Business Context and Reporting Period
Company: CARMAX, INC.
Filing Type: Form 10-K (Annual Report)
Fiscal Year Ended: February 28, 2009
Business Overview: CarMax is the nation's largest retailer of used vehicles, operating 100 used car superstores in 46 metropolitan markets as of the end of fiscal 2009. The company also operates six new car franchises and conducts wholesale vehicle auctions. Its business model focuses on "no-haggle" pricing, high-quality reconditioned vehicles, and a customer-friendly sales process.
Key Financial Metrics
| Metric | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Net Sales and Operating Revenues | $6,974.0 million | $8,199.6 million |
| Gross Profit | $968.2 million | $1,072.4 million |
| CarMax Auto Finance (CAF) Income | $15.3 million | $85.9 million |
| Selling, General & Administrative (SG&A) Expenses | $882.4 million | $858.4 million |
| Net Earnings | $59.2 million | $182.0 million |
| Diluted Earnings Per Share (EPS) | $0.27 | $0.83 |
| Net Cash Provided by Operating Activities | $264.6 million | $79.5 million |
| Total Assets | $2,379.2 million | $2,333.2 million |
| Total Debt (Short-term + Long-term) | $337.0 million | $327.8 million |
| Cash and Cash Equivalents | $140.6 million | $13.0 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 15% to $6.97 billion, driven by a 14% drop in used vehicle revenues and a 29% drop in new vehicle revenues. This was primarily due to a 16% decrease in comparable store used unit sales and a 6% decline in average used vehicle selling prices.
- Profitability Compression: Net earnings fell 67% to $59.2 million. Gross profit declined 10% to $968.2 million. CAF income plummeted 82% to $15.3 million due to significant mark-to-market write-downs and increased loss assumptions.
- Inventory Management: Despite a 12% increase in the store base, the company reduced total used vehicle inventory by 28% ($272.6 million) to align with lower sales rates, which significantly boosted operating cash flow.
- SG&A Efficiency: SG&A expenses increased only 3% despite the store expansion, reflecting cost-cutting measures and the suspension of store growth. However, the SG&A ratio increased to 12.7% from 10.5% due to lower revenue.
- Liquidity Position: Cash and cash equivalents increased significantly to $140.6 million from $13.0 million, as management maintained a higher cash balance due to credit market volatility.
Guidance, Outlook, and Risks
- Outlook: Management does not believe it can make a meaningful projection of fiscal 2010 sales or earnings due to unprecedented declines in traffic and volatility in the asset-backed securitization market. They anticipate a double-digit decline in comparable store used unit sales in fiscal 2010 if trends do not improve.
- Store Growth: Store growth remains temporarily suspended. Three stores substantially completed at the end of fiscal 2009 will not open until market conditions improve. Capital expenditures for fiscal 2010 are estimated at approximately $20 million, down from $185.7 million in fiscal 2009.
- CAF Funding Risks: The company faces potential incremental funding costs of $60 million to $85 million upon refinancing its warehouse facility due to higher credit spreads in the asset-backed market. Management completed a $1.0 billion term securitization in April 2009 utilizing the Federal Reserve's TALF program.
- Key Risks:
- Economic Conditions: Recessionary pressures continue to reduce consumer demand and ability to purchase vehicles.
- Capital Markets: Disruptions in the asset-backed securitization market could increase funding costs or limit the ability to originate loans.
- Inventory Valuation: Continued declines in wholesale market prices could pressure margins if inventory cannot be liquidated at target prices.
- Legal Proceedings: A putative class action lawsuit in California regarding meal/rest breaks and overtime pay remains unresolved; the company cannot estimate the potential loss.
Investor Verification Checklist
- CAF Adjustments: Verify the impact of the $81.8 million in CAF adjustments (mark-to-market write-downs, loss assumptions, funding costs) on the reported income and the sustainability of future CAF profitability.
- Inventory Turnover: Confirm the effectiveness of inventory management strategies in maintaining gross profit per unit ($2,715) despite the 28% reduction in inventory levels.
- Refinancing Costs: Monitor the actual costs incurred when refinancing the $1.22 billion warehouse facility and the impact of the TALF program on future funding rates.
- Comparable Store Sales: Track the trajectory of comparable store used unit sales, which declined 16% in fiscal 2009, as a leading indicator of future revenue recovery.
- Legal Exposure: Review updates on the California class action lawsuit to assess potential liability exposure.