Business Context and Reporting Period
Company: CARMAX, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 30, 2009 (Third Quarter of Fiscal 2010)
Business Overview: CarMax is the largest retailer of used vehicles in the United States, operating 100 used car superstores and six new car franchises. The company generates revenue through the retail sale of used and new vehicles, wholesale vehicle auctions, and financing services via CarMax Auto Finance (CAF).
Key Financial Metrics
| Metric | Three Months Ended Nov 30, 2009 | Nine Months Ended Nov 30, 2009 | Three Months Ended Nov 30, 2008 | Nine Months Ended Nov 30, 2008 |
|---|---|---|---|---|
| Net Sales & Operating Revenues | $1,726.0 million | $5,636.9 million | $1,455.6 million | $5,503.4 million |
| Gross Profit | $242.9 million (14.1% margin) | $833.6 million (14.8% margin) | $199.2 million (13.7% margin) | $737.9 million (13.4% margin) |
| CarMax Auto Finance (CAF) Income | $65.8 million | $116.3 million | ($15.4) million loss | ($12.7) million loss |
| Net Earnings | $74.6 million | $206.3 million | ($21.9) million loss | $21.7 million |
| Diluted EPS | $0.33 | $0.92 | ($0.10) | $0.10 |
| Cash & Cash Equivalents | $15.2 million | N/A | $138.1 million | N/A |
| Total Debt | $146.9 million | N/A | N/A | N/A |
| Operating Cash Flow (9 Months) | $56.5 million | N/A | $306.6 million | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 19% in the quarter and 2% year-to-date (YTD) compared to the prior year. Used vehicle revenues rose 20% in the quarter, driven by a 9% increase in unit sales and a 10% increase in average selling prices.
- Profitability Turnaround: The company reported a net income of $74.6 million for the quarter, a significant improvement from a net loss of $21.9 million in the same period last year. Gross profit increased 22% in the quarter.
- CAF Performance: CAF income swung from a $15.4 million loss to a $65.8 million profit in the quarter. This was largely driven by $31.6 million in favorable mark-to-market adjustments on retained subordinated bonds and refinancing benefits, alongside an improved gain percentage on loans sold (3.6% vs 2.8%).
- Expense Management: Selling, General, and Administrative (SG&A) expenses decreased to $192.1 million (11.1% of sales) from $217.5 million (14.9% of sales) in the prior year quarter, due to reduced advertising and growth-related costs.
- Liquidity: Cash and cash equivalents declined significantly from $138.1 million to $15.2 million. This reduction was primarily due to increased inventory levels ($48.1 million increase) and a $173.0 million increase in retained interest in securitized receivables.
Guidance, Outlook, and Risks
- Outlook: Management stated they cannot make meaningful projections for fiscal 2010 sales or earnings due to market conditions associated with the recession. Store growth remains suspended, though three completed stores are expected to open in the first half of fiscal 2011.
- Capital Expenditures: Estimated at approximately $25 million for fiscal 2010, focused on maintenance and opportunistic real estate acquisitions rather than new store construction.
- Financing Arrangement: In mid-November 2009, CarMax entered an agreement with Santander Consumer USA to purchase loans that CAF would have previously originated, intended to offset the impact of tightened lending standards in the fourth quarter.
- Key Risks:
- Securitization & Fair Value: A significant portion of assets ($521.3 million) is held at fair value (Level 3) related to retained interest in securitized receivables. Valuation relies on unobservable inputs (prepayment rates, loss rates, discount rates) which are sensitive to economic conditions.
- Credit Quality: Past due accounts (31+ days) increased to 4.06% of managed receivables from 3.38% in the prior year, reflecting the weak economic environment.
- Litigation: A putative class action lawsuit in California regarding meal/rest breaks and overtime remains pending, with claims stayed pending a California Supreme Court ruling. The company cannot estimate potential losses.
- Market Conditions: Continued weakness in consumer confidence, high unemployment, and potential disruptions in credit markets affecting securitization costs.
Investor Verification Checklist
- CAF Adjustments: Verify the sustainability of CAF income by analyzing the $31.6 million in non-recurring mark-to-market adjustments and refinancing benefits included in the current quarter's results.
- Cash Burn: Monitor the rapid decline in cash reserves ($125 million decrease YTD) and the company's ability to fund operations without new debt or equity issuance.
- Inventory Levels: Assess the $751.3 million inventory balance and the impact of rising acquisition costs on future gross margins if wholesale vehicle values stabilize or decline.
- Securitization Covenants: Confirm continued compliance with financial covenants and performance triggers in the warehouse facility, which could impact funding costs or access to capital.
- Litigation Exposure: Track the status of the California class action lawsuit and any potential financial impact from the stay being lifted.