CarMax Reports Second Quarter Fiscal 2023 Results

RICHMOND, Va., September 29, 2022--(BUSINESS WIRE)--CarMax, Inc. (NYSE:KMX) today reported results for the second quarter ended August 31, 2022.

Highlights:

  • Net revenues of $8.1 billion, up 2.0% compared with the prior year second quarter.

  • Total retail used units sold decreased 6.4%, while used unit sales in comparable stores were down 8.3%; gross profit per retail used unit was $2,282, an increase of $97 per unit despite steep market depreciation.

  • CarMax’s share of the nationwide 0-10 year old vehicle market continued to increase through July, the latest period for which title data is available.

  • Total wholesale units decreased 15.1% with gross profit per unit of $881, a decrease of $124 per unit; both volume and margins were impacted by retail selectivity and steep market depreciation.

  • Bought 342,731 vehicles from consumers and dealers, down 8.1% versus last year’s second quarter but up approximately 50% as compared to the pre-Instant Offer launch in the second quarter of FY21.

    • 322,543 of these vehicles were from consumers, down 11.5% over last year’s record results.

    • 20,188 of these vehicles were through MaxOffer, our digital appraisal product for dealers, up 130.4% over last year’s second quarter, and up 18% compared to this year’s first quarter.

  • CarMax Auto Finance (CAF) income of $182.9 million, an 8.6% year-over-year decline as a $40.0 million swing in the provision for loan losses, primarily reflecting a significant tailwind in the prior year, outweighed the effects of growth in CAF’s net interest margin and average managed receivables. Net interest margin improved to 7.3% of average managed receivables, up from 7.2% in the prior year’s second quarter.

  • Expanded our industry-leading pre-qualification finance experience to over 50% of customers; national rollout expected to be complete in the third quarter of fiscal 2023.

  • Net earnings per diluted share of $0.79, down from $1.72 a year ago.

CEO Commentary:

"While this was a challenging quarter across the used car industry, our ongoing progress in strengthening and expanding our omnichannel experience continues to positively differentiate us and enable us to grow market share," said Bill Nash, president and chief executive officer. "As we navigate the near-term pressures facing our industry, we are further sharpening our focus on driving additional operational efficiencies across our business. We will also remain focused on continuing our work to achieve our long-term goals, including further improving our omnichannel experience for our customers and associates through enhancing the seamlessness of our online and in-store offerings and growing our diversified business model."

Second Quarter Business Performance Review:

Sales. Combined retail and wholesale used vehicle unit sales were 376,616, a decrease of 10.3% from the prior year’s second quarter. Online retail sales(1) accounted for 11% of retail unit sales, compared with 9% in the second quarter of last year. Revenue from online transactions(2), including retail and wholesale unit sales, was $2.4 billion, or approximately 30% of net revenues, compared with 28% of net revenues in last year’s second quarter.

Total retail used vehicle unit sales declined 6.4% to 216,939 and comparable store used unit sales declined 8.3% from the prior year’s second quarter. Comparable store sales saw a low single-digit decline in June and then fell sharply through the end of the quarter. We believe a number of macroeconomic factors impacted our second quarter unit sales performance, such as vehicle affordability challenges that stem from widespread inflationary pressures, as well as climbing interest rates and low consumer confidence. Total retail used vehicle revenues increased 2.9% compared with the prior year’s second quarter due to an increase in the average retail selling price, which rose approximately $2,500 per unit, or 9.6%, partially offset by the decrease in retail used units sold.

Total wholesale vehicle unit sales decreased 15.1% to 159,677 versus the prior year’s second quarter. Wholesale volume was negatively impacted by retail selectivity, or our decision to shift some units from wholesale to retail to meet consumer demand for lower priced vehicles, and as we intentionally slowed buys in reaction to rapidly changing market conditions. Total wholesale revenues decreased 0.7% compared with the prior year’s second quarter due to the decrease in wholesale units sold, partially offset by the average wholesale selling price rising by almost $1,500 per unit, or 17.0%.

Other sales and revenues declined by 6.6% compared with the second quarter of fiscal 2022, representing a decrease of $12.0 million. The decrease was driven by the divestiture of our remaining new car franchise in the third quarter of fiscal 2022 as well as a $3.2 million decline in extended protection plan (EPP) revenues reflecting the combined effects of stronger margins, stable penetration and the decline in retail unit sales.

Gross Profit. Total gross profit was $737.1 million, down 9.6% versus last year’s second quarter. Retail used vehicle gross profit declined 2.3%, reflecting the combined effects of the decline in retail unit sales and an improvement in the related gross profit per unit, which rose $97 to $2,282.

Wholesale vehicle gross profit decreased 25.6% versus the prior year’s quarter, reflecting lower wholesale unit volume and gross profit per unit, which declined $124 to $881. Gross profit per unit was impacted by both retail selectivity as well as steep market depreciation.

Other gross profit declined 15.4% largely reflecting a reduction in service department margins and EPP revenues. Service margins declined primarily due to deleverage resulting from the reduction in retail unit sales and inflationary pressures.

SG&A. Compared with the second quarter of fiscal 2022, SG&A expenses increased 16.0% to $666.0 million. Contributing factors included the effect of increases in staffing and wage pressures over the past year, investments to advance our technology platforms, as well as strategic and growth initiatives. The change in SG&A was also negatively impacted by a $14 million one-time prior year change in accounting estimate related to non-CAF uncollectible receivables. Partially offsetting these items was a reduction in share-based compensation, which largely reflected changes in the company’s share price, as well as actions taken in the first and second quarters to better align costs to sales performance. SG&A as a percent of gross profit was 90.4%, versus 70.4% in the prior year’s second quarter driven by the expenses noted above, combined with the decrease in gross margin dollars.

CarMax Auto Finance.(3) CAF income decreased 8.6% to $182.9 million, driven by a $40.0 million year- over-year swing in the provision for loan losses. This quarter’s provision was $75.5 million compared to $35.5 million last year, which outweighed the growth in CAF’s net interest margin and average managed receivables. Last year, our loan loss provision was a significant tailwind as the overall performance of the consumer remained remarkably strong.

As of August 31, 2022, the allowance for loan losses was 2.92% of ending managed receivables, up from 2.85% as of May 31, 2022. The increase in the allowance percentage primarily reflected the effect of the previously disclosed expansion of Tier 2 and Tier 3 originations within CAF’s portfolio.

CAF’s total interest margin percentage, which represents the spread between interest and fees charged to consumers and our funding costs, was 7.3% of average managed receivables, up from 7.2% in the prior year’s second quarter, and benefited from our hedging strategy. After the effect of 3-day payoffs, CAF financed 41.2% of units sold in the current quarter up from 39.3% in the first quarter, but down from 43.0% in the prior year’s second quarter, largely reflecting an increase in the mix of customers utilizing outside financing. CAF’s weighted average contract rate increased to 9.4% in the quarter up from 8.5% in the second quarter last year.

Interest Expense. Interest expense increased $10.3 million to $32.7 million, reflecting a higher outstanding debt balance in the current fiscal year, including the $700 million term loan issued in October 2021, as well as higher interest rates.

Share Repurchase Activity. During the second quarter of fiscal 2023, we repurchased 1.7 million shares of common stock for $163.0 million pursuant to our share repurchase program. As of August 31, 2022, we had $2.45 billion remaining available for repurchase under the outstanding authorization.

Store Openings. During the second quarter of fiscal 2023, we opened three new retail locations in Stockton, California, Wayne, New Jersey and East Meadow, New York, bringing our total retail stores in the New York metro market up to three locations. In fiscal 2023, we plan to open a total of ten new locations across the country.

(1)

An online retail unit sale is defined as a sale where the customer completes all four of these major transactional activities remotely: reserving the vehicle; financing the vehicle, if needed; trading-in or opting out of a trade in; and creating a remote sales order.

(2)

Revenue from online transactions is defined as revenue from retail sales that qualify for an online retail sale, as well as any EPP and third-party finance contribution, wholesale sales where the winning bid was an online bid, and all revenue earned by Edmunds.

(3)

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

Supplemental Financial Information

Amounts and percentage calculations may not total due to rounding.

Sales Components

Three Months Ended August 31

Six Months Ended August 31

(In millions)

2022

2021

Change

2022

2021

Change

Used vehicle sales

$

6,284.1

$

6,104.4

2.9

%

$

13,298.6

$

12,261.7

8.5

%

Wholesale vehicle sales

1,690.3

1,701.6

(0.7

) %

3,806.8

3,075.9

23.8

%

Other sales and revenues:

Extended protection plan revenues

109.8

113.0

(2.9

) %

226.3

247.3

(8.5

) %

Third-party finance income/(fees), net

2.7

2.8

(1.8

) %

6.1

(1.8

)

437.5

%

Advertising & subscription revenues (1)

34.3

34.5

(0.8

) %

68.7

34.5

98.7

%

Other

23.6

32.1

(26.4

) %

49.9

68.3

(26.9

) %

Total other sales and revenues

170.4

182.4

(6.6

) %

351.0

348.3

0.8

%

Total net sales and operating revenues

$

8,144.8

$

7,988.4

2.0

%

$

17,456.4

$

15,686.0

11.3

%

(1)

Excludes intersegment revenues that have been eliminated in consolidation.

Unit Sales

Three Months Ended August 31

Six Months Ended August 31

2022

2021

Change

2022

2021

Change

Used vehicles

216,939

231,797

(6.4) %

457,889

502,596

(8.9) %

Wholesale vehicles

159,677

188,098

(15.1) %

345,984

369,487

(6.4) %

Average Selling Prices

Three Months Ended August 31

Six Months Ended August 31

2022

2021

Change

2022

2021

Change

Used vehicles

$ 28,657

$ 26,141

9.6 %

$ 28,755

$ 24,197

18.8 %

Wholesale vehicles

$ 10,179

$ 8,701

17.0 %

$ 10,619

$ 7,997

32.8 %

Vehicle Sales Changes

Three Months Ended August 31

Six Months Ended August 31

2022

2021

2022

2021

Used vehicle units

(6.4) %

6.7 %

(8.9) %

42.6 %

Used vehicle revenues

2.9 %

39.1 %

8.5 %

70.9 %

Wholesale vehicle units

(15.1) %

41.4 %

(6.4) %

88.2 %

Wholesale vehicle revenues

(0.7) %

107.7 %

23.8 %

164.7 %

Comparable Store Used Vehicle Sales Changes (1)

Three Months Ended August 31

Six Months Ended August 31

2022

2021

2022

2021

Used vehicle units

(8.3) %

6.2 %

(10.6) %

41.8 %

Used vehicle revenues

0.4 %

38.8 %

6.0 %

70.4 %

(1)

Stores are added to the comparable store base beginning in their fourteenth full month of operation. Comparable store calculations include results for a set of stores that were included in our comparable store base in both the current and corresponding prior year periods.

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

Three Months Ended August 31

Six Months Ended August 31

2022

2021

2022

2021

CAF (2)

44.8 %

47.1 %

44.0 %

46.9 %

Tier 2 (3)

21.6 %

21.6 %

23.5 %

22.2 %

Tier 3 (4)

6.0 %

7.2 %

6.6 %

8.7 %

Other (5)

27.6 %

24.1 %

25.9 %

22.2 %

Total

100.0 %

100.0 %

100.0 %

100.0 %

(1)

Calculated as used vehicle units financed for respective channel as a percentage of total used units sold.

(2)

Includes CAF's Tier 2 and Tier 3 loan originations, which represent approximately 1% of total used units sold.

(3)

Third-party finance providers who generally pay us a fee or to whom no fee is paid.

(4)

Third-party finance providers to whom we pay a fee.

(5)

Represents customers arranging their own financing and customers that do not require financing.

Selected Operating Ratios

Three Months Ended August 31

Six Months Ended August 31

(In millions)

2022

% (1)

2021

% (1)

2022

% (1)

2021

% (1)

Net sales and operating revenues

$

8,144.8

100.0

$

7,988.4

100.0

$

17,456.4

100.0

$

15,686.0

100.0

Gross profit

$

737.1

9.1

$

815.5

10.2

$

1,612.5

9.2

$

1,740.0

11.1

CarMax Auto Finance income

$

182.9

2.2

$

200.0

2.5

$

387.3

2.2

$

441.8

2.8

Selling, general, and administrative expenses

$

666.0

8.2

$

574.3

7.2

$

1,322.8

7.6

$

1,128.4

7.2

Interest expense

$

32.7

0.4

$

22.4

0.3

$

61.5

0.4

$

42.9

0.3

Earnings before income taxes

$

167.6

2.1

$

367.8

4.6

$

504.2

2.9

$

935.1

6.0

Net earnings

$

125.9

1.5

$

285.3

3.6

$

378.2

2.2

$

722.0

4.6

(1)

Calculated as a percentage of net sales and operating revenues.

Gross Profit (1)

Three Months Ended August 31

Six Months Ended August 31

(In millions)

2022

2021

Change

2022

2021

Change

Used vehicle gross profit

$

495.0

$

506.5

(2.3

) %

$

1,058.5

$

1,103.5

(4.1

) %

Wholesale vehicle gross profit

140.7

189.0

(25.6

) %

332.3

374.9

(11.3

) %

Other gross profit

101.4

120.0

(15.4

) %

221.7

261.6

(15.2

) %

Total

$

737.1

$

815.5

(9.6

) %

$

1,612.5

$

1,740.0

(7.3

) %

(1)

Amounts are net of intercompany eliminations.

Gross Profit per Unit (1)

Three Months Ended August 31

Six Months Ended August 31

2022

2021

2022

2021

$ per unit(2)

%(3)

$ per unit(2)

%(3)

$ per unit(2)

%(3)

$ per unit(2)

%(3)

Used vehicle gross profit

$

2,282

7.9

$

2,185

8.3

$

2,312

8.0

$

2,196

9.0

Wholesale vehicle gross profit

$

881

8.3

$

1,005

11.1

$

961

8.7

$

1,015

12.2

Other gross profit

$

468

59.6

$

517

65.8

$

484

63.2

$

521

75.1

(1)

Amounts are net of intercompany eliminations. Those eliminations had the effect of increasing used vehicle gross profit per unit and wholesale vehicle gross profit per unit and decreasing other gross profit per unit by immaterial amounts.

(2)

Calculated as category gross profit divided by its respective units sold, except the other category, which is divided by total used units sold.

(3)

Calculated as a percentage of its respective sales or revenue.

SG&A Expenses (1)

Three Months Ended August 31

Six Months Ended August 31

(In millions)

2022

2021

Change

2022

2021

Change

Compensation and benefits:

Compensation and benefits, excluding share-based compensation expense

$

333.8

$

299.5

11.4

%

$

679.0

$

583.6

16.3

%

Share-based compensation expense

24.5

28.7

(14.5

) %

46.8

67.1

(30.3

) %

Total compensation and benefits (2)

$

358.3

$

328.2

9.2

%

$

725.8

$

650.7

11.5

%

Occupancy costs

68.8

55.1

25.0

%

134.7

105.6

27.5

%

Advertising expense

82.9

85.0

(2.5

) %

171.8

157.5

9.1

%

Other overhead costs (3)

156.0

106.0

47.2

%

290.5

214.6

35.5

%

Total SG&A expenses

$

666.0

$

574.3

16.0

%

$

1,322.8

$

1,128.4

17.2

%

SG&A as % of gross profit

90.4

%

70.4

%

20.0

%

82.0

%

64.8

%

17.2

%

(1)

Amounts are net of intercompany eliminations.

(2)

Excludes compensation and benefits related to reconditioning and vehicle repair service, which are included in cost of sales.

(3)

Includes IT expenses, non-CAF bad debt, insurance, preopening and relocation costs, charitable contributions, travel and other administrative expenses.

Components of CAF Income and Other CAF Information

Three Months Ended August 31

Six Months Ended August 31

(In millions)

2022

% (1)

2021

% (1)

2022

% (1)

2021

% (1)

Interest margin:

Interest and fee income

$

357.2

8.8

$

324.1

8.8

$

703.9

8.8

$

634.4

8.8

Interest expense

(62.5

)

(1.5

)

(60.6

)

(1.7

)

(111.3

)

(1.4

)

(126.4

)

(1.8

)

Total interest margin

294.7

7.3

263.5

7.2

592.6

7.4

508.0

7.0

Provision for loan losses

(75.5

)

(1.9

)

(35.5

)

(1.0

)

(133.3

)

(1.7

)

(11.1

)

(0.2

)

Total interest margin after provision for loan losses

219.2

5.4

228.0

6.2

459.3

5.7

496.9

6.9

Total direct expenses

(36.3

)

(0.9

)

(27.9

)

(0.8

)

(71.9

)

(0.9

)

(55.1

)

(0.8

)

CarMax Auto Finance income

$

182.9

4.5

$

200.0

5.4

$

387.3

4.8

$

441.8

6.1

Total average managed receivables

$

16,176.2

$

14,683.3

$

15,996.6

$

14,416.0

Net loans originated

$

2,334.0

$

2,372.4

$

4,780.8

$

4,855.8

Net penetration rate

41.2

%

43.0

%

40.2

%

43.4

%

Weighted average contract rate

9.4

%

8.5

%

9.2

%

8.7

%

Ending allowance for loan losses

$

477.5

$

398.1

$

477.5

$

398.1

Warehouse facility information:

Ending funded receivables

$

2,997.9

$

3,181.9

$

2,997.9

$

3,181.9

Ending unused capacity

$

2,402.1

$

1,643.1

$

2,402.1

$

1,643.1

(1)

Annualized percentage of total average managed receivables.

Earnings Highlights

Three Months Ended August 31

Six Months Ended August 31

(In millions except per share data)

2022

2021

Change

2022

2021

Change