CarMax, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2018, ended November 30, 2017; comparisons are with the corresponding fiscal 2017 periods. CarMax operates used-vehicle sales and service operations, plus CarMax Auto Finance (CAF).
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | First 9 months FY2018 | First 9 months FY2017 |
|---|---|---|---|---|
| Net sales and operating revenues | $4.107 billion | $3.702 billion | $13.036 billion | $11.825 billion |
| Gross profit | $539.2 million | $503.1 million | $1.792 billion | $1.621 billion |
| Net earnings | $148.8 million | $136.6 million | $542.0 million | $474.4 million |
| Diluted EPS | $0.81 | $0.72 | $2.93 | $2.45 |
- Q3 revenue rose 11.0%, net earnings 8.9%, and diluted EPS 12.5%. Nine-month revenue increased 10.2%, net earnings 14.3%, and diluted EPS 19.6%.
- Q3 gross margin was 13.1%, down from 13.6%; net margin was 3.6%, versus 3.7%. Nine-month gross margin was 13.7% in both periods; net margin improved to 4.2% from 4.0%.
- Q3 used-vehicle units grew 8.2%, including 2.7% comparable-store growth; average selling price rose 2.5%. Wholesale units increased 9.1%. Q3 used-vehicle gross profit per unit was $2,148, broadly similar to the prior year; total gross profit per used unit declined to $3,178 from $3,209.
- CAF income grew 15.1% in Q3 to $102.8 million and 11.9% for nine months to $320.1 million. Growth reflected a larger managed loan portfolio and lower loan-loss provision, partly offset by narrower interest margin.
- Q3 SG&A rose 12.0% to $399.7 million, mainly reflecting store-base growth and higher incentive-pay and share-based compensation costs. Interest expense increased to $17.4 million from $15.1 million.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was negative $193.1 million, versus negative $336.0 million. Capital expenditures were $227.6 million; investing cash flow was negative $247.5 million.
- Management’s non-GAAP adjusted operating cash flow, adding net issuances of non-recourse notes, was $551.5 million, down from $599.2 million.
- Cash and cash equivalents were $26.3 million at November 30, 2017; restricted cash from loan collections was $388.9 million. Current assets were $3.005 billion and current liabilities $1.112 billion.
- Total debt, including $11.487 billion of non-recourse notes, was $13.033 billion, compared with $12.194 billion at February 28, 2017. Non-recourse debt is principally secured by CAF receivables. The $1.20 billion revolving facility had $954.4 million of unused capacity; warehouse facilities had $1.06 billion unused capacity.
- Financing cash flow was $428.5 million and included $744.6 million net issuance of non-recourse notes and $455.0 million of share repurchases. The company reported compliance with financial covenants and funding-vehicle performance triggers.
Outlook, risks and notable items
- Management planned 15 store openings in fiscal 2018 and 13–16 in fiscal 2019. Fiscal 2018 capital expenditures were estimated at approximately $325 million, compared with $412 million in fiscal 2017. Long-term earnings growth is expected to rely chiefly on unit growth from new and comparable stores; management said SG&A leverage generally requires mid-single-digit comparable used-unit growth, likely toward the higher end near term.
- The December 2017 Tax Cuts and Jobs Act was expected to reduce future tax rates and benefit future earnings and cash flow. Management estimated a one-time $50–$65 million unfavorable tax expense from deferred-tax-asset revaluation, partly offset in fiscal 2018’s fourth quarter by the two-month rate reduction. Actual impacts remained subject to analysis.
- Management cited potential pressure from competition, vehicle-price and inventory-market changes, financing availability and cost, CAF credit losses, execution of expansion and technology investments, and severe weather. An anticipated influx of off-lease vehicles could affect auction prices, acquisition costs and CAF recoveries.
- Past-due CAF receivables were 3.5% of managed receivables, compared with 3.1% at February 28, 2017; average recovery rates were 45.8% for Q3 versus 46.2% a year earlier. Management noted interest-margin compression and possible further pressure from higher funding rates or competition.
- CarMax disclosed four California wage-and-hour putative class actions and an inquiry by California municipal district attorneys into hazardous-waste handling, storage and disposal. The company could not reasonably estimate potential losses. It said other ordinary-course proceedings were not expected to have a material adverse effect.
- Expected adoption of the lease accounting standard was anticipated to materially increase balance-sheet assets and liabilities, but the company had not quantified the impact. Adoption of the revenue standard was not expected to materially affect results; assets and liabilities were expected to each increase by an estimated $10–$15 million for gross presentation of sales-return reserves.
Important facts for investors to verify
- Whether retail unit growth and comparable-store trends persist, and how store expansion affects SG&A and capital spending.
- CAF credit performance, delinquencies, recoveries, loan-loss allowances, and the effect of funding costs on interest margins.
- Availability, renewal terms and pricing of warehouse and securitization funding, including facilities expiring during 2018.
- Final tax-reform impacts, including the estimated deferred-tax revaluation charge and subsequent effective tax rate.
- Developments and potential exposure in the California employment and hazardous-waste matters; the filing provides no clear loss estimate.