MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements, the accompanying notes and the MD&A included in our Annual Report on Form 10-K for the fiscal year ended February 28, 2019 (“fiscal 2019”), as well as our consolidated financial statements and the accompanying notes included in Item 1 of this Form 10-Q. Note references are to the notes to consolidated financial statements included in Item 1. All references to net earnings per share are to diluted net earnings per share. Certain prior year amounts have been reclassified to conform to the current year’s presentation. Amounts and percentages may not total due to rounding.
OVERVIEW
CarMax is the nation’s largest retailer of used vehicles. We operate in two reportable segments: CarMax Sales Operations and CarMax Auto Finance (“CAF”). Our CarMax Sales Operations segment consists of all aspects of our auto merchandising and service operations, excluding financing provided by CAF. Our CAF segment consists solely of our own finance operation that provides financing to customers buying retail vehicles from CarMax.
CarMax Sales Operations
Our sales operations segment consists of retail sales of used vehicles and related products and services, such as wholesale vehicle sales; the sale of extended protection plan (“EPP”) products, which include extended service plans (“ESPs”) and guaranteed asset protection (“GAP”); and vehicle repair service. We offer competitive, no-haggle prices; a broad selection of CarMax Quality Certified used vehicles; value-added EPP products; and superior customer service. Our website and related mobile apps are tools for communicating the CarMax consumer offer in detail; sophisticated search engines for finding the right vehicle; and sales channels for customers who prefer to shop online.
Our customers finance the majority of the retail vehicles purchased from us, and availability of on-the-spot financing is a critical component of the sales process. We provide financing to qualified retail customers through CAF and our arrangements with industry-leading third-party finance providers. All of the finance offers, whether by CAF or our third-party providers, are backed by a 3-day payoff option.
As of August 31, 2019, we operated 209 used car stores in 103 U.S. television markets. As of that date, we also conducted wholesale auctions at 76 used car stores and we operated 2 new car franchises.
CarMax Auto Finance
In addition to third-party finance providers, we provide vehicle financing through CAF, which offers financing solely to customers buying retail vehicles from CarMax. CAF allows us to manage our reliance on third-party finance providers and to leverage knowledge of our business to provide qualifying customers a competitive financing option. As a result, we believe CAF enables us to capture additional profits, cash flows and sales. CAF income primarily reflects the interest and fee income generated by the auto loan receivables less the interest expense associated with the debt issued to fund these receivables, a provision for estimated loan losses and direct expenses. CAF income does not include any allocation of indirect costs. After the effect of 3-day payoffs and vehicle returns, CAF financed 41.8% of our retail used vehicle unit sales in the first six months of fiscal 2020. As of August 31, 2019, CAF serviced approximately 1,004,000 customer accounts in its $13.13 billion portfolio of managed receivables.
Management regularly analyzes CAF’s operating results by assessing the competitiveness of our consumer offer, profitability, the performance of the auto loan receivables, including trends in credit losses and delinquencies, and CAF direct expenses.
Revenues and Profitability
The sources of revenue and gross profit from the CarMax Sales Operations segment for the first six months of fiscal 2020 are as follows:
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Net Sales and
Operating Revenues
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Gross Profit
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A high-level summary of our financial results for the second quarter and first half of fiscal 2020 as compared to the second quarter and first half of fiscal 2019 is as follows:
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(Dollars in millions except per share or per unit data)
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Three Months Ended
August 31, 2019
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Change from
Three Months Ended
August 31, 2018
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Six Months Ended
August 31, 2019
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Change from
Six Months Ended
August 31, 2018
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Income statement information
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Net sales and operating revenues
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$
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5,201.2
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9.1
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%
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$
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10,567.5
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10.6
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%
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Gross profit
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$
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693.5
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6.6
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%
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$
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1,435.8
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9.4
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%
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CAF income
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$
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114.1
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4.1
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%
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$
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230.1
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2.1
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%
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Selling, general and administrative expenses
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$
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480.8
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6.0
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%
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$
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970.5
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8.8
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%
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Net earnings
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$
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233.6
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5.8
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%
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$
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500.3
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8.9
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%
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Unit sales information
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Used unit sales
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209,091
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6.2
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%
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433,359
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9.6
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%
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Change in used unit sales in comparable stores
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3.2
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%
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N/A
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6.3
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%
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N/A
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Wholesale unit sales
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126,513
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4.7
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%
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247,281
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5.6
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%
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Per unit information
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Used gross profit per unit
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$
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2,183
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0.2
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%
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$
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2,200
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0.1
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%
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Wholesale gross profit per unit
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$
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928
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1.0
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%
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$
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984
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2.1
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%
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SG&A per used vehicle unit
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$
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2,300
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(0.2
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)%
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$
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2,239
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(0.8
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)%
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Per share information
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Net earnings per diluted share
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$
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1.40
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12.9
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%
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$
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2.99
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16.3
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%
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Refer to “Results of Operations” for further details on our revenues and profitability.
Liquidity
Our primary ongoing sources of liquidity include funds provided by operations, proceeds from non-recourse funding vehicles, and borrowings under our revolving credit facility or through other financing sources. During the first six months of fiscal 2020, net cash used in operations totaled $125.5 million. This amount, combined with $606.1 million of net issuances of non-recourse notes payable, resulted in $480.6 million of adjusted net cash provided by operating activities (a non-GAAP measure). This
liquidity was primarily used to fund the repurchase of 4.5 million common shares under our share repurchase program and our store growth.
When considering cash provided by operating activities, management does not include increases in auto loan receivables that have been funded with non-recourse notes payable, which are separately reflected as cash provided by (used in) financing activities. For a reconciliation of adjusted net cash provided by operating activities to net cash (used in) provided by operating activities, the most directly comparable GAAP financial measure, see “Reconciliation of Adjusted Net Cash from Operating Activities” included in “FINANCIAL CONDITION – Liquidity and Capital Resources.”
Future Outlook
Our long-term strategy is to complete the rollout of our retail concept, including our new omni-channel experience, and to increase our share of used vehicle unit sales in each of the markets in which we operate. Our omni-channel experience empowers customers to buy a car on their own terms, whether completely from home, in-store, or through a seamlessly integrated combination of online and in-store experiences. We believe that, over the long term, used vehicle unit sales are the primary driver for earnings growth. We also believe that increased used vehicle unit sales will drive increased sales of wholesale vehicles and ancillary products and, over time, increased CAF income.
In calendar 2018, we estimate we sold approximately 4.4% of the age 0- to 10-year old vehicles sold in the comparable store markets in which we were operating and approximately 3.3% of the age 0- to 10-year old vehicles sold on a nationwide basis. Our strategy to increase our market share includes continuing to focus on:
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•
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Opening stores in new markets and expanding our presence in existing markets.
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•
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Delivering a customer-driven, omni-channel buying and selling experience that is a unique and powerful integration of our in-store and online capabilities.
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•
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Hiring and developing an engaged and skilled workforce.
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•
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Improving efficiency in our stores and our logistics operations to drive out waste.
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•
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Leveraging data and advanced analytics to continuously improve the customer experience as well as our processes and systems.
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In order to execute our long-term strategy, we are investing in various strategic initiatives to increase innovation, specifically with regards to customer facing and customer-enabling technologies. We continue to make improvements to our website and introduce new customer experiences, such as finance pre-approval, home delivery, online appraisal and express pick-up. We are also developing and implementing tools that help our associates be more efficient and effective. Additionally, we are centralizing customer support in our customer experience centers (“CEC”), which we expect to provide a more seamless integration between the online and in-store experience for our customers. Our use of data is a core component of these initiatives and continues to be a strategic asset for us as we leverage data to enhance the customer experience and increase operational efficiencies.
In December 2018, we launched our new omni-channel car buying experience in the Atlanta market, and in the second quarter and first half of fiscal 2020, used unit sales in comparable stores and the appraisal buy rate in this market continued to out-perform full company results. During the second quarter of fiscal 2020, we continued this roll-out to several new markets, including markets in Florida, North Carolina, Virginia and Texas, making the omni-channel experience available to approximately one-third of our customer base. We expect performance in each new omni-channel market will vary. Going forward, we plan to discuss our omni-channel results as a whole rather than on a market-by-market basis. We opened CECs in Atlanta and Kansas City during the second quarter of fiscal 2020, and later this year we plan to open another CEC in Phoenix. We anticipate staffing each of these CECs with more than 300 associates. We remain on track to make the omni-channel experience available to the majority of our customers by the end of fiscal 2020.
While there are incremental costs and inefficiencies in the near term related to strategic initiatives, we have also identified potential cost savings through process changes and other improvements that can help offset these expenses over time. While in any individual period conditions may vary, over the long term, we would expect to leverage our SG&A expenses when comparable store used unit sales growth is in the mid-single digit range. With increased spending expected for fiscal 2020, we believe our comparable store used unit sales growth will need to be in the range of 5% to 8% to leverage SG&A. We expect the rate of growth in spending on these initiatives to slow in fiscal 2021 and taper thereafter. We will continue to look for opportunities to reduce waste and re-prioritize spend.
As of August 31, 2019, we had used car stores located in 103 U.S. television markets, which covered approximately 77% of the U.S. population. The format and operating models utilized in stores are continuously evaluated and may change or evolve over time based upon market and consumer expectations. During the first six months of fiscal 2020, we opened six stores, and during the remainder of the fiscal year, we plan to open seven stores. In fiscal 2021, we plan to open a similar number of stores as we
expect to open in fiscal 2020. For a detailed list of stores we plan to open in the 12 months following August 31, 2019, see the table included in “PLANNED FUTURE ACTIVITIES.”
While we execute our long-term strategy, there are trends and factors that could impact our strategic approach or our results in the short and medium term. For additional information about risks and uncertainties facing our company, see “Risk Factors,” included in Part I. Item 1A of the Annual Report on Form 10-K for the fiscal year ended February 28, 2019.
CRITICAL ACCOUNTING POLICIES
For information on critical accounting policies, see “Critical Accounting Policies” in MD&A included in Item 7 of the Annual Report on Form 10-K for the fiscal year ended February 28, 2019.
RESULTS OF OPERATIONS – CARMAX SALES OPERATIONS
NET SALES AND OPERATING REVENUES
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Three Months Ended August 31
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Six Months Ended August 31
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(In millions)
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2019
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2018
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Change
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2019
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2018
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Change
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Used vehicle sales
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$
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4,346.3
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$
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3,975.4
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9.3
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%
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$
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8,887.0
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$
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7,996.4
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11.1
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%
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Wholesale vehicle sales
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678.3
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628.0
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8.0
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%
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1,340.7
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|
1,245.6
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|
7.6
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%
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Other sales and revenues:
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Extended protection plan revenues
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113.3
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98.5
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15.0
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%
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224.6
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198.6
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13.1
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%
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Third-party finance fees, net
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(10.3
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)
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(9.7
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)
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(6.6
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)%
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(25.8
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)
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(24.2
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)
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(6.8
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)%
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Other
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73.6
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73.9
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(0.4
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)%
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141.0
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142.2
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(0.9
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)%
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Total other sales and revenues
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176.6
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|
162.7
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|
8.5
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%
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|
339.8
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|
316.6
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7.3
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%
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Total net sales and operating revenues
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$
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5,201.2
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$
|
4,766.0
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9.1
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%
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$
|
10,567.5
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$
|
9,558.6
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10.6
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%
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UNIT SALES
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Three Months Ended August 31
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Six Months Ended August 31
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2019
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|
2018
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Change
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2019
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2018
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|
Change
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Used vehicles
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209,091
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196,880
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6.2
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%
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433,359
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395,278
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|
9.6
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%
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Wholesale vehicles
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126,513
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120,866
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4.7
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%
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247,281
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234,201
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5.6
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%
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AVERAGE SELLING PRICES
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Three Months Ended August 31
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Six Months Ended August 31
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2019
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2018
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Change
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2019
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2018
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Change
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Used vehicles
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$
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20,581
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$
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20,005
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2.9
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%
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$
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20,306
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$
|
20,036
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|
|
1.3
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%
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Wholesale vehicles
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$
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5,090
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$
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4,955
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2.7
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%
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$
|
5,150
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$
|
5,076
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|
|
1.5
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%
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COMPARABLE STORE USED VEHICLE SALES CHANGES
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Three Months Ended August 31 (1)
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Six Months Ended August 31 (1)
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|
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2019
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|
2018
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|
2019
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|
2018
|
|
Used vehicle units
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3.2
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%
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2.1
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%
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6.3
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%
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(0.2
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)%
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Used vehicle revenues
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6.3
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%
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3.8
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%
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|
7.9
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%
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|
2.2
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%
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(1)
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Stores are added to the comparable store base beginning in their fourteenth full month of operation. We do not remove renovated stores from our comparable store base. 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.
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VEHICLE SALES CHANGES
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|
Three Months Ended August 31
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Six Months Ended August 31
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|
2019
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|
2018
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|
2019
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|
2018
|
|
Used vehicle units
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6.2
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%
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|
5.8
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%
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|
9.6
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%
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|
3.7
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%
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|
Used vehicle revenues
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9.3
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%
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|
7.6
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%
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|
11.1
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%
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|
6.1
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%
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|
|
|
|
|
|
|
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Wholesale vehicle units
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4.7
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%
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|
14.6
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%
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|
5.6
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%
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|
12.1
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%
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|
Wholesale vehicle revenues
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8.0
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%
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|
14.6
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%
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|
7.6
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%
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|
13.1
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%
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USED VEHICLE FINANCING PENETRATION BY CHANNEL (BEFORE THE IMPACT OF 3-DAY PAYOFFS)
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Three Months Ended August 31 (1)
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Six Months Ended August 31 (1)
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2019
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2018
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|
2019
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2018
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|
CAF (2)
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46.8
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%
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|
49.3
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%
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|
46.5
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%
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|
48.8
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%
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Tier 2 (3)
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19.7
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%
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|
17.0
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%
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|
20.0
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%
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|
17.0
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%
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|
Tier 3 (4)
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9.6
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%
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|
8.8
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%
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|
10.6
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%
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|
9.9
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%
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|
Other (5)
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23.9
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%
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|
24.9
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%
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|
22.9
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%
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|
24.3
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%
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|
Total
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100.0
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%
|
|
100.0
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%
|
|
100.0
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%
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|
100.0
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%
|
|
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(1)
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Calculated as used vehicle units financed for respective channel as a percentage of total used units sold.
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(2)
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Includes CAF's Tier 3 loan originations, which represent less than 1% of total used units sold.
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(3)
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Third-party finance providers who generally pay us a fee or to whom no fee is paid.
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(4)
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Third-party finance providers to whom we pay a fee.
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|
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(5)
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Represents customers arranging their own financing and customers that do not require financing.
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CHANGE IN USED CAR STORE BASE
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31
|
|
Six Months Ended August 31
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Used car stores, beginning of period
|
206
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|
|
191
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|
|
203
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|
|
188
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|
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Store openings
|
3
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|
|
3
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|
|
6
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|
|
6
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|
|
Used car stores, end of period
|
209
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|
|
194
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|
|
209
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|
|
194
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|
During the first six months of fiscal 2020, we opened six stores, including three stores in new television markets (Waco, TX; McAllen, TX; and Lubbock, TX) and three stores in existing television markets (Memphis, TN; San Francisco, CA; and Phoenix, AZ).
Used Vehicle Sales. The 9.3% increase in used vehicle revenues in the second quarter of fiscal 2020 was primarily due to a 6.2% increase in used unit sales. The increase in used units included a 3.2% increase in comparable store used unit sales and sales from newer stores not yet included in the comparable store base. The comparable store used unit sales performance primarily reflected strong conversion as well as a 16% increase in website traffic.
The 11.1% increase in used vehicle revenues in the first half of fiscal 2020 was primarily due to a 9.6% increase in used unit sales. The increase in used units included a 6.3% increase in comparable store used unit sales and sales from newer stores not yet included in the comparable store base. The comparable store used unit sales performance primarily reflected strong conversion as well as a 15% increase in website traffic.
We believe that solid execution by our store teams and the impacts of our initiatives to enhance the customer experience, as well as increased conversion by our Tier 2 and Tier 3 providers, contributed to our continued improvements in conversion in both the second quarter and first half of fiscal 2020.
The increase in average retail selling price in both the second quarter and first half of fiscal 2020 reflected higher vehicle acquisition costs as well as shifts in the mix of our sales by both vehicle age and class.
Wholesale Vehicle Sales. Vehicles sold at our wholesale auctions are, on average, approximately 10 years old with more than 100,000 miles and are primarily vehicles purchased through our appraisal process that do not meet our retail standards. Our wholesale auction prices usually reflect trends in the general wholesale market for the types of vehicles we sell, although they can also be affected by changes in vehicle mix or the average age, mileage or condition of the vehicles being sold.
The 8.0% increase in wholesale vehicle revenues in the second quarter of fiscal 2020 was primarily due to a 4.7% increase in unit sales. The wholesale unit growth was largely driven by an increase in our appraisal buy rate, partially offset by lower appraisal traffic.
The 7.6% increase in wholesale vehicle revenues in the first half of fiscal 2020 was primarily due to a 5.6% increase in unit sales. The wholesale unit growth was largely driven by an increase in our appraisal buy rate and the growth in our store base, partially offset by lower appraisal traffic.
Other Sales and Revenues. Other sales and revenues include revenue from the sale of ESPs and GAP (collectively reported in EPP revenues, net of a reserve for estimated contract cancellations), net third-party finance fees, and other revenues, which are predominantly comprised of service department and new vehicle sales. The fees we pay to the Tier 3 providers are reflected as an offset to finance fee revenues received from the Tier 2 providers. The mix of our retail vehicles financed by CAF, Tier 2 and Tier 3 providers, or customers that arrange their own financing, may vary from quarter to quarter depending on several factors, including the credit quality of applicants, changes in providers’ credit decisioning and external market conditions. Changes in originations by one tier of credit providers may also affect the originations made by providers in other tiers.
Other sales and revenues increased 8.5% in the second quarter of fiscal 2020. EPP revenues increased 15.0%, reflecting the combined effects of our used unit growth, increased margin and higher product penetration rates. In addition, we recognized a $6.5 million benefit for estimated ESP profit-sharing revenues compared with a $4.4 million benefit recognized in the prior year quarter. Net third-party finance fees were comparable with the prior year period.
Other sales and revenues increased 7.3% in the first half of fiscal 2020. EPP revenues increased 13.1%, reflecting the combined effects of our used unit growth, increased margin and higher product penetration rates. Net third-party finance fees declined $1.6 million, reflecting shifts in our sales mix by finance channel.
We expect to begin receiving ESP profit-sharing payments in the first calendar quarter of 2020 and the initial payment could be up to $50 million. Through August 31, 2019, we have recognized revenue of $32.2 million, which represents the cumulative amount for which we have determined it is probable it will not result in a significant revenue reversal. The first payment reflects the accumulation of profit-sharing for four years under our current contracts with the providers, while any subsequent profit-sharing payments we receive will only reflect one year of incremental earnings.
Seasonality. Historically, our business has been seasonal. Our stores typically experience their strongest traffic and sales in the spring and summer quarters. Sales are typically slowest in the fall quarter. We typically experience an increase in traffic and sales in February and March, coinciding with federal income tax refund season.
GROSS PROFIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31
|
|
Six Months Ended August 31
|
|
(In millions)
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
|
Used vehicle gross profit
|
$
|
456.4
|
|
|
$
|
429.0
|
|
|
6.4
|
%
|
|
$
|
953.2
|
|
|
$
|
868.4
|
|
|
9.8
|
%
|
|
Wholesale vehicle gross profit
|
117.4
|
|
|
111.1
|
|
|
5.7
|
%
|
|
243.3
|
|
|
225.8
|
|
|
7.8
|
%
|
|
Other gross profit
|
119.7
|
|
|
110.5
|
|
|
8.2
|
%
|
|
239.3
|
|
|
217.8
|
|
|
9.9
|
%
|
|
Total
|
$
|
693.5
|
|
|
$
|
650.6
|
|
|
6.6
|
%
|
|
$
|
1,435.8
|
|
|
$
|
1,312.0
|
|
|
9.4
|
%
|
GROSS PROFIT PER UNIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31
|
|
Six Months Ended August 31
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
$ per unit(1)
|
|
%(2)
|
|
$ per unit(1)
|
|
%(2)
|
|
$ per unit(1)
|
|
%(2)
|
|
$ per unit(1)
|
|
%(2)
|
|
Used vehicle gross profit
|
$
|
2,183
|
|
|
10.5
|
|
$
|
2,179
|
|
|
10.8
|
|
$
|
2,200
|
|
|
10.7
|
|
$
|
2,197
|
|
|
10.9
|
|
Wholesale vehicle gross profit
|
$
|
928
|
|
|
17.3
|
|
$
|
919
|
|
|
17.7
|
|
$
|
984
|
|
|
18.1
|
|
$
|
964
|
|
|
18.1
|
|
Other gross profit
|
$
|
572
|
|
|
67.8
|
|
$
|
562
|
|
|
68.0
|
|
$
|
552
|
|
|
70.4
|
|
$
|
551
|
|
|
68.8
|
|
Total gross profit
|
$
|
3,317
|
|
|
13.3
|
|
$
|
3,305
|
|
|
13.7
|
|
$
|
3,313
|
|
|
13.6
|
|
$
|
3,319
|
|
|
13.7
|
|
|
|
|
(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.
|
Used Vehicle Gross Profit. We target a dollar range of gross profit per used unit sold. The gross profit dollar target for an individual vehicle is based on a variety of factors, including its probability of sale and its mileage relative to its age; however, it is not primarily based on the vehicle’s selling price. Our ability to quickly adjust appraisal offers to be consistent with the broader market trade-in trends and the pace of our inventory turns reduce our exposure to the inherent continual fluctuation in used vehicle values and contribute to our ability to manage gross profit dollars per unit.
We systematically adjust individual vehicle prices based on proprietary pricing algorithms in order to appropriately balance sales trends, inventory turns and gross profit achievement. Other factors that may influence gross profit include the wholesale and retail vehicle pricing environments, vehicle reconditioning and logistics costs, and the percentage of vehicles sourced directly from consumers through our appraisal process. Vehicles purchased directly from consumers typically generate more gross profit per unit compared with vehicles purchased at auction or through other channels.
Used vehicle gross profit rose 6.4% in the second quarter of fiscal 2020 and 9.8% in the first half of fiscal 2020, driven by the 6.2% and 9.6% growth in total used unit sales, respectively. Our used vehicle gross profit per unit was consistent with the corresponding prior year quarter and period. We believe we can manage to a targeted gross profit per unit dollar range, subject to future changes to our business or pricing strategy.
Wholesale Vehicle Gross Profit. Our wholesale gross profit per unit reflects the demand for older, higher mileage vehicles, which are the mainstay of our auctions, as well as strong dealer attendance and resulting high dealer-to-car ratios at our auctions. The frequency of our auctions, which are generally held weekly or bi-weekly, minimizes the depreciation risk on these vehicles. Our ability to adjust appraisal offers in response to the wholesale pricing environment is a key factor that influences wholesale gross profit.
Wholesale vehicle gross profit increased 5.7% in the second quarter of fiscal 2020, driven by the 4.7% increase in wholesale unit sales and a $9 increase in wholesale gross profit per unit. In the first half of fiscal 2020, wholesale vehicle gross profit increased 7.8%, driven by the 5.6% increase in wholesale unit sales and a $20 increase in wholesale gross profit per unit.
Other Gross Profit. Other gross profit includes profits related to EPP revenues, net third-party finance fees and other revenues, which are predominantly comprised of service department operations, including used vehicle reconditioning, and new vehicle sales. We have no cost of sales related to EPP revenues or net third-party finance fees, as these represent revenues paid to us by certain third-party providers. Third-party finance fees are reported net of the fees we pay to third-party Tier 3 finance providers. Accordingly, changes in the relative mix of the components of other gross profit can affect the composition and amount of other gross profit.
Other gross profit rose 8.2% in the second quarter of fiscal 2020 and 9.9% in the first half of fiscal 2020, primarily reflecting the changes in other sales and revenues discussed above.
Impact of Inflation. Historically, inflation has not had a significant impact on results. Profitability is primarily affected by our ability to achieve targeted unit sales and gross profit dollars per vehicle rather than by changes in average retail prices. However, we believe higher vehicle acquisition prices have adversely impacted, and could impact in the future, our comparable store used unit sales growth. Changes in average vehicle selling prices also impact CAF income, to the extent the average amount financed also changes.
SG&A Expenses
COMPONENTS OF SG&A EXPENSES AS A PERCENTAGE OF TOTAL SG&A EXPENSES
COMPONENTS OF SG&A EXPENSES COMPARED WITH PRIOR PERIOD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31
|
|
Six Months Ended August 31
|
|
(In millions except per unit data)
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
|
Compensation and benefits (1)
|
$
|
249.4
|
|
|
$
|
238.9
|
|
|
4.4
|
%
|
|
$
|
520.2
|
|
|
$
|
480.3
|
|
|
8.3
|
%
|
|
Store occupancy costs
|
96.7
|
|
|
90.8
|
|
|
6.5
|
%
|
|
193.3
|
|
|
178.6
|
|
|
8.2
|
%
|
|
Advertising expense
|
46.8
|
|
|
46.7
|
|
|
0.3
|
%
|
|
88.8
|
|
|
85.2
|
|
|
4.2
|
%
|
|
Other overhead costs (2)
|
87.9
|
|
|
77.2
|
|
|
13.9
|
%
|
|
168.2
|
|
|
147.7
|
|
|
13.9
|
%
|
|
Total SG&A expenses
|
$
|
480.8
|
|
|
$
|
453.6
|
|
|
6.0
|
%
|
|
$
|
970.5
|
|
|
$
|
891.8
|
|
|
8.8
|
%
|
|
SG&A per used vehicle unit (3)
|
$
|
2,300
|
|
|
$
|
2,304
|
|
|
$
|
(4
|
)
|
|
$
|
2,239
|
|
|
$
|
2,256
|
|
|
$
|
(17
|
)
|
|
|
|
|
(1)
|
Excludes compensation and benefits related to reconditioning and vehicle repair service, which are included in cost of sales. See Note 10 for details of share-based compensation expense by grant type.
|
|
|
|
|
(2)
|
Includes IT expenses, insurance, preopening and relocation costs, non-CAF bad debt, travel, charitable contributions and other administrative expenses.
|
|
|
|
|
(3)
|
Calculated as total SG&A expenses divided by total used vehicle units.
|
SG&A expenses increased 6.0% in the second quarter of fiscal 2020. In addition to the 9% growth in our store base since the beginning of last year’s second quarter (representing the addition of 18 stores) and higher costs associated with our comparable store unit growth, the net increase reflected the following:
|
|
|
|
•
|
$10.7 million increase in other overhead costs, which included continued spending to advance our technology platforms and support our core and omni-channel strategic initiatives.
|
|
|
|
|
•
|
Advertising expense remained consistent with the prior year quarter due to shifts in the timing of our spend. Advertising spending is expected to increase in the second half of fiscal 2020 and for the full year fiscal 2020, as compared to fiscal 2019, as we launch a new advertising campaign and support our omni-channel rollout.
|
SG&A expenses increased 8.8% in the first half of fiscal 2020. In addition to the 11% growth in our store base since the beginning of fiscal 2019 (representing the addition of 21 stores) and higher costs associated with our comparable store unit growth, the net increase reflected the following:
|
|
|
|
•
|
$13.0 million increase in share-based compensation expense. The increase in share-based compensation expense was largely related to cash-settled restricted stock units, as the expense associated with these units was primarily driven by the change in the company's stock price during the relevant periods.
|
|
|
|
|
•
|
$20.5 million increase in other overhead costs, which included continued spending to advance our technology platforms and support our core and omni-channel strategic initiatives.
|
|
|
|
|
•
|
Advertising expense increased slightly due to shifts in the timing of our spend. As noted above, advertising spending is expected to increase in the second half of fiscal 2020 and for the full year fiscal 2020, as compared to fiscal 2019.
|
Interest Expense. Interest expense includes the interest related to short- and long-term debt, financing obligations and finance lease obligations. It does not include interest on the non-recourse notes payable, which is reflected within CAF income.
Interest expense rose to $21.1 million and $38.9 million in the second quarter and first half of fiscal 2020, respectively, from $18.0 million and $36.0 million in the second quarter and first half of fiscal 2019. The increase primarily reflected higher outstanding debt levels in the second quarter and first half of fiscal 2020.
Income Taxes. The effective income tax rate was 23.5% in the second quarter of fiscal 2020 and 23.8% in the first half of fiscal 2020 versus 23.7% in the second quarter of fiscal 2019 and 24.6% in the first half of fiscal 2019. The effective tax rate for both the second quarter and first half of fiscal 2020 was positively impacted by share-based awards that settled during the periods.
RESULTS OF OPERATIONS – CARMAX AUTO FINANCE
CAF income primarily reflects interest and fee income generated by CAF’s portfolio of auto loan receivables less the interest expense associated with the debt issued to fund these receivables, a provision for estimated loan losses and direct CAF expenses. Total interest margin reflects the spread between interest and fees charged to consumers and our funding costs. Changes in the interest margin on new originations affect CAF income over time. Continued increases in interest rates, which affect CAF’s funding costs, or other competitive pressures on consumer rates, could result in further compression in the interest margin on new originations. Changes in the allowance for loan losses as a percentage of ending managed receivables reflect the effect of the change in loss and delinquency experience on our outlook for net losses expected to occur over the next 12 months.
CAF’s managed portfolio is composed primarily of loans originated over the past several years. Trends in receivable growth and interest margins primarily reflect the cumulative effect of changes in the business over a multi-year period. We strive to originate loans with an underlying risk profile that we believe will, in the aggregate and excluding CAF’s Tier 3 originations, result in cumulative net losses in the 2% to 2.5% range over the life of the loans. Actual loss performance of the loans may fall outside of this range based on various factors, including intentional changes in the risk profile of originations, economic conditions and wholesale recovery rates. Current period originations reflect current trends in both our retail sales and the CAF business, including the volume of loans originated, current interest rates charged to consumers, loan terms and average credit scores. Because we recognize CAF income over the life of the underlying auto loan, loans originated in a given fiscal period generally do not have a significant effect on that period’s financial results.
CAF income does not include any allocation of indirect costs. Although CAF benefits from certain indirect overhead expenditures, we have not allocated indirect costs to CAF to avoid making subjective allocation decisions. Examples of indirect costs not allocated to CAF include retail store expenses and corporate expenses.
See Note 3 for additional information on CAF income and Note 4 for information on auto loan receivables, including credit quality.
SELECTED CAF FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31
|
|
Six Months Ended August 31
|
|
(In millions)
|
2019
|
|
% (1)
|
|
|
2018
|
|
% (1)
|
|
|
2019
|
|
% (1)
|
|
|
2018
|
|
% (1)
|
|
|
Interest margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
$
|
275.7
|
|
|
8.5
|
|
|
$
|
242.2
|
|
|
8.0
|
|
|
$
|
541.9
|
|
|
8.4
|
|
|
$
|
474.5
|
|
|
8.0
|
|
|
Interest expense
|
(90.6
|
)
|
|
(2.8
|
)
|
|
(69.1
|
)
|
|
(2.3
|
)
|
|
(178.0
|
)
|
|
(2.8
|
)
|
|
(132.9
|
)
|
|
(2.2
|
)
|
|
Total interest margin
|
$
|
185.1
|
|
|
5.7
|
|
|
$
|
173.1
|
|
|
5.7
|
|
|
$
|
363.9
|
|
|
5.7
|
|
|
$
|
341.6
|
|
|
5.7
|
|
|
Provision for loan losses
|
$
|
(45.5
|
)
|
|
(1.4
|
)
|
|
$
|
(40.0
|
)
|
|
(1.3
|
)
|
|
$
|
(83.7
|
)
|
|
(1.3
|
)
|
|
$
|
(70.9
|
)
|
|
(1.2
|
)
|
|
CarMax Auto Finance income
|
$
|
114.1
|
|
|
3.5
|
|
|
$
|
109.7
|
|
|
3.6
|
|
|
$
|
230.1
|
|
|
3.6
|
|
|
$
|
225.3
|
|
|
3.8
|
|
|
|
|
|
(1)
|
Annualized percentage of total average managed receivables.
|
CAF ORIGINATION INFORMATION (AFTER THE IMPACT OF 3-DAY PAYOFFS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31
|
|
Six Months Ended August 31
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net loans originated (in millions)
|
$
|
1,772.6
|
|
|
$
|
1,678.4
|
|
|
$
|
3,598.9
|
|
|
$
|
3,343.9
|
|
|
Vehicle units financed
|
88,285
|
|
|
86,399
|
|
|
181,243
|
|
|
171,496
|
|
|
Net penetration rate (1)
|
42.2
|
%
|
|
43.9
|
%
|
|
41.8
|
%
|
|
43.4
|
%
|
|
Weighted average contract rate
|
8.6
|
%
|
|
8.5
|
%
|
|
8.7
|
%
|
|
8.4
|
%
|
|
Weighted average credit score (2)
|
708
|
|
|
707
|
|
|
706
|
|
|
705
|
|
|
Weighted average loan-to-value (LTV) (3)
|
94.7
|
%
|
|
95.2
|
%
|
|
94.5
|
%
|
|
95.1
|
%
|
|
Weighted average term (in months)
|
66.2
|
|
|
66.0
|
|
|
66.2
|
|
|
66.0
|
|
|
|
|
|
(1)
|
Vehicle units financed as a percentage of total used units sold.
|
|
|
|
|
(2)
|
The credit scores represent FICO® scores and reflect only receivables with obligors that have a FICO® score at the time of application. The FICO® score with respect to any receivable with co-obligors is calculated as the average of each obligor’s FICO® score at the time of application. FICO® scores are not a significant factor in our primary scoring model, which relies on information from credit bureaus and other application information as discussed in Note 4. FICO® is a federally registered servicemark of Fair Isaac Corporation.
|
|
|
|
|
(3)
|
LTV represents the ratio of the amount financed to the total collateral value, which is measured as the vehicle selling price plus applicable taxes, title and fees.
|
LOAN PERFORMANCE INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended
August 31
|
|
As of and for the Six Months Ended
August 31
|
|
(In millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Total ending managed receivables
|
$
|
13,131.5
|
|
|
$
|
12,214.1
|
|
|
$
|
13,131.5
|
|
|
$
|
12,214.1
|
|
|
Total average managed receivables
|
$
|
13,012.1
|
|
|
$
|
12,067.5
|
|
|
$
|
12,859.7
|
|
|
$
|
11,921.4
|
|
|
Allowance for loan losses (1)
|
$
|
150.4
|
|
|
$
|
138.1
|
|
|
$
|
150.4
|
|
|
$
|
138.1
|
|
|
Allowance for loan losses as a percentage of ending managed receivables
|
1.15
|
%
|
|
1.13
|
%
|
|
1.15
|
%
|
|
1.13
|
%
|
|
Net credit losses on managed receivables
|
$
|
42.1
|
|
|
$
|
36.2
|
|
|
$
|
71.5
|
|
|
$
|
61.4
|
|
|
Annualized net credit losses as a percentage of total average managed receivables
|
1.29
|
%
|
|
1.20
|
%
|
|
1.11
|
%
|
|
1.03
|
%
|
|
Past due accounts as a percentage of ending managed receivables
|
3.55
|
%
|
|
3.43
|
%
|
|
3.55
|
%
|
|
3.43
|
%
|
|
Average recovery rate (2)
|
48.6
|
%
|
|
47.9
|
%
|
|
48.9
|
%
|
|
47.8
|
%
|
|
|
|
|
(1)
|
The allowance for loan losses represents an estimate of the amount of net losses inherent in our portfolio of managed receivables as of the applicable reporting date and anticipated to occur during the following 12 months.
|
|
|
|
|
(2)
|
The average recovery rate represents the average percentage of the outstanding principal balance we receive when a vehicle is repossessed and liquidated, generally at our wholesale auctions. While in any individual period conditions may vary, over the past 10 fiscal years, the annual recovery rate has ranged from a low of 46% to a high of 60%, and it is primarily affected by the wholesale market environment.
|
|
|
|
|
•
|
CAF Income (Increase of $4.5 million, or 4.1%, and $4.8 million, or 2.1%, in the second quarter and first half of fiscal 2020, respectively)
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◦
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The increase in CAF income for both the second quarter and first half of fiscal 2020 reflects an increase in average managed receivables, partially offset by an increase in the provision for loan losses.
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◦
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Average managed receivables grew 7.8% to $13.01 billion in the second quarter of fiscal 2020 and 7.9% to $12.86 billion in the first half of fiscal 2020 driven primarily by the rise in CAF loan originations in recent years.
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◦
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The growth in net loan originations in both the second quarter and first half of fiscal 2020 resulted from our used vehicle sales growth and an increase in the average amount financed, partially offset by a decline in CAF's penetration rate.
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•
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Provision for Loan Losses (Increased to $45.5 million and $83.7 million in the second quarter and first half of fiscal 2020, respectively, from $40.0 million and $70.9 million in the second quarter and first half of fiscal 2019)
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◦
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The increase in the provision for loan losses was primarily due to the growth in average managed receivables as well as a slight increase in the allowance as a percentage of managed receivables.
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◦
|
The allowance for loan losses as a percentage of ending managed receivables was 1.15% as of August 31, 2019, compared with 1.13% as of August 31, 2018, and 1.10% as of February 28, 2019.
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◦
|
Net losses for both the second quarter and first half of fiscal 2020 remained well within our long-term targeted performance range.
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•
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Total interest margin remained flat at 5.7% of average managed receivables in both the second quarter and first half of fiscal 2020.
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Tier 3 Loan Originations. CAF also originates a small portion of auto loans to customers who typically would be financed by our Tier 3 finance providers, in order to better understand the performance of these loans, mitigate risk and add incremental profits. CAF currently targets originating approximately 5% of the total Tier 3 loan volume; however, this rate may vary over time based on market conditions. A total of $170.0 million and $162.4 million in CAF Tier 3 receivables were outstanding as of August 31, 2019 and February 28, 2019, respectively. These loans have higher loss and delinquency rates than the remainder of the CAF portfolio, as well as higher contract rates. As of August 31, 2019 and February 28, 2019, approximately 10% of the total allowance for loan losses related to the outstanding CAF Tier 3 loan balances.
PLANNED FUTURE ACTIVITIES
We currently plan to open 13 stores in fiscal 2020 and a similar number of stores in fiscal 2021. During the second quarter of fiscal 2020, we opened CECs in Atlanta and Kansas City and plan to open another CEC later this year. We currently estimate capital expenditures will total approximately $350 million in fiscal 2020.
We currently plan to open the following stores within 12 months from August 31, 2019. During this period, we will be entering three new television markets and expanding our presence in ten existing television markets. Of the 13 stores we plan to open during the 12 months ending August 31, 2020, 5 will be in Metropolitan Statistical Areas having populations of 600,000 or less, which we define as small markets. Normal construction, permitting or other scheduling delays could shift the opening dates of any of these stores into a later period.
PLANNED STORE OPENINGS – NEXT 12 MONTHS
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Location
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Television Market
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Metropolitan Statistical Area
|
Planned Opening Date
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|
Denton, Texas (1)
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Dallas/Ft. Worth
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Dallas/Fort Worth/Arlington
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Q3 Fiscal 2020
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|
Palm Desert, California (1)
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Palm Springs (2)
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Riverside/San Bernardino/Ontario
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Q3 Fiscal 2020
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Bogart, Georgia
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Atlanta
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Athens/Clarke County
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Q3 Fiscal 2020
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|
Gulfport, Mississippi
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Biloxi/Gulfport (2)
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Gulfport/Biloxi/Pascagoula
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Q3 Fiscal 2020
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Fort Wayne, Indiana
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Fort Wayne (2)
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Fort Wayne
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Q4 Fiscal 2020
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|
Salem, Oregon
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Portland
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Salem
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Q4 Fiscal 2020
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Murfreesboro, Tennessee
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Nashville
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Nashville/Davidson/Murfreesboro
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Q4 Fiscal 2020
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Easton, Pennsylvania
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Philadelphia
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Allentown/Bethlehem/Easton
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Q1 Fiscal 2021
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|
Bradenton, Florida
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Tampa
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North Port/Sarasota/Bradenton
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Q1 Fiscal 2021
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|
Canoga Park, California
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Los Angeles
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Los Angeles
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Q1 Fiscal 2021
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Covington, Louisiana
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New Orleans
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New Orleans
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Q1 Fiscal 2021
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West Palm Beach, Florida
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Miami/Ft. Lauderdale/W. Palm Beach
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Miami/Ft. Lauderdale/W. Palm Beach
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Q2 Fiscal 2021
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Jacksonville, N. Carolina
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Greenville/New Bern/Washington
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Jacksonville
|
Q2 Fiscal 2021
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(1) Store opened in September 2019.
(2) Represents new television market as of planned store opening date.
FINANCIAL CONDITION
Liquidity and Capital Resources.
Our primary ongoing cash requirements are to fund our existing operations, store expansion and improvement and CAF. Since fiscal 2013, we have also elected to use cash for our share repurchase program. Our primary ongoing sources of liquidity include funds provided by operations, proceeds from non-recourse funding vehicles and borrowings under our revolving credit facility or through other financing sources.
We currently target an adjusted debt-to-total capital ratio in a range of 35% to 45%. In calculating this ratio, we utilize total debt excluding non-recourse notes payable, finance lease liabilities, a multiple of eight times rent expense and total shareholders' equity. We expect to use our revolving credit facility and other financing sources, together with stock repurchases, to maintain this targeted ratio; however, in any period, we may be outside this range due to seasonal, market, strategic or other factors.
Operating Activities. During the first six months of fiscal 2020, net cash used in operating activities totaled $125.5 million, compared with net cash provided by operating activities of $110.9 million in the prior year period, which included increases in auto loan receivables of $721.2 million in the current year period and $675.6 million in the prior year period. The majority of the increases in auto loan receivables are accompanied by increases in non-recourse notes payable, which are separately reflected as cash from financing activities.
As of August 31, 2019, total inventory was $2.60 billion, representing an increase of $85.3 million, or 3.4%, compared with the balance as of the start of the fiscal year. The increase primarily reflected a higher average carrying cost of inventory due to an increase in acquisition costs and changes in our vehicle mix. The impact of adding six new stores to our store base was mostly offset by the seasonal pattern of inventory levels. We typically build inventory in the latter portion of the fiscal year to better position ourselves for seasonal sales opportunities.
When considering cash used in or provided by operating activities, management uses an adjusted measure of net cash from operating activities that offsets the changes in auto loan receivables with the corresponding changes in non-recourse notes payable. This is achieved by adding back the cash provided from the net issuances of non-recourse notes payable, which represents the increase in auto loan receivables that were funded through the issuance of non-recourse notes payable during the period. The resulting financial measure, adjusted net cash from operating activities, is a non-GAAP financial measure. We believe adjusted net cash from operating activities is a meaningful metric for investors because it provides better visibility into the cash generated from operations. Including the increases in non-recourse notes payable, net cash provided by operating activities would have been as follows:
RECONCILIATION OF ADJUSTED NET CASH FROM OPERATING ACTIVITIES
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Six Months Ended August 31
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(In millions)
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2019
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|
2018
|
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Net cash (used in) provided by operating activities
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$
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(125.5
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)
|
|
$
|
110.9
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|
|
Add: Net issuances of non-recourse notes payable (1)
|
606.1
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|
|
607.5
|
|
|
Adjusted net cash provided by operating activities
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$
|
480.6
|
|
|
$
|
718.4
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|
|
|
|
|
(1)
|
Calculated using the gross issuances less payments on non-recourse notes payable as disclosed on the consolidated statements of cash flows.
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Adjusted net cash provided by operating activities for the first six months of the current fiscal year decreased compared with the prior year period primarily due to the changes in inventory discussed above and timing-related changes to accounts payable and accrued expenses and other current assets, partially offset by an increase in net earnings.
Investing Activities. During the first six months of the fiscal year, net cash used in investing activities totaled $178.9 million in fiscal 2020 compared with $174.9 million in fiscal 2019. Capital expenditures were $171.3 million in the current year period versus $171.1 million in the prior year period. Capital expenditures primarily included store construction costs, real estate acquisitions for planned future store openings, and store remodeling expenses. We maintain a multi-year pipeline of sites to support our store growth, so portions of capital spending in one year may relate to stores that we open in subsequent fiscal years.
As of August 31, 2019, 131 of our 209 used car stores were located on owned sites and 78 were located on leased sites, including 22 land-only leases and 56 land and building leases.
Financing Activities. During the first six months of fiscal 2020, net cash provided by financing activities totaled $346.6 million compared with $108.3 million in the prior year period. Included in these amounts were net increases in total non-recourse notes payable of $606.1 million and $607.5 million, respectively, which were used to provide the financing for the majority of the increases of $721.2 million and $675.6 million, respectively, in auto loan receivables (see “Operating Activities”).
During the first six months of fiscal 2020, cash provided by financing activities was impacted by stock repurchases of $341.9 million as well as net borrowings on our long-term debt of $8.6 million. During the first six months of fiscal 2019, cash provided by financing activities was impacted by stock repurchases of $381.3 million as well as net repayments on our long-term debt of $160.0 million.
TOTAL DEBT AND CASH AND CASH EQUIVALENTS
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|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
As of August 31
|
As of February 28
|
|
Debt Description (1)
|
Maturity Date
|
2019
|
2019
|
|
Revolving credit facility (2)
|
June 2024
|
$
|
379,515
|
|
$
|
366,529
|
|
|
Term loan (2)
|
June 2024
|
300,000
|
|
300,000
|
|
|
3.86% Senior notes
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April 2023
|
100,000
|
|
100,000
|
|
|
4.17% Senior notes
|
April 2026
|
200,000
|
|
200,000
|
|
|
4.27% Senior notes
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April 2028
|
200,000
|
|
200,000
|
|
|
Financing obligations
|
Various dates through February 2059
|
522,897
|
|
495,626
|
|
|
Non-recourse notes payable
|
Various dates through January 2026
|
13,141,504
|
|
12,535,405
|
|
|
Total debt (3)
|
|
14,843,916
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|
14,197,560
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|
|
Cash and cash equivalents
|
|
$
|
40,737
|
|
$
|
46,938
|
|
|
|
|
|
(1)
|
Interest is payable monthly, with the exception of our senior notes, which are payable semi-annually.
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|
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(2)
|
Borrowings accrue interest at variable rates based on the Eurodollar rate (LIBOR), the federal funds rate, or the prime rate, depending on the type of borrowing.
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(3)
|
Total debt excludes unamortized debt issuance costs. See Note 9 for additional information.
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Borrowings under our $1.45 billion unsecured revolving credit facility are available for working capital and general corporate purposes, and the unused portion is fully available to us. The credit facility, term loan and senior note agreements contain representations and warranties, conditions and covenants. If these requirements are not met, all amounts outstanding or otherwise owed could become due and payable immediately and other limitations could be placed on our ability to use any available borrowing capacity.
See Note 9 for additional information on our revolving credit facility, term loan, senior notes and financing obligations.
CAF auto loan receivables are primarily funded through our warehouse facilities and asset-backed term funding transactions. These non-recourse funding vehicles are structured to legally isolate the auto loan receivables, and we would not expect to be able to access the assets of our non-recourse funding vehicles, even in insolvency, receivership or conservatorship proceedings. Similarly, the investors in the non-recourse notes payable have no recourse to our assets beyond the related receivables, the amounts on deposit in reserve accounts and the restricted cash from collections on auto loan receivables. We do, however, continue to have the rights associated with the interest we retain in these non-recourse funding vehicles.
As of August 31, 2019, $10.88 billion and $2.26 billion of non-recourse notes payable were outstanding related to asset-backed term funding transactions and our warehouse facilities, respectively. During the first six months of fiscal 2020, we funded a total of $2.87 billion in asset-backed term funding transactions.
We have periodically increased our warehouse facility limit over time, as our store base, sales and CAF loan originations have grown. See Note 9 for additional information on the warehouse facilities.
We generally repurchase the receivables funded through our warehouse facilities when we enter into an asset-backed term funding transaction. If our counterparties were to refuse to permit these repurchases it could impact our ability to execute on our funding program. Additionally, the agreements related to the warehouse facilities include various representations and warranties, covenants and performance triggers. If these requirements are not met, we could be unable to continue to fund receivables through the warehouse facilities. In addition, warehouse facility investors could charge us a higher rate of interest and could have us replaced
as servicer. Further, we could be required to deposit collections on the related receivables with the warehouse facility agents on a daily basis and deliver executed lockbox agreements to the warehouse facility agents.
We expect that adjusted net cash provided by operations, borrowings under existing, new or expanded credit facilities and other funding arrangements will be sufficient to fund CAF, capital expenditures, repurchases of stock and working capital for the foreseeable future. We anticipate that we will be able to enter into new, or renew or expand existing, funding arrangements to meet our future funding needs. However, based on conditions in the credit markets, the cost for these arrangements could be materially higher than historical levels and the timing and capacity of these transactions could be dictated by market availability rather than our requirements.
The timing and amount of stock repurchases are determined based on share price, market conditions, legal requirements and other factors. Shares repurchased are deemed authorized but unissued shares of common stock. As of August 31, 2019, a total of $2 billion of board authorizations for repurchases were outstanding, with no expiration date, of which $1.78 billion remained available for repurchase. See Note 10 for more information on share repurchase activity.
Fair Value Measurements. We recognize money market securities, mutual fund investments and derivative instruments at fair value. See Note 6 for more information on fair value measurements.
FORWARD-LOOKING STATEMENTS
We caution readers that the statements contained in this report about our future business plans, operations, capital structure, opportunities, or prospects, including without limitation any statements or factors regarding expected sales, margins, expenditures, CAF income, stock repurchases, indebtedness, tax rates, earnings, or market conditions are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by the use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “outlook,” “plan,” “predict,” “should,” “will” and other similar expressions, whether in the negative or affirmative. Such forward-looking statements are based upon management’s current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results to differ materially from anticipated results. We disclaim any intent or obligation to update these statements. Among the factors that could cause actual results and outcomes to differ materially from those contained in the forward-looking statements are the following:
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•
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Changes in the competitive landscape and/or our failure to successfully adjust to such changes.
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•
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Events that damage our reputation or harm the perception of the quality of our brand.
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•
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Changes in general or regional U.S. economic conditions.
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•
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Our inability to realize the benefits associated with our omni-channel initiatives.
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•
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Changes in the availability or cost of capital and working capital financing, including changes related to the asset-backed securitization market.
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•
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Our inability to recruit, develop and retain associates and maintain positive associate relations.
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•
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The loss of key associates from our store, regional or corporate management teams or a significant increase in labor costs.
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•
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Security breaches or other events that result in the misappropriation, loss or other unauthorized disclosure of confidential customer, associate or corporate information.
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•
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Significant changes in prices of new and used vehicles.
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•
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Changes in economic conditions or other factors that result in greater credit losses for CAF’s portfolio of auto loan receivables than anticipated.
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•
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A reduction in the availability of or access to sources of inventory or a failure to expeditiously liquidate inventory.
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•
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Changes in consumer credit availability provided by our third-party finance providers.
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•
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Changes in the availability of extended protection plan products from third-party providers.
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•
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Factors related to the regulatory and legislative environment in which we operate.
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•
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Factors related to geographic and sales growth, including the inability to effectively manage our growth.
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•
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The failure of or inability to sufficiently enhance key information systems.
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•
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The effect of various litigation matters.
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•
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Adverse conditions affecting one or more automotive manufacturers, and manufacturer recalls.
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•
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The inaccuracy of estimates and assumptions used in the preparation of our financial statements, or the effect of new accounting requirements or changes to U.S. generally accepted accounting principles.
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•
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The volatility in the market price for our common stock.
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•
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The performance of third-party vendors we rely on for key components of our business.
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•
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Factors related to seasonal fluctuations in our business.
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•
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The occurrence of severe weather events.
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•
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Factors related to the geographic concentration of our stores.
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For more details on factors that could affect expectations, see Part II, Item 1A, “Risk Factors” on Page 40 of this report, our Annual Report on Form 10-K for the fiscal year ended February 28, 2019, and our quarterly or current reports as filed with or furnished to the U.S. Securities and Exchange Commission (“SEC”). Our filings are publicly available on our investor information home page at investors.carmax.com. Requests for information may also be made to our Investor Relations Department by email to
investor_relations@carmax.com or by calling 1-804-747-0422, ext. 4391. We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.