CARMAX, INC.
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 and the
accompanying notes presented in Item 8. Consolidated Financial Statements and
Supplementary Data. Note references are to the notes to consolidated financial
statements included in Item 8. Certain prior year amounts have been
reclassified to conform to the current year's presentation. All references to
net earnings per share are to diluted net earnings per share. Amounts and
percentages may not total due to rounding.
OVERVIEW
See Part I, Item 1 for a detailed description and discussion of the company's
business.
CarMax is the nation's largest and most profitable 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 omni-channel platform, which gives us the largest addressable
market in the used car industry, empowers customers to buy a car on their terms
- online, in-store or a seamless combination of both. Customers can choose to
complete the car-buying experience in-person at one of our stores; or buy the
car online and receive delivery through contactless curbside pickup, available
nationwide, or home delivery, available to most customers.
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 February 28, 2021 , we operated 220 used car stores in 106 U.S. television
markets. As of that date, wholesale auctions previously held at 74 of our used
car stores were being conducted virtually. During the fourth quarter of fiscal
2021, we sold the Toyota new car franchise located in Laurel, MD , resulting in 1
new car franchise remaining at February 28, 2021 .
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 loans receivable 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 42.5% of our retail used vehicle unit sales in
fiscal 2021. As of February 28, 2021 , CAF serviced approximately 1,054,000
customer accounts in its $13.85 billion portfolio of managed receivables.
Management regularly analyzes CAF's operating results by assessing the
competitiveness of our consumer offer, profitability, the performance of the
auto loans receivable, including trends in credit losses and delinquencies, and
CAF direct expenses.
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Revenues and Profitability
Our primary sources of revenue and gross profit from CarMax Sales Operations for
fiscal 2021 are as follows:
Operating Revenues
[[Image Removed: kmx-20210228_g2.jpg]][[Image Removed: kmx-20210228_g3.jpg]]
A high-level summary of our financial results from fiscal 2021 compared with fiscal 2020 is as follows: (Dollars in millions except per share or per unit data) 2021 Change from 2020
Income statement information
Net sales and operating revenues$ 18,950.1 (6.7) % Gross profit$ 2,379.1 (12.6) % CAF income$ 562.8 23.4 % Selling, general and administrative expenses$ 1,898.8 (2.1) % Net earnings$ 746.9 (15.9) % Unit sales information Used unit sales 751,862 (9.7) % Change in used unit sales in comparable stores (11.7) % N/A Wholesale unit sales 426,268 (8.6) %
Per unit information
Used gross profit per unit$ 2,113 (3.3) % Wholesale gross profit per unit$ 993 1.8 % SG&A per used vehicle unit$ 2,525 8.4 %
Per share information
Net earnings per diluted share$ 4.52 (15.2) % Net earnings per diluted share during fiscal 2021 included a one-time benefit of$0.19 in connection with our receipt of settlement proceeds inApril 2020 related to a previously disclosed class action lawsuit. Refer to "Results of Operations" for further details on our revenues and profitability. A discussion regarding Results of Operations and Financial Condition for fiscal 2020 as compared to fiscal 2019 is included in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedFebruary 29, 2020 , filed with theSEC onApril 21, 2020 . Impact of COVID-19 InMarch 2020 , theWorld Health Organization declared the outbreak of the novel coronavirus ("COVID-19") as a global pandemic. In the following weeks, manyU.S. states and localities issued shelter-in-place orders impacting the operations of our stores and consumer demand. We followed mandates from public health officials and government agencies, including implementation of enhanced cleaning measures and social distancing guidelines and, in many localities, the closing of stores and wholesale auctions. As a result of these store closures and lower consumer demand, we announced inApril 2020 that more than 15,000 associates had been placed on furlough. We provided associates with at least 14 days of pay continuity upon store 27 -------------------------------------------------------------------------------- closure or quarantine, along with continuing medical benefits for associateswho were furloughed. During the second quarter of fiscal 2021, we began to call back associates from furlough and by the end ofJuly 2020 , we no longer had any associates on furlough. During the first half of fiscal 2021, we spent approximately$30 million supporting associates impacted by COVID-19, store closures and furloughs. We have implemented robust plans to reduce the risk of exposure and transmission of the virus in our stores and continue to follow the mandates of public health officials and government agencies. We also launched contactless curbside pickup nationwide to better serve our customers in alignment with enhanced safety practices. In addition, we quickly shifted our wholesale business from in-person to online auctions. During the second quarter of fiscal 2021, we completed the rollout of our omni-channel platform, giving us the largest addressable market in the used car industry. This offering allows customers to seamlessly do as much, or as little, online and in-person as they prefer. Our fiscal 2021 results were significantly impacted by the COVID-19 pandemic. In particular retail sales were negatively impacted by store closures and occupancy restrictions in response to COVID-19, primarily during the first quarter. For further details of these impacts, refer to "Results of Operations." Beginning in the first quarter of fiscal 2021, as the pandemic escalated, our CAF business saw an increase in delinquencies and greater demand for payment extensions. In response, we implemented a variety of measures to support our customers through this difficult time and to maximize the long-term collectability of the portfolio. This included temporarily suspending repossessions, waiving late fees, and providing loan payment extensions where appropriate. In addition to pausing our in-house Tier 3 lending, we also made temporary underwriting adjustments focused on preserving CAF's high-quality portfolio and tested certain loan routing to our third-party providers. Payment extensions spiked in April and have declined significantly since then as customers have exhibited the ability and willingness to pay. During fiscal 2021, delinquency rates were lower year-over-year. During the back half of the second quarter of fiscal 2021, we ceased CAF's underwriting adjustments noted above, and in September we resumed our in-house Tier 3 lending. During fiscal 2021, new legislation was enacted to provide relief to businesses in response to the COVID-19 pandemic, including the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and the Taxpayer Certainty and Disaster Tax Relief Act. OnMarch 6, 2021 the American Rescue Plan Act of 2021 was enacted. We have evaluated the tax provisions of these acts as well as newIRS guidance issued. While the most significant impacts to the company include the employee retention tax credit and payroll tax deferral provisions of the CARES Act, we do not expect recentIRS guidance or the legislation to have a material impact on our results of operations. The ongoing crisis of COVID-19 continues to evolve and cause uncertainty. At the end of fiscal 2021, states and localities were in the midst of a vaccine distribution program; however, the continued spread and impact of COVID-19 persist. As such, we are unable to determine the full impact that social distancing protocols, the availability and efficacy of vaccines, or potential subsequent outbreaks, will ultimately have on our operations or consumer demand. We continue to actively monitor developments that may cause us to take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our associates, customers and shareholders. 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. In addition to funding our operations, this liquidity was used to fund the repurchase of common stock under our share repurchase program and our store growth. As previously disclosed, in response to the COVID-19 pandemic, we took certain measures in the first quarter of fiscal 2021 to enhance our liquidity position and provide additional financial flexibility, including drawing down additional funds on our revolving credit facility, pausing our stock repurchase program, pausing our store expansion strategy and remodels and actively aligning operating expenses to the current state of the business, including the previously discussed furlough. We strengthened our overall financial position by selling through inventory and quickly aligning costs to lower sales volumes. We have continued to adjust inventory levels and operating expenses throughout the pandemic to align with sales trends. During the third quarter, we fully paid down the outstanding balance on our revolving credit facility and resumed our store expansion strategy and share repurchase program. Given the turnaround in our business, the strength of the credit markets and our solid balance sheet, we believe we have the appropriate liquidity, access to capital and financial strength to support our operations and continue investing in our omni and digital initiatives as well as other strategic initiatives for the foreseeable future. 28 -------------------------------------------------------------------------------- Strategic Update and Future Outlook The COVID-19 pandemic has created an unprecedented and challenging time. As discussed above, we have taken several steps to ensure a strong liquidity position and enable our stores to operate amidst the current health and safety concerns while continuing to invest in our strategic priorities. We will continue to monitor the ongoing effects of the pandemic and make any further decisions necessary to position the company for a strong recovery as we emerge from this crisis. We recognize the current environment has accelerated a shift in consumer buying behavior. Customers are seeking safety, personalization and convenience in how they shop for and buy a vehicle more than ever. Our omni-channel platform 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. Our diversified business model, combined with our emerging omni-channel experience, is a unique advantage in the used car industry that firmly positions us to continue growing our market share while creating shareholder value over the long-term. We completed our omni-channel rollout in the second quarter of fiscal 2021. We now have a common platform across all of CarMax that leverages our scale, nationwide footprint and infrastructure and empowers our customers to buy a vehicle on their terms. With the completion of our omni-channel rollout, we are now focusing our efforts on optimizing and enhancing the customer experience. In particular, we are focused on enabling self-service for all components of the sale. In the fourth quarter of fiscal 2021, we made significant progress in this area, and at the end of the quarter, approximately 25% of our customers were eligible to buy a vehicle online independently if they choose, up significantly from the third quarter. We are on track for most of our customers to have the ability to buy a vehicle online independently if they choose by the middle of fiscal 2022. Additionally, approximately 75% of our customers advanced their transaction digitally during the fourth quarter of fiscal 2021, with approximately 5% buying the vehicle online. In the fourth quarter of fiscal 2021, we completed the nationwide rollout of our online instant appraisal offer, which quickly provides customers an offer on their vehicle. Early response to this offering has been strong, positioning us to become the largest online buyer of used vehicles from consumers and strengthening our leadership position as the largest used vehicle buyer from consumers. We believe that our online appraisal offers provide us with the potential to approach or exceed the high end of our historical self-sufficiency rate. We also introduced our Love Your Car Guarantee in the fourth quarter of fiscal 2021. This guarantee allows customers to take a 24-hour test drive before committing to purchase and also offers a 30-day/1,500 mile money-back guarantee and a 90-day/4,000-mile limited warranty. At the end of the fourth quarter, we also launched a "penny perfect" transactable financing offer in our online checkout process. With this enhancement, customers can apply and accept finance offers without needing the assistance of an associate to submit a credit application over the phone or in store. We plan to make this available to all customers in the first quarter of fiscal 2022. We first launched our omni-channel platform in theAtlanta market inDecember 2018 . Now, two years later after continued testing on pricing and advertising, our omni-channel platform is delivering sustained growth in this competitive market. TheAtlanta market continues to outperform the company, maintaining its market share in calendar 2020 despite pressure from COVID-19. During the last five months of calendar 2020, our market share inAtlanta increased 13.8%. Over the past two years, our market share inAtlanta has increased 10.9%. Our strategic investments in the near term will focus on our customer experience, vehicle acquisition and marketing. As we continue enhancing our online experience and offerings, we believe it is important to educate customers on our omni-channel platform and to differentiate and elevate our brand. During the fourth quarter of fiscal 2021, we introduced the next phase of our national multi-media marketing campaign that began last year. As a result, marketing spend increased year-over-year. Throughout the quarter, we set records every week for web visits, reaching more than 8 million weekly visits by the end ofFebruary 2021 . After the campaign launch, web traffic andAtlanta market discussed above, we implemented pricing and marketing tests in select markets during the fourth quarter of fiscal 2021 in an effort to proactively drive sales volume. Early results for these tests were positive, and we plan to continue these tests into the first quarter of fiscal 2022 while also monitoring macroeconomic factors. We expect our gross profit per used unit to remain above$2,000 for the quarter. While these tests confirm what we have historically seen regarding price elasticity, several factors have changed resulting in a stronger flow through from the increased sales and thereby driving profitability. These factors include: the high level of profitability for our CAF originations, a lower variable cost structure resulting from our continued transition to CECs and the favorable changes to our third-party finance providers fee structure. 29 -------------------------------------------------------------------------------- InMarch 2021 , we signed a definitive agreement to acquire Edmunds, one of the most well established and trusted online guides for automotive information and a recognized industry leader in digital car shopping innovations. With this acquisition, CarMax will enhance its digital capabilities and further strengthen its role and reach across the used auto ecosystem while adding exceptional technology and creative talent. Edmunds will continue to operate independently and will remain focused on delivering confidence to consumers and excellent value to its dealer and OEM clients. Additionally, this acquisition will allow both businesses to accelerate their respective capabilities to deliver an enhanced digital experience to their customers by leveraging Edmunds' compelling content and technology, our unparalleled national scale and infrastructure, and the combined talent of both businesses. We expect to pay for the transaction with a combination of cash and equity. The transaction is subject to certain conditions to close typical for a transaction of this nature. We anticipate this transaction will close inJune 2021 and expect Edmunds' financial results to have an immaterial impact to CarMax's earnings per share in fiscal 2022, with potential for significant shareholder value creation over the longer term. Our long-term strategy continues to be focused on completing the rollout of our retail concept and improving and enhancing our omni-channel experience, with the goal of increasing our share of used vehicle unit sales in each of the markets in which we operate. At the same time, we are identifying and investing in new initiatives that we believe will contribute to earnings growth. We believe, over the long term, used vehicle unit sales are the primary driver for earnings growth. We also believe increased used vehicle unit sales will drive increased sales of wholesale vehicles and ancillary products and, over time, increased CAF income. In order to execute our long-term strategy, we plan to continue to invest in various strategic initiatives to increase innovation, specifically with regards to customer-facing and customer-enabling technologies, as well as marketing. We are also focused on ensuring we are efficient in our spend, targeting specific areas where we expect to achieve more efficiencies and leverage. This includes our CECs, which are maturing and becoming more efficient and effective. This past year our CECs were more efficient than the prior year and we expect this trend to accelerate in fiscal 2022. 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. For fiscal 2022, we would expect to leverage our SG&A expenses when comparable store used unit sales growth is in the range of 5% to 8% on a two-year stacked basis. In periods of investment, like fiscal 2022, we will need to be at the higher end of this two-year range to lever against fiscal 2021. In calendar 2020, we estimate we sold approximately 4.3% of the age 0- to 10-year old vehicles sold in the current comparable store markets in which we operate, a decline from 4.7% in 2019. We had strong momentum entering the current year and were gaining significant market share up until the onset of the COVID-19 pandemic during the first quarter of fiscal 2021. As markets re-opened and our omni-channel platform launched nationwide, we began gaining market share again, leading to market share gains over the last five months of calendar 2020. On a nationwide basis, we estimate we sold approximately 3.5% of the age 0- to 10-year old vehicles sold. Our strategy to increase our market share includes focusing on: •Delivering a customer-driven, omni-channel buying and selling experience that is a unique and powerful integration of our in-store and online capabilities. •Opening stores in new markets and expanding our presence in existing markets. •Hiring and developing an engaged and skilled workforce. •Improving efficiency in our stores and our logistics operations to reduce waste. •Leveraging data and advanced analytics to continuously improve the customer experience as well as our processes and systems. As ofFebruary 28, 2021 , we had used car stores located in 106 television markets, which covered approximately 77% of theU.S. population. The format and operating models utilized in our stores are continuously evaluated and may evolve over time based upon market and consumer expectations. We opened 4 stores in fiscal 2021. In response to COVID-19, we paused our store expansion strategy in the first quarter of fiscal 2021. We have resumed new store growth and anticipate opening ten stores during fiscal 2022. While we execute both our short- and 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 this Form 10-K.
CRITICAL ACCOUNTING POLICIES
Our results of operations and financial condition as reflected in the consolidated financial statements have been prepared in accordance withU.S. generally accepted accounting principles. Preparation of financial statements requires management to 30 -------------------------------------------------------------------------------- make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues, expenses and the disclosures of contingent assets and liabilities. We use our historical experience and other relevant factors when developing our estimates and assumptions. We regularly evaluate these estimates and assumptions. Note 1 includes a discussion of significant accounting policies. The accounting policies discussed below are the ones we consider critical to an understanding of our consolidated financial statements because their application places the most significant demands on our judgment. Our financial results might have been different if different assumptions had been used or other conditions had prevailed. Financing and Securitization Transactions We maintain a revolving funding program composed of three warehouse facilities ("warehouse facilities") that we use to fund auto loans receivable originated by CAF. We typically elect to fund these receivables through an asset-backed term funding transaction, such as a term securitization or alternative funding arrangement, at a later date. We recognize transfers of auto loans receivable into the warehouse facilities and asset-backed term funding transactions, including term securitizations (together, "non-recourse funding vehicles"), as secured borrowings, which result in recording the auto loans receivable and the related non-recourse notes payable on our consolidated balance sheets. CAF income included in the consolidated statements of earnings primarily reflects the interest and fee income generated by the auto loans receivable less the interest expense associated with the debt issued to fund these receivables, a provision for estimated loan losses and direct CAF expenses. See Notes 1(F), 1(H) and 4 for additional information on securitizations and auto loans receivable. Allowance for Loan Losses The allowance for loan losses represents the net credit losses expected over the remaining contractual life of our managed receivables. Because net loss performance can vary substantially over time, estimating net losses requires assumptions about matters that are uncertain. The allowance for loan losses is determined using a net loss timing curve, primarily based on the composition of the portfolio of managed receivables and historical gross loss and recovery trends. Due to the fact that losses for receivables with less than 18 months of performance history can be volatile, our net loss estimate weights both historical losses by credit grade at origination and actual loss data on the receivables to-date along with forward loss curves, in estimating future performance. Once the receivables have 18 months of performance history, the net loss estimate reflects actual loss experience of those receivables to date, along with forward loss curves, to predict future performance. The forward loss curves are constructed using historical performance data and show the average timing of losses over the course of a receivable's life. The net loss estimate is calculated by applying the loss rates developed using the methods described above to the amortized cost basis of the managed receivables. The output of the net loss timing curve is adjusted to take into account reasonable and supportable forecasts about the future. Specifically, the change inU.S. unemployment rates and theNational Automobile Dealers Association ("NADA") used vehicle price index are used to predict changes in gross loss and recovery rate, respectively. An economic adjustment factor, based upon a single macroeconomic scenario, is developed to capture the relationship between changes in these indices and changes in gross loss and recovery rates. This factor is applied to the output of the net loss timing curve for the reasonable and supportable forecast period of two years. After the end of this two year period, the impact of the economic factor is phased out of the allowance for loan loss calculation on a straight-line basis over a period of 12 months. We periodically consider whether the use of alternative metrics would result in improved model performance and revise the model when appropriate. We also consider whether qualitative adjustments are necessary for factors not reflected in the quantitative methods but impact the measurement of estimated credit losses. Such adjustments include the uncertainty of the impacts of recent economic trends on customer behavior. The change in the allowance for loan losses is recognized through an adjustment to the provision for loan losses. Determining the appropriateness of the allowance for loan losses requires management to exercise judgment about matters that are inherently uncertain, including the timing and distribution of net losses that could materially affect the allowance for loan losses and, therefore, net earnings. To the extent that actual performance differs from our estimates, additional provision for credit losses may be required that would reduce net earnings. A 10% change in the estimated loss rates would have changed the allowance for loan losses by approximately$41.1 million as ofFebruary 28, 2021 .
See Notes 1(H) and 4 for additional information on the allowance for loan losses.
Revenue Recognition
We recognize revenue when the earnings process is complete, generally either at
the time of sale to a customer or upon delivery to a customer. As part of our
customer service strategy, we guarantee the retail vehicles we sell with a
30day, money-back
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guarantee. We record a reserve for estimated returns based on historical
experience and trends, and results could be affected if future vehicle returns
differ from historical averages.
We also sell ESPs and GAP on behalf of unrelated third parties, who are the
primary obligors, to customers who purchase a retail vehicle. The ESPs we
currently offer on all used vehicles provide coverage up to 60 months (subject
to mileage limitations), while GAP covers the customer for the term of their
retail installment contract. We recognize revenue, on a net basis, at the time
of sale. We also record a reserve, or refund liability, for estimated contract
cancellations. The reserve for cancellations is evaluated for each product and
is based on forecasted forward cancellation curves utilizing historical
experience, recent trends and credit mix of the customer base. Our risk related
to contract cancellations is limited to the revenue that we
receive. Cancellations fluctuate depending on the volume of EPP sales, customer
financing default or prepayment rates, and shifts in customer behavior related
to changes in the coverage or term of the product. Results could be affected if
actual events differ from our estimates. A 10% change in the estimated
cancellation rates would have changed cancellation reserves by approximately
$12.5 million as of February 28, 2021 . See Note 8 for additional information on
cancellation reserves.
We are contractually entitled to receive profit-sharing revenues based on the
performance of the ESPs administered by third parties. These revenues are a form
of variable consideration included in EPP revenues to the extent that it is
probable that it will not result in a significant revenue reversal. An estimate
of the amount to which we expect to be entitled, subject to various constraints,
is recognized upon satisfying the performance obligation of selling the ESP.
These constraints include factors that are outside of the company's influence or
control and the length of time until settlement. We apply the expected value
method, utilizing historical claims and cancellation data from CarMax customers,
as well as external data and other qualitative assumptions. This estimate is
reassessed each reporting period with changes reflected in other sales and
revenues on our consolidated statements of earnings and other assets on our
consolidated balance sheets.
Customers applying for financing who are not approved or are conditionally
approved by CAF are generally evaluated by other third-party finance providers.
These providers generally either pay us or are paid a fixed, pre-negotiated fee
per contract. We recognize these fees at the time of sale.
We collect sales taxes and other taxes from customers on behalf of governmental
authorities at the time of sale. These taxes are accounted for on a net basis
and are not included in net sales and operating revenues or cost of sales.
See Note 2 for additional information on revenue recognition.
RESULTS OF OPERATIONS - CARMAX SALES OPERATIONS
NET SALES AND OPERATING REVENUES
Years Ended February 28 or 29
(In millions) 2021 Change 2020 Change 2019
Used vehicle sales $ 15,713.6 (8.5) % $ 17,169.5 13.2 % $ 15,172.8
Wholesale vehicle sales 2,668.8 6.7 % 2,500.0 4.5 % 2,393.0
Other sales and revenues:
Extended protection plan revenues 412.8 (5.6) % 437.4 14.4 % 382.5
Third-party finance fees, net (39.6) 13.6 % (45.8) (5.6) % (43.4)
Other 194.6 (24.8) % 258.9 (3.5) % 268.2
Total other sales and revenues 567.8 (12.7) % 650.5 7.1 % 607.3
Total net sales and operating revenues $ 18,950.1 (6.7) % $ 20,320.0 11.8 % $ 18,173.1
UNIT SALES
Years Ended February 28 or 29
2021 Change 2020 Change 2019
Used vehicles 751,862 (9.7) % 832,640 11.2 % 748,961
Wholesale vehicles 426,268 (8.6) % 466,177 4.2 % 447,491
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AVERAGE SELLING PRICES
Years Ended February 28 or 29
2021 Change 2020 Change 2019
Used vehicles $ 20,690 1.3 % $ 20,418 1.7 % $ 20,077
Wholesale vehicles $ 5,957 17.1 % $ 5,089 (0.2) % $ 5,098 COMPARABLE STORE USED VEHICLE SALES CHANGES
Years Ended February 28 or 29
2021 2020 2019
Used vehicle units (11.7) % 7.7 % 0.3 %
Used vehicle dollars (10.5) % 9.7 % 1.9 %
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.
VEHICLE SALES CHANGES
Years Ended February 28 or 29
2021 2020 2019
Used vehicle units (9.7) % 11.2 % 3.8 %
Used vehicle revenues (8.5) % 13.2 % 5.4 %
Wholesale vehicle units (8.6) % 4.2 % 9.5 %
Wholesale vehicle revenues 6.7 % 4.5 % 9.7 %
USED VEHICLE FINANCING PENETRATION BY CHANNEL (BEFORE THE IMPACT OF 3-DAY
PAYOFFS)
Years Ended February 28 or 29 (1)
2021 2020 2019
CAF (2) 45.5 % 46.7 % 48.4 %
Tier 2 (3) 22.3 20.2 17.9
Tier 3 (4) 10.9 10.2 9.9
Other (5) 21.3 22.9 23.8
Total 100.0 % 100.0 % 100.0 %
(1) Calculated as used vehicle units financed for respective channel as a
percentage of total used units sold.
(2) Includes CAF's Tier 3 loan originations, which represent less than 1% of
total used units sold.
(3) Third-party finance providers who generally pay us a fee or to whom no fee
is paid.
(4) Third-party finance providers to whom we pay a fee.
(5) Represents customers arranging their own financing and customers that do
not require financing.
CHANGE IN USED CAR STORE BASE
Years Ended February 28 or 29
2021 2020 2019
Used car stores, beginning of year 216 203
188
Store openings 4 13
15
Used car stores, end of year 220 216
203
During fiscal 2021, we opened 4 stores, all in existing television markets
(
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Used Vehicle Sales
Fiscal 2021 Versus Fiscal 2020. The 8.5% decrease in used vehicle revenues in
fiscal 2021 was primarily due to a 9.7% decrease in used unit sales, partially
offset by a 1.3% increase in average retail selling price. The decrease in used
units included an 11.7% decrease in comparable store used unit sales. This
reflected the combined effects of COVID-19 related store closures and
restrictions in operations, as well as reduced customer traffic resulting from
the economic impact of the pandemic and nationwide shelter-in-place orders. The
increase in average retail selling price reflected higher vehicle acquisition
costs driven by market appreciation, partially offset by shifts in the mix of
our sales by vehicle age.
We experienced negative comparable used unit sales in the first quarter of
fiscal 2021, which continued into June when we experienced high single digit
negative comparable used unit sales. The June results were more than offset by
mid-single digit positive comparable used unit sales in both July and August, a
trend that continued into September. However, as the election approached and
COVID-19 cases surged, which resulted in tightened occupancy restrictions and
shelter-in-place orders from state and local governments, we saw demand soften.
As a result, sales trended down in the latter part of the third quarter. Sales
began to accelerate towards the end of December and into January as we launched
our new marketing campaign, expanded our pricing tests, introduced new customer
offerings and a second round of stimulus checks was issued. This trend continued
until the middle of February when severe winter weather across a large portion
of the U.S. , delays in tax refunds relative to last year's timing and a lower
inventory position due to COVID-19- and weather-related production constraints
negatively impacted retail sales. Comparable used unit sales growth for the
fourth quarter of fiscal 2021 were also impacted by the extra day for leap day
in the prior year.
Sales in March 2021 were robust, exceeding 100,000 used units sold for the month
and resulting in double-digit used unit and comparable used unit sales growth
when compared with a COVID-19 impacted March 2020 and a record March 2019 .
During the month, the initial distribution of tax refund and stimulus checks
began, weather improved and customers continued to respond favorably to our
ongoing strategic investments and growth initiatives.
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 comprised of vehicles
purchased through our appraisal process that do not meet our retail standards.
Our wholesale auction prices usually reflect the 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. Our wholesale auctions were moved to an online format in response to
the COVID-19 pandemic and continue to operate completely online.
Fiscal 2021 Versus Fiscal 2020. The 6.7% increase in wholesale vehicle revenues
in fiscal 2021 was primarily due to a 17.1% increase in average selling price,
partially offset by an 8.6% decrease in wholesale unit sales. The increase in
average selling price was primarily due to increased acquisition costs driven by
market appreciation. The decline in wholesale units was largely driven by lower
appraisal traffic, which was significantly impacted by COVID-19, partially
offset by an increase in our appraisal buy rate. We achieved a record buy rate
in fiscal 2021.
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.
Fiscal 2021 Versus Fiscal 2020. Other sales and revenues declined 12.7% in
fiscal 2021, reflecting decreases in other revenues, including new car and
service department sales, and EPP revenues, partially offset by the improvement
in net third-party finance fees. EPP revenues declined 5.6%, largely reflecting
the reduction in our used unit sales as discussed above, partially offset by
favorable adjustments to the cancellation reserves and an increase in profit
sharing revenue recognized in the current year. The new car and service
department sales declines reflected both store closures and reduced customer
traffic in response to COVID-19. The decline in new car sales was also driven by
the divestiture of a franchise in the fourth quarter of fiscal 2021. Net
third-party finance fees improved as a result of favorable adjustments in the
fee agreements with our Tier 2 and Tier 3 providers made during the fourth
quarter of fiscal 2021.
34
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GROSS PROFIT
Years Ended February 28 or 29
(In millions) 2021 Change 2020 Change 2019
Used vehicle gross profit $ 1,588.9 (12.7) % $ 1,820.1 11.7 % $ 1,628.7
Wholesale vehicle gross profit 423.3 (6.8) % 454.4 5.4 % 431.0
Other gross profit 366.9 (18.1) % 447.8 6.4 % 420.9
Total $ 2,379.1 (12.6) % $ 2,722.3 9.7 % $ 2,480.6
GROSS PROFIT PER UNIT
Years Ended
2021 2020 2019
$ per unit (1) % (2) $ per unit (1) % (2) $ per unit (1) % (2)
Used vehicle gross profit $ 2,113 10.1 $ 2,186 10.6 $ 2,175 10.7
Wholesale vehicle gross
profit $ 993 15.9 $ 975 18.2 $ 963 18.0
Other gross profit $ 488 64.6 $ 538 68.9 $ 562 69.3
Total gross profit $ 3,164 12.6 $ 3,270 13.4 $ 3,312 13.6
(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.
Fiscal 2021 Versus Fiscal 2020. Used vehicle gross profit declined 12.7% in
fiscal 2021, reflecting the 9.7% decline in total used unit sales as well as the
$73 decline in used vehicle gross profit per unit. During the first quarter of
fiscal 2021, our used vehicle gross profit per unit was pressured by pricing
adjustments made to better align inventory levels with sales in response to
COVID-19. During the fourth quarter of fiscal 2021, our used vehicle gross
profit per unit was impacted by pricing tests rolled out in select markets.
We believe we can manage to a targeted gross profit per unit dollar range,
subject to future changes to our business, pricing strategy or external market
conditions. As noted above, in connection with the improvements and enhancements
we are making to our omni-channel experience, we also implemented pricing and
marketing tests in select markets during the fourth quarter of fiscal 2021.
Early results for these tests were positive and we plan to continue the tests
into the first quarter of fiscal 2022 while also monitoring macroeconomic
factors. We continue to expect gross profit per used unit to be above $2,000
during the quarter.
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.
Fiscal 2021 Versus Fiscal 2020. Wholesale vehicle gross profit decreased 6.8%
in fiscal 2021, driven by the 8.6% decrease in wholesale unit sales, partially
offset by a modest increase in wholesale gross profit per unit. Wholesale gross
profit per unit
35
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was under significant pressure early in the first quarter of fiscal 2021,
reflecting sharp declines in industry wholesale valuations; however, wholesale
gross profit per unit had fully recovered by the end of the first quarter.
During the second quarter of fiscal 2021, performance was supported by strong
appreciation in the market. By the end of the second quarter, depreciation had
returned to the wholesale market, and steep depreciation continued during the
third quarter. At the beginning of the fourth quarter, industry prices flattened
out and began to appreciate through the remainder of the quarter.
Other Gross Profit
Other gross profit includes profits related to EPP revenues, net third-party
finance fees and other revenues. Other revenues 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.
Fiscal 2021 Versus Fiscal 2020. Other gross profit decreased 18.1% in fiscal
2021, reflecting a decline in service department profits and EPP revenues.
Service results reflected the overhead deleverage resulting from our decline in
used car sales, pay continuity for our technicians and other service personnel
during periods of reduced vehicle reconditioning activity in the first quarter
and discretionary bonuses for service and reconditioning associates.
SG&A Expenses
COMPONENTS OF SG&A EXPENSES AS A PERCENTAGE OF TOTAL SG&A EXPENSES
Fiscal Year 2021
[[Image Removed: kmx-20210228_g4.jpg]]
COMPONENTS OF SG&A EXPENSES COMPARED WITH PRIOR PERIODS
Years Ended February 28 or 29
(In millions except per unit data) 2021 Change 2020 Change 2019
Compensation and benefits:
Compensation and benefits, excluding
share-based compensation expense $ 909.8 (0.4) % $ 913.2 9.4 % $ 835.0
Share-based compensation expense 111.7 12.4 % 99.4 42.2 % 69.9
Total compensation and benefits (1) $ 1,021.5 0.9 % $ 1,012.6 11.9 % $ 904.9
Store occupancy costs 399.1 1.5 % 393.4 9.6 % 359.1
Advertising expense 217.5 13.7 % 191.3 15.0 % 166.4
Other overhead costs (2) 260.7 (24.0) % 342.8 14.3 % 299.9
Total SG&A expenses $ 1,898.8 (2.1) % $ 1,940.1 12.1 % $ 1,730.3
SG&A per used vehicle unit (3) $ 2,525 $ 195
(1)Excludes compensation and benefits related to reconditioning and vehicle
repair service, which are included in cost of sales. See Note 12 for details of
stock-based compensation expense by grant type.
(2)Includes IT expenses, non-CAF bad debt, insurance, preopening and relocation
costs, charitable contributions, travel and other administrative expenses.
(3)Calculated as total SG&A expenses divided by total used vehicle units.
36
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Fiscal 2021 Versus Fiscal 2020 (Decrease of $41.3 million or 2.1%). This
decrease reflected a reduction in costs associated with our decline in sales
volume and actions taken in response to COVID-19 to reduce costs, partially
offset by continued spending to advance our technology platforms and support
strategic initiatives. The decrease also reflected the following:
•$40.3 million one-time benefit, representing our receipt of settlement proceeds
in a class action lawsuit related to the economic loss associated with vehicles
containing Takata airbags.
•$26.2 million increase in advertising expense primarily due to our new
advertising campaign launched during the fourth quarter of fiscal 2021 and
incremental marketing spend in select markets in conjunction with our expanded
pricing tests.
•$12.3 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.
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.
Fiscal 2021 Versus Fiscal 2020. Interest expense of $86.2 million in fiscal
2021 was relatively consistent with $83.0 million in fiscal 2020.
Income Taxes
The effective income tax rate was 22.6% in fiscal 2021 compared with 23.5% in
fiscal 2020. The decrease in the effective tax rate is primarily due to an
increase in excess tax benefits recognized on stock exercises and releases in
fiscal 2021.
RESULTS OF OPERATIONS - CARMAX AUTO FINANCE
CAF income primarily reflects interest and fee income generated by CAF's portfolio of auto loans receivable 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. Increases in interest rates, which affect CAF's funding costs, or other competitive pressures on consumer rates, could result in 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 changes in loss and delinquency experience and economic factors on our outlook for net losses expected to occur over the remaining contractual life of the loans receivable. 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. Historically, we have strived 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 (including the effects of the COVID-19 outbreak) and wholesale recovery rates. Based on underwriting adjustments made during the first quarter of fiscal 2021, in response to higher anticipated losses related to COVID-19, we targeted new loans toward the higher end of this range. In the second quarter of fiscal 2021, we ceased the underwriting adjustments made during the previous quarter and we anticipate loans originated since to remain within our targeted range. 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. Loans originated in a given fiscal period impact CAF income over time, as we recognize income over the life of the underlying auto loan.
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 loans receivable, including credit quality.
37
--------------------------------------------------------------------------------SELECTED CAF FINANCIAL INFORMATION
Years Ended February 28 or 29
(In millions) 2021 % (1) 2020 % (1) 2019 % (1)
Interest margin:
Interest and fee income $ 1,142.0 8.5 $ 1,104.1 8.4 $ 972.9 8.0
Interest expense (314.1) (2.3) (358.1) (2.7) (289.3) (2.4)
Total interest margin $ 827.9 6.1 $ 746.0 5.7 $ 683.6 5.6
Provision for loan losses $ (160.7) (1.2) $ (185.7) (1.4) $ (153.8) (1.3)
CarMax Auto Finance income $ 562.8 4.2 $ 456.0 3.5
(1)Percent of total average managed receivables.
CAF ORIGINATION INFORMATION (AFTER THE IMPACT OF 3-DAY PAYOFFS)
Years Ended February 28 or 29
2021 2020 2019
Net loans originated (in millions)$ 6,395.0 $ 7,089.7 $ 6,330.1 Vehicle units financed 319,346 353,654 323,864 Net penetration rate (1) 42.5 % 42.5 % 43.2 % Weighted average contract rate 8.4 % 8.4 % 8.5 % Weighted average credit score (2) 706 710
706
Weighted average loan-to-value (LTV) (3) 92.0 % 94.2 %
94.8 %
Weighted average term (in months) 66.0 66.1 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
Years Ended February 28 or 29
(In millions) 2021 2020 2019
Total ending managed receivables $ 13,847.2 $ 13,617.8 $ 12,510.2
Total average managed receivables $ 13,463.3 $ 13,105.1 $ 12,150.2
Allowance for loan losses (1) $ 411.1
2.97 % 1.16 % 1.10 %
Net credit losses on managed receivables $ 109.4
0.81 % 1.27 % 1.19 %
Past due accounts as a percentage of ending managed
receivables 2.83 % 3.44 % 3.61 %
Average recovery rate (2) 53.5 % 48.1 % 47.7 %
(1) The allowance for loan losses as of February 28, 2021, includes a $202.0
million increase as a result of our adoption of CECL during the first quarter of
fiscal 2021.
(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
changes in the wholesale market pricing environment.
38
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Fiscal 2021 Versus Fiscal 2020.
•CAF Income (Increase of $106.8 million or 23.4%)
•The increase in CAF income reflects increases in the total interest margin
percentage and average managed receivables as well as a decrease in the
provision for loan losses.
•The decrease in net loan originations in fiscal 2021 largely resulted from our
used vehicle sales decline.
•Provision for Loan Losses (Decreased to $160.7 million from $185.7 million )
•The provision largely reflected our initial estimate of lifetime losses on
loans originated in fiscal 2021.
•The provision also included an increase in our estimate of lifetime losses made
during the first quarter of fiscal 2021, largely resulting from COVID-19 turmoil
and worsened economic factors, which was largely offset by favorable loss
experience in comparison to our expectations during the remainder of fiscal
2021.
•The allowance for loan losses as a percentage of ending managed receivables was
2.97% as of February 28, 2021 compared with 2.64% as of March 1, 2020 , after our
adoption of CECL.
•We believe our current reserve is appropriate and considers both the positive
customer payment behavior recently observed as well as the unpredictability of
the current environment and the uncertain consumer situation.
•Total interest margin increased as a percentage of average managed receivables
to 6.1% in fiscal 2021 compared with 5.7% in fiscal 2020 as a result of lower
funding costs.
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. Historically, CAF has targeted originating approximately 5%
of the total Tier 3 loan volume; however, this rate may vary over time based on
market conditions. During the first quarter of fiscal 2021, we paused our CAF
Tier 3 lending given the current economic outlook and uncertainty surrounding
COVID-19. Early in the third quarter, we resumed our Tier 3 lending program. A
total of $147.7 million and $167.5 million in CAF Tier 3 receivables were
outstanding as of February 28, 2021 and February 29, 2020 , respectively. These
loans have higher loss and delinquency rates than the remainder of the CAF
portfolio, as well as higher contract rates. As of February 28, 2021 and
February 29, 2020 , approximately 10% of the total allowance for loan losses
related to the outstanding CAF Tier 3 loan balances. Subsequent to the end of
fiscal 2021, we began to increase our Tier 3 volume beyond our target of 5% of
the total Tier 3 loan volume, and we anticipate reaching and maintaining a 10%
share in Tier 3 loan volume by the end of the first quarter of fiscal 2022.
PLANNED FUTURE ACTIVITIES
We anticipate opening ten stores in fiscal 2022. These stores will predominantly be cross functional stores that have a smaller footprint and can leverage our scale and presence of the larger format stores in nearby markets. We currently estimate capital expenditures will total approximately$350 million in fiscal 2022. Over$100 million , or approximately one-third of this spend, will be focused on investments in technology, an increase from approximately 15% four years ago. RECENT ACCOUNTING PRONOUNCEMENTS See Note 1(X) to the consolidated financial statements for information on recent accounting pronouncements applicable to CarMax. FINANCIAL CONDITION Liquidity and Capital Resources Our primary ongoing cash requirements are to fund our existing operations, store expansion and improvement, CAF, and strategic growth initiatives. 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. During the first quarter of fiscal 2021, in response to COVID-19, we took immediate and proactive measures to bolster our liquidity position and provide additional financial flexibility to improve our ability to meet our short-term liquidity needs. Those measures included drawing down additional funds on our revolving credit facility, pausing our stock repurchase program, pausing our store expansion strategy and actively aligning operating expenses to the current state of the business. We strengthened our overall financial position by selling through inventory and quickly aligning costs to lower sales volumes. We have continued to adjust inventory levels throughout the pandemic to align with sales trends. During the third quarter, we fully paid down the outstanding balance on our revolving credit facility and resumed our store expansion strategy and share 39 -------------------------------------------------------------------------------- repurchase program. Given the turnaround in our business, the strength of the credit markets and our solid balance sheet, we believe we have the appropriate liquidity, access to capital and financial strength to support our operations and continue investing in our strategic initiatives for the foreseeable future. InMarch 2021 , we signed a definitive agreement to acquire Edmunds for a purchase price that implies an enterprise value of$404 million , inclusive of our initial investment. We expect to pay for the transaction with a combination of cash and equity and anticipate it will close inJune 2021 . We are party to contractual obligations involving commitments to make payments to third parties. These obligations impact our liquidity and capital resource needs. Our contractual obligations primarily consist of long-term debt and related interest payments, leases, purchase obligations and commitments, income taxes and defined benefit retirement plans. See Notes 11 and 15 for amounts outstanding as ofFebruary 28, 2021 related to debt and leases, respectively. Our contractual obligations related to income taxes represent the net unrecognized tax benefits related to uncertain tax positions. See Note 9 for information related to income taxes. Our contractual obligations related to defined benefit retirement plans represent the funded status recognized as ofFebruary 28, 2021 . See Note 10 for information related to these plans. Purchase obligations and commitments consist of certain enforceable and legally binding obligations related to real estate purchases, third-party outsourcing services and advertising. As ofFebruary 28, 2021 , our purchase obligations and commitments were approximately$141.2 million , of which$68.0 million are due in fiscal 2022. The majority of the remaining purchase obligations and commitments are due within the next three years. We currently target an adjusted debt to capital ratio in a range of 35% to 45%. At the end of fiscal 2021, our adjusted debt to capital ratio was below our targeted range for the year. 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. Generally, 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 fiscal 2021, net cash provided by operating
activities totaled
The majority of the changes in auto loans receivable are accompanied by changes in non-recourse notes payable, which are issued to fund auto loans originated by CAF. Net issuances of non-recourse notes payable were$151.5 million in fiscal 2021 compared with$1.08 billion in fiscal 2020 and are separately reflected as cash from financing activities. Due to the presentation differences between auto loans receivable and non-recourse notes payable on the consolidated statements of cash flows, fluctuations in these amounts can have a significant impact on our operating and financing cash flows without affecting our overall liquidity, working capital or cash flows. As ofFebruary 28, 2021 , total inventory was$3.16 billion , representing an increase of$310.7 million , or 10.9%, compared with the balance as of the start of the fiscal year. The increase primarily reflected an increase in the average carrying cost of inventory as a result of higher acquisition costs, driven by market appreciation, as well as increased units due to decreased sales at the end of the fourth quarter of fiscal 2021 as a result of severe weather and tax refund delays. The change in net cash provided by (used in) operating activities for fiscal 2021 compared with fiscal 2020 reflected the change in auto loans receivable, partially offset by a decrease in net earnings when excluding non-cash expenses, which include depreciation and amortization, share-based compensation expense and the provisions for loan losses and cancellation reserves. Investing Activities. Net cash used in investing activities totaled$128.2 million in fiscal 2021 and$389.4 million in fiscal 2020. Investing activities primarily consist of capital expenditures, which totaled$164.5 million in fiscal 2021 and$331.9 million in fiscal 2020. Capital expenditures primarily include 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. In response to COVID-19, we paused our store expansion and remodel strategy during the first quarter of fiscal 2021. We have since resumed these activities. We opened 4 stores in fiscal 2021 compared with 13 stores in fiscal 2020. 40 -------------------------------------------------------------------------------- Financing Activities. Net cash used in financing activities was$424.0 million in fiscal 2021, compared with net cash provided by financing activities of$687.0 million in fiscal 2020. Included in these amounts were net issuances of non-recourse notes payable of$151.5 million compared with$1.08 billion , respectively. Non-recourse notes payable are typically used to fund changes in auto loans receivable (see Operating Activities). During fiscal 2021, cash used in financing activities was impacted by stock repurchases of$229.9 million as well as net payments on our long-term debt of$463.0 million . During fiscal 2020, cash provided by financing activities was impacted by stock repurchases of$567.7 million as well as net borrowings on our long-term debt of$77.8 million . TOTAL DEBT AND CASH AND CASH EQUIVALENTS (In thousands)
As of
Debt Description (1) Maturity Date 2021 2020
Revolving credit facility (2) June 2024 $ - $ 452,740
Term loan (2) June 2024 300,000 300,000
3.86% Senior notes April 2023 100,000 100,000
4.17% Senior notes April 2026 200,000 200,000
4.27% Senior notes April 2028 200,000 200,000
Various dates through February
Financing obligations 2059 533,578 536,739
Various dates through November
Non-recourse notes payable 2027 13,764,808 13,613,272
Total debt (3) $ 15,098,386 $ 15,402,751
Cash and cash equivalents $
132,319
(1)Interest is payable monthly, with the exception of our senior notes, which are payable semi-annually. (2)Borrowings accrue interest at variable rates based on LIBOR, the federal funds rate, or the prime rate, depending on the type of borrowing. (3)Total debt excludes unamortized debt issuance costs. See Note 11 for additional information. 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. As ofFebruary 28, 2021 , we were in compliance with these financial covenants. See Note 11 for additional information on our revolving credit facility, term loan, senior notes and financing obligations. CAF auto loans receivable 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 loans receivable, 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 loans receivable. We do, however, continue to have the rights associated with the interest we retain in these non-recourse funding vehicles. As ofFebruary 28, 2021 ,$11.45 billion and$2.31 billion of non-recourse notes payable were outstanding related to asset-backed term funding transactions and our warehouse facilities, respectively. During fiscal 2021, we funded a total of$5.78 billion in asset-backed term funding transactions. As ofFebruary 28, 2021 , we had$1.61 billion of unused capacity in our warehouse facilities. We have periodically increased our warehouse facility limit over time, as our store base, sales and CAF loan originations have grown. See Notes 1(F) and 11 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 41
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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. The timing and amount of stock repurchases are determined based on stock price, market conditions, legal requirements and other factors. Shares repurchased are deemed authorized but unissued shares of common stock. As ofFebruary 28, 2021 , a total of$2 billion of board authorizations for repurchases were outstanding, with no expiration date, of which$1.34 billion remained available for repurchase. InMarch 2020 , our current stock repurchase program was suspended. The repurchase authorization remained effective and the program resumed inSeptember 2020 . See Note 12 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.
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