CarMax, Inc. — Q3 FY2015 Form 10-Q
Reporting period: Quarter and nine months ended November 30, 2014. Financial statements are unaudited. CarMax operates used- and new-vehicle sales, wholesale auctions, vehicle services, and CarMax Auto Finance (CAF).
Financial performance
| Metric | Q3 FY2015 | Change vs. Q3 FY2014 | Nine months FY2015 | Change vs. prior year |
|---|---|---|---|---|
| Net sales and operating revenues | $3.405 billion | +15.8% | $10.755 billion | +13.2% |
| Gross profit | $446.6 million; 13.1% margin | +17.0%; margin up 0.1 percentage point | $1.412 billion; 13.1% margin | +11.6%; margin down 0.2 percentage point |
| CAF income | $89.7 million | +6.9% | $276.9 million | +8.4% |
| Net earnings | $130.0 million; 3.8% of revenue | +22.2% | $454.2 million; 4.2% of revenue | +15.5% |
| Diluted earnings per share | $0.60 | +$0.13; +27.7% | $2.06 | +$0.33 |
- Q3 used-vehicle unit sales increased 14.0%, including 7.4% comparable-store growth; average selling price rose 2.3%. Wholesale unit sales increased 10.0%.
- Q3 SG&A rose 11.3% to $316.6 million, but SG&A per retail unit declined $52 to $2,243. Nine-month SG&A increased 8.1%; excluding a $20.9 million Toyota settlement gain, it rose 10.6%.
- CAF’s average managed receivables grew 17.9% in Q3, while total interest margin narrowed to 6.4% from 6.8%. The provision for loan losses was $24.1 million in Q3 and $60.3 million for nine months.
- Nine-month operating cash flow was a use of $784.6 million, versus $493.1 million used in the prior-year period. Excluding the $1.05 billion increase in auto loan receivables, operating cash provided was $266.1 million, compared with $552.2 million. Management attributed the decline primarily to higher inventory.
Balance sheet, debt and liquidity
- At November 30, 2014, cash and cash equivalents were $189.9 million, down from $627.9 million at February 28, 2014. Inventory was $2.0 billion, up $323.2 million, or 19.7%, since fiscal year-end.
- Total debt was $8.82 billion, compared with $7.58 billion at February 28. This included $8.18 billion of non-recourse notes primarily funding CAF receivables, $300 million of term debt, and $332.7 million of finance and capital lease obligations. Auto loan receivables, net, were $8.14 billion.
- The unsecured revolving credit facility was increased to $1.0 billion; approximately $997 million was unused. Warehouse facilities had a combined $2.3 billion limit and $1.34 billion of unused capacity. Major warehouse expirations were scheduled for February and July 2015.
- Financing activities provided $612.8 million in the nine-month period, including $300 million from a new floating-rate term loan due November 2017. The company said it was in compliance with financial covenants and securitization performance triggers at period-end.
- Share repurchases used $688.6 million of cash in the nine months; 14.1 million shares were repurchased at an average $49.80. A further $2.58 billion was available under authorizations as of November 30.
Changes, outlook and risks
- Revenue and earnings growth reflected higher used-vehicle sales, store expansion, and growth in CAF receivables. Q3 gross profit per used unit was broadly stable at $2,172.
- CAF income grew more slowly than receivables as interest margin compressed. Management cited competitive consumer rates and noted that higher funding costs or further competition could compress margins further.
- CAF credit indicators warrant monitoring: managed receivables past due 31 or more days were 3.07% at November 30, versus 2.91% a year earlier. Annualized net credit losses were 1.07% in Q3, versus 1.04%; for nine months they were 0.86%, versus 0.79%.
- Management planned 13 store openings in fiscal 2015 and 10–15 annually in each of the following two fiscal years. Estimated fiscal 2015 capital expenditures were approximately $300 million. The company said operating cash, securitizations and other funding sources should meet foreseeable needs, but financing availability, capacity and cost depend on credit-market conditions.
- Management built inventory during Q3 for seasonal sales opportunities and tax-refund season; inventory had been below target after weather-related reconditioning disruptions. CarMax identified seasonality, vehicle pricing and supply, consumer-credit availability, securitization markets, competition, hiring and real estate availability among material risks.
- Unusual items include the $20.9 million Toyota litigation settlement gain recorded in July 2014, which reduced SG&A, and an $8.8 million cancellation-reserve adjustment that reduced prior-year Q3 EPP revenue and affects comparisons. EPP coverage on used vehicles was changed in May 2014 from up to 72 months to 60 months, subject to mileage limits.
- A California employment class-action matter remained unresolved; the company said it could not reasonably estimate a potential loss. Management considered other ordinary-course legal proceedings not expected to have a material effect. No material changes to previously disclosed risk factors were reported.
- No specific earnings or revenue guidance was provided. The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether used-vehicle comparable-store growth and sales momentum persist as store expansion contributes less to growth.
- Whether CAF interest margins stabilize and credit losses, delinquencies, and allowance levels remain consistent with portfolio growth.
- Renewal terms, capacity and cost of the warehouse facilities approaching expiration, and continued access to securitization funding.
- Inventory levels, cash conversion and capital spending relative to planned store openings and seasonal demand.
- The effect of ongoing share repurchases and borrowing on liquidity, debt and per-share results, and any developments in the California litigation.