CarMax, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended August 31, 2012 (fiscal 2013); interim financial statements are unaudited. CarMax operates used-car superstores, four new-car franchises, wholesale auctions, and CarMax Auto Finance (CAF).
Financial performance
| Metric | Three months ended August 31, 2012 | Six months ended August 31, 2012 |
|---|---|---|
| Net sales and operating revenues | $2.758 billion, up 7% | $5.532 billion, up 5% |
| Gross profit / gross margin | $368.0 million / 13.3%, versus $354.3 million / 13.7% | $749.9 million / 13.6%, versus $737.4 million / 14.0% |
| CAF income | $75.7 million, up 19% | $150.9 million, up 13% |
| SG&A | $254.7 million, up 11% | $508.3 million, up 8% |
| Earnings before taxes | $181.1 million, versus $179.9 million | $376.7 million, versus $382.5 million |
| Net earnings / diluted EPS | $111.6 million / $0.48, essentially flat | $232.4 million / $1.00, versus $236.7 million / $1.03 |
- Quarterly used-vehicle revenue increased 9% to $2.192 billion; used units rose 8%, including 5% comparable-store growth. Average used selling price was broadly unchanged.
- Wholesale revenue declined 5% to $437.1 million as units and average selling price each fell 2%. Wholesale gross profit per unit declined to $907 from $929.
- Used-vehicle gross profit per unit remained nearly flat at $2,172. Overall gross margin narrowed as cost of sales rose faster than revenue.
- Quarterly SG&A per retail unit rose 2% to $2,241, reflecting store growth and related expansion costs.
Cash flow, balance sheet, and funding
- For the six months, operating cash flow was a use of $285.9 million, versus a use of $75.9 million a year earlier. Investment activities used $102.5 million, including $103.9 million of capital expenditures; financing activities provided $404.3 million. Cash and cash equivalents ended at $458.6 million.
- Cash flow was materially affected by CAF receivables growth: auto loan receivables increased $377.5 million. CarMax said most of this growth was funded by corresponding increases in non-recourse notes.
- At August 31, total debt was $5.443 billion: $5.081 billion of non-recourse notes, $361.0 million of finance and capital lease obligations, and $1.1 million drawn on the revolving credit facility. Non-recourse debt is primarily secured by securitized receivables and is generally without recourse to other company assets.
- Net auto loan receivables were $5.315 billion; managed receivables were $5.342 billion, up from $4.708 billion a year earlier. The allowance for loan losses was $49.5 million, or 0.9% of managed receivables, versus $36.2 million, or 0.8%.
- The $700 million unsecured revolver expires in August 2016 and was substantially undrawn; the company reported covenant compliance. Warehouse facilities totaled $1.6 billion, with $534.0 million unused. One $800 million facility expires in February 2013 and the other in August 2013.
- Restricted cash from securitized loan collections was $204.7 million and is designated for securitization investors, not general liquidity. Separate reserve-account cash was $40.5 million.
Outlook, commentary, and risks
- Management planned 10 superstore openings in fiscal 2013 and 10 to 15 annually in each of the following three fiscal years. Five stores opened in the first half. Fiscal 2013 capital expenditures were estimated at approximately $280 million.
- Management expected operations cash generation, securitizations and other funding, and credit facilities to fund CAF, expansion, and working capital. It cautioned that funding-market conditions could raise financing costs or constrain timing and capacity.
- CAF income benefited from growth in average managed receivables and lower funding costs on newer originations. Management warned that rising rates or competition could compress CAF margins. It expected the loan-loss allowance as a percentage of receivables to increase as higher-risk loans become a larger share of the portfolio.
- First-half annualized net credit losses were 0.62% of average managed receivables, versus 0.56%; past-due receivables were 2.73% of ending managed receivables, versus 2.84%. Management cited changing credit mix, while noting low charge-offs and strong recoveries.
- Management cited constrained late-model used-vehicle supply and elevated acquisition costs as headwinds to sales. Wholesale appraisal traffic increased, but the buy rate declined amid moderating wholesale values. Results are seasonal, with historically slower fall-quarter sales.
- Key stated risks include economic and used-vehicle price changes, inventory availability, consumer credit access, securitization-market funding costs and capacity, competition, expansion execution and real-estate availability, litigation, systems and data security, and seasonal factors.
- A California employee class-action matter remains, involving meal/rest breaks, related wages, and unfair-competition claims; appeal of an order compelling individual arbitration was pending. The company could not reasonably estimate potential loss. It considered other proceedings not expected to have a material effect.
- Prior-period financial statements were revised to correct sale-leaseback accounting for transactions from fiscal 1995–2009. The company said the correction was not material; revised 2011 comparatives are presented. Second-quarter OCI also included an $8.5 million tax-benefit adjustment related to prior years and a $1.3 million tax-provision adjustment related to the first quarter; management said these were not material.
- Management reported effective disclosure controls at quarter-end and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether used-unit growth and comparable-store momentum persist as inventory supply and wholesale vehicle values change.
- Whether CAF credit losses and allowance levels rise as the portfolio’s credit mix shifts, and how recoveries develop.
- CAF funding costs, securitization availability, warehouse renewals, and compliance with facility covenants and performance triggers.
- Execution of planned store openings and capital spending, including the company’s ability to manage expansion costs.
- Developments in the California litigation and any updates to the estimate or disclosure of potential exposure.