CarMax, Inc. — Form 10-Q Summary
Business context and period. The quarter ended May 31, 2017, the first quarter of CarMax’s fiscal 2018. CarMax operates used-vehicle sales and related services, and CarMax Auto Finance (CAF), which finances retail vehicle purchases. Comparisons below are with the three months ended May 31, 2016 unless otherwise noted.
Financial performance and liquidity
| Metric | Quarter ended May 31, 2017 | Prior-year quarter | Change / context |
|---|---|---|---|
| Net sales and operating revenues | $4.542 billion | $4.126 billion | Up 10.1% |
| Gross profit | $648.9 million | $572.6 million | Up 13.3%; gross margin 14.3%, versus 13.9% |
| SG&A | $403.5 million | $380.2 million | Up 6.1%; 8.9% of revenue, versus 9.2% |
| Earnings before income taxes | $338.1 million | $282.7 million | 7.4% of revenue, versus 6.9% |
| Net earnings | $211.7 million | $175.4 million | Up 20.7% |
| Diluted EPS | $1.13 | $0.90 | Up 25.6%, aided by share repurchases |
| Net cash from operating activities | $191.5 million | $87.6 million | Adjusted net cash from operating activities, a non-GAAP measure, was $452.4 million versus $394.2 million |
| Capital expenditures | $79.4 million | $97.5 million | Quarterly spending decreased |
Used-vehicle revenue increased 12.1% as unit sales rose 14.1%; average selling price declined 1.9%. Comparable-store used-unit sales increased 8.2%. Wholesale revenue fell 2.5%, mainly on a 2.9% decline in average selling price, while wholesale units were essentially flat. CAF income increased 8.5% to $109.4 million, principally due to growth in average managed receivables; its total interest margin declined to 5.8% from 5.9%.
CAF managed receivables totaled $10.98 billion at May 31. The allowance for loan losses was $129.8 million, or 1.18% of ending managed receivables, compared with 1.05% a year earlier. Annualized net credit losses rose to 0.83% from 0.72%, and past-due receivables were 3.08% versus 2.84% a year earlier.
At May 31, cash and cash equivalents were $60.1 million and restricted cash from loan collections was $385.7 million. Total debt was $12.30 billion, including $11.00 billion of non-recourse notes primarily secured by CAF receivables. The company reported $1.20 billion of unused capacity under its revolving credit facility and $778 million of unused warehouse-facility capacity. It was in compliance with financial covenants and securitization and warehouse performance triggers.
Material changes versus the prior comparable period
- Used-vehicle sales growth and higher gross profit, together with improved SG&A as a percentage of revenue, contributed to higher earnings and margins.
- CAF receivables and income grew, but the interest margin compressed and credit-loss indicators worsened year over year.
- Interest expense increased to $16.8 million from $11.1 million, reflecting higher debt levels and finance and capital lease obligations.
- CarMax repurchased 3.0 million shares for $187.4 million, compared with $138.0 million of repurchases a year earlier.
- Inventory decreased 5.0% from fiscal year-end to $2.15 billion, as management said levels returned toward normal after a prior-period build.
Outlook, risks, and unusual items
- Management plans 15 store openings in fiscal 2018, including three opened during the quarter, and 13 to 16 openings in fiscal 2019. Planned fiscal 2018 capital expenditures are approximately $325 million, versus $412 million in fiscal 2017.
- Management identifies long-term unit-sales growth through new and existing stores as a primary earnings-growth driver. It expects SG&A leverage when comparable-store used-unit growth is in the mid-single digits; near-term leverage may require growth at the higher end of that range because of strategic investment.
- Management warns that an influx of off-lease vehicles could pressure wholesale auction prices, vehicle acquisition costs, and CAF recovery rates. Higher funding costs or competitive pressure on consumer rates could further compress CAF margins. Warehouse facilities totaling $1.30 billion were due to expire in August 2017 and $1.50 billion in February 2018; renewal terms and market capacity could affect funding costs.
- Three California wage-and-hour proceedings and an inquiry by California district attorney offices concerning hazardous-waste handling, storage, and disposal were disclosed. The company could not reasonably estimate potential losses in these matters.
- Adoption of the share-based-payment accounting standard reduced the quarter’s income tax provision by $2.4 million. The company expects the future lease-accounting standard to materially increase balance-sheet assets and liabilities, but had not quantified the impact.
- Results are subject to seasonal variation. The filing provides operating and store-expansion outlook, but no specific earnings or EPS guidance.
Important facts for investors to verify
- Whether CAF credit losses, delinquencies, recovery rates, and interest margins continue to develop as management expects.
- Whether CarMax renews or replaces expiring warehouse facilities on acceptable terms and maintains access to securitization funding.
- How off-lease supply and wholesale pricing affect vehicle acquisition costs, wholesale profitability, and CAF recoveries.
- Whether planned store openings, capital spending, and strategic investments deliver sales growth and the expected SG&A leverage.
- Developments and potential financial exposure in the California wage-and-hour matters and hazardous-waste inquiry.