CarMax, Inc. — Form 10-K Summary
Business context and reporting period
This annual report covers fiscal 2019, the year ended February 28, 2019; it is not a standalone calendar 2018 Q4 filing. The filing also provides fourth-quarter fiscal 2019 results. CarMax operates used-vehicle retail, wholesale auctions and CarMax Auto Finance (CAF). It sold 748,961 used vehicles during the year and ended the period with 203 stores in 100 U.S. television markets.
Financial results and key metrics
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales and operating revenues | $18.173 billion | $17.120 billion | +6.1% |
| Gross profit | $2.481 billion | $2.329 billion | +6.5% |
| CAF income | $438.7 million | $421.2 million | +4.2% |
| SG&A | $1.730 billion | $1.617 billion | +7.0% |
| Net earnings | $842.4 million | $664.1 million | +26.8% |
| Diluted EPS | $4.79 | $3.60 | +33.1% |
| Used units sold | 748,961 | 721,512 | +3.8% |
| Comparable-store used unit sales | +0.3% | +2.0% | Slower growth |
Gross margin was 13.6% of revenue, versus 13.6% in FY2018; net earnings were 4.6% of revenue, versus 3.9%. Used gross profit per unit was $2,175, nearly unchanged, while SG&A per used unit rose 3.1% to $2,310. The effective tax rate fell to 24.3% from 37.6%, primarily reflecting the lower federal statutory rate under the 2017 Tax Act; FY2018 included an $11.9 million net tax expense from that law.
Fourth-quarter fiscal 2019 revenue was $4.319 billion, gross profit was $599.4 million, CAF income was $103.7 million, net earnings were $192.6 million and diluted EPS was $1.13. Corresponding FY2018 fourth-quarter figures were $4.084 billion, $536.7 million, $101.1 million, $122.1 million and $0.67. The prior-year quarter included the $11.9 million net Tax Act expense and an $8.0 million pretax discretionary associate bonus.
Cash provided by operating activities was $163.0 million, compared with cash used of $80.6 million in FY2018. The company’s non-GAAP adjusted operating cash flow, which adds net issuances of non-recourse notes payable, was $1.054 billion versus $821.6 million. Capital expenditures were $304.6 million. Cash and cash equivalents were $46.9 million; an additional $440.7 million of restricted cash consisted of loan collections reserved for non-recourse noteholders.
Total debt was $14.229 billion, including $12.535 billion of non-recourse notes secured by CAF auto loan receivables. Other debt and financing obligations included $366.5 million drawn on a $1.20 billion revolving facility, a $300 million term loan, $500 million of senior notes and $527.4 million of financing and capital lease obligations. CAF managed receivables were $12.510 billion; net auto loan receivables were $12.428 billion. The allowance for loan losses was $138.2 million, or 1.10% of ending managed receivables. Past-due accounts increased to 3.61% from 3.38%; net credit losses were 1.19% of average managed receivables, compared with 1.18%.
Material changes versus the prior comparable period
- Used vehicle revenue increased 5.4%, driven mainly by 3.8% unit growth, but comparable-store unit growth slowed to 0.3% from 2.0%. Management cited lower store traffic, higher vehicle acquisition prices, competition and delayed February tax refunds; website traffic grew 16%.
- Wholesale vehicle revenue rose 9.7%, with units up 9.5%, reflecting store growth and stronger appraisal activity. Gross profit per used and wholesale unit remained nearly flat.
- CAF income increased, but total interest margin declined to 5.6% from 5.7% as funding costs and consumer-rate competition compressed spreads. Delinquencies increased, while net credit losses remained broadly stable.
- Repurchases totaled $904.7 million, or 13.6 million shares, versus $579.6 million in FY2018. Shares outstanding declined; no common dividends were paid, and none were planned for the foreseeable future.
Outlook, risks, contingencies and unusual items
- Management planned 13 store openings in FY2020 and a similar number in FY2021, with approximately $350 million of FY2020 capital expenditures. It expected the new omni-channel experience to reach the majority of customers by the end of FY2020; the rollout began in Atlanta in December 2018.
- Management said comparable-store used unit growth of 5%–8% would be needed to leverage SG&A amid higher FY2020 initiative spending. It expects spending growth on strategic initiatives to slow in FY2021 and taper afterward. This is not formal sales or EPS guidance.
- Key risks include intense retail and online competition, vehicle sourcing and depreciation, economic and credit conditions, CAF credit losses and funding access, interest-rate pressure, execution of omni-channel and store expansion, cybersecurity, regulation, recalls, weather and geographic concentration.
- Four California wage-and-hour proceedings remained pending; the company could not reasonably estimate potential losses. It also could not estimate losses relating to an inquiry by California municipal district attorneys into hazardous-waste handling at certain stores. Management said other proceedings were not expected to materially affect results.
- FY2019 adopted the new revenue-recognition standard. The transition increased opening retained earnings by $12.9 million after tax; FY2019 included $8.4 million of related ESP profit-sharing revenue. Management expected the new lease standard to add about $450 million to both assets and liabilities at adoption, plus an estimated $240 million remeasurement increase in the first quarter of FY2020, without a material earnings-pattern or covenant effect. The forthcoming expected-credit-loss standard was expected to materially affect the loan-loss allowance calculation.
- The auditor issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective. The filing states that the company was in compliance with financial covenants and securitization performance triggers at year-end.
Important facts for investors to verify
- Whether FY2020 comparable-store sales and conversion improve enough to offset rising SG&A and deliver the stated 5%–8% growth range for expense leverage.
- CAF credit trends, particularly rising past-due balances, charge-offs, allowance adequacy and the impact of spread compression and funding costs.
- Access, capacity and cost of warehouse facilities and securitization funding, and the distinction between non-recourse CAF debt and corporate debt.
- Execution, cost and customer adoption of the omni-channel rollout, planned store openings and approximately $350 million capital budget.
- Outcomes of the California employment and hazardous-waste matters, for which potential loss estimates were not provided.
- Effects of the new lease and expected-credit-loss accounting standards, and the extent to which the FY2019 earnings increase reflects the lower tax rate and share repurchases.