Business context and reporting period
CarMax, Inc. is a U.S. used-vehicle retailer with CarMax Sales Operations and CarMax Auto Finance (CAF) segments. This unaudited Form 10-Q covers the three months ended May 31, 2018, the first quarter of fiscal 2019; comparisons are with the three months ended May 31, 2017 unless noted.
Financial performance
| Metric | Quarter ended May 31, 2018 | Prior-year quarter |
|---|---|---|
| Net sales and operating revenues | $4.793 billion | $4.542 billion |
| Gross profit / gross margin | $661.3 million / 13.8% | $648.9 million / 14.3% |
| Earnings before income taxes | $319.7 million | $338.1 million |
| Net earnings | $238.7 million | $211.7 million |
| Diluted earnings per share | $1.33 | $1.13 |
| Net cash provided by operating activities | $230.8 million | $191.5 million |
Revenue rose 5.5%; net earnings rose 12.7% and diluted EPS rose 17.7%. Net earnings benefited chiefly from a lower effective tax rate, 25.3% versus 37.4%, primarily reflecting the 2017 Tax Act. Pretax earnings declined about 5.4%. Gross margin contracted 0.5 percentage points, while SG&A increased 8.6% to $438.2 million, or 9.1% of revenue versus 8.9%.
Used-vehicle sales were $4.021 billion, up 4.6%; units increased 1.6%, but comparable-store units declined 2.3%. Wholesale sales rose 11.6%, with units up 9.6%. CAF income increased 5.7% to $115.6 million, supported by 8.7% growth in average managed receivables; its interest margin declined to 5.7% from 5.8%.
Financial position, cash flow and liquidity
At May 31, 2018, cash and cash equivalents were $76.3 million; restricted cash from auto-loan collections was $431.4 million. Total assets were $17.76 billion and shareholders’ equity was $3.38 billion. Reported total debt was $13.28 billion, including $11.97 billion of non-recourse notes payable primarily secured by CAF receivables. The filing reports $1.20 billion of unused capacity under the revolving credit facility and $1.11 billion of unused warehouse-facility capacity.
Operating cash flow was $230.8 million; capital expenditures were $79.7 million; and cash used in financing activities was $80.1 million. Management’s non-GAAP adjusted operating cash flow, adding net non-recourse note issuances, was $556.0 million versus $452.4 million. CarMax repurchased 3.3 million shares for $211.1 million during the quarter. Inventory declined 5.5% from February 28 to $2.26 billion.
Changes, outlook, risks and unusual items
- Store traffic was lower and comparable-store used-unit sales fell 2.3%; management cited improved conversion and 16% website-traffic growth. The store base increased to 191 from 176 a year earlier.
- Management planned 12 further store openings during the remainder of fiscal 2019 after three openings in the quarter, and 13–16 openings in fiscal 2020. Fiscal 2019 capital expenditures were estimated at approximately $340 million.
- Management expects lower tax rates to continue benefiting results and cash flows, and said it intends to direct some of the benefit to business and associate investments. It estimated 70%–85% of the lower-tax benefit would affect net earnings after those investments. SG&A leverage was expected over the long term when comparable-store unit growth reaches the mid-single digits, likely at the higher end in the near term.
- Management noted that increased off-lease vehicle supply could affect auction prices, acquisition costs and CAF recovery rates. New-car incentives may also pressure used-vehicle demand. Higher interest rates or competitive pressure could further compress CAF margins; funding-market conditions could raise costs or constrain the availability and timing of financing.
- Revenue-recognition adoption produced a $12.9 million after-tax increase to beginning retained earnings and $4.0 million of additional ESP profit-sharing revenue in the quarter. The filing says the standard did not significantly change the timing of revenue recognition overall.
- Four California wage-and-hour proceedings and an inquiry by California municipal district attorney offices concerning hazardous-waste handling remain unresolved; the company said it could not reasonably estimate potential losses. It reported compliance with financial covenants and non-recourse funding performance triggers.
Important facts for investors to verify
- Whether weak comparable-store unit sales and gross-margin contraction persist, and how store expansion and digital initiatives affect performance.
- CAF credit quality, including loss and delinquency trends: annualized net credit losses were 0.85% versus 0.83%, and past-due accounts were 3.16% versus 3.08% of managed receivables.
- Renewal terms and cost of warehouse facilities, including portions scheduled to expire in August and September 2018 and February 2019.
- The effects of tax-law implementation, higher funding rates, used-vehicle market changes, and the unresolved litigation and hazardous-waste inquiry.
- Execution of planned store openings and capital spending, alongside continued share repurchases and the company’s stated adjusted debt-to-total-capital target of 35%–45%.