8-K: CarMax Reports Mixed Q1 Results Amidst Economic Headwinds, Expands Securitization Program

CarMax's first quarter results show a decrease in unit sales but strong gross profit per unit, alongside an expansion of their asset-backed securitization program.

Summary

• CarMax reported a 3.1% decrease in retail used unit sales and a 3.8% decrease in comparable store used unit sales compared to the same quarter last year.
• Wholesale unit sales declined by 8.3% due to lower year-over-year seasonal appreciation.
• The company achieved strong gross profit margins in retail, wholesale, and Extended Protection Plans (EPP).
• Gross profit per retail used unit was $2,347, consistent with last year, while gross profit per wholesale unit reached a record $1,064.
• EPP gross profit per retail unit also hit a record of $563.
• CarMax purchased 314,000 vehicles from consumers and dealers, an 8.6% decrease year-over-year, with consumer purchases down 13.7% and dealer purchases up 70.8%.
• Selling, general, and administrative (SG&A) expenses increased by 14.1% to $638.6 million, but excluding a prior year legal settlement, SG&A increased by 3.1%.
• CarMax Auto Finance (CAF) income grew by 7.0% to $147.0 million due to growth in average managed receivables and net interest margin.
• The company launched its first non-prime public asset-backed securitization deal in June 2024.
• Net earnings per diluted share were $0.97, compared to $1.44 in the prior year, which included a $0.28 benefit from a legal settlement.
• CarMax repurchased over $100 million in shares of common stock during the quarter.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While there are positives like strong gross profit per unit and expansion of the securitization program, the overall results show declines in sales and earnings, indicating challenges ahead.

Positives

• CarMax achieved strong gross profit per unit in retail, wholesale, and EPP.
• Wholesale and EPP gross profit per unit reached record levels.
• Vehicle purchases from dealers saw a significant increase of 70.8%.
• CarMax Auto Finance (CAF) income grew by 7.0% due to increased receivables and net interest margin.
• The company is expanding its asset-backed securitization program to include non-prime segments.
• Share repurchases were accelerated with over $100 million in shares bought back.
• CAF's total interest margin percentage increased to 6.2% of average managed receivables.

Negatives

• Retail used unit sales decreased by 3.1% and comparable store used unit sales decreased by 3.8%.
• Wholesale unit sales declined by 8.3% due to lower seasonal appreciation.
• Total vehicle purchases decreased by 8.6% year-over-year.
• Net earnings per diluted share decreased to $0.97 from $1.44 in the prior year.
• SG&A expenses increased by 14.1% year-over-year, although this includes a prior year legal settlement.
• Total gross profit decreased by 3.1% compared to the prior year's first quarter.
• Total retail used vehicle revenues decreased 5.4% compared with the prior year's first quarter.

Risks

• The company faces challenges due to inflationary pressures, higher interest rates, and tightened lending standards.
• Vehicle affordability issues continue to impact unit sales performance.
• There is a risk of increased credit losses for CAF's portfolio of auto loans.
• Changes in the competitive landscape could negatively impact CarMax.
• The company is exposed to risks related to the availability and cost of capital and working capital financing.
• Adverse conditions affecting automotive manufacturers and recalls could impact the business.
• The company is subject to risks related to security breaches and the protection of customer and corporate information.

Future Outlook

CarMax plans to expand its asset-backed securitization program to include both prime and non-prime segments, aiming to drive incremental finance income and support future growth. The company also intends to continue managing costs and leveraging its omni-channel platform.

Management Comments

• I am encouraged by the trends we saw in the first quarter including continued year-over-year price declines, improvements in vehicle value stability, and ongoing growth in upper funnel demand.
• We delivered strong retail, wholesale, and EPP gross profit per unit, sourced a record 35,000 vehicles from dealers, continued to actively manage SG&A, and repurchased over $100 million in shares of common stock.
• As CAF advances to a full-spectrum credit model, we launched our first non-prime asset-backed securitization deal early in the second quarter as part of the expansion of our securitization program that will enable incremental growth in finance income.

Industry Context

The results reflect the broader challenges in the automotive retail industry, including inflationary pressures, higher interest rates, and tightened lending standards. CarMax's expansion into non-prime securitization aligns with a trend of financial institutions seeking to diversify their lending portfolios. The company's focus on cost management and omni-channel capabilities is also consistent with industry-wide efforts to adapt to changing consumer preferences and economic conditions.

Comparison to Industry Standards

• CarMax's retail unit sales decline of 3.1% is similar to other used car retailers facing headwinds from inflation and interest rates, however, some competitors have reported smaller declines.
• The company's gross profit per retail unit of $2,347 is competitive, but some luxury used car retailers may have higher margins.
• The 70.8% increase in dealer purchases is a significant positive, indicating a successful strategy to diversify inventory sources, which is a key focus for many used car retailers.
• CarMax's move into non-prime securitization is a strategic move to expand its lending capabilities, similar to other large auto finance companies.
• The 7% growth in CAF income is a positive sign, but some competitors with captive finance arms may have seen higher growth due to different lending strategies.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net earnings and unit sales.
• Employees may be impacted by cost management efforts.
• Customers may experience changes in pricing and financing options.
• Suppliers may see shifts in purchasing volumes.
• Creditors may be impacted by the expansion of the securitization program.

Next Steps

• CarMax will continue to expand its asset-backed securitization program.
• The company will focus on managing costs and leveraging its omni-channel platform.
• CarMax plans to release results for the second quarter ending August 31, 2024, on September 26, 2024.

Key Dates

Keywords

used vehicles, auto finance, retail sales, wholesale sales, asset-backed securitization, gross profit, unit sales, CarMax, finance income, share repurchase