CarMax, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended August 31, 2010 (CarMax fiscal 2011 second quarter), with six-month results compared with the periods ended August 31, 2009. CarMax operated 103 used-car superstores in 49 markets and six new-car franchises.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales and operating revenues | $2.342 billion | $2.077 billion | $4.604 billion | $3.911 billion |
| Gross profit | $349.1 million | $314.5 million | $682.7 million | $590.8 million |
| Gross margin | 14.9% | 15.1% | 14.8% | 15.1% |
| CarMax Auto Finance income | $52.6 million | $72.1 million | $110.1 million | $50.5 million |
| Net earnings | $107.9 million | $103.0 million | $209.0 million | $131.7 million |
| Diluted earnings per share | $0.48 | $0.46 | $0.92 | $0.59 |
- Q2 used-vehicle revenue rose 11%; used retail units increased 5%, comparable-store units 4%, and average selling price 5%. Wholesale revenue increased 39%, on 20% more units and a 17% higher average price.
- Q2 SG&A rose 3% to $225.2 million, while the SG&A-to-revenue ratio improved to 9.6% from 10.5%. Earnings growth was moderated by lower CAF income. Prior-year Q2 CAF income included $36.2 million of favorable adjustments on loans from earlier periods.
- Six-month operating cash flow was a use of $9.5 million, compared with a $51.3 million use a year earlier. A $228.9 million increase in auto loan receivables was the principal cash use; excluding that increase, the company reported $219.4 million generated by operating activities. Investing activities used $20.8 million; financing activities provided $67.2 million.
- At August 31, cash and cash equivalents were $55.2 million; restricted collections cash was $166.6 million and is not freely available. Total assets were $6.58 billion. Inventory was $929.2 million.
- Reported total debt was $4.04 billion, predominantly $4.01 billion of non-recourse notes associated with securitized auto loans. Conventional revolving-credit borrowings were $0.6 million and capital lease obligations were $29.4 million. The company reported $699.4 million of additional capacity on its $700 million inventory-secured revolver and $882 million of unused warehouse capacity.
Material changes versus the prior comparable period
- Revenue grew 13% in Q2 and 18% in the first half. First-half net earnings increased substantially, but comparisons of CAF and balance-sheet amounts are affected by a change in securitization accounting.
- Effective March 1, 2010, new accounting rules required CarMax to consolidate auto loan receivables and related non-recourse borrowings previously treated largely as sales/off-balance-sheet items. The change increased reported assets and liabilities and changed CAF income: it now primarily reflects loan interest and fees less funding costs, direct expenses, and credit-loss provisions, rather than securitization gains.
- Q2 CAF income declined from the prior year, which included the $36.2 million of favorable prior-period loan adjustments. First-half CAF income increased year over year, with the filing citing improved funding spreads and favorable credit-loss experience.
- Annualized net credit losses declined to 1.22% in Q2 from 1.85%; accounts 31 or more days past due were 3.40% of managed receivables, versus 3.79% a year earlier. The allowance for loan losses was $46.6 million, or 1.1% of ending managed receivables.
Outlook, commentary, risks, and contingencies
- Management cited improved sales conversion and increased customer credit availability, while noting continued weak economic conditions, high unemployment, and relatively low consumer confidence. Strong used-vehicle wholesale values raised both acquisition costs and selling prices.
- CarMax resumed store growth, opening three stores in the first half. It planned five openings in fiscal 2012 and five to ten in fiscal 2013. Estimated fiscal 2011 capital expenditures were approximately $70 million. The company said it would not provide or update CAF income guidance.
- Warehouse capacity renewals remain a funding risk: $800 million of facility capacity was scheduled to expire in February 2011 and another $800 million in August 2011. Management expected to obtain funding, but said pricing, structure, capacity, and timing could be materially affected by credit-market conditions. The company was in compliance with warehouse financial covenants and receivables performance triggers at quarter-end.
- Other cited risks include consumer-credit availability, vehicle values and inventory supply, competition, real estate and execution of store growth, seasonal sales patterns, information-system or data-security failures, regulatory matters, and litigation. A California wage-and-hour class action remained pending; CarMax said it could not reasonably estimate a possible loss. Management did not expect other ordinary-course legal matters to materially affect results.
Important facts for investors to verify
- Separate the impact of the securitization accounting change from underlying CAF performance and confirm how it affects comparisons, leverage measures, and cash-flow interpretation.
- Track auto-loan credit quality, including delinquencies, charge-offs, recoveries, and whether the $46.6 million allowance remains adequate as the portfolio grows.
- Monitor warehouse-facility renewals, available capacity, funding costs, and any changes to securitization covenants or performance triggers.
- Assess whether higher wholesale vehicle values support retail and wholesale gross profit without materially increasing inventory costs or reducing margins.
- Follow delivery of planned store openings and approximately $70 million of fiscal 2011 capital spending, and any developments in the California class action.