CarMax, Inc. — Form 10-Q Summary
Business context and period. CarMax operates used-car sales and service businesses and CarMax Auto Finance (CAF). This unaudited filing covers the fiscal third quarter and nine months ended November 30, 2016; comparisons are with the corresponding 2015 periods.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Net sales and operating revenues | $3.702 billion, up 4.4% | $11.825 billion, up 3.3% |
| Gross profit / gross margin | $503.1 million / 13.6%, versus 13.1% | $1.621 billion / 13.7%, versus 13.4% |
| Net earnings | $136.6 million, up 6.6% | $474.4 million, down 1.7% |
| Diluted earnings per share | $0.72, versus $0.63, up 14.3% | $2.45, versus $2.32, up 5.6% |
| CAF income | $89.4 million, down 3.2% | $286.1 million, down 4.5% |
Third-quarter net margin was 3.7%, compared with 3.6%; nine-month net margin was 4.0%, compared with 4.2%. Diluted EPS growth exceeded earnings growth in part because of share repurchases.
- Sales drivers: Third-quarter used-vehicle sales revenue rose 6.2% as units increased 9.1%; comparable-store used units rose 5.4%. Average used selling price fell 2.9%. Wholesale revenue declined 4.9%, with units down 2.2% and average selling price down 2.7%.
- Profit and costs: Third-quarter used gross profit rose 8.8%, while wholesale gross profit fell 7.3%. SG&A increased 5.7% to $356.7 million, reflecting store growth, higher variable costs and strategic spending. Interest expense rose to $15.1 million from $10.0 million.
- CAF credit trends: CAF’s average managed receivables grew 11.2% in the quarter, but its provision for loan losses rose to $41.9 million from $30.9 million. The allowance was $114.8 million, or 1.10% of ending managed receivables, versus 0.97% a year earlier. Annualized net credit losses increased to 1.43% from 1.20%; past-due receivables were 3.46%, versus 3.24%.
Cash flow, balance sheet and liquidity
- For the nine months, operating cash flow was negative $343.1 million, investing cash flow negative $338.2 million, and financing cash flow positive $667.7 million. Capital expenditures were $315.5 million, versus $240.8 million.
- Management’s non-GAAP adjusted operating cash flow, adding net non-recourse note issuances to reported operating cash flow, was $592.1 million, versus $483.7 million.
- At November 30, cash and cash equivalents were $23.7 million. Restricted cash from securitized-loan collections was $357.0 million and is not freely available for general use. Inventory was $2.170 billion; auto loan receivables, net, were $10.333 billion.
- Total debt was $11.832 billion, including $10.463 billion of non-recourse notes tied to securitized auto loans. Shareholders’ equity was $3.015 billion. The $1.20 billion revolving facility had $1.11 billion of unused capacity; warehouse facilities had $1.12 billion unused capacity.
- CarMax issued $500 million of senior unsecured notes during the period. It repurchased 8.7 million shares for $464.4 million in the nine months. The board had $1.69 billion remaining under its repurchase authorization. The company reported compliance with financial covenants and securitization performance triggers.
Outlook, commentary and risks
- Management planned 15 store openings in fiscal 2017 and 13–16 in fiscal 2018; 11 stores had opened in the first nine months of fiscal 2017. Fiscal 2017 capital expenditures were estimated at approximately $450 million.
- Management’s long-term growth thesis emphasizes unit growth from new and comparable stores. It expects to begin leveraging SG&A when comparable-store used-unit growth reaches the mid-single-digit range. The filing provides no specific earnings guidance.
- Management noted that increased off-lease vehicle supply could pressure auction prices, acquisition costs and CAF recovery rates. Other key exposures include CAF credit losses and funding-margin compression, interest rates, competitive conditions, and the availability and cost of securitization and other financing.
- Warehouse facilities included $1.50 billion expiring in February 2017 and $1.30 billion expiring in August 2017. Renewals could change their cost, structure or capacity.
- A modification of the former CEO’s equity awards generated $10.9 million of additional share-based compensation expense; another $3.5 million was recognized at grant. Management said the modification reduced nine-month diluted EPS by $0.04.
- Several California wage-and-hour class-action matters remained unresolved; the company said it could not reasonably estimate possible losses. An Orange County hazardous-waste inquiry had been shared with environmental offices in nine other California counties; management did not expect a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the rise in CAF delinquency, charge-offs and loan-loss allowance continues, and how recovery rates affect losses.
- Whether CAF interest margins can stabilize amid funding-cost and competitive pressures.
- Renewal terms and available capacity for the warehouse facilities expiring in 2017, and the cost of other funding.
- Whether used-unit growth, store expansion and planned capital spending support earnings without further SG&A pressure.
- How off-lease supply affects vehicle acquisition prices, wholesale gross profit and CAF collateral recoveries.
- Updates on the California employment litigation and environmental inquiry, for which the filing does not quantify potential exposure.