CarMax, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2011 third quarter and nine months ended November 30, 2010. Comparisons are with the corresponding 2009 periods unless noted. Dollar amounts are U.S. dollars.
Business context
CarMax is a used-vehicle retailer that also operates new-car franchises, wholesale auctions, and CarMax Auto Finance (CAF). At quarter-end it operated 103 used-car superstores in 49 markets and five new-car franchises. Used vehicles accounted for 98% of retail unit sales.
Financial results and key metrics
| Metric | Three months | Nine months |
|---|---|---|
| Net sales and operating revenues | $2.119 billion, up 23% | $6.723 billion, up 19% |
| Gross profit | $297.9 million, up 23%; 14.1% of revenue, unchanged | $980.6 million, up 18%; 14.6% of revenue, versus 14.8% |
| CAF income | $55.7 million, versus $65.8 million | $165.8 million, versus $116.3 million |
| SG&A | $219.7 million, up 14%; 10.4% of revenue, versus 11.1% | $671.6 million, up 9%; 10.0% of revenue, versus 10.9% |
| Net earnings | $82.4 million, up 10% | $291.4 million, up 41% |
| Diluted EPS | $0.36, versus $0.33 | $1.28, versus $0.92 |
Third-quarter used retail unit sales rose 18%, including 16% comparable-store growth; average used retail selling price increased 2%. Wholesale unit sales rose 26%, and average wholesale selling prices increased 12%. Total gross profit per retail unit increased to $3,175 from $3,048. For the nine months, used retail unit sales rose 10% and average selling prices rose 6%.
CAF’s third-quarter income was below the prior-year period, which included $31.6 million of favorable adjustments tied to loans from earlier fiscal periods. CAF income now primarily reflects loan interest and fees less funding costs, direct expenses, and loan-loss provision; this presentation changed with the new securitization accounting adopted in fiscal 2011. The nine-month period also benefited from lower-than-anticipated charge-offs and favorable allowance adjustments; management estimated the effect at approximately $0.03 per share versus expectations.
Cash flow, debt, and liquidity
For the first nine months, operating activities used $22.5 million of cash, compared with $56.5 million provided a year earlier. A $249.4 million increase in auto loan receivables was the main use; related securitization funding is generally reported in financing activities. Investing activities used $37.6 million, including $38.5 million of capital expenditures. Financing activities provided $116.2 million. Cash and cash equivalents were $74.4 million at November 30, 2010, versus $18.3 million at February 28, 2010. Restricted cash from auto-loan collections was a separate $165.8 million and is held for securitization investors.
Reported total debt was $4.056 billion, including $4.026 billion of non-recourse notes payable secured by securitized auto receivables, $29.3 million of capital leases, and $0.7 million drawn on the revolving credit facility. The company had $2.183 billion of shareholders’ equity. Its $700 million inventory-secured revolver had virtually all capacity available and expires in December 2011. Warehouse facilities totaled $1.6 billion, with $1.06 billion unused; $800 million was scheduled to expire in February 2011 and $800 million in August 2011. Management expected available operating cash and financing arrangements to meet foreseeable needs, while cautioning that funding costs and availability could change.
Material changes and accounting comparability
Effective March 1, 2010, new accounting rules required CarMax to consolidate securitization trusts and account for transfers of auto-loan receivables as secured borrowings. This added receivables and related non-recourse debt to the balance sheet and changed CAF income presentation. Consequently, the reported increase in total assets from $2.556 billion at February 28 to $6.695 billion at November 30, and the large increase in reported debt, are substantially affected by this accounting change and are not directly comparable with the prior-year balance sheet. The company reported $4.275 billion of net auto-loan receivables and a $42.2 million loan-loss allowance at November 30.
Credit indicators improved year over year: accounts 31 or more days past due were 3.46% of managed receivables, versus 4.06%; annualized net credit losses were 1.21%, versus 2.00%; and the average recovery rate was 53.9%, versus 50.2%. The allowance was 1.0% of ending managed receivables.
Outlook, commentary, and risks
CarMax resumed store growth and had opened three stores in fiscal 2011. It planned five openings in fiscal 2012 and five to ten in fiscal 2013. Estimated fiscal 2011 gross capital expenditures were approximately $70 million, primarily for store growth, real estate, technology, and reconditioning equipment. The filing provides no ongoing earnings guidance; management said it would not provide or update CAF-specific guidance.
Management cited improving customer traffic and sales conversion, with some improvement attributed to increased consumer credit availability. Used-vehicle wholesale values remained above historical averages but moderated in the third quarter; higher values increased acquisition costs as well as selling prices. The business is seasonal, typically strongest in spring and summer. Key risks include economic and consumer-credit conditions, used-vehicle prices and inventory availability, securitization funding costs and renewals, competition, store expansion execution, and seasonal fluctuations. Warehouse financial covenants and performance triggers were met at quarter-end.
A California employee class-action matter remained pending, with certain claims stayed and an appeal outstanding; the company could not reasonably estimate a possible loss. It said other ordinary-course proceedings were not expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the new securitization accounting affects comparisons of CAF income, assets, debt, and cash flows with prior periods.
- Whether warehouse facilities are renewed or replaced on acceptable terms as the February and August 2011 expirations approach.
- Whether loan-loss performance and the reduced allowance remain appropriate as credit conditions and managed receivables evolve.
- Whether used-vehicle values, inventory levels, retail margins, and seasonal sales support the planned store expansion and capital spending.
- Developments in the California class action and any change to the company’s inability to estimate potential exposure.