CarMax, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2025, the three months ended May 31, 2024. Comparisons are with the three months ended May 31, 2023, unless otherwise stated. CarMax operates used-vehicle sales operations and CarMax Auto Finance (CAF). Edmunds was integrated into Sales Operations for segment reporting in this quarter; the change did not affect consolidated results.
Financial results and key metrics
| Metric | Q1 FY2025 | Change vs. Q1 FY2024 |
|---|---|---|
| Net sales and operating revenues | $7.11 billion | Down 7.5% |
| Gross profit / gross margin | $791.9 million / 11.1% | Down 3.1%; margin was 10.6% a year earlier |
| CAF income | $147.0 million | Up 7.0% |
| SG&A expenses | $638.6 million | Up 14.1% |
| Earnings before income taxes | $206.6 million | Down from $307.2 million |
| Net earnings / diluted EPS | $152.4 million / $0.97 | Down 33.2% / 32.6% |
| Cash used in operating activities | $117.7 million | Compared with $185.3 million used |
Used-vehicle sales were $5.68 billion, down 5.4%; wholesale sales were $1.26 billion, down 17.0%. Used units fell 3.1% to 211,132, while average retail selling price declined 2.7% to $26,526. Wholesale units fell 8.3% and average wholesale selling price declined 10.3%. Used gross profit per unit was $2,347, down 0.6%; wholesale gross profit per unit was $1,064, up 2.1%.
Net earnings margin was approximately 2.1%, versus 3.0% a year earlier. SG&A was 80.6% of gross profit, compared with 68.5%; excluding a prior-year legal-settlement benefit, the prior-year ratio was 75.7%. Management cited higher share-based compensation and the absence of that settlement benefit as important comparability factors. The filing does not provide a conventional operating cash-flow margin.
Cash and cash equivalents were $218.9 million at May 31, down from $574.1 million at February 29. Restricted cash from auto-loan collections was $536.4 million; total cash, cash equivalents and restricted cash were $914.5 million. Inventory was $3.77 billion. Total debt, including $17.17 billion of non-recourse notes payable, was $18.78 billion, broadly level with fiscal year-end; the $300 million term loan due June 2024 was repaid during the quarter. The $2.00 billion revolving credit facility was undrawn and fully available, and warehouse facilities had $1.92 billion of unused capacity. CarMax reported compliance with applicable financial covenants.
Material changes and business performance
- Retail demand remained pressured by affordability challenges, inflation, higher interest rates and tighter lending standards. Comparable-store used units declined 3.8%; management said they improved during the quarter’s second half and were slightly positive June-to-date.
- CAF income rose as average managed receivables and net interest margin increased. Interest and fee income grew, partly offset by higher funding costs. CAF financed 43.3% of retail used-unit sales after three-day payoffs and returns, versus 42.7% a year earlier.
- Credit indicators weakened year over year: annualized net credit losses were 1.62% of average managed receivables versus 1.24%; past-due accounts were 5.38% versus 5.15%; and average recovery rate was 48.9% versus 59.2%. The allowance was 2.79% of ending managed receivables, compared with 3.11% a year earlier and 2.78% at fiscal year-end. Management attributed rising delinquencies and net charge-offs in part to customer hardship and greater Tier 2 lending.
- Operating cash use improved year over year, but cash flow is affected by growth in CAF loans and related non-recourse funding, which can move operating and financing cash-flow lines without the same effect on overall liquidity.
- CarMax repurchased approximately 1.45 million shares for about $106.9 million during the quarter. Approximately $2.26 billion remained authorized for repurchases.
Outlook, commentary, risks and unusual items
- Management expects fiscal 2025 capital expenditures of $500 million to $550 million, versus $465.3 million in fiscal 2024. It plans five additional stores and one stand-alone auction facility during the remainder of fiscal 2025.
- Management’s initial annual goal is to bring SG&A to the mid-70% range of gross profit over time. It expects low-single-digit gross profit growth in fiscal 2025 to be needed to achieve SG&A leverage. Identified logistics and reconditioning initiatives are expected to yield approximately $200 per retail unit in savings over the next one to two years.
- The long-term target of more than 2 million combined annual retail and wholesale units has been extended to fiscal 2026–2030 because of uncertainty about market recovery. Management expects the $33 billion annual revenue target and more than 5% market share of age 0–10-year-old used vehicles to be achieved sooner than the unit target, but did not give a firm updated timeframe for market share.
- In June 2024, after quarter-end, CAF closed a $625 million asset-backed transaction for its new non-prime securitization program. Management expects broader prime and non-prime funding to add capacity and support CAF growth, subject to lending, funding and credit conditions.
- Management cited a $0.28 per-share benefit in the prior-year quarter from Takata airbag settlement proceeds. The $59.3 million residual recovery received in April 2023 was a key reason prior-year SG&A was lower. Separately, CarMax cannot reasonably estimate potential gains from unresolved residual Ford and Volkswagen Takata settlement matters.
- Risks include vehicle affordability and demand, interest rates and financing availability, used-car price and inventory volatility, CAF credit losses and recoveries, securitization and warehouse funding access and costs, competition, execution of growth and efficiency initiatives, and legal, regulatory, technology and data-security matters. The filing reported no material changes to previously disclosed risk factors or market-risk exposures.
- A California wage-and-hour/PAGA matter was agreed to be settled for a nominal amount. CarMax said other ordinary-course legal proceedings are not expected to materially adversely affect its financial condition, results or cash flows. Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether retail unit sales and comparable-store trends continue to improve, and whether lower vehicle prices support affordability without eroding per-unit gross profit.
- Whether CAF’s higher margins and expanded Tier 2/non-prime lending can offset credit deterioration, including rising delinquencies, net losses and lower vehicle recovery rates.
- Whether securitization expansion and warehouse capacity remain available at acceptable costs, and how the new non-prime program affects CAF returns and risk.
- Whether planned cost savings, SG&A leverage and capital spending targets are achieved amid continued market uncertainty.
- How much of reported year-over-year SG&A and earnings change reflects underlying operations versus the prior-year Takata benefit and higher share-based compensation.
- Whether continued share repurchases remain consistent with management’s stated conservative capital-structure approach and investment needs.