CarMax, Inc. — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended February 29, 2016. This is an annual report, not a stand-alone fourth-quarter filing; quarterly figures are included. Amounts are in U.S. dollars.
Business context
CarMax operates used-vehicle retail and service operations and CarMax Auto Finance (CAF). At year-end it had 158 used-car stores in 78 markets. It sold 619,936 used vehicles at retail and 394,437 vehicles through wholesale auctions during the year.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales and operating revenues | $15.150 billion | $14.269 billion |
| Gross profit; gross margin | $2.019 billion; 13.3% | $1.888 billion; 13.2% |
| CAF income | $392.0 million | $367.3 million |
| SG&A | $1.352 billion | $1.258 billion |
| Interest expense | $36.4 million | $24.5 million |
| Net earnings; net margin | $623.4 million; 4.1% | $597.4 million; 4.2% |
| Diluted earnings per share | $3.03 | $2.73 |
- Used-vehicle sales revenue rose 6.6% to $12.439 billion; units increased 6.5%, while comparable-store units grew 2.4%. Used gross profit per unit eased to $2,159 from $2,179.
- Wholesale revenue rose 6.8% to $2.188 billion; units increased 4.9% and gross profit per unit was $984, up from $970.
- CAF income increased 6.7%, but total interest margin fell to 6.1% of average managed receivables from 6.5%. Net credit losses rose to $88.0 million, or 0.97% of average receivables, from $70.5 million, or 0.90%.
- Cash and cash equivalents were $37.4 million; restricted cash from loan collections was $343.8 million. Inventory was $1.932 billion, down 7.4% year over year.
- Reported net cash used in operating activities was $148.9 million, including growth in CAF receivables. Management’s non-GAAP adjusted operating cash flow was $908.2 million, adding back $1.057 billion of net non-recourse note issuances.
- Capital expenditures were $315.6 million. Total debt was $10.658 billion, including $9.528 billion of non-recourse securitization notes, $415.4 million drawn on the revolving facility, a $300 million term loan and $414.7 million of finance and capital lease obligations. Cash was $37.4 million.
Changes versus prior year
- Revenue increased 6.2%, net earnings 4.4%, and diluted EPS 11.0%. EPS growth benefited from a lower diluted share count, reflecting substantial share repurchases.
- Comparable used-unit growth slowed to 2.4% from 4.4%; management attributed the result to improved conversion offset by lower store traffic, with new-car promotions and used-vehicle availability and valuations among possible factors.
- CAF receivables grew, supporting higher income, while the interest margin narrowed and loan-loss provision increased 22.9% to $101.2 million.
- Interest expense rose, primarily due to higher average borrowings. Total debt increased from $9.109 billion to $10.658 billion.
Outlook, risks and unusual items
- Management identified store and comparable-store unit growth as the principal long-term earnings drivers. It planned 15 store openings in FY2017 and 13–16 in FY2018, with approximately $450 million of FY2017 capital expenditures.
- The company targeted an adjusted debt-to-capital ratio of 35%–45%. Management expected operating cash flow, credit facilities and other funding arrangements to support CAF, expansion, repurchases and working capital, while cautioning that future funding costs and availability depend on market conditions.
- CAF depends heavily on securitization funding. At year-end, warehouse capacity was $2.50 billion, with $1.10 billion unused; facility portions of $1.00 billion and $1.50 billion were scheduled to expire in August 2016 and February 2017, respectively. Renewal terms and market access are risks.
- Other principal risks include intense retail and online competition, used-vehicle supply and price volatility, economic and credit conditions, CAF credit losses and margin compression, regulatory oversight (including CFPB supervision), litigation, cybersecurity and information-system disruption, and seasonal or severe-weather effects.
- Unusual items: FY2016 service gross profit included a $10.4 million benefit from changing the timing of reconditioning-overhead recognition; a one-time $8.3 million property charge was recorded. FY2015 included $20.9 million of pretax class-action settlement proceeds that reduced SG&A. FY2014 included a prior-period EPP cancellation-reserve correction that reduced net earnings by $11.9 million after tax.
- Management succession was underway: William Nash became president in February 2016, with an anticipated transition to CEO before year-end 2016 as Thomas Folliard retired. The Fowler wage-and-hour matter’s remaining claims were settled for an immaterial amount; a separate California PAGA matter remained, and the company said it could not reasonably estimate potential loss.
Important facts for investors to verify
- Reconcile the $148.9 million GAAP operating cash outflow with management’s $908.2 million adjusted measure and understand the treatment of securitized receivables.
- Track CAF interest margins, delinquencies, charge-offs, recoveries and allowance coverage as the receivables portfolio expands.
- Review refinancing and renewal terms for warehouse facilities and monitor leverage, revolving-credit use and the company’s stated debt-to-capital target.
- Assess whether planned store openings and capital spending deliver unit growth and returns, particularly given lower comparable-store growth and softer traffic.
- Evaluate the effects of share repurchases and the identified accounting and legal items on reported earnings and per-share comparisons.