CarMax, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended February 29, 2012. Although the request labels the period “2011 Q4,” this filing covers the full fiscal year; fourth-quarter figures are also included below. Amounts are in U.S. dollars.
Business context
CarMax is a large U.S. used-vehicle retailer operating 108 superstores in 53 metropolitan markets, alongside wholesale auctions, four new-car franchises and its CarMax Auto Finance (CAF) operation. It retailed 408,080 used vehicles and sold 316,649 vehicles at wholesale auctions during fiscal 2012. Used vehicles accounted for 98% of retail vehicle units.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales and operating revenues | $10.00 billion | $8.98 billion |
| Gross profit | $1.379 billion | $1.301 billion |
| Gross margin | 13.8% | 14.5% |
| CAF income | $262.2 million | $220.0 million |
| SG&A | $940.8 million | $878.8 million |
| Net earnings | $413.8 million | $377.5 million |
| Diluted EPS | $1.79 | $1.65 |
| Net cash used in operating activities | $62.2 million | $6.8 million |
- Revenue increased 11% and net earnings increased 10%. Used-vehicle revenue rose 9%, on 3% unit growth and a 5% increase in average selling price. Comparable-store used units grew 1%, versus 10% in fiscal 2011.
- Wholesale revenue increased 32%, reflecting 20% unit growth and a 10% increase in average wholesale selling price. Total gross profit increased 6%, but gross margin declined to 13.8% from 14.5%; gross profit per retail unit rose to $3,316 from $3,218.
- CAF income rose 19%. Average managed receivables grew 10% to $4.66 billion; CAF financed 37% of retail vehicle units, versus 30% in fiscal 2011. The loan-loss provision increased to $36.4 million from $27.7 million, while net credit losses fell to 0.69% of average managed receivables from 1.12%.
- SG&A increased 7%, driven by store growth, related costs, commissions and advertising. SG&A as a share of revenue improved to 9.4% from 9.8%.
- Cash and cash equivalents were $442.7 million at year-end, up from $41.1 million. Current assets were $1.85 billion and current liabilities $646.3 million. Operating cash use largely reflected a $675.7 million increase in auto loan receivables; financing activities included a $670.4 million net increase in non-recourse notes.
- Total reported debt was $5.05 billion, including $4.68 billion of non-recourse notes associated with CAF securitizations, $367.7 million of finance and capital lease obligations and $0.9 million drawn on the revolving credit facility. The $700 million unsecured revolver was substantially undrawn and fully available, and CarMax reported covenant compliance.
- Fourth-quarter FY2012 revenue was $2.476 billion, gross profit $338.2 million, CAF income $66.1 million, SG&A $243.5 million, net earnings $95.0 million and diluted EPS $0.41. Fourth-quarter FY2011 comparatives were $2.253 billion, $320.7 million, $54.1 million, $226.9 million, $88.8 million and $0.39, respectively.
Material changes and unusual items
- CarMax revised fiscal 2011 and 2010 statements to correct sale-leaseback accounting. The company said the revisions were not material; reported EPS was reduced by $0.02 in each year. At February 28, 2011, the correction increased assets by $285.6 million and liabilities by $338.0 million and reduced equity by $52.4 million.
- Since March 1, 2010, securitized auto receivables and related non-recourse notes have been consolidated as secured borrowings. Consequently, debt, assets and CAF income presentation are not directly comparable with periods before adoption; prior-year balance-sheet amounts were not restated for that accounting change.
- Used-vehicle acquisition costs and selling prices rose amid strong wholesale values and constrained late-model vehicle supply. Management cited weak economic conditions and low consumer confidence as factors limiting comparable-store sales growth.
- CAF retained a greater share of loans previously purchased by third parties, reducing third-party finance fees but increasing CAF receivables and expected future earnings contribution. Management noted that the allowance for loan losses could rise as higher-risk loans become a larger share of the portfolio.
Outlook, risks and contingencies
- Management planned 10 superstore openings in fiscal 2013 and 10 to 15 annual openings in each of the following three fiscal years. Estimated fiscal 2013 capital expenditures were approximately $280 million.
- Management expects operating cash generation and securitization or other funding arrangements, together with available credit facilities, to fund CAF, expansion and working capital. It cautioned that market conditions could raise funding costs or limit timing and capacity.
- Key risks include economic weakness and consumer credit availability, used-vehicle supply and pricing volatility, competition, CAF credit losses and securitization-market access, rising interest rates, regulatory and environmental obligations, information-system and customer-data security, staffing and growth execution, and weather and seasonal sales patterns.
- A California employee class-action matter remained pending on meal/rest-break and related claims; an appeal concerning compelled individual arbitration was pending. CarMax could not reasonably estimate a potential loss. The company stated other proceedings were not expected to have a material adverse effect.
- CarMax paid no cash dividend and did not anticipate one in the foreseeable future. Management reported effective internal control over financial reporting; KPMG gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile the reported $5.05 billion of debt, distinguishing CAF non-recourse securitization notes from corporate debt and lease obligations.
- Review CAF portfolio credit mix, delinquency and loss trends, allowance adequacy, and the effect of retaining higher-risk loans.
- Assess the sustainability of margins as vehicle acquisition costs, wholesale values, reconditioning costs and sales mix change.
- Confirm funding availability and renewal terms for warehouse facilities, including the stated August 2012 and February 2013 expirations, and monitor securitization-market conditions.
- Review the sale-leaseback revisions and the securitization accounting change when comparing results and balance sheets across periods.
- Monitor planned store openings, the $280 million fiscal 2013 capital-spending estimate, and the unresolved California litigation.