CarMax, Inc. — Q3 fiscal 2021 10-Q
Reporting period: Three and nine months ended November 30, 2020. CarMax operates used-car sales and wholesale operations and CarMax Auto Finance (CAF). Results are unaudited; the nine-month period includes the pandemic-disrupted first quarter.
Financial results
| Metric | Three months ended Nov. 30, 2020 | Nine months ended Nov. 30, 2020 |
|---|---|---|
| Net sales and operating revenue | $5.185 billion; up 8.2% year over year | $13.786 billion; down 10.2% |
| Gross profit | $631.4 million; up 2.9%; 12.2% of revenue | $1.738 billion; down 15.2%; 12.6% of revenue |
| CAF income | $176.4 million; up 54.7% | $374.6 million; up 8.9% |
| SG&A | $478.8 million; down 1.2% | $1.343 billion; down 7.7% |
| Net earnings | $235.3 million; diluted EPS $1.42 | $537.0 million; diluted EPS $3.25 |
| Operating cash flow | Not separately reported for the quarter | $868.4 million, versus cash used of $117.9 million |
For the quarter, used-unit sales rose 1.0% to 194,576, while comparable-store used-unit sales declined 0.8%. Used gross profit was $2,151 per unit; wholesale gross profit was $906 per unit. For the nine months, used-unit sales fell 12.6% and comparable-store sales fell 14.8%. Nine-month diluted EPS included a $0.18 one-time benefit from $40.3 million of net Takata-airbag settlement recoveries.
CAF’s quarterly income benefited from a lower loan-loss provision and higher interest margin. Its allowance for loan losses was $431.6 million, or 3.17% of managed receivables, versus $153.6 million, or 1.15%, a year earlier. The current-year allowance includes the $202.0 million increase recorded upon adoption of CECL. Nine-month net credit losses were 0.84% of average managed receivables, compared with 1.20% in the prior-year period.
Financial position and liquidity
- At November 30, cash and cash equivalents were $236.6 million; restricted cash was $631.8 million. Inventory was $2.780 billion and net auto loans receivable were $13.267 billion.
- Total debt was $14.952 billion, including $13.620 billion of non-recourse notes payable tied primarily to CAF receivables. Long-term debt, net of current maturities and issuance costs, was $14.481 billion. The company had paid down its revolving credit facility to approximately $1.0 million; its $1.45 billion facility was fully available.
- For the nine months, capital expenditures were $124.0 million. Financing cash flows included $158.6 million of share repurchases and $460.3 million of net payments on long-term debt. The repurchase program, paused in March, resumed in September.
Changes, outlook and risks
- Quarterly results rebounded from pandemic-affected prior periods, while nine-month revenue and earnings remained below the prior year. Management attributed the early-year downturn to store closures, operating restrictions and weaker demand; used sales also softened late in the third quarter. Same-store sales were down approximately 4% in the first two weeks of December.
- Management cited strong wholesale vehicle valuations and higher acquisition costs. It expects fourth-quarter used gross profit per unit to remain above $2,000, but anticipates a larger year-over-year change than in recent years as it tests pricing and marketing in selected markets.
- Management planned approximately $25 million more advertising expense for fiscal 2021 than fiscal 2020, with most of the increase in the fourth quarter. It anticipated opening eight to ten stores in fiscal 2022 and said most customers should be able to complete an online purchase independently by mid-next fiscal year.
- Management said liquidity and capital access were adequate for operations and planned investment, while emphasizing uncertainty around COVID-19, consumer demand, store restrictions and economic conditions. The company’s adjusted debt-to-total-capital ratio was modestly below its 35%–45% target range. Actual results may be affected by vehicle-price changes, CAF credit losses, funding-market access, and execution of omni-channel initiatives.
- CAF’s loss allowance depends on uncertain economic forecasts, including unemployment and used-vehicle prices. Delinquencies were 2.93% of managed receivables, down from 3.83% at the comparable prior-year date. Management noted payment extensions had declined after an April peak.
- CarMax reported no material adverse effect expected from the disclosed litigation. A California wage-and-hour settlement was approved in December 2020 for an immaterial, fully accrued amount; the Sabanovich case was not included. The company also disclosed a settled hazardous-waste matter with an immaterial payment.
Investor verification points
- Track comparable-store sales and demand after the late-quarter slowdown, including the impact of COVID-19 restrictions.
- Assess CAF allowance adequacy and future charge-offs as pandemic-related economic forecasts evolve.
- Review used-vehicle acquisition costs, gross profit per unit, and the results of fourth-quarter pricing and marketing tests.
- Distinguish unrestricted cash from restricted cash and non-recourse CAF debt when evaluating liquidity and leverage.
- Separate recurring earnings from the $40.3 million Takata settlement recovery and monitor planned advertising, store expansion and share repurchases.