CarMax, Inc. — Form 10-Q Summary
Reporting period: Three months ended May 31, 2011, CarMax’s first quarter of fiscal 2012. Comparisons are with the three months ended May 31, 2010, unless stated otherwise. CarMax operates used-car superstores, a smaller new-car franchise business, wholesale auctions, and CarMax Auto Finance (CAF).
Financial performance
| Metric | Quarter ended May 31, 2011 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales and operating revenues | $2.679 billion | $2.262 billion | Up 18% |
| Gross profit | $383.1 million | $333.5 million | Up 15% |
| Gross margin | 14.3% | 14.7% | Down 0.4 percentage point |
| CAF income | $69.7 million | $57.5 million | Up 21% |
| SG&A expenses | $248.2 million | $226.7 million | Up 9% |
| Earnings before income taxes | $203.9 million | $164.4 million | Up 24% |
| Net earnings | $126.3 million | $101.1 million | Up 25% |
| Diluted earnings per share | $0.55 | $0.44 | Up 25% |
Net margin was 4.7%, compared with 4.5%. Used-vehicle revenue rose 13% on 8% more units and a 5% increase in average selling price. Wholesale revenue rose 51%, reflecting 32% more units and a 14% higher average price. Comparable-store used-unit sales grew 6%. Total gross profit per retail unit increased 7% to $3,453, while used-vehicle gross profit per unit was nearly flat at $2,224.
CAF’s interest margin increased to 7.2% from 6.3%, principally reflecting wider spreads between customer loan rates and funding costs. CAF’s provision for loan losses was a $1.0 million credit, versus a $0.9 million expense. Management said unusually favorable loss experience improved earnings per share by approximately $0.03 in both periods; it cautioned that this benefit reflected losses below expectations.
Cash flow, balance sheet, and liquidity
- Operating cash flow was $22.1 million, down from $55.6 million. The cash-flow statement included a $162.0 million increase in auto loan receivables, compared with $93.8 million in the prior-year quarter; management said most receivables growth is funded through securitizations.
- Investing activities used $39.5 million, versus providing $4.3 million. Capital expenditures were $31.0 million, compared with $9.2 million.
- Financing activities provided $132.3 million, versus using $64.5 million. CarMax issued $1.234 billion and repaid $1.106 billion of non-recourse notes during the quarter.
- Cash and cash equivalents were $156.0 million at May 31, up from $41.1 million at February 28, 2011. Restricted cash from collections on securitized auto loans was a further $170.1 million and is not freely available to the company.
- Total debt, including $4.142 billion of non-recourse notes, was $4.172 billion; most non-recourse debt funds auto loan receivables and is payable from those receivables. Separately, revolving-credit borrowings were $1.2 million, with the $700 million facility’s remaining capacity fully available. The facility expires in December 2011.
- Warehouse facilities had a combined $1.6 billion limit, with $924.0 million funded and $676.0 million unused. Half the limit was due to expire in August 2011 and the other half in February 2012. CarMax reported compliance with applicable covenants and performance triggers.
Material changes, outlook, and risks
- Management attributed sales growth to increased customer traffic, stronger appraisal activity, higher wholesale vehicle values, and sales from newer stores. It also cited market headwinds including higher fuel and vehicle prices, unemployment, and weaker consumer confidence. Used-vehicle supply constraints and strong wholesale pricing raised acquisition costs and retail selling prices.
- CarMax operated 105 used-car superstores and five new-car franchises at quarter end. It opened two superstores during the quarter and planned five openings in fiscal 2012 and eight to ten in fiscal 2013. Estimated fiscal 2012 gross capital expenditures were approximately $225 million, primarily for expansion.
- Management expected operating cash generation and securitization or other funding arrangements, sale-leasebacks, and credit facilities to fund CAF, capital spending, and working capital for the foreseeable future. It warned that market conditions could raise funding costs or constrain the timing and capacity of financing.
- Unusual financing matter: A subsidiary began a rescission offer concerning up to $650 million of asset-backed notes sold in March 2011 under an expired registration statement. Initial purchasers could elect to tender notes once the registration statement became effective. CarMax said it expected to have funds to repurchase any tendered notes, but remarketing costs and timing could be affected by market conditions.
- Contingency: A California employment class action had remaining meal/rest-break, related wage, and unfair-competition claims. The appeals court affirmed a ruling for CarMax on the sales-consultant overtime claim, but plaintiffs petitioned the California Supreme Court for review. CarMax said it could not reasonably estimate potential loss on the remaining matters.
- Other stated risks include economic and competitive changes, vehicle pricing and inventory availability, financing access and cost, store expansion execution, regulation, litigation, seasonal fluctuations, and information-system or data-security failures. Management reported no material change in its previously disclosed risk factors and no material change in market-risk exposure.
Most important facts for investors to verify
- Whether stronger unit sales and CAF income persist without the quarter’s unusually favorable loan-loss experience, and how credit losses and delinquencies develop.
- Whether used-vehicle supply, acquisition costs, wholesale prices, and retail gross margins remain favorable or reverse.
- The outcome and cash impact of the $650 million note rescission offer, and the availability and cost of refinancing as warehouse facilities and the revolving facility approach expiration.
- Execution of planned store openings and approximately $225 million of fiscal 2012 capital expenditures, alongside operating cash flow and liquidity needs.
- Developments in the California employment litigation and any resulting financial exposure.