CarMax, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended February 28, 2017. The filing also reports fourth-quarter results for the three months ended that date. CarMax operates used-vehicle retail, wholesale auctions and related services, alongside CarMax Auto Finance (CAF), which finances CarMax retail customers.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales and operating revenues | $15.88 billion | $15.15 billion | +4.8% |
| Gross profit | $2.18 billion | $2.02 billion | +8.2% |
| CAF income | $369.0 million | $392.0 million | -5.9% |
| Net earnings | $627.0 million | $623.4 million | +0.6% |
| Diluted EPS | $3.26 | $3.03 | +7.6% |
| Used vehicles sold | 671,294 | 619,936 | +8.3% |
Gross margin was 13.8%, up from 13.3%; net margin was 3.9%, down from 4.1%. Used-vehicle comparable-store unit sales grew 4.3%. Used-vehicle gross profit per unit was essentially flat at $2,163, while wholesale gross profit per unit declined 5.9% to $926.
In the fourth quarter, revenue was $4.05 billion versus $3.71 billion, gross profit was $562.2 million versus $489.3 million, net earnings were $152.6 million versus $141.0 million, and diluted EPS was $0.81 versus $0.71. CAF income fell to $82.9 million from $92.3 million.
Cash flow, debt and liquidity
- GAAP net cash used in operating activities was $468.1 million, versus $148.9 million used in FY2016. Management’s non-GAAP adjusted operating cash flow, adding net issuances of non-recourse notes, was $746.6 million, down from $908.2 million.
- Capital expenditures were $418.1 million, compared with $315.6 million. Cash and cash equivalents were $38.4 million; an additional $380.4 million of restricted collections cash was not freely available for general use.
- Total debt was $12.19 billion, including $10.74 billion of non-recourse notes backed by CAF receivables. Other debt included $155.1 million outstanding on the revolving facility, a $300 million term loan, $500 million of senior notes and $496.1 million of finance and capital lease obligations.
- Available capacity was $1.04 billion on the $1.20 billion revolving credit facility and $1.18 billion on CAF warehouse facilities. Warehouse facilities had expirations in August 2017 and February 2018. The company reported compliance with debt covenants and securitization performance triggers at year-end.
Material changes and management commentary
- Used-vehicle sales growth drove higher revenue and gross profit, while wholesale revenue declined 4.8% as unit sales and average selling prices fell. Management cited vehicle mix and reduced appraisal traffic as contributing factors.
- SG&A increased 10.1% to $1.49 billion, faster than revenue, reflecting store growth, strategic spending and higher share-based compensation. The latter included approximately $10 million of incremental expense related to awards for the retired CEO.
- CAF’s managed receivables grew 11.7% to $10.68 billion, but credit indicators worsened: net credit losses rose to 1.20% from 0.97% of average receivables, past-due accounts rose to 3.10% from 2.74%, and the allowance increased to 1.16% from 0.99% of ending receivables. CAF’s total interest margin declined to 5.8% from 6.1%.
- The company repurchased 10.3 million shares for $564.3 million during FY2017; $1.59 billion remained authorized. It does not plan to pay dividends for the foreseeable future.
Outlook, risks and unusual matters
- CarMax planned 15 store openings in FY2018 and 13–16 in FY2019, with estimated FY2018 capital expenditures of approximately $325 million. Management identified unit-sales growth from new and comparable stores as the long-term earnings-growth driver, but provided no specific near-term revenue or EPS guidance.
- Management expects to begin leveraging SG&A when comparable-store used-unit growth reaches the mid-single-digit range. It also noted that increased off-lease vehicle supply could reduce auction prices and acquisition costs, while potentially affecting CAF recovery rates.
- Key risks include competition and online sales models, used-vehicle price and inventory volatility, economic and credit conditions, CAF loan losses and funding access, data security, regulation, severe weather, and seasonal sales concentration. A third-party Tier 3 lender tightened standards, contributing to lower sales in that customer segment.
- Three California wage-and-hour putative class actions were disclosed; CarMax said it could not reasonably estimate potential losses. The company also reported an Orange County hazardous-waste inquiry, which management did not expect to have a material financial impact based on information then available.
Facts investors should verify
- Whether CAF delinquency, charge-off and recovery trends stabilize, and whether allowance levels remain adequate.
- Renewal terms, cost and capacity for warehouse funding facilities nearing expiration, and continued access to securitization markets.
- Whether comparable-store sales growth can support planned store expansion and contain SG&A growth.
- Potential financial exposure from California wage-and-hour litigation and the California environmental inquiry.
- The sustainability of earnings growth after considering higher credit-loss provisions, share-based compensation and share repurchases.