CarMax, Inc. — Q3 FY2012 Form 10-Q
Reporting period: Quarter and nine months ended November 30, 2011; comparisons are with the corresponding 2010 periods. CarMax operates used-car superstores, a small new-car franchise business, wholesale auctions, and CarMax Auto Finance (CAF). At quarter-end it operated 107 used-car superstores and four new-car franchises.
Financial performance
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Revenue | $2.261bn | $2.119bn | $7.528bn | $6.723bn |
| Gross profit | $303.2m | $297.9m | $1.041bn | $980.6m |
| Net earnings | $82.8m | $82.4m | $321.0m | $291.4m |
| Diluted EPS | $0.36 | $0.36 | $1.39 | $1.28 |
- Q3 revenue rose 7%, but net earnings were nearly flat. Gross margin declined to 13.4% from 14.1%; net margin was 3.7% versus 3.9%.
- For nine months, revenue increased 12% and net earnings increased 10%; gross margin was 13.8% versus 14.6%.
- Q3 used-vehicle revenue rose 5% as average selling price increased 6%, while used units fell 1%; comparable-store used unit sales declined 3%. Wholesale revenue rose 22%, with units up 13% and average selling price up 8%.
- Q3 CAF income increased 12% to $62.6m. Lower funding costs and growth in average managed receivables outweighed a higher loan-loss provision ($15.1m versus $8.6m). The nine-month provision was $24.9m versus $18.5m.
- SG&A increased 6% in Q3 to $232.3m, though the expense ratio improved to 10.3% from 10.4%. Other gross profit fell 20% to $37.2m, reflecting lower service department gross profit and third-party finance fees.
Cash flow, liquidity and debt
- Nine-month operating cash flow was a use of $2.4m, compared with a $22.5m use in 2010. Growth in auto-loan receivables used $512.1m; securitization funding largely appears in financing cash flow.
- Investing cash use was $118.5m, including $106.0m of capital expenditures. Financing provided $463.3m, including a net $451.6m increase in non-recourse notes payable. Cash and cash equivalents ended at $383.4m, up from $41.1m at February 28, 2011.
- Total debt was $4.495bn, primarily $4.465bn of non-recourse notes tied to securitized auto loans; these investors generally have no recourse to CarMax assets beyond specified collateral and restricted funds. Long-term debt and capital leases were comparatively small.
- CarMax replaced its inventory-secured revolver with a five-year, $700m unsecured credit facility. At November 30, $0.8m was drawn and the remaining capacity was available. Warehouse facilities had a $1.6bn limit, $876m funded and $724m unused; $800m of capacity was due to expire in February 2012 and another $800m in August 2012. CarMax reported compliance with relevant covenants and performance triggers.
Changes, outlook and risks
- Management attributed higher used-vehicle prices primarily to increased acquisition costs amid strong wholesale values and constrained used-car supply. Weak economic conditions and low consumer confidence weighed on comparable-store sales conversion.
- CAF retained more loans previously purchased by third parties, increasing its financing share and managed receivables. Management expects this strategy to benefit CAF income over time, but noted that the newer, higher-risk loans could raise delinquencies and losses as they season. Q3 provision expense increased despite lower reported net credit losses year over year.
- Management planned five store openings in FY2012, ten in FY2013, and 10–15 annually for the following three fiscal years. Estimated FY2012 gross capital expenditures were approximately $200m, largely for expansion.
- Management expected operating cash, securitizations and other funding arrangements, sale-leasebacks, and credit facilities to fund CAF, expansion and working capital. It cautioned that market conditions could raise funding costs or constrain timing and capacity.
- Key risks include economic weakness, used-vehicle price and inventory-supply changes, consumer-credit availability, securitization-market access and renewal terms, execution of store growth, seasonality, and litigation. The Fowler California employment case was ordered into individual arbitration on remaining claims; the company could not reasonably estimate a potential loss. Other proceedings were not expected to have a material effect.
- A 2011 asset-backed note offering had been made under an expired registration statement. CarMax offered rescission; the offer expired with no purchases accepted and no notes repurchased.
Key facts investors should verify
- Whether comparable-store used sales and sales conversion recover, and how much growth depends on higher vehicle prices versus unit volume.
- CAF credit performance as retained higher-risk loans season, including delinquencies, charge-offs, recoveries and allowance adequacy.
- Renewal, pricing and capacity of the warehouse facilities, particularly the February and August 2012 expirations, and access to term securitizations.
- Actual FY2012 capital spending and store-opening pace relative to management’s plans and available liquidity.
- Developments in the California employment litigation and any material change in contingent exposure.