CarMax, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2015, three months ended May 31, 2014. Comparisons are with the three months ended May 31, 2013, unless otherwise noted. CarMax operates used- and new-vehicle retail and wholesale operations and CarMax Auto Finance (CAF).
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales and operating revenues | $3.750 billion | $3.311 billion | +13.3% |
| Gross profit | $501.7 million | $448.1 million | +12.0% |
| Gross margin | 13.4% | 13.5% | -0.1 percentage point |
| CAF income | $94.6 million | $87.0 million | +8.7% |
| Net earnings | $169.7 million | $146.7 million | +15.7% |
| Diluted earnings per share | $0.76 | $0.64 | +18.8% |
| Net cash used in operating activities | $209.1 million | $77.6 million | More cash used |
| Capital expenditures | $53.7 million | $42.0 million | Higher |
- Used-vehicle revenue rose 13.3% to $3.060 billion; used units sold increased 9.8%, including 3.4% comparable-store growth, and average selling price rose 3.2% to $20,173.
- Wholesale revenue rose 11.1% to $545.2 million, with units up 9.9%; wholesale gross profit per unit increased 6.8% to $1,046, aided by strong industry wholesale pricing.
- SG&A increased 8.0% to $313.4 million, slower than revenue growth. SG&A per retail unit declined $39 to $2,047. Gross profit per retail unit was $3,277, versus $3,221.
- CAF average managed receivables increased 20.1% to $7.39 billion and CAF income increased, but the interest margin fell to 6.7% from 7.2%. The loan-loss provision was $15.8 million, versus $11.3 million.
Cash, debt and liquidity
- Cash and cash equivalents were $532.2 million at May 31, down from $627.9 million at February 28, 2014. Restricted cash from securitized-loan collections was an additional $290.7 million and is not freely available.
- Total debt was $7.964 billion, up from $7.583 billion at February 28. It consisted mainly of $7.627 billion in non-recourse notes payable tied to auto-loan securitizations and $335.5 million in finance and capital lease obligations. The securitization notes are supported by designated receivables and related restricted funds; investors generally have no recourse to other CarMax assets.
- CarMax had a $700 million unsecured revolving credit facility, with capacity fully available at quarter-end; only $1.2 million was drawn. Warehouse facilities had $836 million of unused capacity at quarter-end. One facility limit was increased by $300 million in July 2014.
- Operating cash use included a $415.7 million increase in auto-loan receivables, largely funded through non-recourse notes. Excluding that receivables increase, management reported operating cash provided of $206.6 million, down from $348.2 million, primarily due to inventory changes. Inventory was $1.682 billion, up 20.3% year over year.
- Financing activities provided $207.5 million, including $378.5 million of net increases in non-recourse notes, partly offset by $171.9 million of share repurchases.
Material changes and management commentary
- Retail growth reflected comparable-store gains and a larger store base: CarMax operated 135 used-car superstores at quarter-end, up from 121 a year earlier, and opened four stores during the quarter. Used-unit growth was lower than the prior-year quarter’s 22.1% increase.
- Net third-party finance fees improved by $8.6 million, primarily because a smaller share of sales was financed through third-party subprime providers. That share, combined with loans under CAF’s origination test, declined to 16.1% from 21.3%.
- CAF financed 41.3% of retail units, similar to 41.5% a year earlier. Net credit losses rose to 0.56% of average managed receivables from 0.50%; past-due accounts were 2.51% of receivables versus 2.44% a year earlier. CAF’s allowance was $75.4 million, or 1.00% of ending managed receivables.
- Management planned to open 13 superstores in fiscal 2015 and 10–15 annually in each of the next two fiscal years, and estimated fiscal 2015 capital expenditures of approximately $325 million. It expected operations and securitization or other funding arrangements, together with available facilities, to fund foreseeable needs, while warning that funding costs and availability could change materially with credit-market conditions.
Outlook, risks and unusual items
- Management noted risks from competition, economic conditions, vehicle prices and inventory availability, consumer-credit availability, securitization-market costs and capacity, store expansion and staffing, information-system failures, litigation, seasonality and severe weather. No material changes to the prior annual report’s risk factors were reported.
- Warehouse facilities had scheduled expirations of $800 million in August 2014 and $1.3 billion in February 2015. Renewal terms, funding costs and capacity could change; management said such changes could significantly affect funding costs. CarMax reported compliance with financial covenants and securitization performance triggers at May 31.
- CAF’s test to originate approximately $70 million of loans to customers typically financed by subprime providers had originated $29.6 million by May 31. Management expected this test portfolio to have higher losses and delinquencies than the remainder of CAF’s portfolio.
- A California wage-and-hour class action remains unresolved; the company said it could not reasonably estimate a possible loss. A Toyota settlement administrator notified CarMax of an estimated approximately $20 million recovery, potentially payable in Q3 2014, subject to claims, documentation and court approval. CarMax will recognize it when received.
- In May 2014, ESP coverage on used vehicles was changed from up to 72 months to 60 months, subject to mileage limits. The cancellation reserve for EPP products was $81.1 million, compared with $33.3 million a year earlier.
- The company repurchased 3.84 million shares for $171.9 million at an average $45.33 per share during the quarter. Approximately $1.1 billion remained authorized for repurchases at May 31.
Most important facts for investors to verify
- Whether CAF credit losses, delinquencies and allowance levels continue to rise, particularly as the higher-risk origination test develops.
- Whether CAF’s interest-margin compression persists as new originations enter the managed portfolio and funding or consumer-rate conditions change.
- Whether warehouse facilities are renewed on acceptable terms before their stated expirations, and how securitization capacity and costs evolve.
- Whether inventory growth and expansion spending convert into sustained comparable-store sales, gross profit and operating cash generation.
- The final amount and timing, if any, of the estimated Toyota settlement recovery, and developments in the California litigation.