Business Context and Reporting Period
Company: CARMAX, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 30, 2003 (Third Quarter of Fiscal 2004)
Business Overview: CarMax operates as a retailer of used and new vehicles, providing financing through CarMax Auto Finance (CAF). The company separated from Circuit City Stores, Inc. on October 1, 2002, and operates as an independent public entity. The reporting period covers the three and nine months ended November 30, 2003.
Key Financial Metrics
| Metric | Three Months Ended Nov 30, 2003 | Nine Months Ended Nov 30, 2003 |
|---|---|---|
| Net Sales and Operating Revenues | $1,071.5 million | $3,480.8 million |
| Gross Profit | $126.2 million (11.8% margin) | $437.1 million (12.6% margin) |
| Net Earnings | $19.1 million | $93.9 million |
| Diluted EPS | $0.18 | $0.89 |
| Operating Cash Flow (9 months) | $131.0 million | |
| Cash and Cash Equivalents | $55.0 million (as of Nov 30, 2003) | |
| Total Debt | $106.3 million (Short-term: $6.3M; Long-term: $100.0M) | |
| Inventory | $449.7 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 14% year-over-year for the quarter and 15% for the nine-month period, driven by a 16% increase in used vehicle sales and a 27% increase in wholesale vehicle sales.
- Profitability: Net earnings rose 29% for the quarter and 24% for the nine-month period compared to the prior year. This was driven by strong sales growth, improved used vehicle gross margins, and the absence of non-tax-deductible separation costs incurred in the prior year.
- Gross Margins: Total gross profit margin improved to 11.8% in the quarter (from 11.4%) and 12.6% for the nine months (from 11.8%). Used vehicle gross profit per unit increased to $1,693 (from $1,610) due to a change in the Appraisal Cost Recovery (ACR) methodology.
- Auto Finance Income: CAF income decreased 8% for the quarter to $17.6 million due to spread compression (gains on loans sold dropped to 3.8% from 5.4%). However, for the nine months, CAF income increased 8% to $66.1 million.
- SG&A Expenses: SG&A as a percentage of sales was 10.7% for the quarter (down from 10.9%) and 10.1% for the nine months (up from 9.7%). The nine-month increase reflects higher stand-alone operating costs and expenses related to new store openings.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Store Expansion: CarMax plans to open approximately 10 used car superstores in fiscal 2005, expanding the base by 20%. Planned entries include Indianapolis, Columbia, Austin, and Albuquerque.
- Franchise Dispositions: The company is actively selling or returning new car franchises (Jeep, Nissan, Mitsubishi, Ford, Chrysler-Jeep) to focus on the more profitable used car business. Proceeds from these sales could add 1 cent to Q4 EPS.
- Earnings Guidance: Management anticipates Q4 diluted EPS in the range of $0.19 to $0.22. Full-year fiscal 2004 diluted EPS is expected to be in the range of $1.08 to $1.11.
- CAF Spreads: Spreads are expected to be near the mid-point of the normalized 3.5% to 4.5% range in the fourth quarter.
Risks and Contingencies
- Securitization Performance: The company retains interests in securitized receivables. If these receivables do not perform as projected (due to prepayment or default rates), earnings could be impacted. Management adjusted default rate assumptions for current originations to 2.00% reflecting weak recovery rates.
- Market Risk: Interest rate exposure is managed via swaps. A 100 basis point increase in rates is not expected to have a material effect on operations.
- Liquidity: The company maintains a $300 million credit facility secured by inventory, with $193.7 million available as of November 30, 2003. Unused capacity in the warehouse facility was $539.5 million.
Investor Verification Checklist
- ACR Methodology Impact: Verify the sustained effect of the new Appraisal Cost Recovery method on used vehicle acquisition costs and gross margins.
- CAF Spread Compression: Monitor the trend in gains on sales of loans as a percentage of loans sold, which dropped significantly in Q3.
- Franchise Disposition Timeline: Confirm the timing and financial impact of the planned sales of remaining new car franchises.
- Capital Expenditures: Review the $137.2 million in capital expenditures for the nine months to ensure alignment with the aggressive store expansion plan.
- Delinquency Rates: Track the 31+ days past due accounts (1.61% of managed receivables) to ensure they remain within historical ranges despite adjusted default assumptions.