CarMax, Inc. — Form 10-Q Summary
Business context and reporting period: CarMax operates used- and new-vehicle retail, wholesale auctions, and CarMax Auto Finance (CAF). This unaudited filing covers the quarter and six months ended August 31, 2014 (fiscal 2015); comparisons are with the corresponding fiscal 2014 periods.
Financial performance
| Metric | Three months ended Aug. 31, 2014 | Year-over-year change | Six months ended Aug. 31, 2014 | Year-over-year change |
|---|---|---|---|---|
| Net sales and operating revenues | $3.599 billion | +10.9% | $7.349 billion | +12.1% |
| Gross profit | $463.3 million; 12.9% margin | +6.6%; margin down from 13.4% | $965.1 million; 13.1% margin | +9.3%; margin down from 13.5% |
| CAF income | $92.6 million | +9.7% | $187.2 million | +9.2% |
| Net earnings | $154.5 million; 4.3% margin | +10.2% | $324.2 million; 4.4% margin | +13.0% |
| Diluted EPS | $0.70 | +12.9% | $1.46 | +15.9% |
| Net cash used in operating activities | Not provided for the quarter | — | $436.6 million | Compared with $263.6 million used |
Quarterly revenue growth reflected 6.3% more used-vehicle units and a 4.1% higher average selling price; comparable-store used-unit sales rose only 0.2%. Wholesale unit sales increased 7.4%. SG&A was $297.6 million, up 5.1% as reported, but the comparison includes a $20.9 million settlement gain; excluding it, SG&A rose 12.5%. Used-vehicle gross profit per unit was essentially unchanged at $2,173.
CAF’s average managed receivables grew 18.5% in the quarter, supporting higher income, but the total interest margin rate declined to 6.6% from 7.0%. Quarterly provision for loan losses was $20.4 million versus $18.0 million a year earlier. Net credit losses were 0.93% of average managed receivables, up from 0.79%; receivables 31 or more days past due were 2.79% of managed receivables, versus 2.67% a year earlier.
Balance sheet, cash flow and liquidity
- At August 31, 2014, cash and cash equivalents were $354.6 million, down from $627.9 million at February 28, 2014. An additional $297.1 million of restricted collections cash was not freely available.
- Total debt was $8.24 billion, up from $7.58 billion at fiscal year-end. It included $7.91 billion of non-recourse notes largely secured by CAF receivables and $331.0 million of finance and capital lease obligations. The filing describes securitization investors’ recourse as limited to specified securitized assets and related cash.
- The $700 million unsecured revolving credit facility had approximately $698 million unused and available; it expires in August 2016. The company reported compliance with financial covenants and securitization performance triggers.
- Six-month operating cash use included a $732.6 million increase in auto loan receivables, largely accompanied by non-recourse financing. Excluding that receivables increase, management reported operating cash provided of $296.0 million, compared with $535.8 million a year earlier, with the decline primarily driven by inventory changes.
- Six-month capital expenditures were $135.3 million. Financing cash flow included $373.4 million of share repurchases, versus $179.3 million in the prior-year period.
Material changes, outlook and risks
- Settlement gain: CarMax received $20.9 million in July 2014 from a Toyota-related class-action settlement and recorded the gain in SG&A. Management said it increased quarterly net earnings by $12.9 million, or $0.06 per diluted share. Excluding the item, quarterly net earnings increased 1.0% and diluted EPS increased 3.2% year over year.
- Store expansion: The company operated 139 used-car stores at quarter-end and plans 13 openings in fiscal 2015, followed by 10–15 annually in each of the next two fiscal years. Fiscal 2015 capital expenditures were estimated at approximately $300 million. Management cited hiring, management development and suitable real estate as expansion challenges.
- Funding and interest-rate exposure: Management expects operating cash and securitization or other funding arrangements to support foreseeable needs, but warned funding costs could rise and timing or capacity could depend on credit-market availability. Warehouse facilities had $1.06 billion of unused capacity; $1.3 billion of facility limit was due to expire in February 2015 and $800 million in July 2015. CAF margin could face further pressure from higher funding costs or competitive consumer rates.
- Credit and operating risks: CAF’s allowance was $77.8 million, about 0.99% of managed receivables. A test program for loans to customers typically financed by third-party subprime providers is expected to have higher loss and delinquency rates; $44.4 million had been originated toward a planned approximately $70 million test. Other identified risks include used-vehicle prices and inventory availability, competition, seasonality, store-growth execution, economic conditions, litigation and access to consumer credit.
- Other items: Extended-service-plan coverage on used vehicles was changed in May 2014 from up to 72 months to 60 months, subject to mileage limits. The company could not reasonably estimate potential loss in a remaining California wage-and-hour lawsuit. Management reported no material changes in risk factors or market risk from the prior annual filing.
Important facts for investors to verify
- How much of reported earnings growth reflects the one-time Toyota settlement, and how do normalized margins and EPS trend?
- Whether comparable-store sales improve and whether vehicle acquisition costs and lower gross margin pressure persist.
- CAF’s future interest margins, delinquencies, net credit losses and allowance adequacy as receivables grow.
- Renewal terms, cost and capacity of warehouse funding, and the company’s ability to fund receivables and expansion through changing credit markets.
- The pace and returns of planned store openings, capital spending and substantial share repurchases relative to liquidity needs.
- Developments in the California lawsuit and other contingencies; the filing does not provide a clear estimate of potential loss for the remaining claims.