CarMax, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2023, ended November 30, 2022; comparisons are to the corresponding prior-year periods. CarMax operates used-vehicle sales operations and CarMax Auto Finance (CAF).
Financial results
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Net sales and operating revenues | $6.51B | $8.53B | $23.96B | $24.21B |
| Gross profit | $576.7M | $836.6M | $2.19B | $2.58B |
| CAF income | $152.2M | $166.0M | $539.5M | $607.7M |
| Net earnings | $37.6M | $269.4M | $415.8M | $991.5M |
| Diluted earnings per share | $0.24 | $1.63 | $2.60 | $5.99 |
- Q3 revenue fell 23.7% and net earnings fell 86.1% year over year. Nine-month revenue decreased 1.0%; net earnings decreased 58.1%.
- Q3 gross margin was 8.9%, down from 9.8%. Selling, general and administrative (SG&A) expense was $591.7M, or 102.6% of gross profit, versus 68.8% a year earlier. Nine-month SG&A rose 12.3% to $1.91B.
- Q3 used-vehicle sales were 180,050 units, down 20.8%; comparable-store used units fell 22.4%. Wholesale sales were 118,757 units, down 36.7%. Used gross profit per unit was $2,237, essentially flat; wholesale gross profit per unit declined to $966 from $1,131.
- CAF’s Q3 income declined 8.3%. Its loan-loss provision increased to $85.7M from $76.2M. The allowance was $491.0M, or 2.95% of managed receivables, compared with 2.75% a year earlier. Past-due accounts rose to 4.99% from 3.83%; annualized net credit losses were 1.74% versus 1.25%.
- For the first nine months, operating cash flow was $1.66B, compared with $2.08B used a year earlier. The filing attributes the change substantially to inventory and receivable movements; inventory fell $1.71B from fiscal year-end. Investing cash outflow was $318.7M, including $319.5M of capital expenditures. Financing cash outflow was $827.0M.
- At November 30, cash and cash equivalents were $688.6M; restricted cash from auto-loan collections was $466.5M. Current assets were $4.98B and current liabilities $1.94B.
- Total debt was $18.25B, including $16.24B of non-recourse notes associated with CAF loan funding. The $2.00B unsecured revolving credit facility was undrawn and fully available. CarMax reported compliance with financial covenants and funding-vehicle performance triggers. Its adjusted debt-to-capital ratio, net of cash, was below its 35%–45% target range.
Changes, outlook and management commentary
- Management cited vehicle affordability pressures from inflation and higher interest rates, low consumer confidence, and competitor price reductions as factors weighing on sales. Q3 wholesale vehicle depreciation was approximately $2,000, following approximately $2,500 in Q2.
- Management expects average retail selling prices to decrease in Q4 FY2023 and SG&A expense to decline year over year in that quarter. Its longer-term goal is to reduce annual SG&A as a percentage of gross profit to the mid-70% range through efficiency gains and gross-profit growth.
- Long-term targets remain 2.0–2.4 million combined retail and wholesale vehicle sales and $33B–$45B in revenue by fiscal 2026, and more than 5% share of the age 0–10 used-vehicle market by the end of calendar 2025. These targets incorporate potential macroeconomic volatility.
- Management planned ten store openings in FY2023 and slowed FY2024 planned growth to five stores. FY2023 capital expenditures were estimated at approximately $450M. Share repurchases were paused during Q3; $2.45B remained under the authorization at period-end.
- CAF’s weighted average customer contract rate rose to 9.8% in Q3 from 8.3%. Management attributed pressure on CAF’s Q3 interest margin to higher funding costs; expanded Tier 2 and Tier 3 lending contributed to higher expected credit losses and delinquencies.
- Prior-year comparisons include unusual items: a $22.6M class-action settlement benefit lowered prior-year Q3 SG&A, while prior-year other income included a gain from selling the last new-car franchise; nine-month other income also benefited from investment gains.
Risks and contingencies
- Key exposures include used-vehicle price volatility, consumer demand and affordability, interest rates and funding access, CAF credit losses, competition, inventory sourcing, labor costs, technology and cybersecurity, and litigation.
- A California wage-and-hour matter is proceeding as a PAGA-only case. The court compelled arbitration of the individual claim and stayed consideration of representative claims pending a California Supreme Court decision. CarMax stated it cannot reasonably estimate potential loss.
- Management reported no material change to previously disclosed risk factors or market-risk disclosures, and concluded disclosure controls were effective. It does not expect the Inflation Reduction Act to materially affect results.
Important facts for investors to verify
- Whether unit sales, gross profit and SG&A trends improve, including the expected Q4 price and expense changes.
- CAF delinquency, charge-off, allowance and funding-cost trends, especially as Tier 2 and Tier 3 lending expands.
- Liquidity and funding access, including warehouse capacity renewals, securitization costs and the availability of the revolving facility.
- Progress against store-growth, capital-expenditure and long-term sales, revenue and market-share targets.
- Developments in the California PAGA litigation and any changes to other contingencies or disclosed risks.