CarMax, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended August 31, 2022. CarMax operates used-vehicle sales and CarMax Auto Finance (CAF); comparisons are with the same periods of FY2022. Unless noted, amounts are U.S. dollars.
Financial performance
| Metric | Q2 FY2023 | Change year over year | Six months FY2023 | Change year over year |
|---|---|---|---|---|
| Net sales and operating revenues | $8.145 billion | +2.0% | $17.456 billion | +11.3% |
| Gross profit | $737.1 million | -9.6% | $1.613 billion | -7.3% |
| CAF income | $182.9 million | -8.6% | $387.3 million | -12.3% |
| SG&A | $666.0 million | +16.0% | $1.323 billion | +17.2% |
| Net earnings | $125.9 million | -55.9% | $378.2 million | -47.6% |
| Diluted earnings per share | $0.79 | -54.1% | $2.35 | -46.0% |
Q2 gross margin was 9.1%, versus 10.2% a year earlier; net margin was 1.5%, versus 3.6%. SG&A equaled 90.4% of gross profit, up from 70.4%. Used-vehicle gross profit per unit rose to $2,282 from $2,185, but wholesale gross profit per unit fell to $881 from $1,005.
Q2 used-unit sales declined 6.4% to 216,939, while average retail selling price increased 9.6% to $28,657. Wholesale-unit sales fell 15.1%; average wholesale selling price rose 17.0% to $10,179. Comparable-store used units declined 8.3%. For the first six months, used units fell 8.9% and wholesale units fell 6.4%.
CAF, credit and cash flow
- CAF’s Q2 loan-loss provision was $75.5 million, compared with $35.5 million a year earlier; the six-month provision was $133.3 million versus $11.1 million. The allowance was $477.5 million, or 2.92% of managed receivables, versus 2.66% a year earlier.
- Annualized net credit losses were 1.39% of average managed receivables in Q2, versus 0.46%; past-due accounts were 4.64%, versus 2.72%. Management attributed the comparisons partly to unusually low prior-year delinquencies and expanded Tier 2 and Tier 3 lending.
- Six-month operating cash flow was $479.6 million, versus cash used of $1.385 billion in the prior-year period. The filing notes that changes in auto loans and related non-recourse funding significantly affect reported operating and financing cash flows.
- Capital expenditures were $204.5 million for the six months, versus $137.8 million. Cash and cash equivalents were $56.8 million at August 31; restricted cash was reported separately.
Debt, liquidity and capital
Total debt, including $16.121 billion of non-recourse notes associated with CAF receivables, was $18.746 billion at August 31, 2022, compared with $18.734 billion at February 28. Non-recourse notes are supported by the related receivables and are distinct from corporate borrowings. The company had $1.39 billion of unused capacity on its $2.0 billion revolving credit facility and $2.40 billion of unused warehouse-facility capacity. CarMax reported compliance with financial covenants and non-recourse funding performance triggers. Shareholders’ equity was $5.414 billion.
CarMax repurchased $325.2 million of shares during the first six months. Its $4.0 billion total repurchase authorization had $2.45 billion remaining at period-end. Management said its adjusted debt-to-total-capital ratio, net of cash, was around the middle of its 35%–45% target range.
Outlook, management commentary and risks
- Management cited affordability pressures from inflation, higher interest rates and low consumer confidence as factors affecting used-unit sales. Comparable-store sales declined sharply toward quarter-end, and the trend continued into September. It also reported steep wholesale vehicle depreciation continuing into September and said it had slowed vehicle purchases in response to rapidly changing market conditions.
- For FY2023, CarMax expects to open ten stores in total and estimates capital expenditures of approximately $500 million, with about 30% directed to technology. It expects marketing spend per unit to be at least FY2022 levels.
- Management said FY2023 gross-profit growth would need to exceed the previously stated 5%–8% range to leverage SG&A, citing strategic investment timing, growth costs and inflation. It expects the leverage point to be lower after FY2023.
- Long-term targets remain 2.0–2.4 million vehicles sold through retail and wholesale channels and $33–$45 billion in revenue by FY2026, and more than 5% share of the nationwide age 0–10 used-vehicle market by the end of calendar 2025. Management said these targets incorporate potential macroeconomic volatility.
- Key risks include vehicle-price volatility and inventory availability, consumer demand and financing conditions, CAF credit losses, funding-market access and cost, inflation and labor costs, execution of digital and growth investments, and litigation. Two California wage-and-hour/PAGA matters remain pending; CarMax said it could not reasonably estimate potential loss. It reported no material changes to the risk factors in its FY2022 Form 10-K.
Unusual comparative items: Prior-year results included an $8.7 million gain related to remeasurement of CarMax’s Edmunds investment; six-month other income was also higher due primarily to gains on an equity investment. Q2 SG&A comparison was affected by a $14 million one-time change in estimate recorded in prior-year overhead costs. The filing says the Inflation Reduction Act was not expected to have a material impact on results.
Investor verification priorities
- Track used-unit and comparable-store trends, particularly the weakness reported through September, and assess whether higher vehicle prices continue to weigh on affordability and demand.
- Monitor wholesale depreciation, inventory acquisition costs, and the effect of shifting lower-priced vehicles between retail and wholesale channels on unit margins.
- Review CAF delinquency, charge-off and allowance trends, especially as Tier 2 and Tier 3 originations expand and funding costs change.
- Compare gross-profit growth and expense growth against management’s FY2023 SG&A-leverage commentary and the approximately $500 million capital-spending plan.
- Distinguish CAF-related non-recourse debt from corporate debt and verify ongoing access, pricing and renewal terms for revolving and warehouse facilities.
- Follow the California PAGA proceedings and related arbitration motions; the filing provides no clear estimate of potential loss.