CarMax, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended August 31, 2013 (fiscal 2014). Comparisons are with the corresponding 2012 periods. Amounts are in U.S. dollars.
Business context
CarMax operates used-vehicle retail and service operations and CarMax Auto Finance (CAF). At quarter-end, it operated 123 used-car superstores and four new-car franchises. CAF financed 41.4% of retail unit sales in the quarter, after three-day payoffs and vehicle returns.
Key financial results
| Metric | Three months | Six months |
|---|---|---|
| Net sales and operating revenue | $3.246 billion, up 17.7% | $6.557 billion, up 18.5% |
| Gross profit / gross margin | $434.7 million / 13.4%, versus $368.0 million / 13.3% | $882.8 million / 13.5%, versus $749.9 million / 13.6% |
| CAF income | $84.4 million, up 12% | $171.4 million, up 14% |
| Net earnings | $140.3 million, up 26% | $286.9 million, up 23% |
| Diluted earnings per share | $0.62, versus $0.48 | $1.26, versus $1.00 |
| SG&A | $283.2 million, up 11%; $2,067 per retail unit, down $174 | $573.4 million, up 13%; $2,076 per retail unit, down $153 |
Quarterly used-vehicle unit sales rose 21%, including 16% comparable-store growth; used-vehicle gross profit per unit was nearly unchanged at $2,174. Wholesale units rose 10%, while wholesale gross profit per unit fell 6% to $849. The quarterly effective tax rate was 38.2%, compared with 38.4% a year earlier.
CAF average managed receivables grew 24% in the quarter, but its total interest margin rate declined to 7.0% from 7.6%. The loan-loss provision was 1.1% of average managed receivables versus 1.0%; annualized net credit losses were 0.79% versus 0.76%. Past-due accounts were 2.67% of managed receivables, similar to 2.73% a year earlier.
Cash flow, debt, and liquidity
- For the first six months, operating cash flow was negative $263.6 million, compared with negative $285.9 million. This included a $799.4 million increase in auto loan receivables; management stated operating cash flow excluding that increase would have been positive $535.8 million.
- Investing cash flow was negative $148.7 million, including $136.0 million of capital expenditures. Financing cash flow was positive $713.0 million, including a net $875.3 million increase in non-recourse notes and $179.3 million of share repurchases. Cash increased $300.7 million to $750.0 million.
- Total debt was $7.075 billion at August 31, versus $6.209 billion at February 28, including $6.730 billion of non-recourse notes primarily secured by CAF receivables. Net debt was not stated as a filing metric.
- The $700 million unsecured revolving credit facility was fully available; warehouse facilities had $753 million of unused capacity within a combined $1.7 billion limit. The company reported compliance with financial covenants and securitization performance triggers.
Material changes and management commentary
Growth was led by used-vehicle sales and comparable-store volume, supported by improved conversion, modestly higher traffic, store expansion, and what management described as an attractive consumer credit environment. ESP revenue increased, while net third-party finance fees declined, partly reflecting a greater share of sales financed by subprime providers. CAF income rose on portfolio growth, partly offset by lower interest margins and higher quarterly loan-loss provisions.
CarMax opened five stores in the first half and planned 13 openings in fiscal 2014, followed by 10 to 15 annually in each of the next two fiscal years. Fiscal 2014 capital expenditures were estimated at approximately $300 million. Management expected operating cash generation and funding arrangements to support operations, CAF, capital expenditures, and working capital, while warning that credit-market conditions could raise funding costs or constrain timing and capacity.
Risks, contingencies, and unusual items
- CAF depends substantially on securitization and warehouse funding. Warehouse facilities face renewal dates in February and August 2014; their cost, structure, and capacity may change with market conditions. Rising rates or competitive pressure could further compress CAF margins.
- A California employee class action (Fowler) remains pending over meal/rest breaks, related wage claims, and other claims. An appellate court reversed an order compelling individual arbitration; CarMax intended to appeal and said it could not reasonably estimate potential loss.
- Other disclosed risks include economic and vehicle-market changes, competition, consumer credit availability, inventory sourcing, expansion execution and real estate, regulation, litigation, information security and systems, seasonality, and severe weather. The filing reported no material change to previously disclosed risk factors or market risk.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether strong comparable-store unit growth and lower SG&A per unit persist, and how gross profit per vehicle evolves.
- CAF portfolio credit performance, allowance adequacy, delinquency trends, and the effect of lower origination rates on future interest margins.
- Availability, pricing, and renewal terms for warehouse and securitization funding, including the 2014 facility expirations.
- Execution of store-opening and capital-spending plans, and the impact of seasonal sales patterns.
- Developments in the Fowler litigation and any change in the company’s ability to estimate potential exposure.