CarMax, Inc. — Form 10-Q Summary
Reporting period: Three months ended May 31, 2015, the first quarter of fiscal 2016. Comparisons are with the three months ended May 31, 2014, unless otherwise noted. CarMax operates used- and new-vehicle sales, wholesale auctions, related services, and CarMax Auto Finance (CAF).
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales and operating revenues | $4.015 billion | $3.750 billion | +7.1% |
| Gross profit | $543.8 million | $501.7 million | +8.4% |
| Gross margin | 13.5% | 13.4% | +0.1 percentage point |
| Earnings before income taxes | $296.0 million | $275.0 million | +7.6% |
| Net earnings | $182.0 million | $169.7 million | +7.3% |
| Diluted earnings per share | $0.86 | $0.76 | +13.2% |
| SG&A expenses | $349.8 million | $313.4 million | +11.6% |
| Net cash from operating activities | $117.6 million | $(209.1) million | Improved |
Net margin was 4.5% in both periods. Diluted EPS growth benefited in part from share repurchases, which reduced weighted-average diluted shares to 211.7 million from 223.6 million. CarMax repurchased 1.78 million shares for $117.6 million during the quarter.
Used-vehicle sales were $3.293 billion, up 7.6%; units rose 9.3%, including 4.9% comparable-store growth, while average selling price fell 1.6%. Wholesale sales increased 5.8% and units increased 4.7%. CAF income rose 15.3% to $109.1 million, supported by growth in average managed receivables and favorable credit-loss experience. Average managed receivables increased 17.2% to $8.66 billion; the CAF interest margin declined to 6.3% from 6.7%.
Cash, liquidity and debt
- Cash and cash equivalents were $351.7 million at May 31, versus $27.6 million at February 28, 2015. Separately, $328.1 million of restricted cash collections was held for securitization investors.
- Operating cash flow was $117.6 million; management’s non-GAAP adjusted operating cash flow, adding $391.5 million of net non-recourse note issuances, was $509.1 million. The prior-year adjusted figure was $169.4 million. The adjustment reflects securitized loan funding and is not a GAAP cash-flow measure.
- Investing activities used $97.1 million, including $59.4 million of capital expenditures. Financing activities provided $303.6 million, including net non-recourse note issuances and share repurchases.
- Total debt was $9.486 billion, versus $9.109 billion at February 28. This includes $8.862 billion of non-recourse notes tied to CAF receivables, $300 million of term debt, and $323.1 million of finance and capital lease obligations. Non-recourse debt is primarily secured by the related receivables and has no general recourse to CarMax assets beyond specified securitization assets.
- The $1.0 billion unsecured revolving credit facility had $999.2 million of unused capacity and expires in August 2016. Warehouse facilities had $1.21 billion of unused capacity; $800 million of facility capacity was scheduled to expire in July 2015 and another $1.5 billion in February 2016. The company reported compliance with applicable covenants and securitization performance triggers.
Outlook, risks and unusual items
- Management identified unit growth from new and comparable stores as a long-term earnings driver. It planned 14 store openings and one relocation in fiscal 2016, 13–16 openings in each of the following two fiscal years, and approximately $360 million of fiscal 2016 capital expenditures. Store schedules may shift.
- Management expected adjusted operating cash flow and funding arrangements to be sufficient for CAF, capital expenditures, repurchases and working capital, but cautioned that credit-market conditions could raise funding costs or constrain timing and capacity.
- CAF’s interest spread had compressed over recent years. Management noted that higher funding rates or competitive pressure on customer rates could further compress margins. The allowance for loan losses was $83.7 million, or 0.94% of managed receivables, versus 1.00% a year earlier; past-due receivables were 2.65%, versus 2.51% a year earlier.
- Key disclosed risks include competition, economic and vehicle-price changes, access to inventory and consumer financing, securitization-market availability and cost, store expansion and real estate, seasonality, systems and data security, litigation, and geographic concentration. The company reported no material changes to risk factors or market risk since its prior annual report.
- A California employment class-action matter remained unresolved; CarMax said it could not reasonably estimate a possible loss. Other ordinary-course legal matters were not expected to have a material adverse effect. No material environmental commitments were reported.
- Interest expense was lower partly because $2.8 million of interest was capitalized during the quarter; none was capitalized in the prior-year quarter. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether used-unit growth and comparable-store momentum continue, and how lower average selling prices affect unit economics.
- Whether CAF credit performance remains favorable as the portfolio grows, including trends in delinquencies, recoveries, provisions and allowance coverage.
- Renewal terms, pricing and capacity for warehouse facilities expiring in July 2015 and February 2016, and the availability and cost of securitization funding.
- Progress on planned store openings and the approximately $360 million capital-spending plan.
- Developments in the California litigation, for which the filing provides no clear estimate of potential loss.