Business Context and Reporting Period
Company: CARMAX, INC.
Filing Type: Form 10-K (Annual Report)
Period Ended: February 28, 2010
Business Overview: CarMax is the nation's largest retailer of used vehicles, operating 100 used car superstores in 46 metropolitan markets. The company utilizes a "no-haggle" pricing model, sells new vehicles at five franchise locations, and operates wholesale auctions for vehicles not meeting retail standards. It also provides financing through CarMax Auto Finance (CAF) and third-party providers.
Key Financial Metrics
| Metric | Fiscal 2010 | Fiscal 2009 |
|---|---|---|
| Net Sales and Operating Revenues | $7,470.2 million | $6,974.0 million |
| Gross Profit | $1,098.9 million | $968.2 million |
| Gross Margin | 14.7% | 13.9% |
| CarMax Auto Finance (CAF) Income | $175.2 million | $15.3 million |
| Net Earnings | $281.7 million | $59.2 million |
| Diluted EPS | $1.26 | $0.27 |
| Used Vehicle Units Sold | 357,129 | 345,465 |
| Wholesale Vehicle Units Sold | 197,382 | 194,081 |
| Total Assets | $2,556.2 million | $2,379.2 million |
| Total Debt | $150.6 million | $337.0 million |
| Cash and Cash Equivalents | $18.3 million | $140.6 million |
| Operating Cash Flow | $50.3 million | $264.6 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 7% to $7.47 billion, driven by a 9% increase in used vehicle revenues and an 8% increase in wholesale revenues. Used vehicle unit sales rose 3%, with comparable store sales up 1%.
- Profitability Surge: Net earnings increased 376% to $281.7 million. This was primarily due to a significant recovery in CAF income (up from $15.3M to $175.2M) and improved gross profit per unit ($3,011 vs. $2,715 in FY09).
- CAF Income Volatility: CAF income in FY10 included $26.7 million in favorable adjustments (mark-to-market on retained bonds and valuation changes), whereas FY09 included $81.8 million in unfavorable adjustments. Excluding these adjustments, CAF income still improved significantly due to a higher gain percentage on loans sold (4.5% vs. 2.4%).
- Expense Management: SG&A expenses decreased 7% to $818.7 million despite higher sales volume, resulting in an SG&A ratio drop from 12.7% to 11.0%. This was achieved through reduced advertising, wage freezes, and the suspension of store growth.
- Liquidity Shift: Operating cash flow declined significantly to $50.3 million (from $264.6 million) due to increased inventory levels and retained interest in securitized receivables. The company used excess cash to pay down debt, reducing total debt by $186.5 million.
Guidance, Outlook, and Risks
- Store Growth Resumption: After suspending growth in December 2008, CarMax plans to resume opening stores in Fiscal 2011. The plan includes opening 3 stores in FY11, 3-5 in FY12, and 5-10 in FY13.
- CAF Income Outlook: Management estimates CAF income for Fiscal 2011 will range between $145 million and $185 million. This outlook incorporates the adoption of new accounting standards (ASUs 2009-16 and 2009-17) effective March 1, 2010, which will reclassify securitizations as secured borrowings, significantly increasing reported assets and liabilities.
- Capital Expenditures: Planned capital expenditures for Fiscal 2011 are approximately $90 million, up from $22.4 million in FY10, reflecting real estate acquisitions and construction.
- Key Risks:
- Economic Conditions: Sensitivity to consumer credit availability, unemployment, and discretionary spending.
- Capital Markets: Reliance on securitization markets to fund auto loans; disruptions could increase funding costs or curtail lending.
- Inventory: Risk of excess inventory or inability to liquidate at target margins if market values decline.
- Accounting Changes: The shift to consolidating securitization trusts will alter the presentation of financial statements and cash flows.
Investor Verification Checklist
- CAF Adjustments: Verify the sustainability of CAF income by analyzing the $26.7 million in favorable mark-to-market adjustments versus the core gain on loans originated.
- Inventory Levels: Monitor the $843.1 million inventory balance (up 20% from FY09) and the impact of rising wholesale vehicle values on future acquisition costs and margins.
- Accounting Transition: Review the pro forma balance sheet impacts of the March 1, 2010 adoption of ASUs 2009-16/17, which will add approximately $3.7 billion in assets and $3.8 billion in liabilities.
- Debt Covenants: Confirm continued compliance with financial covenants on the $700 million revolving credit facility and the warehouse facility, particularly regarding tangible net worth and fixed charge coverage.
- Store Execution: Track the successful opening and ramp-up of the three planned stores in Fiscal 2011 to ensure the resumption of growth does not strain management resources.