CARMAX INC annual report, FY2023

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CarMax, Inc. — FY2023 Form 10-K

Reporting period: Fiscal year ended February 28, 2023. This is an annual report, not a standalone fourth-quarter filing; the filing also discusses selected Q4 operating measures. CarMax is a used-vehicle retailer with CarMax Sales Operations and CarMax Auto Finance (CAF) reportable segments.

Financial results and liquidity

  • Revenue: $29.68 billion, down 6.9% from FY2022. Used-vehicle sales were $23.03 billion (down 5.7%); wholesale vehicle sales were $5.99 billion (down 11.4%).
  • Profit and margins: Gross profit was $2.80 billion, down 14.8%; gross margin was 9.4%, versus 10.3%. Net earnings were $484.8 million, down 57.9%; diluted EPS was $3.03, down 56.5%. Net margin was 1.6%, versus 3.6%.
  • Operating expenses: SG&A rose 7.0% to $2.49 billion and equaled 88.8% of gross profit, compared with 70.7%. Interest expense increased to $120.4 million from $94.1 million.
  • Unit economics and volume: Retail used-vehicle sales fell 12.6% to 807,823 units; comparable-store units fell 14.3%. Average retail selling price increased 7.8% to $28,251. Used gross profit per unit rose to $2,288 from $2,205. Wholesale units declined 17.2% to 585,071, and wholesale gross profit per unit fell to $1,008 from $1,083.
  • CAF: CAF income was $663.4 million, down 17.2%. Provision for loan losses increased to $317.0 million from $141.7 million. Net credit losses were 1.49% of average managed receivables, versus 0.80%; past-due accounts were 5.00% of ending managed receivables, versus 4.02%. The allowance was $507.2 million, or 3.02% of ending managed receivables. CAF’s managed portfolio was $16.77 billion.
  • Cash flow and investment: Operating cash flow was $1.28 billion, versus cash used of $2.55 billion in FY2022; the change was substantially affected by inventory and receivables movements. Capital expenditures were $422.7 million, up from $308.5 million. Inventory declined 27.3% to $3.73 billion.
  • Debt and liquidity: Cash and cash equivalents were $314.8 million. Reported total debt was $18.38 billion, including $16.36 billion of non-recourse CAF notes payable; the remainder included corporate borrowings and financing obligations. The $2.00 billion revolving facility was undrawn and fully available. CarMax reported covenant compliance and $1.95 billion of unused CAF warehouse capacity. Restricted cash is tied to CAF collections and is not equivalent to freely available cash.

Material changes versus FY2022

  • Lower retail and wholesale unit volumes drove revenue and gross-profit declines; higher average selling prices partly offset retail volume weakness.
  • Net earnings fell sharply as gross profit contracted, SG&A increased, and CAF loan-loss provisions rose. FY2022 also included a one-time $0.11-per-share benefit from class-action settlement proceeds.
  • Used-vehicle demand was pressured by inflation, higher interest rates, tighter lending standards and low consumer confidence. CarMax said it prioritized profitability over market share in the second half of the year.
  • CAF’s net interest margin as a percentage of average managed receivables declined to 6.9% from 7.2%, while the allowance rate and delinquencies increased.
  • CarMax reduced inventory, slowed planned store growth and paused share repurchases during the third quarter. It repurchased $333.9 million of shares during FY2023, compared with $576.5 million in FY2022.

Outlook, risks and other notable items

  • FY2024 plans: Management expected to open five stores and one offsite production location, with capital expenditures of approximately $450 million. It expected low-single-digit gross-profit growth to be needed to leverage SG&A in FY2024, and identified a mid-70% annual SG&A-to-gross-profit ratio as an initial longer-term goal. Management expected per-unit advertising spending to remain at a similar level.
  • Long-term targets reaffirmed: Sell 2.0–2.4 million vehicles through retail and wholesale channels and generate $33–$45 billion in revenue by FY2026; exceed 5% nationwide share of the age 0–10 used-vehicle market by the end of calendar 2025. Management cautioned that macroeconomic conditions could affect delivery.
  • Business and credit risks: Key exposures include consumer affordability and demand, vehicle-price volatility and inventory depreciation, competition and sourcing costs, financing availability and cost, and deterioration in CAF credit performance. CAF’s allowance estimate depends on uncertain loss, recovery and macroeconomic assumptions; a 10% change in estimated loss rates would change the allowance by approximately $50.7 million.
  • Funding and rate risks: CAF relies substantially on securitizations and warehouse facilities. Market disruption, higher funding costs, facility renewals or covenant/performance-trigger issues could constrain lending or raise costs. Management estimated a 100-basis-point rate increase would reduce FY2023 EPS by approximately $0.17 for non-recourse funding exposure and $0.04 for other debt exposure, absent further mitigation.
  • Litigation and contingencies: A California wage-and-hour/PAGA matter remained pending; CarMax stated it could not reasonably estimate potential loss. The company reported no known material environmental commitments and said other routine proceedings were not expected to have a material adverse effect.
  • Audit and controls: KPMG gave an unqualified opinion on the financial statements and internal control over financial reporting. The allowance for loan losses on core managed receivables was identified as a critical audit matter.

Most important facts for investors to verify

  • Whether retail unit sales, gross profit and SG&A leverage recover as demand and vehicle affordability evolve.
  • Whether CAF delinquencies, net losses, recoveries and allowance levels stabilize, particularly for expanded Tier 2 and Tier 3 lending.
  • How CAF funding costs, warehouse renewals and securitization access affect margins and liquidity.
  • Whether inventory reductions and pricing discipline limit depreciation losses without impairing vehicle availability or sales.
  • Progress against FY2024 cost, capital expenditure and store plans, and the assumptions underlying the FY2026 revenue and vehicle-volume targets.