CarMax, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2020, the three months ended May 31, 2019; filed July 3, 2019. Comparisons are with the three months ended May 31, 2018 unless otherwise noted. CarMax operates used-vehicle sales and services businesses and CarMax Auto Finance (CAF).
Key financial results
| Metric | Q1 FY2020 | Change |
|---|---|---|
| Net sales and operating revenues | $5.366 billion | +12.0% |
| Gross profit | $742.4 million; 13.8% margin | +12.3%; margin unchanged |
| CAF income | $116.0 million | +0.3% |
| SG&A | $489.7 million | +11.7% |
| Net earnings | $266.7 million; 5.0% of revenue | +11.8% |
| Diluted EPS | $1.59 | +19.5% |
| Operating cash flow | $43.2 million | Compared with $230.8 million |
Used-vehicle sales were $4.541 billion (+12.9%); wholesale sales were $662.4 million (+7.3%). Used units rose 13.0% to 224,268, including 9.5% comparable-store unit growth. Average used selling price was nearly unchanged at $20,050. Used gross profit per unit was $2,215, unchanged year over year.
CAF average managed receivables grew 7.9% to $12.71 billion. Its total interest margin declined to 5.6% from 5.7%, while provision for loan losses increased to $38.2 million from $30.9 million. Annualized net credit losses were 0.93% of average managed receivables versus 0.85%; past-due accounts were 3.36% versus 3.16%.
Financial position and liquidity
At May 31, 2019, cash and cash equivalents were $42.2 million; restricted cash from auto-loan collections was $479.4 million. Inventory was $2.55 billion and net auto-loan receivables were $12.78 billion. Total debt was $14.48 billion, including $12.89 billion of non-recourse notes payable principally secured by CAF receivables. Long-term debt, net of current portion and issuance costs, was $14.03 billion. The company reported $925.6 million of unused revolving-credit capacity and stated it was in compliance with financial covenants and funding-vehicle performance triggers.
Operating cash flow plus net non-recourse note issuances produced management’s non-GAAP adjusted operating cash flow of $401.4 million, down from $556.0 million. The filing attributes the decline primarily to working-capital changes, including inventory, partly offset by higher earnings. Capital expenditures were $79.0 million; share repurchases used $212.0 million. Total shares repurchased were 2.95 million at an average $69.35 per share.
Changes, outlook, and significant items
- Net earnings rose 11.8%; diluted EPS increased faster, partly reflecting lower weighted-average shares following repurchases.
- Retail unit growth drove revenue and gross-profit gains. SG&A rose with store growth, variable costs, higher share-based compensation, and technology and omni-channel investment.
- Management expected fiscal 2020 comparable-store used-unit growth of 5%–8% to be needed to leverage SG&A, given elevated initiative spending. It expected initiative-spending growth to slow in fiscal 2021 and taper thereafter.
- CarMax planned 13 store openings in fiscal 2020, a similar number in fiscal 2021, and approximately $350 million in fiscal 2020 capital expenditures. It expected its omni-channel experience to reach most customers by fiscal year-end; two additional customer experience centers were planned later in the year.
- Management cited strong store execution, increased website traffic, improved conversion, lending availability, and the timing of tax refunds as contributors to comparable sales growth. It cautioned that some benefits may reflect timing and that seasonal sales patterns apply.
- In June 2019, after quarter-end, CarMax amended its revolving facility to increase capacity from $1.20 billion to $1.45 billion and extend maturity to June 2024; the term loan maturity was also extended to June 2024.
- Adoption of lease accounting (ASC 842) added operating lease assets and liabilities; the filing reported $466.4 million of operating lease assets and $488.6 million of operating lease liabilities at May 31. Adoption had no material effect on earnings or debt-covenant compliance.
- Management identified risks including CAF credit losses and funding costs, securitization and credit-market availability, vehicle-price and inventory movements, third-party financing availability, execution of omni-channel initiatives, competition, and litigation. Four California wage-and-hour class proceedings remained; management did not expect them to have a material adverse effect. It could not reasonably estimate potential loss from an informal hazardous-waste inquiry by California municipal prosecutors.
Investor verification points
- Check whether comparable-store growth and conversion gains persist after the quarter’s tax-refund timing effects, and whether the omni-channel rollout meets management’s schedule and cost expectations.
- Track CAF net losses, delinquencies, allowance coverage, credit mix, and interest-margin compression against management’s targeted lifetime net losses of 2%–2.5% for relevant originations.
- Review liquidity and funding dependence, including warehouse-facility renewals, securitization capacity and pricing, and the distinction between corporate debt and non-recourse CAF notes.
- Compare GAAP operating cash flow with adjusted operating cash flow and assess working-capital movements, capital spending, and continued share repurchases.
- Monitor the California employment cases and hazardous-waste inquiry, whose ultimate financial exposure is not fully quantified in the filing.