CarMax, Inc. — FY2014 Form 10-K
Business context and reporting period. This is an annual report for the fiscal year ended February 28, 2014, not a standalone fourth-quarter filing. CarMax operates used- and new-vehicle retail, wholesale auctions, vehicle service and CarMax Auto Finance (CAF). At year-end it operated 131 used-car superstores in 64 markets. The fourth-quarter figures below are unaudited.
Financial performance
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales and operating revenues | $12.574 billion | $10.963 billion | +14.7% |
| Gross profit | $1.649 billion | $1.464 billion | +12.6% |
| Gross margin | 13.1% | 13.4% | Down 0.3 percentage points |
| CAF income | $336.2 million | $299.3 million | +12% |
| SG&A | $1.155 billion | $1.031 billion | +12.0% |
| Earnings before income taxes | $797.3 million | $701.4 million | +13.7% |
| Net earnings | $492.6 million | $434.3 million | +13% |
| Diluted EPS | $2.16 | $1.87 | +16% |
- Used-vehicle sales were $10.306 billion, up 17.8%; units sold increased 18% to 526,929, including 12% comparable-store unit growth. Used-vehicle gross profit per unit was essentially flat at $2,171.
- Wholesale sales were $1.823 billion, up 3.6%; units rose 5%, while wholesale gross profit per unit declined to $916 from $949.
- CAF average managed receivables increased 23% to $6.63 billion. CAF income growth was partly offset by a lower total interest margin, 6.9% versus 7.4%. Net credit losses rose to 0.90% of average managed receivables from 0.78%; 31-day-plus delinquencies were 2.58%, compared with 2.60%.
- Cash and cash equivalents were $627.9 million, up from $449.4 million. Current assets were $2.643 billion and current liabilities $875.5 million. Inventory totaled $1.641 billion.
- Net cash used in operating activities was $613.2 million, versus $778.4 million used in FY2013, including increases in auto loan receivables of $1.324 billion and $992.2 million, respectively. Excluding those receivable increases, the filing reports operating cash provided of $711.0 million in FY2014 and $213.8 million in FY2013.
- Capital expenditures were $310.3 million. Net cash provided by financing activities was $1.128 billion, including a $1.393 billion net increase in non-recourse notes payable and $307.2 million of stock repurchases.
- Total debt was $7.583 billion, chiefly non-recourse notes tied to CAF securitized receivables. The $700 million unsecured revolving facility had $582,000 outstanding and was otherwise available; the company reported compliance with financial covenants and securitization performance triggers.
Fourth-quarter comparison
FY2014 fourth-quarter revenue was $3.076 billion versus $2.828 billion in FY2013, while net earnings were $99.2 million versus $107.2 million and diluted EPS was $0.44 versus $0.46. The filing attributes part of the quarter’s results to an accounting correction for ESP and GAP cancellation reserves.
Material changes, outlook and risks
- CarMax corrected its ESP and GAP cancellation-reserve accounting in the fourth quarter, increasing reserves and reducing revenue. The correction reduced FY2014 net earnings by $11.9 million after tax, or $0.05 per share, for amounts related to FY2013 and FY2012; the filing says the out-of-period error was not material to FY2014 or any prior reported period. Cancellation reserves ended at $72.5 million, compared with $32.7 million a year earlier.
- Management plans 13 new superstores in FY2015 and 10 to 15 in each of the following two fiscal years. Estimated FY2015 capital expenditures are approximately $325 million. These are plans, not guaranteed outcomes.
- In March 2014, the board authorized up to an additional $1.0 billion in share repurchases through December 31, 2015. No cash dividend had been paid.
- Management expects operating cash, securitization proceeds or other funding, and available credit to fund CAF, expansion and working capital for the foreseeable future. It cautions that funding availability, cost and capacity depend on credit-market conditions; warehouse facilities had $921 million of unused capacity at year-end, with expirations in August 2014 and February 2015.
- Key risks include competition and online disruption; economic conditions and consumer credit availability; used-vehicle supply, acquisition costs, prices and depreciation; CAF credit losses and funding access; interest-rate exposure; regulatory and litigation matters; data security and information-system disruptions; seasonality, severe weather and geographic concentration; and execution of store growth.
- The company disclosed an unresolved California employee class action concerning meal and rest breaks and related claims; it could not reasonably estimate potential loss. Separately, after year-end, CarMax received notice it may recover approximately $20 million from a Toyota settlement, subject to claim review and court approval; proceeds will be recognized when received.
- Management reported effective internal control over financial reporting, and the independent auditor gave an unqualified opinion on the financial statements and internal controls.
Investor verification priorities
- Review the cancellation-reserve correction, its fourth-quarter effects and assumptions underlying the $72.5 million reserve.
- Assess CAF credit performance, including rising net credit losses, allowance adequacy, loan mix, interest-margin compression and the planned subprime-loan test.
- Verify the availability, renewal terms and cost of CAF warehouse and securitization funding, and distinguish non-recourse debt from corporate obligations.
- Track comparable-store growth, used-vehicle gross profit per unit, inventory levels and execution against planned store openings and capital spending.
- Monitor the California litigation and the conditions and timing for the potential Toyota settlement recovery.