CarMax, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended February 28, 2018. CarMax operates used-vehicle retail and wholesale businesses and CarMax Auto Finance (CAF). It had 188 stores in 91 U.S. television markets at year-end.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales and operating revenues | $17.12 billion | $15.88 billion | +7.8% |
| Gross profit | $2.329 billion | $2.183 billion | +6.7% |
| Net earnings | $664.1 million | $627.0 million | +5.9% |
| Diluted EPS | $3.60 | $3.26 | +10.4% |
| Used units sold | 721,512 | 671,294 | +7.5% |
| Comparable-store used unit sales | +2.0% | +4.3% | Growth slowed |
| CAF income | $421.2 million | $369.0 million | +14.1% |
- Gross margin was 13.6%, down from 13.8%; net margin was approximately 3.9% in both years. Used-vehicle gross profit per unit was nearly unchanged at $2,173; wholesale gross profit per unit rose to $961 from $926.
- SG&A increased 8.6% to $1.617 billion, reflecting store growth, incentive accruals and strategic investment. SG&A per used unit rose to $2,241 from $2,217.
- Net cash used in operating activities was $80.6 million, versus $455.3 million used in FY2017. Management’s non-GAAP adjusted operating cash flow, adding net non-recourse debt issuance, was $821.6 million versus $759.4 million. Capital expenditures were $296.8 million.
- Cash and cash equivalents were $44.5 million. Total reported debt was $13.14 billion, including $11.64 billion of non-recourse notes payable primarily funding CAF receivables. Other borrowings included $197.6 million under the revolving facility, a $300 million term loan, $500 million of senior notes and $500.4 million of finance and capital lease obligations.
- CAF managed receivables were $11.62 billion. CAF total interest margin declined to 5.7% from 5.8%; net credit losses were 1.18% of average managed receivables, compared with 1.20%, while past-due accounts rose to 3.38% from 3.10%.
Material changes versus FY2017
- Higher retail and wholesale unit volumes drove revenue and gross-profit growth, though comparable-store unit growth slowed. Lower store traffic was partly offset by improved conversion, which management associated with execution and digital initiatives.
- CAF income recovered from FY2017’s decline, primarily on larger average receivables and a lower loan-loss provision; margin compression continued.
- Diluted EPS growth exceeded net-earnings growth, aided by share repurchases. CarMax repurchased 8.9 million shares for $579.6 million during the year; $1.02 billion remained authorized at year-end.
- Fiscal 2018 net earnings included an $11.9 million net tax expense related to the 2017 Tax Act. The fourth quarter also included an $8.0 million pretax discretionary associate bonus.
Outlook, risks and other notable items
- Management planned 15 store openings in FY2019 and 13–16 in FY2020; estimated FY2019 capital expenditures were approximately $340 million. It expected the new lower federal tax rate to benefit future earnings and cash flows, with an effective tax rate generally around 25%; management expected 70%–85% of the tax-rate benefit to affect net earnings after planned investment.
- Management said SG&A leverage is generally expected when comparable-store used unit sales growth reaches the mid-single digits; near-term, with heavier strategic investment, it expected the threshold to be toward the higher end of that range. No specific earnings or sales-growth guidance was provided.
- Management cited a forecast influx of off-lease vehicles as a possible source of lower auction prices and acquisition costs, while noting potential effects on CAF recovery rates. Other key exposures include used-car price and inventory depreciation, competition from online and traditional retailers, consumer credit conditions, CAF credit losses and funding access, interest rates, cybersecurity, regulation and severe weather.
- CAF funding depends substantially on securitizations and warehouse facilities. The $1.20 billion revolving credit facility had $1.00 billion unused capacity; warehouse facilities had $1.31 billion unused capacity, with portions due to expire in 2018 and 2019. The company reported covenant and performance-trigger compliance at year-end.
- Four California wage-and-hour putative class actions and a California municipal inquiry concerning hazardous-waste handling were disclosed; CarMax could not reasonably estimate potential losses. It said other ordinary-course proceedings were not expected to have a material adverse effect.
- The company paid no common dividends and said it did not plan to do so for the foreseeable future. The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting.
Investor verification priorities
- Reconcile GAAP operating cash flow with management’s adjusted non-GAAP measure and assess the continued cash needs of CAF receivables and store expansion.
- Review CAF delinquency, loss, recovery and allowance trends, and the implications of continued funding-cost or consumer-rate pressure on interest margins.
- Check renewal terms and capacity for warehouse facilities, covenant headroom, and the company’s debt and repurchase plans.
- Assess whether planned store openings, digital investments and comparable-store sales can support growth while controlling SG&A.
- Monitor final accounting for the 2017 Tax Act, California litigation and environmental inquiry, and adoption of new lease and expected-credit-loss accounting standards.