CarMax, Inc. — Form 10-Q Summary
Reporting period: Three months ended May 31, 2016, the first quarter of fiscal 2017. CarMax operates used-vehicle retail and wholesale businesses and CarMax Auto Finance (CAF). It reported 160 used-car stores across 80 U.S. markets.
Financial performance
- Revenue: Net sales and operating revenues were $4.126 billion, up 2.8% year over year. Used-vehicle sales rose 4.1%; wholesale sales fell 1.5%; other sales and revenues fell 10.9%.
- Profit and margins: Gross profit increased 5.3% to $572.6 million, and gross margin improved to 13.9% from 13.5%. Net earnings declined 3.6% to $175.4 million; net margin was 4.2% versus 4.5%. Diluted EPS increased 4.7% to $0.90, supported by share repurchases.
- Sales metrics: Used-vehicle units rose 4.0% to 171,076, while comparable-store used units increased 0.2%. Used gross profit per unit was nearly unchanged at $2,202. Wholesale units increased 1.8%, but gross profit per wholesale unit declined to $995 from $1,032.
- Expenses: SG&A rose 8.7% to $380.2 million, reflecting store-base growth, higher share-based compensation and weather-related expenses. Interest expense increased to $11.1 million from $7.1 million.
- CAF: CAF income declined 7.7% to $100.8 million. Average managed receivables grew 12.5% to $9.745 billion, but interest margin fell to 5.9% from 6.3%, and loan-loss provision rose to $26.6 million from $13.6 million. Annualized net credit losses were 0.72% of average managed receivables, versus 0.54%.
- Cash flow and investment: Operating cash flow was $85.4 million versus $117.6 million. Management’s non-GAAP adjusted operating cash flow, including net issuances of non-recourse notes, was $392.0 million versus $509.1 million. Investing cash outflow was $123.3 million, including $97.5 million in capital expenditures.
- Liquidity and debt: Cash and cash equivalents were $52.6 million; a further $364.2 million of restricted customer loan collections was not freely available. Total debt was $10.868 billion, including $9.834 billion of non-recourse securitization notes. The $1.20 billion revolving facility had $1.199 billion of unused capacity; warehouse facilities had $1.03 billion unused capacity.
Material changes versus the prior-year quarter
- Revenue and gross profit grew, led by higher used-vehicle sales and stronger other gross profit. Used comparable-store unit growth slowed to 0.2% from 4.9%.
- Net earnings declined despite higher revenue, primarily alongside increased SG&A, interest expense and CAF loan-loss provision. Share repurchases reduced weighted-average diluted shares to 195.3 million from 211.7 million, contributing to higher diluted EPS.
- CAF’s allowance for loan losses increased to $104.0 million from $83.7 million a year earlier; past-due accounts were 2.84% of managed receivables versus 2.65%.
- Repurchased 2.57 million shares for $138.0 million in the quarter. The board subsequently authorized an additional $750 million of repurchases and removed the authorization’s expiration date.
Outlook, commentary and risks
- Management planned 15 store openings in fiscal 2017 (two opened in the quarter) and 13–16 in fiscal 2018. Fiscal 2017 capital expenditures were estimated at approximately $450 million, versus $332 million in fiscal 2016.
- Management expects adjusted operating cash flow, credit facilities and other funding arrangements to support CAF, expansion, repurchases and working capital. It targets adjusted debt to total capital of 35%–45%, while noting the ratio can vary.
- Management cited lower customer traffic, partly associated with a reduced Tier 3 sales mix and tighter lending by a third-party provider. CAF also faced margin compression, higher credit-loss provisions and lower vehicle recovery rates.
- Management noted that a future increase in off-lease vehicles could pressure wholesale prices and CAF recovery values; it said no clear trend in that direction had emerged. Funding-market costs and availability, competition, vehicle supply and pricing, store growth, weather and economic conditions are additional risks.
- After quarter-end, CarMax issued the remaining $200 million of its $500 million senior-note placement on June 22, 2016. The notes carry stated rates of 3.86%–4.27% and mature in 2023, 2026 and 2028. The company reported compliance with financial covenants and securitization performance triggers at May 31.
- Legal matters included a proposed settlement of California employment claims for an immaterial amount, subject to court approval. The company could not reasonably estimate potential loss in a separate California wage-related action.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to the risk factors in the prior Form 10-K were reported.
Important facts for investors to verify
- Whether used-vehicle comparable-store sales recover and planned store openings and capital spending proceed as expected.
- Whether CAF loan-loss trends, recoveries and delinquency levels stabilize, and whether interest-margin compression continues.
- Renewal terms, capacity and cost of warehouse facilities, including facilities scheduled to expire in August 2016 and February 2017.
- Cash generation relative to CAF receivable growth, capital expenditures and ongoing share repurchases; distinguish unrestricted cash from restricted securitization collections.
- Actual impact of the off-lease vehicle supply outlook, wholesale pricing, third-party lending changes and the unresolved legal proceeding.