparability of management’s adjusted operating cash-flow measure alongside GAAP cash flow, and the funding of expanding CAF receivables.
- Progress against store-opening and capital-expenditure plans, and the timing and amount of ESP profit-sharing cash receipts. The filing reported $32.2 million of cumulative related revenue recognized and said the initial payment could be up to $50 million.
- Developments in the hazardous-waste inquiry and California employment litigation, as well as the future effect of the expected-credit-loss accounting standard.