CarMax, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended February 29, 2020. The filing also provides unaudited fourth-quarter results. Fiscal 2020 performance largely predates the material COVID-19 disruption described as a subsequent event.
Business context and reporting period
CarMax is the largest U.S. used-vehicle retailer, operating 216 stores in 106 television markets. Its two reportable segments are CarMax Sales Operations and CarMax Auto Finance (CAF). In FY2020 it sold 832,640 used vehicles at retail and 466,177 vehicles wholesale; CAF serviced about 1.036 million accounts and had $13.62 billion of managed receivables.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales and operating revenues | $20.320 billion | $18.173 billion |
| Gross profit | $2.722 billion; 13.4% margin | $2.481 billion; 13.6% margin |
| CAF income | $456.0 million | $438.7 million |
| SG&A expenses | $1.940 billion; 9.5% of revenue | $1.730 billion; 9.5% of revenue |
| Net earnings | $888.4 million; 4.4% margin | $842.4 million; 4.6% margin |
| Diluted earnings per share | $5.33 | $4.79 |
| Net cash from operating activities | $(236.6) million | $163.0 million |
| Adjusted net cash from operating activities, non-GAAP | $841.3 million | $1.054 billion |
Revenue increased 11.8%, gross profit 9.7%, CAF income 4.0%, and net earnings 5.5% year over year. Used retail units rose 11.2%, with comparable-store units up 7.7%; used gross profit per unit was $2,186 versus $2,175. SG&A rose 12.1%, reflecting store growth, technology and omni-channel investment, higher share-based compensation, and advertising.
FY2020 cash capital expenditures were $331.9 million. Cash and cash equivalents were $58.2 million at year-end; an additional $481.0 million of restricted collections cash was not freely available. Total debt was $15.403 billion, including $13.613 billion of non-recourse notes secured by auto loans. Inventory was $2.846 billion. The company reported a $1.45 billion revolver, with $997.3 million unused at year-end; it stated its adjusted debt-to-capital ratio was at the lower end of its 35%–45% target range.
Fourth-quarter results and changes versus prior year
For the fourth quarter of fiscal 2020, revenue was $4.962 billion, gross profit $672.9 million, CAF income $111.9 million, SG&A $484.7 million, net earnings $214.9 million, and diluted EPS $1.30. In the fourth quarter of fiscal 2019, the respective figures were $4.319 billion, $599.4 million, $103.7 million, $429.0 million, $192.6 million, and $1.13.
For the full year, comparable-store used-unit growth accelerated to 7.7% from 0.3%. CAF’s total interest margin improved to 5.7% from 5.6%, while its provision for loan losses increased to $185.7 million from $153.8 million. Net credit losses were 1.27% of average managed receivables versus 1.19%.
Outlook, risks, contingencies, and unusual items
- COVID-19: After year-end, about half of stores were closed or operating on a limited basis; most open stores were selling at 50% or less of prior-year levels, continuing into April. Management expected a material effect on business, results, financial position, and liquidity, but could not estimate its duration or severity. It anticipated near-term gross-profit-per-unit pressure while reducing inventory.
- Liquidity and operating actions: During March 2020, CarMax borrowed approximately $675 million net under its revolver, leaving more than $300 million unused capacity. At March 31, it reported approximately $700 million cash and more than $2.5 billion of inventory. It halted share repurchases, paused store expansion and remodels, reduced advertising and labor hours, instituted a hiring freeze, and furloughed approximately 15,500 associates effective April 18.
- CAF and funding risk: Management reported increased delinquencies and requests for payment extensions beginning in the second half of March. CAF suspended repossessions and late fees and offered extensions where appropriate; it paused in-house Tier 3 lending. The asset-backed securities market was disrupted, though the company reported $1.32 billion of unused warehouse capacity at fiscal year-end and was assessing alternatives.
- Strategy: Long-term priorities remain omni-channel capabilities and increased used-vehicle market share. The full omni-channel experience was available to more than 60% of customers by fiscal year-end; rollout was redirected toward online self-progression and curbside or express pickup. Store-opening plans were paused pending stabilization.
- Accounting change: Adoption of the expected-credit-loss standard on March 1, 2020 was expected to increase the opening loan-loss allowance by $200 million to $250 million, with a corresponding after-tax retained-earnings adjustment; management expected greater quarterly provision volatility.
- Unusual items: FY2020 EPP profit-sharing revenue was $20.3 million, including a $46.0 million fourth-quarter receipt; management expected future profit-sharing revenue to be less material. A separate $40.3 million Takata settlement recovery was received and recorded in April 2020, after FY2020 year-end.
- Other risks and contingencies: Key exposures include used-vehicle price and inventory depreciation risk, consumer credit losses, financing-market access, competition, regulation, cybersecurity, and litigation. The filing describes California wage-and-hour matters and an environmental settlement; the monetary settlements were described as immaterial, with the wage settlement accrued.
Important facts for investors to verify
- Post-filing sales trends, store operating status, and the duration and cost of COVID-19 measures.
- CAF delinquency, loss, allowance, and payment-extension trends, including the impact of the new expected-credit-loss standard.
- Availability and cost of CAF funding, warehouse capacity, and compliance with debt covenants and funding triggers.
- Inventory levels, used-vehicle gross profit per unit, and the pace of recovery in retail and wholesale demand.
- Whether reported liquidity and cash-flow measures distinguish restricted cash and non-recourse financing from resources available for general corporate use.