CarMax, Inc. — Form 10-Q Summary
Business context and reporting period. CarMax operates used-car superstores, wholesale auctions, new-car franchises and CarMax Auto Finance (CAF). This quarterly report covers the three and nine months ended November 30, 2012 (the third quarter and first nine months of fiscal 2013); comparisons are with the corresponding prior-year periods. Prior-year figures reflect revisions correcting sale-leaseback accounting. Management said the correction was not material to the financial statements.
Financial performance
| Metric | Three months ended Nov. 30, 2012 | Year-over-year change | Nine months ended Nov. 30, 2012 | Year-over-year change |
|---|---|---|---|---|
| Net sales and operating revenues | $2.60 billion | +15.1% | $8.13 billion | +8.1% |
| Gross profit | $345.2 million | +13.9% | $1.095 billion | +5.2% |
| Gross margin | 13.3% | 13.4% prior year | 13.5% | 13.8% prior year |
| CAF income | $72.5 million | +16% | $223.3 million | +14% |
| Net earnings | $94.7 million | +15.3% | $327.1 million | +2.6% |
| Diluted EPS | $0.41 | $0.36 prior year | $1.41 | $1.38 prior year |
- Sales drivers: Third-quarter used-vehicle revenue rose 17% on 16% unit growth and a 1% increase in average selling price. Comparable-store used units increased 12%. Wholesale revenue rose 10%, primarily on higher unit volume. Nine-month used-vehicle revenue increased 10%; wholesale revenue was nearly flat.
- Profitability: Third-quarter gross profit grew more slowly than revenue, and gross margin narrowed to 13.3%. Used-car gross profit per unit was $2,146 versus $2,171 a year earlier. SG&A increased 14% to $257.3 million, but SG&A per retail unit fell to $2,393 from $2,436. For nine months, SG&A per retail unit rose to $2,281 from $2,262.
- CAF and credit: CAF income growth primarily reflected a 15% increase in average managed receivables. Third-quarter interest margin was 7.4%, unchanged year over year. The loan-loss provision was $18.1 million for the quarter and $40.2 million year to date. The allowance reached $54.3 million, or 1.0% of managed receivables, versus $41.4 million and 0.9% a year earlier. Annualized net credit losses increased to 0.97% from 0.83% for the quarter and to 0.74% from 0.65% year to date.
- Cash flow: Operating activities used $499.2 million in the first nine months, compared with $6.3 million provided in the prior-year period. The company attributed much of the cash use to growth in auto loan receivables ($632.3 million); the majority of that growth was funded through non-recourse securitization debt. Inventory also increased $246.5 million from fiscal year-end as CarMax expanded stores and built seasonal inventory. Investing activities used $179.2 million, including $184.9 million of capital expenditures. Financing activities provided $680.9 million. Cash and cash equivalents ended the period at $445.1 million.
- Debt and liquidity: Total debt was $5.74 billion, including $5.38 billion of non-recourse notes payable largely associated with securitized auto loans, and $357.3 million of finance and capital lease obligations. The $700 million unsecured revolving credit facility had $0.7 million drawn and was otherwise available; CarMax reported compliance with its covenants. Warehouse facilities had $724 million of unused capacity, but $800 million of capacity was scheduled to expire in February 2013 and another $800 million in August 2013.
Material changes, outlook and risks
- CarMax had 116 used-car superstores at quarter-end, after opening eight in the first nine months. It planned 10 openings in fiscal 2013 and 10–15 annually for the following three fiscal years. Management estimated fiscal 2013 capital expenditures of approximately $250 million.
- Management cited improved sales conversion, increased inventory selection, more compelling financing offers and stronger customer sentiment as factors supporting comparable-store sales. It also noted that late-model used-car supply remained constrained, while expecting gradual improvement as new-car sales recover.
- Management said rising interest rates or competitive pressure on consumer loan rates could compress CAF margins over time. It expected the loan-loss allowance as a percentage of receivables to rise as higher-risk loans become a larger share of the portfolio.
- Funding costs, availability and capacity are exposed to credit-market conditions and warehouse renewals. CarMax said renewals could change the cost, structure or capacity of funding. It expected operating cash flow and funding arrangements to be sufficient for foreseeable needs, while acknowledging that market conditions could make financing more costly or constrain timing and capacity.
- Other stated risks include used-car price and inventory-supply changes, consumer credit availability, competition, economic conditions, store-growth execution, real-estate access, information-system or customer-data security events, seasonality, regulation and litigation. Management reported no material change in previously disclosed risk factors or market-risk exposure.
- A California wage-and-hour class action remained pending on meal/rest-break and related claims; an appeal concerning individualized arbitration was pending. CarMax said it could not reasonably estimate a possible loss. It considered other ordinary-course legal proceedings unlikely to have a material effect.
- In October 2012, the board authorized up to $300 million in share repurchases through December 31, 2013. CarMax repurchased 1.7 million shares at an average $34.53 per share, leaving approximately $239.8 million authorized. The filing also disclosed a prior-year sale-leaseback accounting correction and an $8.5 million prior-year tax-benefit adjustment in other comprehensive income, which management said was not material to the periods presented.
Important facts for investors to verify
- Whether used-vehicle unit growth and comparable-store sales remain strong, and whether gross profit per unit and gross margin hold up.
- Whether CAF credit losses and the allowance continue to rise as the portfolio grows and its credit mix changes; review delinquencies, recoveries and loan performance.
- How the February and August 2013 warehouse-facility renewals affect funding cost, capacity and securitization access.
- Whether negative operating cash flow persists after accounting for CAF receivables growth, inventory investment and planned store expansion.
- Whether planned store openings and approximately $250 million of fiscal 2013 capital expenditures are achieved, and how buybacks affect capital allocation.
- Developments in the California litigation and any change in the company’s ability to estimate or record a potential loss.