CarMax, Inc. — Fiscal 2011 Form 10-K
Reporting period: Fiscal year ended February 28, 2011. The filing also reports fourth-quarter results for the three months ended that date; this is an annual report, not a standalone quarterly filing.
Business context
CarMax operated 103 used-car superstores in 49 markets and five new-car franchises. Its principal businesses are used-vehicle retailing, wholesale vehicle auctions, customer financing through CarMax Auto Finance (CAF) and third parties, and related products and services.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales and operating revenues | $8.976 billion | $7.470 billion |
| Gross profit / gross margin | $1.301 billion / 14.5% | $1.099 billion / 14.7% |
| CAF income | $220.0 million | $175.2 million |
| SG&A / share of revenues | $905.1 million / 10.1% | $818.7 million / 11.0% |
| Net earnings / net margin | $380.9 million / 4.2% | $281.7 million / 3.8% |
| Diluted earnings per share | $1.67 | $1.26 |
| Cash from operating activities | $(17.2) million | $50.3 million |
| Cash from investing activities | $(72.2) million | $(21.3) million |
| Cash from financing activities | $112.3 million | $(151.3) million |
Used-vehicle sales were $7.210 billion, up 16%; used units sold increased 11%, including 10% comparable-store growth. Wholesale sales rose 54% to $1.302 billion as units increased 33% and average selling price rose 16%. Total gross profit increased 18%. Used gross profit per unit was $2,156, versus $2,072; total retail gross profit per unit was $3,218, versus $3,011.
At year-end, cash and cash equivalents were $41.1 million, inventory was $1.049 billion, and auto loan receivables, net, were $4.321 billion. Total debt was $4.044 billion, including $4.014 billion of non-recourse notes associated with CAF securitizations; revolving-credit borrowings were $1.0 million. The company had a $700 million revolving credit facility with remaining capacity available, and $657 million of unused capacity under its $1.6 billion warehouse facilities. Restricted cash from loan collections was $161.1 million and is not freely available to the company.
FY2011 operating cash use primarily reflected a $304.7 million increase in auto loan receivables. This cash-flow presentation changed with the accounting adoption described below, so comparisons with prior years are affected. Capital expenditures were $76.6 million. CarMax paid no cash dividend and stated it did not anticipate one in the foreseeable future.
Fourth-quarter results
Fiscal Q4 FY2011 revenue was $2.253 billion, gross profit was $320.7 million, CAF income was $54.1 million, SG&A was $233.5 million, net earnings were $89.5 million, and diluted EPS was $0.39. In Q4 FY2010, the corresponding figures were $1.833 billion, $265.2 million, $58.9 million, $202.2 million, $75.4 million, and $0.33. Revenue and earnings increased, while CAF income declined year over year.
Material changes and unusual items
- Effective March 1, 2010, CarMax adopted new securitization accounting rules prospectively. CAF loan receivables and related non-recourse notes that had largely been off balance sheet were consolidated; transfers are now generally treated as secured borrowings. FY2011 CAF income reflects interest and fee income less funding costs, direct expenses, and loan-loss provision rather than gains on loan sales. Prior-year balance sheets were not restated, limiting comparability.
- CAF income increased to $220.0 million. Management cited historically wide spreads between consumer loan rates and funding costs, and lower-than-projected losses. Lower charge-offs and an allowance adjustment benefited FY2011 net income by about $0.03 per share. The allowance was $38.9 million, down from $58.6 million at March 1, 2010; net credit losses fell to 1.12% of average managed receivables from 1.73%.
- FY2010 CAF income included $26.7 million of favorable adjustments for prior-year loans, while FY2009 included $81.8 million of unfavorable adjustments. These items complicate year-over-year comparisons.
- CarMax resumed store growth after a pause beginning in December 2008, opening three stores in FY2011. Higher sales, advertising, and growth-related costs increased SG&A, although the SG&A ratio improved. FY2010 included a favorable litigation settlement that added $0.02 per share.
Outlook, risks, and contingencies
Management expected to open five superstores in FY2012 and eight to ten in FY2013. Planned FY2012 capital expenditures were approximately $225 million, mainly for real estate and construction. Management said operating cash, securitizations or other funding, sale-leasebacks, and credit facilities should be sufficient for foreseeable capital and working-capital needs, while cautioning that financing costs and availability depend on credit markets.
Key risks include economic weakness and reduced consumer credit availability; securitization-market disruption or higher funding costs; credit losses and loan performance; used-vehicle supply, pricing, and inventory valuation; competition and margin pressure; dependence on third-party financing providers; store expansion and staffing; regulatory and consumer-protection requirements; information-system and data-security risks; seasonality and geographic concentration; and severe weather.
A California wage-and-hour putative class action remained unresolved, with some claims stayed and an appeal pending. The company said it could not reasonably estimate a loss range. It considered other ordinary-course legal proceedings not expected to have a material adverse effect. Management and the auditor reported effective internal control over financial reporting; the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- How the prospective securitization accounting change affects CAF earnings, balance-sheet leverage, and comparisons with prior periods.
- Whether CAF loan-loss trends, delinquency levels, recovery rates, and funding spreads remain favorable; verify the allowance assumptions and credit performance.
- Renewal, capacity, and pricing of warehouse facilities, including the August 2011 and February 2012 expirations, and the December 2011 revolving-credit maturity.
- Whether used-vehicle supply and wholesale valuations support unit growth and gross profit per unit, particularly as acquisition costs and inventory rise.
- Execution of the planned store openings and approximately $225 million of FY2012 capital expenditures, alongside the unresolved California litigation.