CarMax, Inc. — Form 10-Q Summary
Reporting period: Quarter ended May 31, 2012, CarMax’s first quarter of fiscal 2013. Comparisons are with the three months ended May 31, 2011, unless noted. The company is the largest U.S. used-vehicle retailer and also earns income from auto financing, wholesale auctions, and related products and services.
Financial performance
| Metric | Quarter ended May 31, 2012 | Prior-year quarter |
|---|---|---|
| Net sales and operating revenues | $2.774 billion | $2.679 billion |
| Gross profit / gross margin | $381.9 million / 13.8% | $383.1 million / 14.3% |
| CarMax Auto Finance income | $75.2 million | $69.7 million |
| SG&A expenses | $253.6 million | $241.7 million |
| Earnings before income taxes | $195.6 million | $202.7 million |
| Net earnings / diluted EPS | $120.7 million / $0.52 | $125.5 million / $0.54 |
| Operating cash flow | $(115.5) million | $24.9 million |
| Capital expenditures | $47.6 million | $31.0 million |
- Revenue rose about 4%, while net earnings declined about 4%. Used-vehicle revenue increased 6% as units sold rose 3% and average selling price rose 2%; comparable-store used units were flat.
- Used-vehicle gross profit increased to $249.4 million, but wholesale gross profit fell to $81.9 million and other gross profit to $49.1 million. Total gross profit per retail unit declined to $3,338 from $3,453.
- CAF average managed receivables increased 16% to $5.075 billion. CAF’s total interest margin was 7.5% of average managed receivables versus 7.2%; income growth also reflected lower funding costs. Favorable loan-loss experience contributed $0.01 per share this quarter, versus $0.03 in the prior-year quarter.
Financial position and liquidity
- At May 31, cash and cash equivalents were $456.4 million; restricted cash from auto-loan collections was another $182.3 million and is reserved for securitization investors. Inventory was $1.210 billion and net auto loan receivables were $5.132 billion.
- Total debt was $5.190 billion, including $4.825 billion of non-recourse notes and $364.4 million of finance and capital lease obligations. Non-recourse notes are principally secured by securitized receivables. Total debt was $5.053 billion at February 29, 2012.
- The company had $0.8 million outstanding under its $700 million revolving credit facility, with the remaining capacity available; it reported compliance with facility and lease covenants. Warehouse facilities had $349 million of unused capacity at quarter-end.
- Operating cash use included a $181.5 million increase in auto loan receivables and a $117.6 million increase in inventory. Financing activities provided $149.7 million, primarily from net issuance of non-recourse notes.
Material changes, outlook, and risks
- Used retail units increased 3% overall, largely from newer stores; comparable-store used units were flat. Wholesale units declined 2%, partly due to one fewer Tuesday auction date. New-vehicle revenue fell 10%, including the effect of a previously terminated Chrysler franchise.
- SG&A rose 5%, reflecting seven additional stores versus the prior-year quarter and higher growth-related costs. SG&A per retail unit increased to $2,217 from $2,178.
- Management planned 10 store openings in fiscal 2013 and 10 to 15 annually in each of the following three fiscal years; estimated fiscal 2013 capital expenditures were approximately $280 million. No earnings guidance was provided in the filing.
- After quarter-end, CarMax completed a $940 million term securitization of auto loan receivables. Warehouse facilities totaling $800 million each were scheduled to expire in August 2012 and February 2013. Management cautioned that renewal terms, capacity, and funding costs depend on credit-market conditions.
- Management expected loan-loss allowance rates to rise as higher-credit-risk loans season. Net credit losses were 0.46% of average managed receivables, up from 0.32%; the allowance was $46.6 million, or 0.9% of ending managed receivables. Management also noted that rising rates could cause CAF funding costs to increase faster than consumer rates.
- Risks include economic and vehicle-price changes, vehicle sourcing, consumer credit availability, securitization-market access and cost, competition, expansion execution, systems and data security, regulation, seasonality, and litigation. A California employment class action remained pending; the company could not reasonably estimate potential loss. It said other proceedings were not expected to have a material effect.
Other notable matters
Prior-year interim financial statements were revised to correct sale-leaseback accounting. Management said the correction did not materially affect the financial statements; the prior-year comparison reflects the revised amounts. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Track comparable-store used-unit sales, gross profit per unit, and the effect of higher used-vehicle acquisition costs and constrained late-model supply.
- Monitor credit quality as CAF retains more loans, including allowance coverage, delinquencies, net losses, and the seasoning of higher-risk originations.
- Verify warehouse facility renewals, post-quarter securitization funding, available capacity, and resulting financing costs.
- Assess whether operating cash use, inventory growth, and planned capital expenditures remain consistent with store expansion and liquidity needs.
- Review the status and potential exposure of the California litigation and confirm the impact, if any, of the sale-leaseback accounting correction.