CarMax, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended August 31, 2017 (fiscal 2018). Comparisons are with the corresponding 2016 periods. CarMax operates used-vehicle sales and related services, and CarMax Auto Finance (CAF). Figures are unaudited.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales and operating revenues | $4.387 billion, up 9.7% | $8.929 billion, up 9.9% |
| Gross profit / gross margin | $604.0 million / 13.8%, versus 13.6% | $1.253 billion / 14.0%, versus 13.8% |
| CAF income | $107.9 million, up 12.5% | $217.3 million, up 10.5% |
| Earnings before income taxes | $290.2 million, versus $261.7 million | $628.3 million, versus $544.4 million |
| Net earnings / diluted EPS | $181.4 million / $0.98, versus $162.4 million / $0.84 | $393.1 million / $2.12, versus $337.7 million / $1.74 |
| SG&A expenses | $405.1 million, up 10.6% | $808.6 million, up 8.3% |
| Interest expense | $16.8 million, versus $13.9 million | $33.7 million, versus $25.0 million |
Quarterly net margin was 4.1%, unchanged year over year; first-half net margin rose to 4.4% from 4.2%. Used-vehicle sales drove growth: second-quarter used units increased 11.1%, including 5.3% comparable-store growth. Used-vehicle gross profit per unit was $2,178, versus $2,160. Wholesale revenue declined 2.3% as average selling prices fell 3.2%, although wholesale gross profit rose 9.6%.
Cash flow, balance sheet and funding
- For the first six months, operating cash flow was $81.1 million, versus cash used of $33.0 million a year earlier. Management’s non-GAAP adjusted operating cash flow, adding net non-recourse note issuances, was $642.2 million versus $703.8 million.
- Investing cash outflow was $185.1 million, including $155.1 million of capital expenditures. Financing cash inflow was $91.3 million. Cash and cash equivalents ended at $25.8 million; restricted cash from auto-loan collections was $404.3 million and is not freely available.
- Total debt was $12.624 billion, including $11.304 billion of non-recourse notes backed by CAF receivables. Other reported debt included $18.3 million drawn on the revolving facility, $800 million of term loan and senior notes, and $502.5 million of finance and capital lease obligations.
- The $1.20 billion revolving facility had $1.18 billion of unused capacity. Warehouse facilities had $839 million unused capacity; certain facility expirations were scheduled for 2018. CarMax reported compliance with financial covenants and securitization performance triggers.
- CAF managed receivables were $11.253 billion. The loan-loss allowance was $129.5 million, or 1.15% of managed receivables. Past-due accounts were 3.42%, up from 3.24% a year earlier; the average recovery rate was 45.7%, down from 48.4%.
Material changes and management commentary
- Quarterly net earnings increased 11.7%; diluted EPS increased 16.7%, also benefiting from share repurchases. First-half net earnings rose 16.4% and diluted EPS rose 21.8%.
- CAF’s average managed receivables grew 10.6% in the quarter, supporting higher income. Its interest margin declined to 5.8% from 5.9% as funding costs and consumer-rate competition compressed spreads. Loan-loss provision fell year over year in the quarter, though the allowance ratio was higher than a year earlier.
- SG&A growth reflected a larger store base, comparable-store volume-related costs, and higher incentive-pay accruals. Lower share-based compensation partly offset these increases; the prior-year quarter included $10.9 million of additional expense related to modification of the former CEO’s awards.
- CarMax repurchased 2.45 million shares in the quarter at an average $63.78 per share; first-half repurchases totaled 5.49 million shares for $344.8 million. The board had $1.252 billion remaining under its authorization at quarter end.
Outlook, risks and unusual items
- Management expects long-term earnings growth to be driven principally by unit growth from new and comparable stores. It expects SG&A leverage over the long term when comparable-store used-unit growth is in the mid-single digits, likely toward the higher end while strategic investment remains elevated.
- CarMax 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. No specific earnings or revenue guidance was provided.
- Management said off-lease vehicle supply could increase auction inventory, potentially lowering wholesale prices and vehicle acquisition costs, while also affecting CAF recovery rates. Other risks include funding-market availability and cost, interest-rate and credit-loss changes, competition, execution of store growth, and severe weather.
- Hurricane Harvey closed six Houston stores for most of the final week of the quarter and modestly affected comparable-store sales. Inventory losses were largely expected to be offset by insurance; CAF’s loan-loss provision did not include potential Harvey impacts because they were unknown.
- Three California wage-and-hour putative class actions and an inquiry by California district attorney offices concerning hazardous-waste handling, storage and disposal remained unresolved. The company said it could not reasonably estimate potential losses from these matters.
- CarMax expected the new lease accounting standard to materially increase balance-sheet assets and liabilities but had not quantified the impact. Management generally did not expect the forthcoming revenue standard to materially affect the financial statements.
Important facts for investors to verify
- Whether used-unit growth and comparable-store momentum continue, and how store expansion affects SG&A and cash needs.
- CAF credit performance: delinquencies, charge-offs, allowance adequacy, recovery rates, and margin pressure from funding costs and competition.
- Availability, renewal terms, capacity and pricing of warehouse facilities and securitization funding, including the 2018 expirations.
- The distinction between reported total debt and non-recourse CAF funding, and the limited availability of restricted cash.
- Potential financial exposure from the California litigation, hazardous-waste inquiry and Hurricane Harvey impacts; the filing does not provide clear loss estimates for these matters.