CarMax, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended August 31, 2023 (CarMax fiscal 2024); compared with the corresponding 2022 periods. CarMax operates used-vehicle sales and CarMax Auto Finance (CAF), alongside its Edmunds business.
Financial performance
| Metric | Q2 FY2024 | Change vs. Q2 FY2023 | Six months FY2024 | Change vs. prior year |
|---|---|---|---|---|
| Net sales and operating revenues | $7.07 billion | -13.1% | $14.76 billion | -15.4% |
| Gross profit | $696.8 million | -5.5% | $1.51 billion | -6.1% |
| CAF income | $135.0 million | -26.2% | $272.3 million | -29.7% |
| Earnings before tax | $158.3 million | -$9.3 million | $465.5 million | -$38.7 million |
| Net earnings | $118.6 million | -5.8% | $346.9 million | -8.3% |
| Diluted EPS | $0.75 | -$0.04 | $2.18 | -$0.17 |
Q2 gross margin was 9.8% of revenue, versus 9.1% a year earlier; net margin was 1.7%, versus 1.5%. Despite lower total gross profit, used-vehicle gross profit per unit was $2,251, down 1.4%; wholesale gross profit per unit rose 9.3% to $963. SG&A fell 12.1% to $585.7 million, and equaled 84.1% of gross profit versus 90.4%.
Used-unit sales fell 7.4% in Q2, with comparable-store units down 9.0%; average retail selling price fell 4.0% to $27,500. Wholesale units fell 11.2% and average wholesale selling price fell 12.3%. Management attributed pressure to affordability challenges, inflation, higher interest rates, tighter lending standards and weak consumer confidence. It reported sequential monthly improvement in comparable used-unit sales during Q2.
CAF’s Q2 interest margin declined to 6.1% from 7.3%, principally reflecting higher funding costs. Loan-loss provision rose to $89.8 million from $75.5 million. Net credit losses were $87.2 million for the quarter; past-due accounts increased to 5.45% of managed receivables from 4.64% a year earlier. The allowance for loan losses was $538.0 million, or 3.08% of managed receivables, versus 2.92% a year earlier. CAF raised weighted average customer contract rates to 11.1% from 9.4% and tightened underwriting, including reducing its targeted Tier 3 originations to below 5%.
Cash flow, liquidity and debt
For the six months, operating cash flow was a use of $61.1 million, compared with $479.6 million provided in the prior-year period. The cash-flow statement reflects an $828.6 million increase in auto loans receivable and a $113.1 million increase in inventory; management notes that receivable movements are substantially funded through non-recourse financing and that cash-flow presentation can be affected by this timing. Investing cash use was $211.8 million, including $210.2 million of capital expenditures. Financing activities provided $547.0 million, including $647.5 million of net non-recourse note issuance.
At August 31, cash and cash equivalents were $521.1 million; restricted cash is reported separately. Inventory was $3.84 billion. Total debt, including $17.01 billion of non-recourse notes payable, was $18.93 billion. The non-recourse notes are principally secured by CAF receivables. CarMax also had $1.4 billion of term loans and senior notes, plus $522.1 million of financing obligations. Its $2.0 billion revolving credit facility was undrawn and fully available; the June 2023 amendment extended maturity to June 2028. The $300 million term loan matures in June 2024. The company reported covenant compliance.
Share repurchases remained paused during Q2. Management intended to resume in the fiscal third quarter at an initial pace of approximately $50 million per quarter, subject to market and other factors.
Outlook, commentary and risks
- Management estimated fiscal 2024 capital expenditures of approximately $450 million and planned five store openings for the year, plus an offsite production location in the Atlanta area.
- Management’s initial goal is annual SG&A-to-gross-profit leverage in the mid-70% range over time; achieving it depends on efficiency gains, gross-profit growth and healthier consumer demand. It expected low-single-digit gross-profit growth would be needed to leverage SG&A in fiscal 2024.
- Management expected fiscal 2024 advertising spend per unit to be similar to fiscal 2023, with higher per-unit spending in the second half than in the first half. It also expected about $10 million of year-to-date technology-related overhead favorability to reverse in the second half.
- Long-term targets previously disclosed by the company include selling 2.0–2.4 million vehicles and generating $33–$45 billion of revenue by fiscal 2026, and reaching over 5% nationwide share of the age 0–10 used-vehicle market by the end of calendar 2025. Management cautioned that macroeconomic volatility could affect these targets.
- The first-half diluted EPS included a $0.32 benefit from Takata airbag settlement proceeds. The company reported receiving $59.3 million of residual settlement funds in April 2023 and another $7.9 million in August; it remains a class member in unresolved Ford residual-fund and Volkswagen settlement matters.
- CarMax disclosed a California wage-and-hour/PAGA proceeding and said it could not reasonably estimate a possible loss. It reported no known material environmental indemnification issues and said other ordinary-course proceedings were not expected to materially adversely affect the company.
- Principal cited risks include consumer affordability and demand, used-vehicle price changes and inventory access, CAF credit losses and delinquencies, financing and securitization-market costs or availability, competition, execution of omni-channel initiatives, severe weather, cybersecurity and litigation. Management reported no material change to the risk factors in its latest annual report.
Most important facts for investors to verify
- Whether retail and wholesale unit-sales trends improve, and whether lower selling prices and consumer affordability continue to affect revenue.
- CAF credit performance: delinquencies, net losses, recoveries, allowance adequacy, and the effect of higher funding costs on margins and income.
- Whether operating cash generation improves as inventory and CAF receivables change, while distinguishing restricted cash and non-recourse funding from corporate liquidity.
- Execution of expense plans, fiscal 2024 capital spending and store-growth plans, and the timing and pace of any resumed share repurchases.
- Potential outcomes of the California PAGA matter and the unresolved settlement matters; the filing does not provide a clear estimate of potential loss or gain.