CarMax, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended November 30, 2015. The company operates used- and new-vehicle retail, wholesale auctions, related services, and CarMax Auto Finance (CAF). Dollar amounts are in U.S. dollars.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Net sales and operating revenues | $3.544 billion, +4.1% year over year | $11.444 billion, +6.4% |
| Gross profit / gross margin | $464.3 million / 13.1%; gross profit +4.0% | $1.529 billion / 13.4%; gross profit +8.3% |
| Net earnings | $128.2 million, down 1.4% | $482.4 million, up 6.2% |
| Diluted EPS | $0.63, up 5.0% | $2.32, up 12.6% |
| Pre-tax margin / net margin | 5.9% / 3.6%, versus 6.2% / 3.8% | 6.8% / 4.2%, both approximately flat year over year |
| CAF income | $92.3 million, +2.9% | $299.7 million, +8.2% |
Quarterly used-vehicle unit sales rose 3.2%, but comparable-store used units declined 0.8%; used gross profit per unit was $2,160 versus $2,172. Wholesale units increased 3.4%, and wholesale gross profit per unit rose to $949 from $927. SG&A rose 6.6% in the quarter, faster than revenue, partly reflecting store growth and advertising timing. Interest expense increased 36.6% to $10.0 million.
For the nine months, management said earnings growth included a $0.04-per-share benefit from changing the timing of reconditioning-overhead recognition. The prior-year period included a $0.06-per-share benefit from class-action settlement proceeds. Excluding these items, management reported net earnings growth of 7.5% and EPS growth of 14.0%.
Cash flow, liquidity and debt
Cash and cash equivalents were $33.3 million at November 30, 2015, versus $27.6 million at fiscal year-end. Nine-month GAAP operating cash flow was negative $381.6 million, compared with negative $784.6 million a year earlier. Management’s non-GAAP adjusted operating cash flow, which adds net non-recourse note issuances, was $483.7 million versus $147.4 million. Investing cash outflow was $274.6 million, including $240.8 million of capital expenditures; financing cash inflow was $661.9 million.
Total debt was $10.61 billion, up from $9.11 billion at February 28, 2015, including $9.34 billion of non-recourse notes tied to auto-loan receivables. The company had $864.0 million of long-term corporate debt, including $564.0 million drawn on its revolving facility and a $300.0 million term loan. The $1.2 billion revolving facility had $636.0 million of available capacity. The $2.5 billion warehouse facilities had $1.11 billion unused capacity; $1.5 billion of that capacity was due to expire in February 2016 and $1.0 billion in August 2016. The company said it complied with financial covenants and securitization performance triggers.
Share repurchases totaled $816.2 million for the nine-month period. At November 30, $1.55 billion remained under the authorization expiring December 31, 2016. Management targets an adjusted debt-to-capital ratio of 35%–45%; the filing does not provide a current ratio value in the supplied text.
Material changes, outlook and risks
- Managed CAF receivables grew to $9.37 billion from $8.19 billion a year earlier. CAF’s total interest margin fell to 6.0% in the quarter from 6.4%; quarterly annualized net credit losses rose to 1.20% from 1.07%, and past-due accounts were 3.24% versus 3.07% a year earlier. Management cited gradual spread compression and warned that higher funding rates or consumer-rate competition could compress margins further.
- Management planned 14 new stores for fiscal 2016, including five during the remainder of the year, and 13–16 stores in each of the next two fiscal years. Estimated fiscal 2016 capital expenditures were approximately $360 million. No specific earnings or revenue guidance was provided.
- Management said long-term earnings growth depends primarily on vehicle-unit growth from new and comparable stores, customer experience, staffing, and securing suitable real estate. It also noted competition, used-vehicle inventory availability and valuations, new-car promotions, and lower Tier 3 credit applications as factors affecting traffic.
- Funding access and cost remain risks: warehouse renewals may have different pricing, structure, or capacity, and market conditions could make future funding more expensive or constrain its timing. The company also identified consumer-credit availability, vehicle-price changes, inventory sourcing and liquidation, execution of store expansion, seasonality, and information-security or systems failures as risks.
- A California employee case’s Private Attorney General Act claim may proceed in state court; the company said it could not reasonably estimate potential loss. It considered other legal proceedings not expected to have a material adverse effect. No material changes to previously disclosed risk factors or market-risk disclosures were reported.
Important facts for investors to verify
- Whether CAF delinquency and net-loss trends continue to rise, and whether credit-loss provisions adequately reflect portfolio performance.
- CAF funding costs, interest-margin compression, and the cost and availability of warehouse facilities at the 2016 renewal dates.
- Progress against store-opening and capital-spending plans, alongside comparable-store sales and SG&A growth.
- The recurring cash generation behind the company’s adjusted operating-cash-flow measure, including the distinction from GAAP operating cash flow.
- The effect of continued share repurchases and borrowing on leverage, liquidity, and per-share results.
- Developments in the unresolved California claim and any resulting contingency or loss disclosure.