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, the
accompanying notes and the MD&A included in our Annual Report on Form 10-K for
the fiscal year ended February 29, 2020 ("fiscal 2020"), 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 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 experience, 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 integration 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 August 31, 2020 , we operated 220 used car stores in 106 U.S. television
markets, as well as 2 new car franchises. As of that date, wholesale auctions
previously held at 74 of our used car stores were being conducted virtually.
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 40.1% of our retail used vehicle unit sales in the
first six months of fiscal 2021. As of August 31, 2020 , CAF serviced
approximately 1,027,000 customer accounts in its $13.38 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.
Impact of COVID-19
In March 2020 , the World Health Organization declared the outbreak of the novel
coronavirus ("COVID-19") as a global pandemic. In the following weeks, many U.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 in April 2020 that more than 15,000 associates had
been placed on furlough. During the first six months of fiscal 2021, we spent
approximately
Page 27
--------------------------------------------------------------------------------We have implemented robust plans to reduce the risk of exposure and further spread 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, and we continue to keep our appraisal lanes open for customerswho want or need to sell their cars. During the second quarter of fiscal 2021, we completed the rollout of our omni-channel experience, which gives us the largest addressable market in the used car industry. This offering gives customers the option to seamlessly do as much, or as little, online and in-person as they prefer. At the peak of the COVID-19 pandemic in early April, due to the mandates of public health officials and government agencies, approximately half of our stores were closed or under limited operations. Limited operations means the stores could sell cars but were limited to appointment-only, curbside pickup, home delivery or some combination of all three. As a result, used vehicle sales were down more than 75% during that period. Further, pricing and margin was pressured by sharp declines in industry wholesale valuations due to a steep depreciation environment. During this period, we reduced inventory levels to align with sales. Since hitting a trough in early April, we have seen our sales improve as stores reopened, occupancy restrictions eased and customers re-engaged in car buying. As ofAugust 31, 2020 , all of our stores were open, but many continue to run under occupancy restrictions. 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 through September. As demand increased during the second quarter, we were able to build our saleable inventory by more than 50% and successfully ramped up to target levels in September. The impact of COVID-19 on CAF loan origination volume has been consistent with our retail and wholesale sales performance noted above. As the pandemic escalated, we 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 the first six months of 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. In response to COVID-19, we took several measures in the first quarter of fiscal 2021 to enhance our liquidity position and provide additional financial flexibility. This included drawing down additional funds on our revolving credit facility, pausing our stock repurchase program, pausing our store expansion strategy and remodels, reducing inventory levels and aligning other operating expenses to the lower sales volume. In addition to the temporary furlough mentioned above, we also implemented a hiring freeze, reduced advertising spending and reduced labor hours. As of the end of the second quarter, we are actively hiring nationwide and have resumed our store expansion strategy with plans to open between eight and ten stores in fiscal 2022. Subsequent to the end of the second quarter, we used our cash on hand to fully pay down the outstanding balance on our revolving credit facility and resumed our share repurchase program. During the first quarter of fiscal 2021, new legislation was enacted, and newIRS guidance was issued to provide relief to businesses in response to the COVID-19 pandemic. We have evaluated the tax provisions included in legislation such as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as well as recentIRS guidance. 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 CARES Act to have a material impact on our results of operations. The COVID-19 pandemic remains a rapidly evolving situation. 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. The duration and severity of the COVID-19 Page 28 -------------------------------------------------------------------------------- outbreak are uncertain, and we are unable to determine the full impact that social distancing protocols, or potential subsequent outbreaks, will ultimately have on our operations or consumer demand. As such, the full impact on our revenues, profitability, financial position and liquidity remains uncertain at this time. Revenues and Profitability The sources of revenue and gross profit from the CarMax Sales Operations segment for the first six months of fiscal 2021 are as follows:
Operating Revenues
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A high-level summary of our financial results for the second quarter and first
half of fiscal 2021 as compared to the second quarter and first half of fiscal
2020 is as follows:
Three Months Change from
Ended Three Months Change from
(Dollars in millions except per share August 31, Ended Six Months Ended Six Months Ended
or per unit data) 2020 August 31, 2019 August 31, 2020 August 31, 2019
Income statement information
Net sales and operating revenues $ 5,372.2 3.3 % $ 8,600.9 (18.6) %
Gross profit $ 752.1 8.5 % $ 1,106.3 (22.9) %
CAF income $ 147.2 29.0 % $ 198.1 (13.9) %
Selling, general and administrative
expenses $ 490.2 2.0 % $ 863.9 (11.0) %
Net earnings $ 296.7 27.0 % $ 301.7 (39.7) %
Unit sales information
Used unit sales 217,330 3.9 % 352,358 (18.7) %
Change in used unit sales in
comparable stores 1.2 % N/A (21.0) % N/A
Wholesale unit sales 132,980 5.1 % 196,275 (20.6) %
Per unit information
Used gross profit per unit $ 2,214 1.4 % $ 2,108 (4.2) %
Wholesale gross profit per unit $ 1,086 17.0 % $ 1,051 6.8 %
SG&A per used vehicle unit $ 2,256 (1.9) % $ 2,452 9.5 %
Per share information
Net earnings per diluted share$ 1.79 27.9 % $ 1.83 (38.8) % Net earnings per diluted share during the first half of fiscal 2021 included a one-time benefit of$0.18 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. Page 29 --------------------------------------------------------------------------------
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 historically used to fund the repurchase of common stock under our share repurchase program and our store growth. Our current capital allocation strategy is to remain focused on growing the business while maintaining the appropriate amount of caution given the uncertainty that remains in the economic environment. As noted above, in response to the COVID-19 situation, 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. As demand increased during the second quarter, we were able to build our saleable inventory by more than 50% and successfully ramped up to target levels in September. Subsequent to the end of the second 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 for the foreseeable future. Future Outlook The COVID-19 situation 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. We will continue to monitor the COVID-19 situation 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 more than ever in how they shop for and buy a vehicle. 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. The current environment creates an opportunity for us to use our unique consumer offering to capitalize on our current position and grow market share. We completed our omni-channel rollout in the second quarter of fiscal 2021 and are now focusing our efforts on optimizing this customer experience with new enhancements. In the near term, our strategic investments will focus on our customer experience, vehicle acquisition and marketing. As we go forward, we plan to focus on clearly differentiating our brand from digital-only and traditional dealer brands by demonstrating the benefits of our omni-channel offering. As a result, we plan to increase our year-over-year marketing spend in the second half of fiscal 2021. We also continue to focus on driving effectiveness through our centralized CECs, improving our core buying channels and opening new buying channels and modernizing our wholesale auction platforms. While it is still a relatively new capability for us and still maturing, our CECs are quickly becoming more effective than our previous model. Approximately 70% of our customers interacted with our CECs during the second quarter. Additionally, approximately 50% of our customers chose to progress their sale remotely, which is up from 42% prior to COVID-19. We have taken decisive actions since the start of the COVID-19 pandemic that have supported our ability to appropriately manage costs. We will continue to act on opportunities to become leaner, more agile and a more cost-effective organization over the long term. Our long-term strategy continues to be focused on completing the rollout of our retail concept and optimizing 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 also be solid contributors to our 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. Page 30 -------------------------------------------------------------------------------- In calendar 2019, we estimate we sold approximately 4.7% of the age 0- to 10-year old vehicles sold in the comparable store markets in which we were operating and approximately 3.5% of the age 0- to 10-year old vehicles sold on a nationwide basis. 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 drive out waste. •Leveraging data and advanced analytics to continuously improve the customer experience as well as our processes and systems. In order to execute our long-term strategy, we have invested 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 enhance customer experiences, such as finance pre-approval, online appraisal, home delivery and curbside pick-up. We are also developing and implementing tools that help our associates be more efficient and effective. Additionally, we have centralized customer support in our CECs, which we believe provides 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. While in any individual period conditions may vary, in periods of elevated investment in our strategic initiatives, 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 an annual basis. As ofAugust 31, 2020 , we had used car stores located in 106 U.S. television markets, which covered approximately 78% of theU.S. population. The format and operating models utilized in our stores are continuously evaluated and may change or evolve over time based upon market and consumer expectations. During the first six months of fiscal 2021, we opened four stores. In response to COVID-19, we paused our store expansion strategy in the first quarter of fiscal 2021. We are resuming new store growth and anticipate opening between eight and ten stores in 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 the Annual Report on Form 10-K for the fiscal year endedFebruary 29, 2020 .
CRITICAL ACCOUNTING POLICIES
For information on critical accounting policies, see "Critical Accounting
Policies" in the MD&A included in Item 7 of the Annual Report on Form 10-K for
the fiscal year ended
Page 31 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS - CARMAX SALES OPERATIONS
NET SALES AND OPERATING REVENUES
Three Months Ended August 31 Six Months Ended August 31
(In millions) 2020 2019 Change 2020 2019 Change
Used vehicle sales $ 4,389.2 $ 4,346.3 1.0 % $ 7,175.4 $ 8,887.0 (19.3) %
Wholesale vehicle sales 819.1 678.3 20.8 % 1,161.9 1,340.7 (13.3) %
Other sales and revenues:
Extended protection plan revenues 119.4 113.3 5.4 % 192.8 224.6 (14.2) %
Third-party finance fees, net (15.4) (10.3) (49.6) % (26.2) (25.8) (1.4) %
Other 59.9 73.6 (18.6) % 97.0 141.0 (31.2) %
Total other sales and revenues 163.9 176.6 (7.2) % 263.6 339.8 (22.4) %
Total net sales and operating
revenues $ 5,372.2 $ 5,201.2 3.3 % $ 8,600.9 $ 10,567.5 (18.6) %
UNIT SALES
Three Months Ended August 31 Six Months Ended August 31
2020 2019 Change 2020 2019 Change
Used vehicles 217,330 209,091 3.9 % 352,358 433,359 (18.7) %
Wholesale vehicles 132,980 126,513 5.1 % 196,275 247,281 (20.6) %
AVERAGE SELLING PRICES
Three Months Ended August 31 Six Months Ended August
31
2020 2019 Change 2020 2019 Change
Used vehicles $ 19,991 $ 20,581 (2.9) % $ 20,127 $ 20,306 (0.9) %
Wholesale vehicles $ 5,891 $ 5,090 15.7 % $ 5,639 $ 5,150 9.5 %
COMPARABLE STORE USED VEHICLE SALES CHANGES
Three Months Ended August 31 (1) Six Months Ended August
31 (1)
2020 2019 2020 2019
Used vehicle units 1.2 % 3.2 % (21.0) % 6.3 %
Used vehicle revenues (1.6) % 6.3 % (21.6) % 7.9 %
(1) 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
Three Months Ended August 31 Six Months Ended August
31
2020 2019 2020 2019
Used vehicle units 3.9 % 6.2 % (18.7) % 9.6 %
Used vehicle revenues 1.0 % 9.3 % (19.3) % 11.1 %
Wholesale vehicle units 5.1 % 4.7 % (20.6) % 5.6 %
Wholesale vehicle revenues 20.8 % 8.0 % (13.3) % 7.6 %
Page 32
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USED VEHICLE FINANCING PENETRATION BY CHANNEL (BEFORE THE IMPACT OF 3-DAY
PAYOFFS)
Three Months Ended August 31 (1) Six Months Ended August 31
(1)
2020 2019 2020 2019
CAF (2) 45.7 % 46.8 % 42.8 % 46.5 %
Tier 2 (3) 22.3 % 19.7 % 24.7 % 20.0 %
Tier 3 (4) 11.1 % 9.6 % 12.4 % 10.6 %
Other (5) 20.9 % 23.9 % 20.1 % 22.9 %
Total 100.0 % 100.0 % 100.0 % 100.0 %
(1) Calculated as used vehicle units financed for respective channel as a
percentage of total used units sold.
(2) Includes CAF's Tier 3 loan originations, which represent less than 1% of
total used units sold.
(3) Third-party finance providers who generally pay us a fee or to whom no fee
is paid.
(4) Third-party finance providers to whom we pay a fee.
(5) Represents customers arranging their own financing and customers that do
not require financing.
CHANGE IN USED CAR STORE BASE
Three Months Ended August 31 Six Months Ended August 31
2020 2019 2020 2019
Used car stores, beginning of
period 220 206 216 203
Store openings - 3 4 6
Used car stores, end of period 220 209 220 209
During the first six months of fiscal 2021, we opened four stores, all in
existing television markets (
Used Vehicle Sales. The 1.0% increase in used vehicle revenues in the second quarter of fiscal 2021 was primarily due to a 3.9% increase in used unit sales. The increase in used units included a 1.2% 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 reflected strong conversion, continued support from financing, growth in web initiated selling opportunities, and solid execution by our associates in our stores and our customer experience centers. A strengthening used car environment also benefited the quarter, and though inventory availability was a headwind to sales, we returned to targeted inventory levels in September. The 19.3% decrease in used vehicle revenues in the first six months of fiscal 2021 was primarily due to an 18.7% decrease in used unit sales. The decrease in used units included a 21.0% decrease in comparable store used unit sales. This reflected the combined effects of COVID-19 related store closures and restrictions on operations, as well as reduced customer traffic resulting from the economic impact of the pandemic and nationwide shelter-in-place orders, primarily during the first quarter of fiscal 2021. We experienced negative comparable used unit sales in the first quarter of fiscal 2021, which continued through June. This was partially offset by positive comparable used unit sales in both July and August. The decrease in average retail selling price in the second quarter of fiscal 2021 reflected shifts in the mix of our sales by both vehicle age and class. The decrease in average retail selling price in the first six months of fiscal 2021 reflected shifts in the mix of our sales by both vehicle age and class, partially offset by higher vehicle acquisition costs. 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 20.8% increase in wholesale vehicle revenues in the second quarter of fiscal 2021 was primarily due to a 5.1% increase in unit sales as well as a 15.7% increase in average selling price. The wholesale unit growth was largely driven by a record appraisal buy rate, partially offset by lower appraisal traffic. Additionally, wholesale unit sales benefited from an extra auction day in the quarter. Page 33 -------------------------------------------------------------------------------- The 13.3% decrease in wholesale vehicle revenues in the first six months of fiscal 2021 was primarily due to a 20.6% decline in unit sales, partially offset by a 9.5% increase in average selling price. The wholesale unit decrease was largely driven by lower appraisal traffic, partially offset by an increase in our appraisal buy rate. The increase in average selling price in both the second quarter and first six months of fiscal 2021 was primarily due to increased acquisition costs driven by market appreciation. 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 declined 7.2% in the second quarter of fiscal 2021, reflecting a decrease in other revenues, including new car and service department sales, and an increase in net third-party finance fees, partially offset by growth in EPP revenues. EPP revenues increased 5.4%, largely reflecting the growth in our used unit sales as well as a year-over-year increase of$1.7 million related to profit-sharing revenue. Other sales and revenues declined 22.4% in the first six months of fiscal 2021, reflecting decreases in other revenues, including new car and service department sales, and EPP revenues. EPP revenues declined 14.2%, largely reflecting the reduction in our used unit sales, partially offset by a year-over-year increase of$5.1 million related to profit-sharing revenue. The new car and service department sales declines reflected both store closures and reduced customer traffic. Seasonality. Historically, our business has been seasonal. Our stores typically experience their strongest traffic and sales in the spring and summer, with an increase in traffic and sales in February and March, coinciding with federal income tax refund season. Sales are typically slowest in the fall. GROSS PROFIT Three Months Ended August 31 Six Months Ended August 31 (In millions) 2020 2019 Change 2020 2019 Change Used vehicle gross profit$ 481.2 $ 456.4 5.4 %$ 742.7 $ 953.2 (22.1) % Wholesale vehicle gross 144.4 117.4 23.0 % 206.3 243.3 (15.2) % profit Other gross profit 126.5 119.7 5.8 % 157.3 239.3 (34.2) % Total$ 752.1 $ 693.5 8.5 %$ 1,106.3 $ 1,435.8 (22.9) % GROSS PROFIT PER UNIT Three Months Ended August 31 Six Months Ended August 31 2020 2019 2020 2019 $ per $ per $ per $ per unit(1) %(2) unit(1) %(2) unit(1) %(2) unit(1)
%(2)
Used vehicle gross profit$ 2,214 11.0$ 2,183 10.5$ 2,108 10.4$ 2,200
10.7
Wholesale vehicle gross profit$ 1,086 17.6$ 928 17.3$ 1,051 17.8$ 984 18.1 Other gross profit$ 583 77.3$ 572 67.8$ 447 59.7$ 552 70.4 Total gross profit$ 3,461 14.0$ 3,317 13.3$ 3,140 12.9$ 3,313 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. Page 34 -------------------------------------------------------------------------------- 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 increased 5.4% in the second quarter of fiscal 2021, reflecting the 3.9% increase in total used unit sales and strong execution, which contributed to the$31 increase in used vehicle gross profit per unit. Used vehicle gross profit declined 22.1% in the first six months of fiscal 2021, reflecting the 18.7% decline in total used unit sales as well as the$92 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. We believe we can manage to a targeted gross profit per unit dollar range, subject to future changes to our business or pricing strategy. With regard to the COVID-19 pandemic, we believe significant pressures on gross profit per unit are behind us; however, gross profit per unit performance is largely dependent on sales trends and ongoing economic recovery. 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 23.0% in the second quarter of fiscal 2021, reflecting the 5.1% increase in wholesale unit sales, robust appreciation in the market and strong execution, which contributed to the$158 increase in wholesale gross profit per unit. Wholesale vehicle gross profit decreased 15.2% in the first six months of fiscal 2021, driven by the 20.6% decrease in wholesale unit sales, partially offset by a$67 increase in wholesale gross profit per unit. Wholesale gross profit per unit was under significant pressure early in the current year's first quarter, 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 quarter, depreciation had returned to the wholesale market. 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. Other gross profit increased 5.8% in the second quarter of fiscal 2021, reflecting the increase in EPP revenues, partially offset by the increase in net third-party finance fees. The increase was also due to an increase in service department profits, reflecting improved overhead leverage resulting from our growth in used unit sales as well as the employee retention tax credit enacted as part of the CARES Act. Other gross profit decreased 34.2% in the first six months of fiscal 2021, reflecting a decline in service department profits and EPP revenues. Service results in the first six months of fiscal 2021 reflected the overhead deleverage resulting from our decline in used car sales, as well as pay continuity for our technicians and other service personnel during periods of reduced vehicle reconditioning activity in the first quarter. Service results for the six-month period also continued to be adversely affected by the increase in our post-sale warranty period from 30 to 90 days implemented inMay 2019 . 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 can also impact CAF income, to the extent the average amount financed also changes. Page 35 --------------------------------------------------------------------------------
SG&A Expenses
COMPONENTS OF SG&A EXPENSES AS A PERCENTAGE OF TOTAL SG&A EXPENSES
Three Months Ended
Three Months Ended August 31 Six Months Ended August 31
(In millions except per unit data) 2020 2019 Change 2020 2019 Change Compensation and benefits: Compensation and benefits, excluding share-based compensation expense$ 239.3 $ 227.5 5.2 %$ 430.5 $ 457.4 (5.9) % Share-based compensation expense 34.3 21.9 56.6 % 58.0 62.8 (7.7) %
Total compensation and benefits (1)
9.7 %$ 488.5 $ 520.2 (6.1) % Store occupancy costs 101.1 96.7 4.5 % 195.7 193.3 1.2 % Advertising expense 50.5 46.8 7.7 % 85.0 88.8 (4.3) % Other overhead costs (2) 65.0 87.9 (26.0) % 94.7 168.2 (43.7) % Total SG&A expenses$ 490.2 $ 480.8 2.0 %$ 863.9 $ 970.5 (11.0) %
SG&A per used vehicle unit (3)
(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, preopening and relocation costs, insurance, 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 2.0% in the second quarter of fiscal 2021. This increase reflected increased costs as a result of the 7% growth in our store base since the beginning of last year's second quarter (representing the addition of 14 stores) and continued spend in omni-channel and core strategic initiatives, partially offset by actions taken during the early stages of the COVID-19 pandemic to reduce costs, including aligning staffing and other overhead costs to the business and pausing our store expansion. The increase also included the following: •$12.4 million increase in share-based compensation expense. The increase in share-based compensation expense was primarily related to cash-settled restricted stock units, as the expense associated with these units was driven by the change in the company's stock price during the relevant periods. •$3.7 million increase in advertising expense. We plan to increase our year-over-year advertising expense during the remainder of the current year. •$22.9 million decrease in other overhead costs, driven by the factors listed above as well as reduced self-insurance loss and litigation-related expenses. Page 36 -------------------------------------------------------------------------------- SG&A expenses decreased 11.0% in the first six months of fiscal 2021. This decrease reflected a reduction in costs associated with our decline in sales volume and actions taken in response to the COVID-19 pandemic to reduce costs, as noted above, partially offset by an increase in costs as a result of the 8% growth in our store base since the beginning of fiscal 2020 (representing the addition of 17 stores) and continued spend in omni-channel and core strategic initiatives. The decrease also included 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. •$4.8 million decrease in share-based compensation expense. The decrease in share-based compensation expense was primarily related to cash-settled restricted stock units, as the expense associated with these units was driven by the change in the company's stock price during the relevant periods. •$3.8 million decrease in advertising expense. We plan to increase our year-over-year advertising expense during the remainder of the current year. 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 remained relatively flat at$22.5 million in the second quarter of fiscal 2021 compared with$21.1 million in the second quarter of fiscal 2020. Interest expense increased to$46.4 million in the first six months of fiscal 2021 from$38.9 million in the first six months of fiscal 2020. The increase primarily reflected increased expense for our financing obligations as well as a higher outstanding average revolver balance in the current year period, partially offset by lower interest rates. Income Taxes. The effective income tax rate was 23.6% in the second quarter of fiscal 2021 and 23.1% in the first six months of fiscal 2021 versus 23.5% in the second quarter of fiscal 2020 and 23.8% in the first six months of fiscal 2020.
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 loans originated continued to be targeted at the higher end, or slightly above, this 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. Page 37 --------------------------------------------------------------------------------
SELECTED CAF FINANCIAL INFORMATION
Three Months Ended August 31 Six Months Ended August 31
(In millions) 2020 % (1) 2019 % (1) 2020 % (1) 2019 % (1)
Interest margin:
Interest and fee income $ 280.1 8.5 $ 275.7 8.5 $ 562.6 8.5 $ 541.9 8.4
Interest expense (81.3) (2.5) (90.6) (2.8) (165.9) (2.5) (178.0) (2.8)
Total interest margin $ 198.8 6.0 $ 185.1 5.7 $ 396.7 6.0 $ 363.9 5.7
Provision for loan losses$ (26.0) (0.8)$ (45.5) (1.4)$ (148.0) (2.2)$ (83.7)
(1.3)
CarMax Auto Finance income$ 147.2 4.5$ 114.1 3.5$ 198.1 3.0$ 230.1 3.6 (1) Annualized percentage of total average managed receivables.
CAF ORIGINATION INFORMATION (AFTER THE IMPACT OF 3-DAY PAYOFFS)
Six Months Ended August
Three Months Ended August 31 31
2020 2019 2020 2019
Net loans originated (in millions) $ 1,790.6 $ 1,772.6 $ 2,782.9 $ 3,598.9
Vehicle units financed 92,648 88,285 141,344 181,243
Net penetration rate (1) 42.6 % 42.2 % 40.1 % 41.8 %
Weighted average contract rate 8.2 % 8.6 % 8.3 % 8.7 %
Weighted average credit score (2) 710 708 709 706
Weighted average loan-to-value (LTV) (3) 91.6 % 94.7 % 92.1 % 94.5 %
Weighted average term (in months) 65.8 66.2 65.9 66.2
(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 As of and for the Six
August 31 Months Ended August 31
(In millions) 2020 2019 2020 2019
Total ending managed receivables $ 13,379.0 $
13,131.5
$ 13,218.8 $
13,012.1
$ 432.5 $
150.4
3.23 % 1.15 % 3.23 % 1.15 %
Net credit losses on managed receivables $ 30.7 $
42.1
0.93 % 1.29 % 1.13 % 1.11 %
Past due accounts as a percentage of ending
managed receivables 2.62 % 3.55 % 2.62 % 3.55 %
Average recovery rate (2) 57.3 % 48.6 % 52.0 % 48.9 %
(1) The allowance for loan losses as of August 31, 2020 , 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 the
wholesale market environment.
Page 38
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•CAF Income (Increase of $33.1 million , or 29.0% in the second quarter of fiscal
2021)
•The increase in CAF income reflects a decrease in the provision for loan
losses, as well as increases in the total interest margin percentage and average
managed receivables.
•The increase in net loan originations resulted from our used vehicle sales
growth as well as an increase in CAF's net penetration rate, partially offset by
a decrease in the average amount financed.
•CAF Income (Decrease of $31.9 million or 13.9% in the first six months of
fiscal 2021)
•The decrease in CAF income reflects an increase in the provision for loan
losses, partially offset by improvement in the total interest margin percentage.
•The decrease in net loan originations resulted from our used vehicle sales
decline as well as a decline in CAF's net penetration rate.
•Provision for Loan Losses (Decrease of $19.5 million in the second quarter of
fiscal 2021)
•The decrease in the provision for loan losses was primarily due to favorable
loss experience in comparison to our loss expectations set at the end of the
first quarter, resulting in a $29.6 million favorable adjustment for receivables
then outstanding.
•This adjustment was more than offset by a $55.6 million increase to the
provision related to our estimate of lifetime losses on originations during the
second quarter.
•While we experienced some loss favorability during the second quarter, this
favorability was tempered by economic adjustment factors applied to the
provision. The allowance for loan losses as of August 31, 2020 reflects the
unpredictability of the current environment and the highly uncertain consumer
situation.
•Provision for Loan Losses (Increase of $64.3 million in the first six months of
fiscal 2021)
•The provision included $93.7 million , which largely reflected our initial
estimate of lifetime losses on loans originated in each quarter of the current
fiscal year.
•The provision also included a net increase of $54.3 million in our estimate of
lifetime losses on loans existing at the beginning of each quarter during the
current fiscal year, largely resulting from COVID-19 turmoil and worsened
economic factors.
•In connection with our adoption of CECL during the first quarter of fiscal
2021, we recorded a $202.0 million increase in the allowance for loan losses on
the first quarter opening balance sheet, with a corresponding decrease of
$153.3 million , net of tax, in retained earnings.
•Total interest margin (Increased to 6.0% of average managed receivables for
both the second quarter and first six months of fiscal 2021 from 5.7% for both
the second quarter and first six months of fiscal 2020)
•The increase in the total interest margin percentage for both the second
quarter and first six months of fiscal 2021 was the 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
the COVID-19 outbreak. Subsequent to the end of the second quarter, we resumed
our Tier 3 lending program. A total of $146.1 million and $167.5 million in CAF
Tier 3 receivables were outstanding as of August 31, 2020 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
August 31, 2020 and February 29, 2020 , approximately 10% of the total allowance
for loan losses related to the outstanding CAF Tier 3 loan balances.
PLANNED FUTURE ACTIVITIES
In the first quarter of fiscal 2021, we paused our store expansion strategy in response to the COVID-19 situation. We are resuming new store growth and anticipate opening between eight and ten stores in fiscal 2022.
Page 39 --------------------------------------------------------------------------------
FINANCIAL CONDITION
Liquidity and Capital Resources Historically, our primary ongoing cash requirements have been 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. During the first quarter of fiscal 2021, in response to the COVID-19 crisis, 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. As demand increased during the second quarter, we were able to build our saleable inventory by more than 50% and successfully ramped up to target levels in September. Subsequent to the end of the second quarter, we fully paid down the outstanding balance on our revolving credit facility and resumed our store expansion strategy and share repurchase program. Our current capital allocation strategy is to remain focused on growing the business while maintaining an appropriate amount of caution given the uncertainty that remains in the economic environment. 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 for the foreseeable future. We currently target an adjusted debt-to-total capital ratio in a range of 35% to 45%. Our adjusted debt to capital ratio was modestly below our targeted range for the second quarter of fiscal 2021, when netting out our accumulated cash of approximately$712 million . 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 the first six months of fiscal 2021, net cash provided by operating activities totaled$889.8 million , compared with cash used in operating activities of$125.5 million in the prior year period. Our operating cash flows are significantly impacted by changes in auto loans receivable, which decreased$188.6 million in the current year period compared with an increase of$721.2 million in the prior year period. 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 payments on non-recourse notes payable were$230.9 million in the current year period compared with net issuances of$606.1 million in the prior year period 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 ofAugust 31, 2020 , total inventory was$2.82 billion , representing a decrease of$21.5 million compared with the balance as of the start of the fiscal year. The decrease was primarily due to a decline in vehicle units reflecting the seasonal pattern in inventory levels. The decrease in units was partially offset by an increase in the average carrying cost of inventory as a result of higher acquisition costs, driven by market appreciation. The change in net cash provided by (used in) operating activities for the first six months of the current fiscal year compared with the prior year period reflected the changes in auto loans receivable and inventory, as discussed above, and timing-related changes to other current assets and accounts payable, 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. During the first six months of the fiscal year, net cash used in investing activities totaled$92.4 million in fiscal 2021 compared with$178.9 million in fiscal 2020. Capital expenditures were$92.0 million in the current year period versus$171.3 million in the prior year period. Capital expenditures primarily included store construction costs 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. Page 40 --------------------------------------------------------------------------------
As of
Financing Activities. During the first six months of fiscal 2021, net cash used in financing activities totaled$86.0 million compared with net cash provided by financing activities of$346.6 million in the prior year period. Included in these amounts were net payments on non-recourse notes payable of$230.9 million compared with net issuances of non-recourse notes payable of$606.1 million in the prior year period. Non-recourse notes payable are typically used to fund changes in auto loans receivable (see "Operating Activities"). During the first six months of fiscal 2021, cash used in financing activities was impacted by stock repurchases of$54.2 million as well as net borrowings on our long-term debt of$117.4 million . 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 . TOTAL DEBT AND CASH AND CASH EQUIVALENTS (In thousands) As of
Debt Description (1) Maturity Date 2020 2020
Revolving credit facility (2) (4) June 2024 $ 575,838 $ 452,740
Term loan 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 533,165 536,739
Non-recourse notes payable Various dates through
13,613,272
Total debt (3) 15,291,378 15,402,751
Cash and cash equivalents $ 711,561 $ 58,211
(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 the Eurodollar rate (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 9 for additional information. (4) OnSeptember 16, 2020 , we fully paid down the outstanding borrowings under this facility with cash on hand. 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 ofAugust 31, 2020 , we were in compliance with these financial covenants.
See Note 9 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 ofAugust 31, 2020 ,$11.13 billion and$2.25 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 2021, we funded a total of$2.50 billion in asset-backed term funding transactions. As ofAugust 31, 2020 , we had$1.25 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 Note 9 for additional information on the warehouse facilities. Page 41 -------------------------------------------------------------------------------- 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. 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 ofAugust 31, 2020 , a total of$2 billion of board authorizations for repurchases was outstanding, with no expiration date, of which$1.51 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 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 operating capacity, sales, market share, 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: •The effect and consequences of COVID-19 on matters includingU.S. and local economies; our business operations and continuity; the availability of corporate and consumer financing; the health and productivity of our associates; the ability of third-party providers to continue uninterrupted service; and the regulatory environment in which we operate. •Changes in general or regionalU.S. economic conditions. •Changes in the availability or cost of capital and working capital financing, including changes related to the asset-backed securitization market. •Changes in the competitive landscape and/or our failure to successfully adjust to such changes. •Events that damage our reputation or harm the perception of the quality of our brand. •Our inability to realize the benefits associated with our omni-channel initiatives. •Our inability to recruit, develop and retain associates and maintain positive associate relations. •The loss of key associates from our store, regional or corporate management teams or a significant increase in labor costs. •Security breaches or other events that result in the misappropriation, loss or other unauthorized disclosure of confidential customer, associate or corporate information. •Significant changes in prices of new and used vehicles. •Changes in economic conditions or other factors that result in greater credit losses for CAF's portfolio of auto loans receivable than anticipated. •A reduction in the availability of or access to sources of inventory or a failure to expeditiously liquidate inventory. •Changes in consumer credit availability provided by our third-party finance providers. •Changes in the availability of extended protection plan products from third-party providers. Page 42 -------------------------------------------------------------------------------- •Factors related to the regulatory and legislative environment in which we operate. •Factors related to geographic and sales growth, including the inability to effectively manage our growth. •The failure of or inability to sufficiently enhance key information systems. •The performance of third-party vendors we rely on for key components of our business. •The effect of various litigation matters. •Adverse conditions affecting one or more automotive manufacturers, and manufacturer recalls. •The failure or inability to realize the benefits associated with our strategic investments. •The inaccuracy of estimates and assumptions used in the preparation of our financial statements, or the effect of new accounting requirements or changes toU.S. generally accepted accounting principles. •The volatility in the market price for our common stock. •The failure or inability to adequately protect our intellectual property. •The occurrence of severe weather events. •Factors related to the geographic concentration of our stores. For more details on factors that could affect expectations, see Part II, Item 1A, "Risk Factors" on Page 45 of this report, our Annual Report on Form 10-K for the fiscal year endedFebruary 29, 2020 , and our quarterly or current reports as filed with or furnished to theU.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. Page 43 --------------------------------------------------------------------------------
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