CarMax, Inc. — Form 10-Q Summary
Business context and reporting period
CarMax operates used- and new-vehicle retail, wholesale auctions, related services and CarMax Auto Finance (CAF). This filing covers the quarter and six months ended August 31, 2015 (the second quarter and first half of fiscal 2016). CarMax had 151 used-car stores, 65 wholesale auction locations and four new-car franchises at quarter-end.
Financial results and position
| Metric | Three months ended August 31, 2015 | Six months ended August 31, 2015 |
|---|---|---|
| Net sales and operating revenues | $3.885 billion, up 7.9% | $7.900 billion, up 7.5% |
| Gross profit / gross margin | $521.4 million / 13.4% | $1.065 billion / 13.5% |
| CAF income | $98.3 million, up 6.2% | $207.4 million, up 10.8% |
| Net earnings | $172.2 million, up 11.5% | $354.2 million, up 9.3% |
| Diluted EPS | $0.82, up 17.1% | $1.68, up 15.1% |
For the quarter, used-vehicle units rose 9.2% (comparable-store units rose 4.6%); used-vehicle gross profit per unit was nearly flat at $2,166. Wholesale units grew 8.7%, and wholesale gross profit per unit increased to $951 from $874. SG&A was $330.8 million, up 11.1%; interest expense was $7.5 million. The effective tax rate was 38.5%. CAF’s interest margin after loan-loss provision was 5.1% of average managed receivables, versus 5.5% a year earlier.
At August 31, total assets were $13.953 billion, including $100.5 million cash and $9.117 billion net auto loan receivables. Total liabilities were $10.742 billion and shareholders’ equity was $3.211 billion. Total debt, including non-recourse notes and finance and capital leases, was $9.835 billion, versus $9.109 billion at February 28. The company reported $1.198 billion available on its $1.2 billion revolving facility and $1.26 billion unused warehouse capacity. Restricted collections cash of $335.1 million is dedicated to securitization investors and is not general-purpose cash.
For the first six months, GAAP operating cash flow was negative $84.7 million; investing cash flow was negative $199.5 million and financing cash flow was positive $357.1 million. Management’s non-GAAP adjusted operating cash flow was $597.8 million, adding back $682.5 million of net non-recourse note issuances. Capital expenditures were $145.7 million and share repurchases were $369.2 million.
Material changes versus prior comparable periods
- Quarterly used-vehicle revenue rose 7.9%, driven by unit growth, while average selling price fell 1.1%. Six-month used-vehicle units increased 9.2% and comparable-store units increased 4.8%.
- Gross margin increased to 13.4% from 12.9% for the quarter and to 13.5% from 13.1% for the first half.
- CAF average managed receivables grew 16.4% in the quarter, but its total interest margin fell to 6.2% from 6.6%. Quarterly net credit losses were 0.96% of average managed receivables versus 0.93%; past-due loans were 3.00% versus 2.79%.
- Inventory decreased 8.4% from fiscal year-end to $1.912 billion, but was 11.9% higher than a year earlier.
- CarMax repurchased 3.88 million shares in the quarter at an average $64.40 per share. Shares outstanding declined from 208.9 million at fiscal year-end to 204.9 million at August 31.
Outlook, commentary, risks and unusual items
- Management cited unit growth from existing and new stores as the primary long-term earnings driver. It planned 14 store openings and one relocation in fiscal 2016, 13–16 openings in each of the following two fiscal years, and approximately $360 million of fiscal 2016 capital expenditures.
- Management said adjusted operating cash flow and other funding arrangements were expected to fund CAF, capital expenditures, repurchases and working capital for the foreseeable future. It cautioned that funding costs, availability and timing depend on credit-market conditions.
- Quarterly results included a $10.4 million one-time service gross-profit benefit from changing the timing of reconditioning-overhead recognition, contributing about $0.03 to EPS. The prior-year quarter included $20.9 million of class-action settlement proceeds, a $0.06 EPS benefit. Excluding these items, management reported quarterly earnings growth of 17.1% and EPS growth of 23.4%; first-half net earnings growth was 11.7% and EPS growth was 17.9%.
- CAF’s spread may face further pressure from higher funding rates or competitive consumer rates. Warehouse facilities totaling $2.5 billion have expirations in February and August 2016; renewal terms, capacity and costs could change.
- A California employment class action remains pending on a Private Attorney General Act claim. CarMax said it could not reasonably estimate potential loss. It stated other ordinary-course proceedings were not expected to have a material adverse effect.
- Other identified risks include competition, economic and vehicle-price changes, access to inventory and credit, securitization-market conditions, store expansion and real estate, litigation, systems and seasonal factors. Management reported no material change in its risk factors or market-risk exposure and said disclosure controls were effective.
Important facts for investors to verify
- How much reported earnings growth reflects recurring operations versus the reconditioning-cost timing benefit and prior-year settlement comparison.
- CAF credit quality, including rising delinquency rates, charge-offs, recoveries, loan-loss allowance and spread compression.
- Availability and pricing of warehouse and securitization funding as facilities approach renewal, and the distinction between recourse corporate debt and non-recourse debt.
- Execution of store-opening and capital-spending plans, comparable-store sales and inventory levels.
- Developments and potential exposure in the California lawsuit; the filing provides no clear estimate of possible loss.