CarMax, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended November 30, 2013. Comparisons are with the corresponding prior-year periods. CarMax operates used-vehicle retail and wholesale businesses and CarMax Auto Finance (CAF). This is an unaudited quarterly filing.
Financial performance
| Metric | Three months ended Nov. 30, 2013 | Change year over year | Nine months ended Nov. 30, 2013 | Change year over year |
|---|---|---|---|---|
| Revenue | $2.941 billion | +13.0% | $9.498 billion | +16.8% |
| Gross profit | $381.7 million | +10.6% | $1.265 billion | +15.5% |
| Gross margin | 13.0% | 13.3% prior year | 13.3% | 13.5% prior year |
| CAF income | $83.9 million | +16% | $255.3 million | +14% |
| Net earnings | $106.5 million | +12% | $393.4 million | +20% |
| Diluted EPS | $0.47 | $0.41 prior year | $1.73 | $1.41 prior year |
- Third-quarter used-vehicle unit sales increased 15%, including 10% comparable-store growth; nine-month used unit sales increased 20%, including 14% comparable-store growth. Average used-vehicle selling prices were $19,469 for the quarter and $19,480 for the nine months.
- Used-vehicle gross profit per unit was nearly unchanged year over year: $2,149 for the quarter and $2,181 for the nine months. Total gross profit grew more slowly than revenue, with total gross profit per retail unit declining to $3,081 from $3,211 in the quarter.
- SG&A increased 11% in the quarter and 12% in the nine months, reflecting store growth and higher variable selling costs. SG&A per retail unit improved to $2,295 from $2,393 in the quarter and to $2,144 from $2,281 year to date.
- CAF’s average managed receivables grew 24% in the quarter and 23% year to date. This supported higher CAF income, but its total interest margin rate fell to 6.8% from 7.4% in the quarter and to 7.0% from 7.5% year to date.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was a use of $493.1 million, versus a use of $499.2 million. This included a $1.045 billion increase in auto loan receivables, mostly financed through non-recourse borrowings. Excluding that receivables increase, management reported operating cash flow of $552.2 million, versus $133.1 million in the prior-year period.
- Investing cash outflow was $228.7 million, including $212.9 million of capital expenditures. Financing cash inflow was $937.2 million, including a net $1.115 billion increase in non-recourse notes payable and $196.7 million of share repurchases.
- At November 30, cash and cash equivalents were $664.8 million; restricted cash from securitized-loan collections was a further $246.8 million. Total debt was $7.310 billion, including $6.970 billion of non-recourse notes payable and $338.6 million of finance and capital lease obligations. The non-recourse debt is principally backed by securitized auto loans.
- The $700 million unsecured revolving credit facility was fully available, with only $1.3 million outstanding. Warehouse facilities had $993 million of unused capacity within a combined $1.8 billion limit. CarMax reported compliance with financial covenants and securitization performance triggers.
Outlook, commentary and risks
- Management planned 13 superstore openings in fiscal 2014 and 10–15 annually in each of the following two fiscal years. Estimated fiscal 2014 capital expenditures were approximately $300 million.
- Management expected operations, securitizations and other funding arrangements, and available credit to fund foreseeable needs, while cautioning that funding-market conditions could raise costs or constrain timing and capacity. A $1.0 billion warehouse facility was due to expire in February 2014 and an $800 million facility in August 2014.
- CarMax planned a fourth-quarter test of approximately $70 million in CAF loans to customers typically served by subprime providers. The company expected higher loss and delinquency rates than in its existing portfolio; test loans were to be separately funded and excluded from its public securitization program.
- Management cited late-quarter tightening in subprime providers’ credit terms. CAF’s weighted-average contract rate on new originations declined to 7.0% in the quarter from 7.7%; management noted that further rate competition or rising funding rates could compress margins. Quarterly annualized net credit losses increased to 1.04% from 0.97%, while 31-plus-day delinquencies were 2.91% of managed receivables.
- Other risks include used-vehicle pricing and inventory availability, consumer credit access, securitization-market conditions, store expansion and real-estate availability, seasonality, litigation, regulatory matters, and information-system or data-security events. Management reported no material change in previously disclosed risk factors or market risk.
- A California employment class action remained unresolved; CarMax said it could not reasonably estimate a possible loss range and had petitioned the U.S. Supreme Court for review. The filing also reported $28.3 million of gross unrecognized tax benefits. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether used-unit growth and comparable-store momentum continue, and whether lower total gross margin persists.
- CAF portfolio performance: loan-loss rates, delinquencies, recoveries, allowance adequacy, and the effect of lower origination rates on future interest margins.
- Renewal terms, cost and capacity of warehouse funding, and continued access to securitization markets.
- Execution of store-opening plans and the approximately $300 million fiscal 2014 capital-spending estimate.
- Developments in the California litigation and the separately funded subprime-loan test.