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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