CarMax, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended August 31, 2011 (fiscal 2012), compared with the corresponding 2010 periods. CarMax is a U.S. used-vehicle retailer with new-car franchises, wholesale auctions and an in-house auto-finance business, CarMax Auto Finance (CAF).
Financial performance and position
| Metric | Three months ended Aug. 31, 2011 | Year-over-year change | Six months ended Aug. 31, 2011 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $2.588 billion | +11% | $5.267 billion | +14% |
| Gross profit | $354.3 million | +1% | $737.4 million | +8% |
| Gross margin | 13.7% | 14.9% prior year | 14.0% | 14.8% prior year |
| Net earnings | $111.9 million | +4% | $238.2 million | +14% |
| Diluted EPS | $0.49 | $0.48 prior year | $1.03 | $0.92 prior year |
| Net margin | 4.3% | 4.6% prior year | 4.5% | 4.5% prior year |
- Sales mix and volumes: Q2 used-vehicle revenue rose 7% as average selling price increased 7%, while used units declined 1% and comparable-store used units fell 2%. Wholesale revenue rose 39%, with units up 23% and average price up 13%. For the first half, used units rose 3% and wholesale units rose 27%.
- Profitability: Q2 used gross profit declined 2% to $224.0 million, while wholesale gross profit rose 33% to $78.8 million. Other gross profit fell 18% to $49.8 million, including an $8.6 million decline in service-department gross profit. Q2 total gross profit per retail unit was $3,386 versus $3,306, but gross margin declined as vehicle costs and selling prices rose.
- CAF: Q2 CAF income increased 21% to $63.8 million; first-half income rose 21% to $133.5 million. Q2 average managed receivables grew 9% to $4.60 billion. Lower funding costs helped results, while CAF retained a greater share of loans previously purchased by third parties. Q2 provision for loan losses rose to $10.8 million from $9.0 million.
- Credit performance: Annualized net credit losses were 0.77% of average managed receivables in Q2, down from 1.22%; accounts 31 or more days past due were 2.84% of ending receivables, compared with 3.40% a year earlier. The allowance was $36.2 million, or 0.8% of managed receivables, at August 31.
- Cash flow and investment: First-half operating cash flow was a use of $81.6 million versus a use of $9.5 million. Investing cash use was $74.1 million, including $80.2 million of capital expenditures. Financing provided $296.6 million. Management attributed much of the operating cash use to growth in CAF receivables, largely funded through securitization-related borrowing.
- Balance sheet and liquidity: At August 31, cash and cash equivalents were $181.9 million; current assets were $1.496 billion and current liabilities $490.3 million. Total debt was $4.329 billion, predominantly $4.299 billion of non-recourse securitization notes, compared with $4.044 billion at February 28. Restricted cash and securitization-related assets are not generally available for corporate use.
Material changes and management commentary
- Management linked weaker comparable-store used sales to a softer economy and reduced consumer confidence. Traffic increased, but a larger share of visitors sought appraisals only, lowering sales conversion.
- Higher wholesale vehicle values raised acquisition costs and retail selling prices. Strong appraisal traffic and buy rates supported wholesale unit growth and wholesale profit.
- SG&A rose 5% in Q2 to $236.4 million, including increased advertising and spending to support expansion; the SG&A ratio improved to 9.1% from 9.6% as average selling prices increased.
- CarMax entered a new five-year, $700 million unsecured revolving credit facility, replacing its inventory-secured facility. Only $1.3 million was drawn at quarter-end, with the remaining capacity available.
- The company renewed a warehouse facility and temporarily increased aggregate warehouse capacity to $2.0 billion. After a September 2011 securitization, the temporary increase expired and capacity returned to $1.6 billion. At August 31, $1.56 billion was funded and $441 million of capacity was unused.
Outlook, risks and unusual items
- CarMax planned five store openings in fiscal 2012 and eight to ten in fiscal 2013. Estimated fiscal 2012 gross capital expenditures were approximately $225 million, primarily for real estate and store construction.
- Management expected operating cash, securitizations and other funding arrangements, sale-leasebacks and credit facilities to fund CAF, capital expenditures and working capital for the foreseeable future. It cautioned that financing costs, timing and capacity depend on credit-market conditions.
- Key stated risks include economic weakness, consumer credit availability, funding cost and access, competition, used-vehicle pricing and inventory supply, store expansion execution, regulation, litigation, systems and information security, manufacturer conditions and seasonality. Management reported compliance with warehouse covenants and receivables performance triggers at August 31.
- A California employment class action continued on meal/rest-break and related claims; CarMax said it could not reasonably estimate potential loss. Other ordinary-course proceedings were not expected to have a material effect.
- CarMax Auto Funding offered to rescind purchases of notes issued in March 2011 under an expired registration statement. The offer expired August 31, 2011, with no initial purchasers accepting; no notes were repurchased.
- Management reported that lower-than-expected loan losses favorably affected EPS by $0.03 in the first quarter and first half of both fiscal 2012 and fiscal 2011. The filing also states that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether comparable-store used sales and sales conversion recover, and how vehicle price appreciation affects unit demand, acquisition costs and gross margins.
- CAF loan-retention strategy, credit mix, delinquencies, charge-offs and allowance adequacy as the receivables portfolio grows.
- Availability, renewal terms and cost of warehouse and term-securitization funding, including the February and August 2012 facility expirations and covenant requirements.
- Execution of planned store openings and approximately $225 million of fiscal 2012 capital expenditures.
- Developments in the California employment litigation and any consequences from the note-registration matter.