CarMax, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2020 third quarter, ended November 30, 2019. Comparisons are with the three and nine months ended November 30, 2018, unless noted. CarMax operates used-vehicle sales and services businesses and CarMax Auto Finance (CAF).
Financial performance and liquidity
| Metric | Three months | Nine months |
|---|---|---|
| Net sales and operating revenues | $4.79 billion, up 11.5% | $15.36 billion, up 10.8% |
| Gross profit / gross margin | $613.6 million / 12.8% (13.3% prior year) | $2.05 billion / 13.3% (13.6% prior year) |
| CAF income | $114.0 million, up 3.9% | $344.1 million, up 2.7% |
| Net earnings | $173.2 million, down 9.0% | $673.5 million, up 3.6% |
| Diluted EPS | $1.04, down 4.6% | $4.03, up 10.1% |
Quarterly used-unit sales rose 11.0%, including comparable-store growth of 7.5%; nine-month used-unit sales rose 10.1%, including comparable-store growth of 6.7%. Quarterly SG&A increased 18.4% to $484.8 million, faster than revenue, and SG&A per used unit rose 6.6% to $2,518. Management attributed the quarter’s earnings decline primarily to higher share-based compensation and planned advertising and omni-channel marketing spending. Quarterly used gross profit per unit was $2,145, compared with $2,133 a year earlier.
For the first nine months, operating cash flow was a use of $117.9 million, versus a source of $114.6 million a year earlier. Capital expenditures were $249.2 million. Management’s non-GAAP adjusted operating cash flow, adding back net non-recourse note issuances, was $667.1 million, down from $863.0 million. Financing activities provided $409.1 million, including $785.0 million of net non-recourse note issuances; share repurchases used $458.6 million.
At November 30, cash and cash equivalents were $56.6 million; restricted cash was $458.5 million from auto-loan collections and $115.0 million included in other assets. Inventory was $2.68 billion. Total debt, including $13.32 billion of non-recourse notes payable, was $15.04 billion. The $1.45 billion revolving facility had $1.07 billion of unused capacity available. CarMax reported compliance with financial covenants and funding-vehicle performance triggers. Shareholders’ equity was $3.70 billion.
Material changes and management commentary
- Revenue growth was led by used vehicles: quarterly used-vehicle sales increased 13.6%; wholesale sales increased 1.2%. Used-vehicle average selling price rose 2.2% in the quarter. Wholesale unit growth was partly offset by lower average selling prices.
- CAF’s managed receivables reached $13.35 billion, up from $12.38 billion a year earlier. The allowance for loan losses was $153.6 million, or 1.15% of managed receivables, versus 1.12% a year earlier. Annualized net credit losses were 1.38%, compared with 1.32%; past-due accounts were 3.83%, compared with 3.77%.
- Management said the omni-channel buying experience was available to about 40% of customers and remained on track to reach a majority by fiscal year-end and be fully rolled out in fiscal 2021. Markets with the experience had slightly stronger comparable used-unit growth in the quarter and nine-month period. The company opened 10 stores in the first nine months and planned three more in the rest of fiscal 2020, with a similar number planned for fiscal 2021.
Outlook, risks and unusual items
- No specific near-term earnings or revenue guidance is provided. Management expects fiscal 2020 advertising expense per retail unit to be slightly above fiscal 2019 and estimates fiscal 2020 capital expenditures of approximately $350 million. With increased fiscal 2020 spending, management said annual comparable used-unit growth of 5% to 8% would be needed to leverage SG&A; it expects growth in omni-channel initiative spending to slow in fiscal 2021.
- CarMax expects adoption of the new expected-credit-loss accounting standard on March 1, 2020 to increase its opening allowance for loan losses by approximately $200 million to $250 million, with a corresponding after-tax retained-earnings adjustment. The estimate may change with portfolio and economic conditions; the method may increase quarterly provision volatility.
- Management cited risks including economic and used-car price changes, CAF credit losses, financing-market availability and cost, third-party credit availability, execution of omni-channel initiatives, inventory sourcing, labor, technology and cybersecurity, litigation, and seasonality. It warned that funding costs or capacity may be affected by credit-market conditions.
- The filing describes California wage-and-hour putative class actions and an inquiry by California municipal district attorneys concerning hazardous-waste handling. Management did not expect either matter to have a material adverse effect. No material change in reported risk factors was disclosed.
- CarMax recognized $32.2 million of cumulative ESP profit-sharing revenue by November 30 and expected to begin receiving payments in calendar Q1 2020; the initial payment could be up to $50 million. The company recorded an unrealized investment gain that contributed to other income during the periods.
Important facts for investors to verify
- Whether used-unit and comparable-store growth can continue to offset rising SG&A and preserve gross margins.
- CAF credit performance, especially delinquency and net-loss trends, and the expected $200 million to $250 million accounting-standard adoption impact.
- Cash generation after inventory investment, capital expenditures, share repurchases, and the funding needs of CAF.
- Availability and cost of warehouse and securitization funding, and the company’s reported covenant compliance.
- Actual timing and amount of ESP profit-sharing receipts, store openings, capital spending, and omni-channel rollout costs and benefits.