CARMAX INC annual report, FY2015

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CarMax, Inc. — FY2015 Form 10-K

Reporting period: Fiscal year ended February 28, 2015. The filing also reports fourth-quarter results; fiscal 2015 is not a calendar-year period. CarMax operates used-vehicle retail, wholesale auctions and related services, plus CarMax Auto Finance (CAF). At year-end it had 144 used-car stores in 73 markets.

Financial performance and liquidity

  • Revenue: Net sales and operating revenues were $14.269 billion, up 13.5% from $12.574 billion. Used-vehicle sales were $11.675 billion; wholesale sales were $2.049 billion.
  • Profit: Gross profit rose 14.5% to $1.888 billion; gross margin was 13.2%, versus 13.1%. Net earnings increased 21.3% to $597.4 million, and diluted EPS rose 26.4% to $2.73. Net margin was 4.2%, versus 3.9%.
  • Fourth quarter: Revenue was $3.514 billion, gross profit $475.8 million, net earnings $143.1 million and diluted EPS $0.67. The comparable FY2014 quarter reported $3.076 billion, $384.1 million, $99.2 million and $0.44, respectively.
  • Vehicle activity: Retail used-vehicle units increased 10.5% to 582,282; comparable-store used units rose 4.4%. Wholesale units increased 9.8% to 376,186. Used-vehicle gross profit per unit was $2,179, essentially steady year over year; wholesale gross profit per unit rose to $970 from $916.
  • CAF: Income increased 9.3% to $367.3 million. Average managed receivables grew 18.6% to $7.86 billion, while the interest margin declined to 6.5% from 6.9%. Net credit losses were 0.90% of average managed receivables, unchanged from FY2014; past-due accounts were 2.62% of year-end receivables.
  • Cash flow and investment: GAAP operating cash flow was negative $968.1 million, largely reflecting a $1.37 billion increase in auto-loan receivables. Management’s non-GAAP adjusted operating cash flow was $254.1 million, down from $780.2 million. Capital expenditures were $309.8 million.
  • Liquidity and debt: Cash and cash equivalents fell to $27.6 million from $627.9 million. Total debt was $9.109 billion, including $8.471 billion of non-recourse securitization debt; total debt was $7.583 billion a year earlier. The $1.0 billion revolving facility had $989 million unused, and warehouse facilities had $1.31 billion of unused capacity. The company reported compliance with debt covenants and securitization performance triggers.
  • Capital allocation: CarMax repurchased 17.5 million shares for approximately $917 million during FY2015 and had $2.369 billion of authorized repurchases remaining at year-end. It did not pay dividends and said it did not expect to do so in the foreseeable future.

Material changes versus the prior year

  • Growth reflected higher retail volume, comparable-store sales growth, newer stores and a larger store base. Average retail selling price increased 2.5%, partly due to a greater mix of newer vehicles.
  • Wholesale gross profit improved with higher unit volume and per-unit profit. SG&A increased 8.9%, but declined per retail unit; excluding a settlement gain, SG&A growth was 10.7%.
  • CAF income grew, but margin compression reflected lower average rates on recent originations and higher funding costs. The loan-loss allowance increased to $81.7 million from $69.9 million, while remaining 0.97% of managed receivables.
  • Inventory rose 27.1% to $2.087 billion, attributed to seasonal positioning, store growth, sales growth and below-target inventory at the start of the year.
  • Reported earnings growth benefited from a $20.9 million Toyota class-action settlement gain and comparison with FY2014’s EPP cancellation-reserve accounting correction. Management stated that excluding these items, FY2015 net earnings grew 15.9% and diluted EPS 20.3%.

Outlook, risks and unusual items

  • Management planned 13–16 store openings annually for the next three fiscal years; FY2016 plans included 14 new stores and one relocation. FY2016 capital expenditures were estimated at approximately $360 million, with about 15 older stores also slated for remodeling.
  • Management identified long-term earnings growth as dependent primarily on vehicle-unit growth from new and comparable stores, with related potential growth in wholesale sales, ancillary products and CAF income. It cited execution, associate development, competition and access to suitable real estate as important conditions.
  • Key risks include economic and credit-market conditions; used-vehicle supply, pricing and depreciation; competition, particularly online; CAF funding availability and interest-margin pressure; third-party financing reliance; regulation and consumer-finance oversight; cybersecurity and information-system disruption; seasonal and weather-related demand; and legal proceedings.
  • The CFPB had proposed extending supervisory authority to large nonbank auto-finance companies, including CarMax. The company warned that regulation could raise compliance costs or require business-practice changes.
  • A long-running California employee class action remained unresolved. Some claims were ordered to individual arbitration, while the Private Attorney General Act claim was not; CarMax sought California Supreme Court review. The company said it could not reasonably estimate a possible loss. It considered other proceedings not expected to have a material adverse effect.
  • FY2014 included an EPP cancellation-reserve correction; the filing says $19.5 million of the correction related to FY2013 and FY2012, including an $11.9 million after-tax reduction to FY2014 earnings ($0.05 per share). The Toyota settlement gain was recorded in FY2015 upon receipt.

Important facts for investors to verify

  • Whether operating cash generation, cash balances and funding capacity remain adequate as CAF receivables and store investment grow; distinguish GAAP cash flow from management’s non-GAAP adjusted measure.
  • CAF’s future credit losses, delinquencies, funding costs and interest margins, including performance of the higher-risk loan-origination test.
  • Whether used-vehicle supply, acquisition costs, inventory levels and gross profit per unit support continued sales growth without increased depreciation or margin pressure.
  • How much reported earnings growth is recurring after the Toyota settlement gain and the prior-year EPP reserve correction.
  • Progress on planned openings and capital spending, remaining share-repurchase authorization, and the outcome or financial exposure of the Fowler litigation.

KPMG gave an unqualified opinion on the consolidated financial statements and concluded internal control over financial reporting was effective as of February 28, 2015.