Should You Buy KMX?

 

CarMax, Inc. (NYSE:KMX), the nation’s largest and most profitable retailer of used cars, today reported results for the fourth quarter and fiscal year ended February 28, 2021.

Fourth Quarter Highlights and Recent Developments:

   -- Net sales and operating revenues increased 4.1% to $5.16 billion when 
      compared with the prior year fourth quarter. Net earnings decreased 2.3% 
      to $209.9 million and net earnings per diluted share decreased 2.3% to 
      $1.27 compared with the prior year quarter. 
 
   -- Total used unit sales and unit sales in comparable stores decreased 0.9% 
      and 2.3%, respectively, and wholesale units decreased 1.2% when compared 
      with the prior year quarter. Total used, comparable store unit, and 
      wholesale unit sales were positive for the quarter when excluding the 
      impact of calendar shifts. Sales impacted by the delay in tax refunds and 
      severe weather. 
 
          -- On a two-year stack, total used and comparable store unit sales 
             were up 13.8% and 8.7%, respectively. 
 
   -- Robust used unit sales growth in March 2021 when compared with 
      COVID-impacted March 2020 and a record March 2019. Increase supported by 
      the initial distribution of tax refund and stimulus checks, improved 
      weather, and favorable customer response to digital enhancements and 
      strategic initiatives. 
 
   -- CarMax Auto Finance (CAF) income increased 68.2% due to the combined 
      effects of favorable loan loss performance, higher net interest margin 
      and an increase in average managed receivables. 
 
   -- Three-quarters of our customers advanced their transaction digitally, 
      with approximately 25% of our customers eligible to buy a vehicle online 
      independently. 
 
   -- Completed nationwide rollout of online instant appraisal offer on 
      carmax.com, positioning us to become the largest online buyer of used 
      autos from consumers and strengthening our leadership as the largest used 
      auto buyer from consumers. 
 
   -- Signed a definitive agreement to acquire Edmunds, further strengthening 
      our role and reach across the used auto ecosystem while adding 
      exceptional technology and creative talent.

Edmunds Acquisition:

In a separate release issued today, we announced that we have signed a definitive agreement to acquire Edmunds, one of the most well established and trusted online guides for automotive information and a recognized industry leader in digital car shopping innovations. With this acquisition, CarMax will enhance its digital capabilities and further strengthen its role and reach across the used auto ecosystem while adding exceptional technology and creative talent. Edmunds will continue to operate independently and will remain focused on delivering confidence to consumers and excellent value to its dealer and OEM clients. Additionally, this acquisition will allow both businesses to accelerate their respective capabilities to deliver an enhanced digital experience to their customers by leveraging Edmunds’ compelling content and technology, our unparalleled national scale and infrastructure, and the combined talent of both businesses. A copy of the news release is available on our investor relations website at investors.carmax.com under the News Releases tab.

Fourth Quarter Business Performance Review:

Sales. Total used vehicle unit sales decreased 0.9% while comparable store used unit sales decreased 2.3% compared with increases of 14.7% and 11.0%, respectively, for the prior year’s fourth quarter. Excluding the added benefit of leap day in the prior year quarter, both total used unit and comparable store sales would have increased slightly year-over-year. For the first part of the quarter, retail sales were pressured due to the surge in COVID-19 cases, resulting in the tightening of occupancy restrictions and shelter-in-place orders. Sales then began to accelerate towards the end of December and into January as we launched our new marketing campaign, expanded our pricing tests, introduced new customer offerings and a second round of stimulus checks was issued. This trend continued until the middle of February when severe winter weather across a large portion of the U.S., delays in tax refunds relative to last year’s timing, and a lower inventory position due to COVID- and weather-related production constraints, negatively impacted retail sales. Total used vehicle revenues increased 1.8% due primarily to higher average retail selling prices versus the prior year quarter.

Total wholesale vehicle unit sales decreased 1.2% compared with the fourth quarter of fiscal 2020. The decrease in units was due to one less auction day in the quarter when compared with the prior year, the delays in tax refunds, severe weather and lower store traffic. This was partially offset by a strong fourth quarter appraisal buy rate.

Other sales and revenues decreased 1.9% to $157.4 million when compared with the fourth quarter of fiscal 2020. This decrease was mostly due to the divestiture of a new car franchise, partially offset by the 72.9% improvement in net third-party finance fees due to the favorable renegotiation of fee structures with Tier 2 and Tier 3 third-party finance providers.

Gross Profit. Total gross profit decreased 4.7% versus last year’s fourth quarter to $641.4 million. Used vehicle gross profit declined 5.8%, reflecting the decrease in total used unit sales and the impact of price reduction tests rolled out in select markets. Used vehicle gross profit per unit decreased to $2,086 compared with $2,195 in the prior year’s quarter and was consistent with our expectations. Wholesale vehicle gross profit decreased 1.5% versus the prior year’s quarter, reflecting the loss of an auction day when compared with the prior year. Wholesale vehicle gross profit of $990 per unit was in-line with the prior year quarter. Other gross profit decreased 3.2%, reflecting a decline in service profits, partially offset by changes in net third-party finance provider fees and growth in EPP revenues, which was driven by favorable adjustments to cancellation reserves and an increase in profit sharing revenue.

SG&A. SG&A expenses increased 14.7% to $556.1 million when compared with the fourth quarter of fiscal 2020. Factors contributing to the increase include a $32.7 million increase in stock-based compensation expense and a $23.0 million increase in advertising expense. The growth in stock-based compensation expense was primarily driven by the 27.8% increase in our stock price during the current quarter versus the 10.2% decrease during the prior year quarter. Advertising expense increased due to the heavier support for our new advertising campaign launched at the end of December. SG&A per used unit was $2,713, up $368 year-over-year, largely reflecting the deleverage associated with the decline in comparable store used unit sales, the $160 per unit increase in stock-based compensation expense, the $115 per unit increase primarily in awareness advertising expense and the continued spending to advance our technology platforms and strategic support initiatives. We expect marketing spend in fiscal 2022 to remain elevated with similar per unit expenses in the second half of fiscal 2021.

CarMax Auto Finance.(1) CAF income increased 68.2% to $188.2 million when compared with last year’s fourth quarter, reflecting a decrease in the provision for loan losses to $4.6 million from $53.0 million in the prior year quarter, plus an increase in net interest margin and average managed receivables. This lower provision was a function of the observed favorable loan loss experience within the quarter compared with expectations set at the end of the third quarter, as well as our outlook on future losses. As of February 28, 2021, the allowance for loan losses of $411.1 million was 2.97% of ending managed receivables, down from 3.17% as of November 30, 2020.

CAF’s total interest margin percentage, which represents the spread between interest and fees charged to consumers and our funding costs, improved to 6.4% of average managed receivables from 5.8% in the prior year’s fourth quarter, primarily due to lower funding costs. After the effect of 3-day payoffs, CAF financed 43.5% of units sold in the current quarter, in-line with the prior year’s fourth quarter.

CAF will increase its targeted Tier 3 share from 5% to 10% with the anticipation of reaching this level by the end of the first quarter. We will continue to evaluate the lending environment and will consider adjusting the target if and when we believe changes are sustainable and in the best interest of our long-term business goals.

2021-04-01 10:50:00 GMT CarMax Reports Fourth Quarter and Fiscal Year -2- Share Repurchase Activity. We repurchased 0.7 million shares of common stock for $66.3 million pursuant to our share repurchase program during the fourth quarter of fiscal 2021. As of February 28, 2021, we had $1.34 billion remaining available for repurchase under the outstanding authorization.

Fiscal 2022 Capital Spending Plan. We estimate capital expenditures will increase to approximately $350 million in fiscal 2022, up from $164.5 million in fiscal 2021 and $331.9 million in fiscal 2020. The increase in planned capital spending in fiscal 2022 reflects several factors, including continued spending on technology and the opening of 10 new locations.

 
(1)    Although CAF benefits from certain indirect overhead expenditures, we 
       have not allocated indirect costs to CAF to avoid making subjective 
       allocation decisions. 

Supplemental Financial Information

Amounts and percentage calculations may not total due to rounding.

Sales Components

 
                Three Months Ended February 28 
                             or 29                Years Ended February 28 or 29 
(In millions)     2021      2020      Change       2021       2020       Change 
--------------  --------  --------  -----------  ---------  ---------  ---------- 
Used vehicle 
 sales          $4,328.4  $4,253.7     1.8%      $15,713.6  $17,169.5   (8.5)% 
Wholesale 
 vehicle 
 sales             678.5     548.3    23.7%        2,668.8    2,500.0     6.7% 
Other sales 
and revenues: 
  Extended 
   protection 
   plan 
   revenues        118.3     115.7     2.3%          412.8      437.4   (5.6)% 
  Third-party 
   finance 
   fees, net       (2.9)    (10.6)    72.9%         (39.6)     (45.8)    13.6% 
  Other             42.0      55.4  (24.2)%          194.6      258.9  (24.8)% 
--------------  --------  --------  ------       ---------  ---------  ------ 
Total other 
 sales and 
 revenues          157.4     160.5   (1.9)%          567.8      650.5  (12.7)% 
--------------  --------  --------  ------       ---------  ---------  ------ 
Total net 
 sales and 
 operating 
 revenues       $5,164.3  $4,962.5     4.1%      $18,950.1  $20,320.0   (6.7)% 
--------------   -------   -------  ------        --------   --------  ------ 

Unit Sales

 
            Three Months Ended February   Years Ended February 28 or 
                      28 or 29                        29 
             2021     2020      Change     2021     2020     Change 
----------  -------  -------  ----------  -------  -------  --------- 
Used 
 vehicles   204,928  206,718  (0.9)%      751,862  832,640  (9.7)% 
Wholesale 
 vehicles   103,676  104,900  (1.2)%      426,268  466,177  (8.6)% 

Average Selling Prices

 
            Three Months Ended February  Years Ended February 28 or 
                     28 or 29                        29 
             2021     2020     Change     2021     2020     Change 
----------  -------  -------  ---------  -------  -------  -------- 
Used 
 vehicles   $20,980  $20,380   2.9%      $20,690  $20,418   1.3% 
Wholesale 
 vehicles   $ 6,207  $ 4,954  25.3%      $ 5,957  $ 5,089  17.1% 

Vehicle Sales Changes

 
                             Three Months Ended           Years Ended 
                              February 28 or 29         February 28 or 29 
                              2021         2020         2021         2020 
------------------------  ------------  ----------  ------------  ---------- 
Used vehicle units          (0.9)%        14.7%       (9.7)%        11.2% 
Used vehicle revenues         1.8%        17.2%       (8.5)%        13.2% 
 
Wholesale vehicle units     (1.2)%         2.0%       (8.6)%         4.2% 
Wholesale vehicle 
 revenues                    23.7%         0.8%         6.7%         4.5% 

Comparable Store Used Vehicle Sales Changes (1)

 
                           Three Months Ended           Years Ended 
                            February 28 or 29         February 28 or 29 
                            2021         2020          2021         2020 
----------------------  ------------  ----------  --------------  -------- 
Used vehicle units        (2.3)%        11.0%        (11.7)%       7.7% 
Used vehicle revenues       0.6%        13.4%        (10.5)%       9.7% 
 
 
(1)    Stores are added to the comparable store base beginning in their 
       fourteenth full month of operation. Comparable store calculations 
       include results for a set of stores that were included in our 
       comparable store base in both the current and corresponding prior year 
       periods. 

Used Vehicle Financing Penetration by Channel (Before the Impact of 3-day Payoffs) (1)

 
                Three Months Ended           Years Ended 
                 February 28 or 29         February 28 or 29 
                 2021         2020         2021         2020 
-----------  ------------  ----------  ------------  ---------- 
CAF (2)         47.0%        46.7%        45.5%        46.7% 
Tier 2 (3)      21.0%        20.5%        22.3%        20.2% 
Tier 3 (4)       9.5%        10.0%        10.9%        10.2% 
Other (5)       22.5%        22.8%        21.3%        22.9% 
-----------  -------       ------      -------       ------ 
Total          100.0%       100.0%       100.0%       100.0% 
-----------  -------       ------      -------       ------ 
 
 
(1)    Calculated as used vehicle units financed for respective channel as a 
       percentage of total used units sold. 
(2)    Includes CAF's Tier 3 loan originations, which represent less than 1% 
       of total used units sold. 
(3)    Third-party finance providers who generally pay us a fee or to whom no 
       fee is paid. 
(4)    Third-party finance providers to whom we pay a fee. 
(5)    Represents customers arranging their own financing and customers that 
       do not require financing. 

Selected Operating Ratios

 
                  Three Months Ended February 28 
                              or 29                   Years Ended February 28 or 29 
(In millions)      2021    % (1)    2020    % (1)    2021     % (1)    2020      % (1) 
---------------  --------  -----  --------  -----  ---------  -----  ---------  ------- 
Net sales and 
 operating 
 revenues        $5,164.3  100.0  $4,962.5  100.0  $18,950.1  100.0  $20,320.0  100.0 
Gross profit     $  641.4   12.4  $  672.9   13.6  $ 2,379.1   12.6  $ 2,722.3   13.4 
CarMax Auto 
 Finance 
 income          $  188.2    3.6  $  111.9    2.3  $   562.8    3.0  $   456.0    2.2 
Selling, 
 general, and 
 administrative 
 expenses        $  556.1   10.8  $  484.7    9.8  $ 1,898.8   10.0  $ 1,940.1    9.5 
Interest 
 expense         $   20.3    0.4  $   22.3    0.4  $    86.2    0.5  $    83.0    0.4 
Earnings before 
 income taxes    $  262.2    5.1  $  276.6    5.6  $   965.3    5.1  $ 1,161.0    5.7 
Net earnings     $  209.9    4.1  $  214.9    4.3  $   746.9    3.9  $   888.4    4.4 
 
 
(1)    Calculated as a percentage of net sales and operating revenues. 

Gross Profit

 
                    Three Months Ended 
                    February 28 or 29       Years Ended February 28 or 29 
(In millions)    2021    2020     Change      2021      2020      Change 
--------------  ------  ------  ----------  --------  --------  ---------- 
Used vehicle 
 gross profit   $427.6  $453.7  (5.8)%      $1,588.9  $1,820.1  (12.7)% 
Wholesale 
 vehicle gross 
 profit          102.6   104.2  (1.5)%         423.3     454.4   (6.8)% 
Other gross 
 profit          111.2   115.0  (3.2)%         366.9     447.8  (18.1)% 
--------------  ------  ------  -----       --------  --------  ------ 
Total           $641.4  $672.9  (4.7)%      $2,379.1  $2,722.3  (12.6)% 
--------------   -----   -----  -----        -------   -------  ------ 

Gross Profit per Unit

 
             Three Months Ended February 28 
                         or 29                  Years Ended February 28 or 29 
                 2021             2020             2021              2020 
----------  ---------------  ---------------  ---------------  ----------------- 
              $ per            $ per            $ per            $ per 
             unit(1)   %(2)   unit(1)   %(2)   unit(1)   %(2)   unit(1)     %(2) 
----------  ---------  ----  ---------  ----  ---------  ----  ---------  ------ 
Used 
 vehicle 
 gross 
 profit     $   2,086   9.9  $   2,195  10.7  $   2,113  10.1  $   2,186  10.6 
Wholesale 
 vehicle 
 gross 
 profit     $     990  15.1  $     993  19.0  $     993  15.9  $     975  18.2 
Other 
 gross 
 profit     $     543  70.6  $     556  71.6  $     488  64.6  $     538  68.9 
Total 
 gross 
 profit     $   3,130  12.4  $   3,255  13.6  $   3,164  12.6  $   3,270  13.4 
 
 
(1)    Calculated as category gross profit divided by its respective units 
       sold, except the other and total categories, which are divided by total 
       used units sold. 
(2)    Calculated as a percentage of its respective sales or revenue. 

SG&A Expenses

 
                  Three Months Ended February 
                           28 or 29              Years Ended February 28 or 29 
(In millions)     2021    2020      Change        2021      2020       Change 
---------------  ------  ------  -------------  --------  --------  ------------ 
Compensation 
and benefits: 
  Compensation 
   and 
   benefits, 
   excluding 
   share-based 
   compensation 
   expense       $248.4  $238.5      4.2%       $  909.8  $  913.2     (0.4)% 
Share-based 
 compensation 
 expense           43.1    10.4    314.6%          111.7      99.4      12.4% 
---------------  ------  ------  -------   ---  --------  --------  -------- 
Total 
 compensation 
 and benefits 
 (1)             $291.5  $248.9     17.1%       $1,021.5  $1,012.6       0.9% 
Store occupancy 
 costs            101.6   102.1    (0.5)%          399.1     393.4       1.5% 
Advertising 
 expense           73.7    50.7     45.4%          217.5     191.3      13.7% 
Other overhead 
 costs (2)         89.3    83.0      7.5%          260.7     342.8    (24.0)% 
---------------  ------  ------  -------   ---  --------  --------  -------- 
Total SG&A

2021-04-01 10:50:00 GMT CarMax Reports Fourth Quarter and Fiscal Year -3-

 expenses        $556.1  $484.7     14.7%       $1,898.8  $1,940.1     (2.1)% 
---------------   -----   -----  -------   ---   -------   -------  -------- 
SG&A per used 
 unit            $2,713  $2,345  $   368        $  2,525  $  2,330  $    195 
 
 
 
(1)    Excludes compensation and benefits related to reconditioning and 
       vehicle repair service, which are included in cost of sales. 
(2)    Includes IT expenses, non-CAF bad debt, insurance, preopening and 
       relocation costs, charitable contributions, travel and other 
       administrative expenses. 

Components of CAF Income and Other CAF Information

 
                   Three Months Ended February 28 or 29            Years Ended February 28 or 29 
(In millions)       2021       % (1)      2020       % (1)      2021       % (1)      2020        % (1) 
--------------  -------------  -----  -------------  -----  -------------  -----  -------------  ------- 
Interest 
margin: 
  Interest and 
   fee income   $   290.9        8.5  $   283.3        8.4  $ 1,142.0        8.5  $ 1,104.1        8.4 
  Interest 
   expense         (71.1)      (2.1)     (89.7)      (2.7)    (314.1)      (2.3)    (358.1)      (2.7) 
--------------  ---------      -----  ---------      -----  ---------      -----  ---------      ----- 
Total interest 
 margin             219.8        6.4      193.6        5.8      827.9        6.1      746.0        5.7 
  Provision 
   for loan 
   losses           (4.6)      (0.1)     (53.0)      (1.6)    (160.7)      (1.2)    (185.7)      (1.4) 
--------------  ---------      -----  ---------      -----  ---------      -----  ---------      ----- 
Total interest 
 margin after 
 provision for 
 loan losses        215.2        6.3      140.6        4.2      667.2        5.0      560.3        4.3 
 
Total other 
expense                --         --         --         --      (2.2)         --         --         -- 
 
Total direct 
 expenses          (27.0)      (0.8)     (28.7)      (0.9)    (102.2)      (0.8)    (104.3)      (0.8) 
--------------  ---------      -----  ---------      -----  ---------      -----  ---------      ----- 
CarMax Auto 
 Finance 
 income         $   188.2        5.5  $   111.9        3.3  $   562.8        4.2  $   456.0        3.5 
--------------   --------      -----   --------      -----   --------      -----   --------      ----- 
 
Total average 
 managed 
 receivables    $13,708.6             $13,461.9             $13,463.3             $13,105.1 
Net loans 
 originated     $ 1,787.2             $ 1,792.5             $ 6,395.0             $ 7,089.7 
Net 
 penetration 
 rate                43.5%                 43.0%                 42.5%                 42.5% 
Weighted 
 average 
 contract 
 rate                 8.5%                  7.9%                  8.4%                  8.4% 
 
Ending 
 allowance for 
 loan losses    $   411.1             $   157.8             $   411.1             $   157.8 
 
Warehouse 
facility 
information: 
  Ending 
   funded 
   receivables  $ 2,314.1             $ 2,181.7             $ 2,314.1             $ 2,181.7 
  Ending 
   unused 
   capacity     $ 1,610.9             $ 1,318.3             $ 1,610.9             $ 1,318.3 
 
 
 
(1)    Annualized percentage of total average managed receivables. 

Earnings Highlights

 
                          Three Months Ended      Years Ended February 28 or 
                          February 28 or 29                   29 
(In millions except 
per share data)        2021    2020     Change     2021    2020     Change 
--------------------  ------  ------  ----------  ------  ------  ---------- 
Net earnings          $209.9  $214.9  (2.3)%      $746.9  $888.4  (15.9)% 
Diluted weighted 
 average shares 
 outstanding           165.6   165.8  (0.1)%       165.1   166.8   (1.0)% 
Net earnings per 
 diluted share        $ 1.27  $ 1.30  (2.3)%      $ 4.52  $ 5.33  (15.2)%

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