CarMax, Inc. — Form 10-Q Summary
Reporting period: Three months ended May 31, 2022 (CarMax fiscal 2023 first quarter), compared with the three months ended May 31, 2021. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context and key financial results
CarMax operates used-vehicle retail and wholesale operations and CarMax Auto Finance (CAF). It reported 231 used-car stores in 108 U.S. markets. Edmunds, acquired in June 2021, is included in consolidated results but is not a reportable segment.
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales and operating revenues | $9,311.6 | $7,697.6 | +21.0% |
| Gross profit | $875.4 | $924.5 | -5.3% |
| Gross margin | 9.4% | 12.0% | -2.6 percentage points |
| CAF income | $204.5 | $241.7 | -15.4% |
| Earnings before income taxes | $336.6 | $567.3 | -40.7% |
| Net earnings | $252.3 | $436.8 | -42.2% |
| Diluted earnings per share | $1.56 | $2.63 | -40.7% |
| Net margin | 2.7% | 5.7% | -3.0 percentage points |
Used-vehicle revenue rose 13.9%, while wholesale revenue increased 54.0%. Average selling prices rose 28.0% for retail vehicles and 51.3% for wholesale vehicles, but used-unit sales fell 11.0% and comparable-store used-unit sales fell 12.7%. Used gross profit per unit increased 6.1% to $2,339; wholesale gross profit per unit was $1,029, up 0.4%.
Cash flow, balance sheet, debt and liquidity
- Operating cash flow was $531.0, versus cash used of $111.9 a year earlier. The filing notes that changes in auto loans receivable and related non-recourse funding materially affect cash-flow presentation.
- Investing cash outflow was $99.0, including $94.8 of capital expenditures. Financing cash outflow was $455.0, including $163.0 of share repurchases and net payments on long-term debt of $585.9.
- Cash and cash equivalents were $95.3 at May 31, 2022, versus $102.7 at February 28, 2022. Cash, cash equivalents and restricted cash totaled $780.6.
- Total debt, including $15.76 billion of non-recourse notes payable primarily backed by CAF auto loans, was $18.45 billion, down from $18.73 billion at February 28. Long-term debt excluding current amounts and non-recourse notes was $2.57 billion on the balance sheet. The company reported $1.34 billion available under its $2.0 billion revolving credit facility and $1.77 billion of unused warehouse capacity.
- Inventory declined to $4.69 billion from $5.12 billion at fiscal year-end. Total assets were $26.34 billion and shareholders’ equity was $5.40 billion.
- Management said its adjusted debt-to-total-capital ratio, net of cash, was at the middle of its 35%–45% target range. CarMax was in compliance with financial covenants and non-recourse funding performance triggers.
Material changes and management commentary
- Higher vehicle selling prices lifted revenue despite lower retail unit volume. Management cited the prior-year comparison against stimulus-supported demand, inflation and vehicle affordability challenges, and declining consumer confidence. Comparable-store unit declines improved during the quarter, from double-digit declines in March to low single-digit declines in May.
- SG&A rose 18.5% to $656.7, and increased to 75.0% of gross profit from 59.9%. Drivers included higher compensation and wage costs, advertising, technology and growth-related spending, and Edmunds inclusion. Interest expense rose to $28.8 from $20.5, reflecting debt balances and higher rates.
- CAF income fell as the loan-loss provision shifted to $57.8 expense from $24.4 of provision income in the prior-year quarter. The allowance was $458.2, or 2.85% of managed receivables, versus 2.62% a year earlier. Annualized net credit losses rose to 0.83% from 0.21%, and past-due accounts rose to 4.06% from 2.10%. Management attributed delinquency increases partly to a return toward pre-pandemic levels and prior-year system implementation effects.
- CAF’s total interest margin increased to 7.5% from 6.9%, partly from lower funding costs and a $9.2 benefit from swaps not designated as hedges. The weighted-average contract rate on new CAF loans was 9.0%, up from 8.2% in the preceding quarter.
- Online retail sales were 11% of retail units, versus 8% a year earlier; omni sales were 54%, versus 56%. Management said it expects online and omni sales to grow over time and intends to expand financing tools and digital capabilities.
Outlook, risks and contingencies
- Management expects to open ten stores in fiscal 2023, including nine after the first quarter, and estimates fiscal 2023 capital expenditures of approximately $500 million, compared with $308.5 million in fiscal 2022. About 30% is expected to support technology.
- For fiscal 2023, management said gross-profit growth would need to exceed the prior 5%–8% range to produce SG&A leverage, citing strategic investment timing, growth costs and inflation. It expects the leverage threshold to be lower after fiscal 2023.
- Long-term targets are 2.0–2.4 million combined retail and wholesale vehicle sales and $33–$45 billion of revenue by fiscal 2026, and more than 5% share of the U.S. age 0–10 used-vehicle market by the end of calendar 2025. These are targets, not near-term guidance, and include potential macroeconomic volatility.
- Key disclosed risks include economic and consumer-credit conditions, used-vehicle price and inventory shifts, financing and securitization-market access and cost, labor and inflation, competition, execution of digital and growth investments, cybersecurity, litigation, and COVID-19-related effects. Management reported no material changes to the risk factors in its fiscal 2022 Form 10-K.
- Three California wage-and-hour/PAGA proceedings are pending. CarMax said it could not reasonably estimate potential loss; following the U.S. Supreme Court’s June 15, 2022 decision in Viking Cruise v. Moriana, it intended to seek arbitration of individual PAGA claims and dismissal of representative claims. The company also recorded a $26.6 million liability for its 90-day/4,000-mile used-vehicle warranty.
Important facts for investors to verify
- Whether retail-unit trends and vehicle affordability improve, and whether elevated selling prices and gross profit per unit can be sustained.
- Future CAF credit losses, delinquencies, allowance adequacy and funding costs, particularly as Tier 2 and Tier 3 lending expands.
- Whether planned technology, marketing and store investments deliver growth while controlling SG&A and achieving the company’s stated leverage objectives.
- Availability, cost and renewal terms of warehouse and securitization funding, as well as compliance with applicable covenants and performance triggers.
- Developments in the California wage-and-hour/PAGA cases and any eventual estimate or disclosure of potential loss.