CarMax, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended February 28, 2013. The filing also reports fourth-quarter results; fiscal Q4 is the three months ended February 28, 2013. CarMax operates used- and new-vehicle retail, wholesale auctions, and CarMax Auto Finance (CAF).
Business context and results
CarMax was the largest U.S. used-car retailer, operating 118 used-car superstores in 58 markets at year-end. It retailed 447,728 used vehicles and sold 324,779 vehicles through its wholesale auctions. CAF financed 39% of retail vehicle unit sales, after payoffs and returns.
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales and operating revenues | $10.963 billion | $10.004 billion | +9.6% |
| Gross profit | $1.464 billion | $1.379 billion | +6.2% |
| Net earnings | $434.3 million | $413.8 million | +5.0% |
| Diluted EPS | $1.87 | $1.79 | +4.5% |
| CAF income | $299.3 million | $262.2 million | +14.1% |
| Operating cash flow | $(778.4) million | $(62.2) million | More cash used |
Gross margin was 13.4%, down from 13.8%; net margin was 4.0%, down from 4.1%. Used-vehicle revenue rose 11.8%, supported by 10% unit growth and a 2% increase in average selling price. Comparable-store used unit sales grew 5%. Used gross profit per unit was nearly flat at $2,170 versus $2,177.
Financial position, liquidity, and cash flow
- Year-end cash and cash equivalents were $449.4 million; restricted cash from auto-loan collections was $224.3 million. Current assets were $2.310 billion and current liabilities $684.2 million.
- Total debt was $6.209 billion, including $5.855 billion of non-recourse notes associated with CAF securitizations and $353.6 million of finance and capital lease obligations. The non-recourse notes are primarily supported by securitized auto receivables, not general corporate assets.
- CAF managed receivables grew 19% to $5.933 billion. Its allowance for loan losses rose to $57.3 million, or 1.0% of ending managed receivables, from $43.3 million, or 0.9%. Net credit losses were 0.78% of average receivables versus 0.69%; accounts 31 or more days past due were 2.60% versus 2.34%.
- Operating cash use reflected a $992.2 million increase in auto-loan receivables and a $425.2 million inventory build. Inventory increased 39% to $1.518 billion. Financing cash flow of $1.040 billion largely reflected increased non-recourse funding; capital expenditures were $235.7 million.
- The company had a $700 million revolving credit facility, with $355,000 outstanding and remaining capacity reported as fully available. Warehouse facilities had $908 million of unused capacity. CarMax reported compliance with financial covenants and securitization performance triggers at year-end.
Changes, outlook, and risks
Revenue and earnings increased, but earnings growth trailed revenue growth as gross margin contracted and SG&A rose 9.6% to $1.031 billion. CAF income growth reflected larger receivables; management noted that lower customer rates were compressing margins on new originations and expected the allowance ratio to rise as higher-risk loans became a larger portfolio share. Used-car supply remained constrained, raising acquisition costs and selling prices.
Management planned 13 new stores in fiscal 2014 and 10–15 annually in each of the following two fiscal years, with approximately $300 million of fiscal 2014 capital expenditures. It expected operating cash, securitizations or other funding, and available credit to fund foreseeable needs, while warning that funding costs and availability depend on credit-market conditions. The filing does not provide a specific earnings or sales growth forecast.
Material risks include competition and online price transparency, used-vehicle supply and valuation changes, consumer demand and credit conditions, CAF loan losses, securitization and third-party funding access, regulatory scrutiny of consumer finance and sales practices, cybersecurity and system disruptions, and geographic and seasonal concentration. In the Fowler California employment case, an appellate court reversed an order compelling arbitration in March 2013; CarMax intended to appeal and said it could not reasonably estimate potential loss.
CarMax repurchased 5.762 million shares during FY2013 for approximately $211.9 million and had $588.1 million remaining under authorizations at year-end. It paid no cash dividend. KPMG issued an unqualified audit opinion and concluded internal control over financial reporting was effective.
Investor verification priorities
- Reconcile CAF receivables, securitization balances, restricted cash, and non-recourse funding; assess renewal dates and available warehouse capacity.
- Track credit quality trends, including delinquency, net charge-offs, recovery rates, credit mix, and the adequacy of the loan-loss allowance.
- Evaluate whether the inventory build supports sales growth without increasing markdown, depreciation, or working-capital risk.
- Compare new-store openings and capital spending with management’s plans, and monitor comparable-store growth and gross profit per unit.
- Follow the Fowler litigation appeal and any developments that could clarify potential exposure.