CarMax, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, three months ended May 31, 2013; comparisons are with the three months ended May 31, 2012, unless otherwise noted. CarMax operates used- and new-vehicle sales, wholesale auctions, and CarMax Auto Finance (CAF). It had 121 used-car superstores at quarter-end.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net sales and operating revenues | $3.311 billion | $2.774 billion |
| Gross profit / gross margin | $448.1 million / 13.5% | $381.9 million / 13.8% |
| CAF income | $87.0 million | $75.2 million |
| SG&A | $290.2 million | $253.6 million |
| Earnings before income taxes | $237.3 million | $195.6 million |
| Net earnings | $146.7 million | $120.7 million |
| Diluted earnings per share | $0.64 | $0.52 |
- Revenue increased 19%; net earnings increased 21%; diluted EPS increased 23%. Used-vehicle revenue rose 23%, with used units up 22% and comparable-store used units up 17%. Wholesale revenue grew 5% on 6% higher unit sales.
- Gross profit grew 17%, but gross margin declined to 13.5% from 13.8%. Used-vehicle gross profit per unit was approximately flat at $2,216 versus $2,221.
- SG&A rose 14%, primarily reflecting a larger store base and higher variable selling costs; SG&A per retail unit declined to $2,086 from $2,217. The effective tax rate was 38.2%, versus 38.3%.
- CAF income rose 16%, mainly as average managed receivables grew 21% to $6.15 billion. Interest margin fell to 7.2% from 7.5%; the loan-loss provision was 0.7% of average managed receivables in both periods.
- CAF originations increased 42% to $1.12 billion; penetration rose to 41.5% from 36.4%. The average contract rate fell to 7.0% from 8.9%, reflecting more competitive offers.
Cash flow, balance sheet and liquidity
- Operating cash flow was negative $77.6 million, compared with negative $115.5 million. Investing cash flow was negative $46.5 million; financing cash flow was positive $400.0 million. Cash and cash equivalents ended at $725.3 million, up from $449.4 million at February 28, 2013.
- Operating cash use included a $425.8 million increase in auto loan receivables, largely funded through non-recourse financing. The company cautions that receivables growth and related funding affect operating and financing cash flows.
- Total debt was $6.72 billion, up from $6.21 billion at February 28, 2013, including $6.37 billion of non-recourse notes tied to auto-loan receivables. Finance and capital lease obligations were $349.8 million. The $700 million unsecured revolving facility was substantially unused, with its capacity fully available; it expires in August 2016.
- Warehouse facilities had a $1.7 billion combined limit and $759 million of unused capacity. $800 million of facility capacity was due to expire in August 2013 and the remaining $900 million in February 2014. Management noted renewal terms, cost and capacity could change with market conditions.
- Inventory was $1.40 billion, down 8% from the start of the fiscal year but up 16% from May 2012. The company reported compliance with financial covenants and securitization performance triggers at May 31.
Outlook, risks and unusual items
- Management planned 13 store 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. Three stores opened in the quarter.
- Management expected operating cash generation and securitization or other funding arrangements, along with available credit, to fund CAF, capital expenditures and working capital for the foreseeable future. It warned that funding could become materially more expensive or less available, and that transaction timing and capacity may depend on credit-market conditions.
- CAF’s larger portfolio supported income, but lower rates on new loans and potential further rate compression could reduce future interest margins. Net credit losses increased to $7.7 million, or 0.50% of average managed receivables, from $5.9 million, or 0.46%. Past-due receivables were 2.44% of managed receivables, versus 2.50% a year earlier.
- CarMax repurchased 2.95 million shares for approximately $130.2 million during the quarter, at an average $42.29 per share. Approximately $463.5 million remained available under repurchase authorizations.
- Material disclosed legal matters included a California wage-and-break class action, for which an appellate ruling reversed an order compelling arbitration, and copyright, trademark and related claims concerning vehicle photographs brought by eVox. CarMax said it could not reasonably estimate potential losses for either matter; it expected insurance coverage for some or all of the eVox matter.
- Principal stated risks include economic and competitive conditions, consumer credit availability, vehicle prices and inventory sourcing, securitization-market access and cost, store expansion and real estate, litigation, information security and systems, seasonality, and adverse automotive-industry events. Management reported no material change in risk factors or market risk from the prior annual filing and said disclosure controls were effective.
Important facts for investors to verify
- Whether used-unit growth and comparable-store momentum continue, and whether gross profit per unit and overall margins hold up.
- CAF loan performance, allowance adequacy, delinquencies, recovery rates, and the effect of lower new-loan rates on portfolio margins.
- Renewal terms and availability of warehouse facilities, securitization funding costs, and the relationship between receivables growth and non-recourse debt.
- Execution of planned store openings and the approximately $300 million fiscal 2014 capital expenditure plan.
- Developments and any eventual loss exposure in the Fowler and eVox legal matters, for which the filing provides no clear loss estimate.