CarMax, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2022, ended November 30, 2021; comparisons are with the corresponding periods of fiscal 2021. Amounts are in U.S. dollars.
Business context
CarMax operates used-vehicle retail and wholesale businesses and CarMax Auto Finance (CAF). It completed its acquisition of Edmunds on June 1, 2021, for total consideration of $401.8 million, adding digital automotive content and shopping capabilities. Edmunds’ results were included from the acquisition date and were not material to reported revenue or earnings for the periods shown.
Financial performance
| Metric | Three months ended Nov. 30, 2021 | Year-over-year change | Nine months ended Nov. 30, 2021 | Year-over-year change |
|---|---|---|---|---|
| Net sales and operating revenue | $8.53 billion | +64.5% | $24.21 billion | +75.6% |
| Gross profit | $836.6 million | +32.5% | $2.58 billion | +48.3% |
| CAF income | $166.0 million | -5.9% | $607.7 million | +62.2% |
| Net earnings | $269.4 million | +14.5% | $991.5 million | +84.6% |
| Diluted earnings per share | $1.63 | +14.8% | $5.99 | +84.3% |
| Gross margin | 9.8% | 12.2% prior year | 10.6% | 12.6% prior year |
Quarterly revenue growth reflected higher used-vehicle unit sales and selling prices, and especially strong wholesale sales. Used-vehicle sales rose 52.9% and wholesale vehicle sales rose 132.1% in the quarter; average selling prices increased 30.8% and 58.4%, respectively. Gross profit per used unit was $2,235, up 3.9%; wholesale gross profit per unit was $1,131, up 24.8%.
Quarterly selling, general and administrative expense (SG&A) increased 33.7% to $575.9 million, and was 68.8% of gross profit versus 68.2% a year earlier. For the nine months, SG&A was 66.1% of gross profit versus 68.9%. Management cited staffing, advertising, share-based compensation and technology investments among the expense drivers.
Cash flow, balance sheet and funding
- Operating activities used $2.08 billion in cash in the first nine months, versus $868.4 million provided a year earlier. The company attributed the shift mainly to a $1.76 billion increase in auto loans receivable and a $1.50 billion increase in inventory; CAF loan funding flows are presented separately from related financing activity.
- Investing activities used $432.7 million, including $241.6 million paid for Edmunds, net of cash acquired, and $226.9 million of capital expenditures. Financing activities provided $2.51 billion, including net borrowing and non-recourse funding activity.
- At November 30, cash and cash equivalents were $62.6 million; restricted cash from auto-loan collections was $552.5 million. Total cash, cash equivalents and restricted cash, including amounts in other assets, was $764.6 million.
- Total debt was $18.03 billion, including $15.42 billion of non-recourse notes payable principally secured by CAF receivables. Long-term debt on the balance sheet was $2.60 billion, excluding current maturities and non-recourse notes. Inventory was $4.66 billion and auto loans receivable, net, were $15.17 billion.
- The $1.45 billion unsecured revolving facility had $861.9 million of unused capacity at period-end; in December 2021, after the reporting date, CarMax increased its limit to $2.00 billion. Warehouse facilities had $1.67 billion of unused capacity. CarMax reported compliance with financial covenants and funding-vehicle performance triggers.
Material developments and outlook
- CAF’s quarterly income declined as its loan-loss provision rose to $76.2 million from $8.2 million a year earlier. The allowance was $426.5 million, or 2.75% of managed receivables, versus 3.17% a year earlier. Past-due managed receivables increased to 3.83% from 2.93%. Management said favorable recent payment and loss performance did not eliminate uncertainty about future credit losses.
- CAF’s total interest margin improved to 7.2% from 6.3% in the quarter, mainly due to lower funding costs and higher customer interest and fees. The quarter included approximately $5 million of costs to convert CAF’s loan-servicing system.
- CarMax reported that online retail sales were 9% of retail unit sales in the quarter, versus 5% a year earlier; omni-channel sales, where customers completed at least one specified step online, were approximately 57%. It purchased approximately 194,000 vehicles online from consumers during the quarter.
- Management expected advertising spending to remain elevated for the rest of fiscal 2022 and stated an intention to leverage SG&A as a percentage of gross profit for the full year and fourth quarter. Fiscal 2022 plans included opening ten stores in total and approximately $350 million of capital expenditures, nearly $100 million directed to technology.
- Long-term targets include more than 5% national share of 0- to 10-year-old vehicle sales by calendar 2025, two million annual used-vehicle sales through retail and wholesale channels by fiscal 2026, and approximately $33 billion of revenue in fiscal 2026. These are targets, not guarantees.
Risks, contingencies and unusual items
Management highlighted uncertainty from COVID-19 and new variants, used-vehicle pricing and supply, inventory availability, CAF credit losses, funding costs and securitization-market access, competition, labor availability, technology and cybersecurity, and realizing benefits from Edmunds and omni-channel investments. CAF’s loan-loss estimates depend on assumptions about economic conditions and vehicle recovery values.
Third-quarter and nine-month diluted EPS included a one-time $0.10 benefit from a $22.6 million General Motors settlement recovery received November 30, 2021. The prior-year nine-month period included a one-time $0.18 per-share benefit from a separate $40.3 million settlement recovery. Several California wage-and-hour proceedings are pending; the company said it cannot reasonably estimate a loss range for certain matters. It stated that the resolution of another disclosed wage-and-hour case is not expected to materially affect its financial position, results or cash flows.
Most important facts for investors to verify
- Whether elevated vehicle prices, acquisition costs and inventory constraints persist, and how they affect unit volumes and gross margins.
- Whether CAF delinquencies and credit losses rise, and whether the loan-loss allowance remains adequate under changing economic conditions.
- How much of reported earnings growth reflects sustainable operations versus the settlement recovery and prior-year comparison effects.
- Whether operating cash use, inventory growth and CAF receivable funding remain manageable alongside debt, repurchases and planned investment.
- Execution against store-opening, capital-spending and long-term growth targets, including whether Edmunds and digital investments deliver expected benefits.