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 28, 2021 ("fiscal 2021"), 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. Our consolidated
financial statements include the financial results related to our Edmunds
Holding Company ("Edmunds") business, which does not meet the definition of a
reportable segment. For purposes of our MD&A discussion, amounts related to that
business are discussed in combination with our CarMax Sales Operations segment.
Separate discussion of these amounts is not considered meaningful for the
purpose of gaining an understanding of our business, as the significant drivers
of these operations in total are consistent with those of our CarMax Sales
Operations segment. Where appropriate, specific amounts related to
non-reportable segments have been disclosed for informational purposes.
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 our retail 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 August 31, 2021 , we operated 225 used car stores in 106 U.S. television
markets, as well as 1 new car franchise, which was sold on September 30, 2021 .
As of August 31, 2021 , 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 43.4% of our retail used vehicle unit sales in the
first six months of fiscal 2022. As of August 31, 2021 , CAF serviced
approximately 1,083,000 customer accounts in its $14.98 billion portfolio of
managed receivables.
Management regularly analyzes CAF's operating results by assessing the
competitiveness of our consumer offer, profitability, the performance of the
auto loans receivable, including trends in credit losses and delinquencies, and
CAF direct expenses.
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Revenues and Profitability
The sources of revenue and gross profit from the CarMax Sales Operations segment
and other non-reportable segments for the first six months of fiscal 2022 are as
follows:
Net Sales and Gross Profit
Operating Revenues
[[Image Removed: kmx-20210831_g1.jpg]][[Image Removed: kmx-20210831_g2.jpg]]
A high-level summary of our financial results for the second quarter and first
half of fiscal 2022 as compared to the second quarter and first half of fiscal
2021 is as follows (1):
Three Months Change from
Ended Three Months Change from
(Dollars in millions except per share August 31, Ended Six Months Ended Six Months Ended or per unit data)
2021 August 31 ,
2020
Net sales and operating revenues$ 7,988.4 48.7 %$ 15,686.0 82.4 % Gross profit$ 815.5 8.4 %$ 1,740.0 57.3 % CAF income$ 200.0 35.9 % $ 441.8 122.9 % Selling, general and administrative expenses$ 574.3 30.0 %$ 1,128.4 47.1 % Net earnings$ 285.3 (3.9) % $ 722.0 139.3 % Unit sales information Used unit sales 231,797 6.7 % 502,596 42.6 % Change in used unit sales in comparable stores 6.2 % N/A 41.8 % N/A Wholesale unit sales 188,098 41.4 % 369,487 88.2 % Per unit information Used gross profit per unit$ 2,185 (1.3) % $ 2,196 4.2 % Wholesale gross profit per unit$ 1,005 (7.5) % $ 1,015 (3.4) % SG&A as % of gross profit 70.4 % 11.6 % 64.8 % (4.5) %
Per share information
Net earnings per diluted share$ 1.72 (3.9) % $ 4.35 137.7 %
(1) Where applicable, amounts are net of intercompany eliminations.
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. InMarch 2020 , theWorld Health Organization declared the outbreak of the novel coronavirus ("COVID-19") as a global pandemic. Throughout fiscal 2021, manyU.S. states and localities had shelter-in-place orders and occupancy restrictions, Page 31 --------------------------------------------------------------------------------
impacting the operations of our stores and consumer demand. As a result, our fiscal 2021 results were significantly impacted by the COVID-19 pandemic, primarily during the first quarter.
Although the immediate impact of COVID-19 has subsided, uncertainty continues. During the first half of fiscal 2022, states and localities were in the midst of a vaccine distribution program and easing certain state-mandated restrictions; however, the continued spread and impact of COVID-19 persists, particularly as it relates to the emergence of new variants of the virus. 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, communities 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, our store growth and the Edmunds acquisition, which was completed during the second quarter of fiscal 2022. Our current capital allocation strategy is to focus on our core business, including investing in digital capabilities and the strategic expansion of our store footprint, pursue new growth opportunities through investments, partnerships and acquisitions and return excess capital to shareholders. Given the year-over-year improvement in our business and overall macroeconomic conditions, 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. Strategic Update and Future Outlook Since completing 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. We recognize the events over the past year and a half have 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. With the completion of our omni-channel platform rollout, we are now focusing our efforts on optimizing and enhancing the customer experience. In particular, we are focused on completing the roll out of our self-service experience. Currently, slightly more than 50% of our customers are eligible to complete an online retail sale independently if they choose, up from 40% in the first quarter. We are on track to bring this capability to all of our retail consumers by the end of fiscal 2022. In the second quarter of fiscal 2022, online retail sales accounted for 9% of retail unit sales, consistent with the previous quarter and up from 3% in the prior year quarter. Online retail sales accounted for 5% of retail unit sales for both the third and fourth quarter of fiscal 2021. An online retail sale is defined as a sale where the customer completes all four of the following activities remotely: reserving the vehicle; financing the vehicle, if needed; trading-in or opting out of a trade-in; and, creating an online sales order. Omni sales, defined as sales where customers complete at least one of the four activities listed above online, represented approximately 55% of retail sales, consistent with the previous quarter and up from 49% in the prior year quarter. Omni sales represented approximately 49% and 51% of retail sales for the third and fourth quarter of fiscal 2021, respectively. The growing rate of customer adoption versus the prior year reinforces our belief in our omni-channel strategy. Revenue from online transactions, defined as revenue from retail sales that qualify as an online retail sale, as well as any related EPP and third-party finance contribution, wholesale sales where the winning bid was taken from an online bid and all revenue earned by Edmunds, was$2.2 billion , or approximately 28% of net revenues in the second quarter of fiscal 2022, up from 24% in the previous quarter and 18% in the prior year quarter. Revenue from online transactions was approximately 20% and 17% of net revenues in the third and fourth quarter of fiscal 2021, respectively. 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. This innovative experience allowed us to purchase approximately 188,000 vehicles online from consumers during the second quarter of fiscal 2022, representing 52% of total buys from consumers, up from 48% in the previous quarter. This offering supports our belief that we have become and are further expanding our position as the largest online buyer of used vehicles from consumers in the US. Historically, our annual self-sufficiency rate has been between 36% and 41%. For the first quarter of fiscal 2022, our self-sufficiency rate was between 45% and 50%, and for the second quarter of fiscal 2022 we achieved a record self-sufficiency rate Page 32 --------------------------------------------------------------------------------
of approximately 70%. In the second quarter of fiscal 2022, total vehicles purchased from consumers was 364,263, a 7% increase versus the prior quarter and a 59% increase versus the prior year quarter, strengthening our leadership position as the largest used vehicle buyer from consumers.
At the end of the fourth quarter of fiscal 2021, we also launched a financing offer product in our online checkout process. With this enhancement, eligible 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 continue to enhance and further expand this product. Nearly 65% of our finance customers start their loan process online with a pre-approval application, and as of the second quarter of fiscal 2022, 100% of those customers now receive a digital decision that includes customized loan terms. In addition, a majority of those customers, through no additional time or effort on their part, are provided digital access to their personalized financing terms on every car in our inventory. 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 about 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. As a result, marketing spend increased year-over-year in the first half of fiscal 2022. We expect our marketing spend to remain elevated in fiscal 2022 with per unit expenses similar to those experienced in the second half of fiscal 2021. We believe we are well positioned to gain market share through the promotion of our omni-channel platform and new product offerings such as our Love Your Car Guarantee. Our strategic investments include the acquisition of Edmunds, which we completed onJune 1, 2021 . The acquisition is the first in CarMax history, and adds one of the most well established and trusted online guides for automotive information and a recognized industry leader in digital car shopping innovations to the CarMax family. With this acquisition, CarMax has enhanced its digital capabilities and further strengthened its role and reach across the used auto ecosystem while adding exceptional technology and creative talent. Edmunds continues to operate independently and remains focused on delivering confidence to consumers and excellent value to its dealer and OEM clients. Additionally, this acquisition allows both businesses to accelerate their respective capabilities to deliver an enhanced digital experience to their customers by leveraging Edmunds' compelling content and technology, CarMax's unparalleled national scale and infrastructure, and the combined talent of both businesses. Edmunds was slightly accretive to our profitability in the second quarter of fiscal 2022. We 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. 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. 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 lever SG&A as a percentage of gross profit when our gross profit 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 the previous fiscal year. Over the next five years, we expect our diversified model, the scale of our operations, our investments and omni-channel strategy to provide a solid foundation for further growth. As such, we have set the following long-term targets, which we are currently on track to achieve: •Grow national market share of 0- to 10-year old vehicles to more than 5% by the end of calendar year 2025. •Sell two million used vehicles per year by fiscal 2026 through our retail and wholesale channels combined. •Generate net revenue of approximately$33 billion in fiscal 2026. Page 33 -------------------------------------------------------------------------------- In calendar 2020, we estimate we sold approximately 4.3% 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 and achieve our other long-term targets 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. •Utilizing advertising to educate customers about our omni-channel platform and to differentiate and elevate our brand. As ofAugust 31, 2021 , we had used car stores located in 106 U.S. television markets, which covered approximately 77% 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 2022, we opened five stores, and during the remainder of the fiscal year we plan to open five stores. 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 28, 2021 .
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
RESULTS OF OPERATIONS - CARMAX SALES OPERATIONS AND OTHER NON-REPORTABLE SEGMENTS
NET SALES AND OPERATING REVENUES
Three Months Ended August 31 Six Months Ended August 31
(In millions) 2021 2020 Change 2021 2020 Change
Used vehicle sales $ 6,104.4 $ 4,389.2 39.1 % $ 12,261.7 $ 7,175.4 70.9 %
Wholesale vehicle sales 1,701.6 819.1 107.7 % 3,075.9 1,161.9 164.7 %
Other sales and revenues:
Extended protection plan revenues 113.0 119.4 (5.4) % 247.3 192.8 28.2 %
Third-party finance fees, net 2.8 (15.4) 118.0 % (1.8) (26.2) 93.1 %
Advertising & subscription revenues
(1) 34.5 - 100.0 % 34.5 - 100.0 %
Other 32.1 59.9 (46.4) % 68.3 97.0 (29.5) %
Total other sales and revenues 182.4 163.9 11.3 % 348.3 263.6 32.1 %
Total net sales and operating
revenues $ 7,988.4 $ 5,372.2 48.7 % $ 15,686.0 $ 8,600.9 82.4 %
(1) Excludes intersegment revenues that have been eliminated in consolidation. See Note 17 for further details.
UNIT SALES
Three Months Ended August 31 Six Months Ended August 31
2021 2020 Change 2021 2020 Change
Used vehicles 231,797 217,330 6.7 % 502,596 352,358 42.6 %
Wholesale vehicles 188,098 132,980 41.4 % 369,487 196,275 88.2 %
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AVERAGE SELLING PRICES
Three Months Ended August 31 Six Months Ended August 31
2021 2020 Change 2021 2020 Change
Used vehicles $ 26,141 $ 19,991 30.8 % $ 24,197 $ 20,127 20.2 %
Wholesale vehicles $ 8,701 $ 5,891 47.7 % $ 7,997 $ 5,639 41.8 %
COMPARABLE STORE USED VEHICLE SALES CHANGES
Three Months Ended August 31 (1) Six Months Ended August 31 (1)
2021 2020 2021 2020
Used vehicle units 6.2 % 1.2 % 41.8 % (21.0) %
Used vehicle revenues 38.8 % (1.6) % 70.4 % (21.6) %
(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
2021 2020 2021 2020
Used vehicle units 6.7 % 3.9 % 42.6 % (18.7) %
Used vehicle revenues 39.1 % 1.0 % 70.9 % (19.3) %
Wholesale vehicle units 41.4 % 5.1 % 88.2 % (20.6) %
Wholesale vehicle revenues 107.7 % 20.8 % 164.7 % (13.3) %
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)
2021 2020 2021 2020
CAF (2) 47.1 % 45.7 % 46.9 % 42.8 %
Tier 2 (3) 21.6 % 22.3 % 22.2 % 24.7 %
Tier 3 (4) 7.2 % 11.1 % 8.7 % 12.4 %
Other (5) 24.1 % 20.9 % 22.2 % 20.1 %
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
2021 2020 2021 2020
Used car stores, beginning of
period 222 220 220 216
Store openings 3 - 5 4
Used car stores, end of period 225 220 225 220
During the first six months of fiscal 2022, we opened five stores (
Page 35 -------------------------------------------------------------------------------- Used Vehicle Sales. The 39.1% increase in used vehicle revenues in the second quarter of fiscal 2022 was primarily driven by a 6.7% increase in used unit sales and a 30.8% increase in average retail selling price. The increase in used units included a 6.2% increase in comparable store used unit sales. For the first six months of fiscal 2022, used vehicle revenues increased 70.9%, driven by a 42.6% increase in used unit sales and a 20.2% increase in average selling price. The increase in used units included a 41.8% increase in comparable store used unit sales. Online retail sales, as defined previously, accounted for 9% and 8% of used unit sales for the second quarter and first six months of fiscal 2022, respectively, compared with 3% for both the second quarter and first six months of fiscal 2021, respectively. We believe several factors contributed to our strong comparable store used unit sales growth for both the second quarter and first six months of fiscal 2022, including a robust used vehicle demand environment and solid execution supported by the adoption of our omni-channel customer experience. This sales growth was also impacted by headwinds from inventory levels, staffing and used car valuations. Our results for the first six months of fiscal 2021 were significantly impacted by COVID-19, primarily during the first quarter. We continued to experience positive momentum in comparable store used unit sales growth throughSeptember 2021 .
The increase in average retail selling price in both the second quarter and first six months of fiscal 2022 reflected higher vehicle acquisition costs driven by market appreciation.
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
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. During fiscal 2021, our
wholesale auctions were moved to an online format in response to COVID-19 and
continue to operate completely online.
The 107.7% increase in wholesale vehicle revenues in the second quarter of
fiscal 2022 was primarily due to a 41.4% increase in unit sales as well as a
47.7% increase in average selling price. For the first six months of fiscal
2022, wholesale vehicle revenues increased 164.7%, driven by an 88.2% increase
in unit sales as well as a 41.8% increase in average selling price. The
wholesale unit growth for both the second quarter and first six months of fiscal
2022 was largely driven by increased appraisal volume from online offerings and
strong offers aided by market prices. The increase in average selling price in
both the second quarter and first six months of fiscal 2022 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, advertising
and subscription revenues earned by our Edmunds business, and other revenues,
which are predominantly comprised of service department and new vehicle sales.
The fees we pay to the Tier 3 providers are reflected as an offset to finance
fee revenues received from the Tier 2 providers. The mix of our retail vehicles
financed by CAF, Tier 2 and Tier 3 providers, or customers that arrange their
own financing, may vary from quarter to quarter depending on several factors,
including the credit quality of applicants, changes in providers' credit
decisioning and external market conditions. Changes in originations by one tier
of credit providers may also affect the originations made by providers in other
tiers.
Other sales and revenues increased 11.3% in the second quarter of fiscal 2022,
reflecting the addition of Edmunds' revenue and an improvement in net
third-party finance fees, partially offset by declines in new vehicles sales,
EPP revenues and service revenues. Net third-party finance fees improved as a
result of lower Tier 3 volume in the current year quarter as well as favorable
adjustments in the fee agreements with our Tier 2 and Tier 3 providers made
during the fourth quarter of fiscal 2021. The decline in new car sales was
driven by the divestiture of a new car franchise in the fourth quarter of fiscal
2021. EPP revenues decreased 5.4%, primarily driven by profit sharing revenues
recognized during the second quarter of fiscal 2021.
Other sales and revenues increased 32.1% in the first six months of fiscal 2022,
reflecting growth in EPP revenues, the addition of Edmunds' revenue and a
reduction in net third-party finance fees, partially offset by a decline in new
vehicle sales. EPP revenues increased 28.2%, reflecting the increase in our
retail unit volume partially offset by profit sharing revenues recognized during
the prior year period. 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 as well as shifts in our sales mix
by finance channel, partially offset by increased sales. The decline in new car
sales was driven by the divestiture of a new car franchise, as noted above.
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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. In
fiscal 2021, traffic and sales were impacted by COVID-19 during periods of the
year when we have historically experienced strong traffic and sales, and it
remains unclear how the continuing impact of COVID-19, including the emergence
of new variants, will affect the seasonality of our business.
GROSS PROFIT
Three Months Ended August 31 (1) Six Months Ended August 31 (1)
(In millions) 2021 2020 Change 2021 2020 Change
Used vehicle gross profit $ 506.5 $ 481.2 5.3 % $ 1,103.5 $ 742.7 48.6 %
Wholesale vehicle gross 189.0 144.4 30.9 % 374.9 206.3 81.7 %
profit
Other gross profit 120.0 126.5 (5.3) % 261.6 157.3 66.3 %
Total $ 815.5 $ 752.1 8.4 % $ 1,740.0 $ 1,106.3 57.3 %
(1) Amounts are net of intercompany eliminations.
GROSS PROFIT PER UNIT
Three Months Ended August 31 (1) Six Months Ended August 31 (1)
2021 2020 2021 2020
$ per $ per $ per $ per
unit(2) %(3) unit(2) %(3) unit(2) %(3) unit(2) %(3)
Used vehicle gross profit $ 2,185 8.3 $ 2,214 11.0 $ 2,196 9.0 $ 2,108 10.4
Wholesale vehicle gross profit$ 1,005 11.1$ 1,086 17.6$ 1,015 12.2$ 1,051 17.8 Other gross profit$ 517 65.8$ 583 77.3$ 521 75.1$ 447 59.7 Total gross profit$ 3,518 10.2$ 3,461 14.0$ 3,462 11.1$ 3,140 12.9 (1) Amounts are net of intercompany eliminations. Those eliminations had the effect of increasing used vehicle gross profit per unit and wholesale vehicle gross profit per unit and decreasing other gross profit per unit by immaterial amounts. (2) Calculated as category gross profit divided by its respective units sold, except the other and total categories, which are divided by total used units sold. (3) 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. Gross profit per used unit is consistent across our omni-channel platform. 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 generally have a lower cost per unit compared with vehicles purchased at auction or through other channels, which may generate more gross profit per unit. We monitor macroeconomic factors and pricing elasticity and adjust our pricing accordingly to optimize unit sales and profitability while also maintaining a competitively priced inventory. Used vehicle gross profit increased 5.3% in the second quarter of fiscal 2022, driven by the 6.7% increase in total used unit sales. Our used vehicle gross profit per unit for the second quarter was down slightly compared with the record prior year quarter but in-line with historical performance. Used vehicle gross profit increased 48.6% in the first six months of fiscal 2022, driven by the 42.6% increase in total used unit sales as well as the$88 increase in used vehicle gross profit per unit, reflecting a strong pricing environment. 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 Page 37 --------------------------------------------------------------------------------
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 30.9% in the second quarter of fiscal 2022, largely reflecting the 41.4% increase in wholesale unit sales, partially offset by an$81 decline in wholesale vehicle gross profit per unit. Wholesale vehicle gross profit increased 81.7% in the first six months of fiscal 2022, driven by the 88.2% increase in wholesale unit sales, partially offset by a$36 decline in wholesale vehicle gross profit per unit. Other Gross Profit. Other gross profit includes profits related to EPP revenues, net third-party finance fees, advertising and subscription profits earned by our Edmunds business, 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 decreased 5.3% in the second quarter of fiscal 2022, reflecting a decrease in service department profits and a decline in EPP revenue, partially offset by the addition of Edmunds' gross profit and favorability in net third-party finance fees. The decrease in service department profits was the result of increased warranty service work, a shift in retail service capacity to support production and inflationary pressures experienced during the second quarter of fiscal 2022 as well as savings experienced during the second quarter of fiscal 2021 related to COVID-19.
Other gross profit increased 66.3% in the first six months of fiscal 2022, reflecting the growth in EPP revenues and reduction in net third-party finance fees, as discussed above, as well as the addition of Edmunds' gross profit.
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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) 2021 2020 Change 2021 2020 Change
Compensation and benefits:
Compensation and benefits, excluding
share-based compensation expense $ 299.5 $ 239.3 25.1 % $ 583.6 $ 430.5 35.6 %
Share-based compensation expense 28.7 34.3 (16.3) % 67.1 58.0 15.8 %
Total compensation and benefits (3) $ 328.2 $ 273.6 19.9 % $ 650.7 $ 488.5 33.2 %
Occupancy costs 55.1 52.8 4.3 % 105.6 98.6 7.2 %
Advertising expense 85.0 50.5 68.5 % 157.5 85.0 85.4 %
Other overhead costs (4) 106.0 65.0 63.0 % 214.6 94.7 126.3 %
Total SG&A expenses $ 574.3 $ 441.9 30.0 % $ 1,128.4 $ 766.8 47.1 %
SG&A as % of gross profit 70.4 % 58.8 % 11.6 % 64.8 % 69.3 % (4.5) %
(1) Depreciation and amortization previously included in SG&A expenses is now
separately presented and is excluded from this table. Prior period amounts have
been reclassified to conform to the current period's presentation.
(2) Amounts are net of intercompany eliminations.
(3) Excludes compensation and benefits related to reconditioning and vehicle
repair service, which are included in cost of sales. See Note 11 for details of
share-based compensation expense by grant type.
(4) Includes IT expenses, non-CAF bad debt, insurance, preopening and relocation
costs, charitable contributions, travel and other administrative expenses.
SG&A expenses increased 30.0% in the second quarter of fiscal 2022. Factors
contributing to the increase include the following:
•$34.5 million increase in advertising expense driven by our previously
communicated investment in advertising spend.
•Increased compensation and benefits expense and other overhead costs driven by
staffing and sales growth as well as continued spending to advance our
technology platforms and support our strategic initiatives and cost-reduction
actions taken during the prior year quarter in response to the pandemic. We
estimate that these cost-reduction actions resulted in savings of $25 million to
$30 million in the second quarter of fiscal 2021.
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SG&A expenses increased 47.1% in the first six months of fiscal 2022. Factors
contributing to the increase include the following:
•$72.5 million increase in advertising expense driven by our previously
communicated investment in advertising spend.
•$40.3 million one-time benefit recognized in other overhead costs during the
first quarter of fiscal 2021, representing our receipt of settlement proceeds in
a class action lawsuit related to the economic loss associated with vehicles
containing Takata airbags.
•Increased compensation and benefits expense and other overhead costs driven by
staffing and sales growth as well as continued spending to advance our
technology platforms and support our strategic initiatives and cost-reduction
actions taken in response to the pandemic in the prior year period.
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 of $22.4 million and $42.9 million in the second quarter and
first six months of fiscal 2022, respectively, was relatively consistent with
$22.5 million and $46.4 million in the second quarter and first six months of
fiscal 2021, respectively.
Other (Income) Expense. Other income of $1.8 million in the second quarter of
fiscal 2022 was relatively consistent with $1.7 million in the second quarter of
fiscal 2021. Other income was $27.4 million in the first six months of fiscal
2022 compared with expense of $1.6 million in the first six months of fiscal
2021. The increase for the six-month period was primarily due to a net
unrealized gain on an equity investment recorded during fiscal 2022.
Income Taxes. The effective income tax rate was 22.4% in the second quarter of
fiscal 2022 and 22.8% in the first six months of fiscal 2022 versus 23.6% in the
second quarter of fiscal 2021 and 23.1% in the first six months of 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 sought 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 COVID-19) 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. By the end of the second quarter of fiscal 2021, we discontinued these adjustments and we anticipate non-Tier 3 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 4 for additional information on CAF income and Note 5 for information on auto loans receivable, including credit quality. Page 40 --------------------------------------------------------------------------------
SELECTED CAF FINANCIAL INFORMATION
Three Months Ended August 31 Six Months Ended August 31
(In millions) 2021 % (1) 2020 % (1) 2021 % (1) 2020 % (1)
Interest margin:
Interest and fee income $ 324.1 8.8 $ 280.1 8.5 $ 634.4 8.8 $ 562.6 8.5
Interest expense (60.6) (1.7) (81.3) (2.5) (126.4) (1.8) (165.9) (2.5)
Total interest margin $ 263.5 7.2 $ 198.8 6.0 $ 508.0 7.0 $ 396.7 6.0
Provision for loan losses $ (35.5) (1.0) $ (26.0) (0.8) $ (11.1) (0.2) $ (148.0) (2.2)
CarMax Auto Finance income$ 200.0 5.4$ 147.2 4.5$ 441.8 6.1$ 198.1 3.0 (1) Annualized percentage of total average managed receivables.
CAF ORIGINATION INFORMATION (AFTER THE IMPACT OF 3-DAY PAYOFFS)
Three Months Ended August 31 Six Months Ended August 31
2021 2020 2021 2020
Net loans originated (in millions) $ 2,372.4 $ 1,790.6 $ 4,855.8 $ 2,782.9
Vehicle units financed 99,671 92,648 218,034 141,344
Net penetration rate (1) 43.0 % 42.6 % 43.4 % 40.1 %
Weighted average contract rate 8.5 % 8.2 % 8.7 % 8.3 %
Weighted average credit score (2) 704 710 699 709
Weighted average loan-to-value (LTV) (3) 89.4 % 91.6 % 89.8 % 92.1 %
Weighted average term (in months) 66.6 65.8 66.4 65.9
(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
5. 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 Months Ended
August 31 August 31
(In millions) 2021 2020 2021 2020
Total ending managed receivables $ 14,984.4 $ 13,379.0 $ 14,984.4 $ 13,379.0
Total average managed receivables $ 14,683.3 $ 13,218.8 $ 14,416.0 $ 13,313.6
Allowance for loan losses $ 398.1 $ 432.5 $ 398.1 $ 432.5
Allowance for loan losses as a percentage of
ending managed receivables 2.66 % 3.23 % 2.66 % 3.23 %
Net credit losses on managed receivables $ 16.9 $ 30.7 $ 24.1 $ 75.3
Annualized net credit losses as a percentage of
total average managed receivables 0.46 % 0.93 % 0.34 % 1.13 %
Past due accounts as a percentage of ending
managed receivables 2.72 % 2.62 % 2.72 % 2.62 %
Average recovery rate (1) 66.3 % 57.3 % 65.4 % 52.0 %
(1) 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.
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•CAF Income (Increase of $52.8 million , or 35.9%, and $243.6 million , or 122.9%,
in the second quarter and first six months of fiscal 2022, respectively)
•The increase in CAF income for the second quarter of fiscal 2022 reflects
increases in the total interest margin percentage and average managed
receivables, partially offset by an increase in the provision for loan losses.
•The increase in CAF income for the first six months of fiscal 2022 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 in both the second quarter and first six
months of fiscal 2022 resulted from an increase in the average amount financed
as well as our used unit sales growth.
•Provision for Loan Losses ($35.5 million and $11.1 million in the second
quarter and first six months of fiscal 2022, respectively, compared with $26.0
million and $148.0 million in the second quarter and first six months of fiscal
2021, respectively)
•The change in the provision for the six-month period was primarily driven by
reserve increases during the first quarter of fiscal 2021 associated with
deterioration in the macroeconomic environment resulting from the COVID-19
pandemic, compared with reserve reductions during the first quarter of fiscal
2022, reflecting significant favorable loan loss experience as well as continued
improvements in the macroeconomic environment.
•The allowance for loan losses as a percentage of ending managed receivables was
2.66% as of August 31, 2021 , compared with 3.23% as of August 31, 2020 and 2.62%
as of May 31, 2021 .
•Total Interest Margin (Increased to 7.2% and 7.0% in the second quarter and
first six months of fiscal 2022, respectively, from 6.0% in both the second
quarter and first six months of fiscal 2021, respectively)
•The increase in the total interest margin percentage was the result of lower
funding costs as well as higher interest and fees from consumers.
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. During the first quarter of fiscal 2022, we
began to increase our Tier 3 loan volume beyond our target of 5% of total Tier 3
loan volume to 10% by the end of the first quarter of fiscal 2022. Additionally,
in the second quarter of fiscal 2022 CAF began to test loan originations in the
Tier 2 space. Any future adjustments in Tier 2 and Tier 3 will consider the
broader lending environment along with the long-term sustainability of the
change. A total of $172.5 million and $147.7 million in CAF Tier 3 receivables
were outstanding as of August 31, 2021 and February 28, 2021 ,
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, 2021 and February 28, 2021 , approximately 10% of the total allowance
for loan losses related to the outstanding CAF Tier 3 loan balances.
PLANNED FUTURE ACTIVITIES
We anticipate opening a total of ten stores in fiscal 2022. These stores will predominantly be cross functional stores that have a smaller footprint and can leverage our scale and the presence of our larger format stores in nearby markets. We currently estimate capital expenditures will total approximately$350 million in fiscal 2022. We expect nearly$100 million of this spend will be focused on investments in technology.
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. Our current capital allocation strategy is to focus on our core business, including investing in digital capabilities and the strategic expansion of our store footprint, pursue new growth opportunities through investments, partnerships and acquisitions and return excess capital to shareholders. Given the year-over-year improvement in our business and overall macroeconomic conditions, 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. Page 42 -------------------------------------------------------------------------------- OnJune 1, 2021 , we completed our acquisition of Edmunds for a total purchase price of$401.8 million , inclusive of our initial investment. The consideration paid at closing included a combination of cash and shares of CarMax common stock. See Note 2 for additional information. We currently target an adjusted debt-to-total capital ratio in a range of 35% to 45%. Our adjusted debt to capital ratio, net of cash on hand, was at the lower end of our targeted range for the second quarter of fiscal 2022. 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 2022, net cash used in operating activities totaled$1.39 billion , compared with cash provided by operating activities of$889.8 million in the prior year period. Our operating cash flows are significantly impacted by changes in auto loans receivable, which increased$1.18 billion in the current year period compared with a$188.6 million decline 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 issuances of non-recourse notes payable were$1.21 billion in the current year period compared with net payments of$230.9 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, 2021 , total inventory was$4.11 billion , representing an increase of$948.3 million compared with the balance as of the start of the fiscal year. The increase was primarily due to an increase in the average carrying cost of inventory as a result of higher acquisition costs, driven by market appreciation. This increase was slightly offset by a decline in vehicle units. Saleable inventory levels were below our targets throughout the current fiscal year as a result of temporary production slowdowns experienced in the fourth quarter of fiscal 2021 and strong demand experienced during the first half of fiscal 2022. We made substantial progress in building our inventory position during the second quarter of fiscal 2022. The change in net cash (used in) provided by 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, as well as the change in accounts receivable, driven by increased sales and timing, partially offset by an increase 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. Our results for the first six months of fiscal 2021 were significantly impacted by COVID-19, primarily during the first quarter. In response, we took proactive measures to strengthen our liquidity position, including reducing our inventory levels and aligning our costs to lower sales volumes. Investing Activities. During the first six months of the fiscal year, net cash used in investing activities totaled$380.2 million in fiscal 2022 compared with$92.4 million in fiscal 2021. For fiscal 2022, this included$241.6 million in cash paid in connection with the Edmunds acquisition, net of cash acquired. Capital expenditures were$137.8 million in the current year period versus$92.0 million in the prior year period. Capital expenditures primarily included store construction costs and store remodeling expenses as well as investments in technology. We maintain a multi-year pipeline of sites to support our store growth, so portions of capital spending in one year may relate to stores that we open in subsequent fiscal years.
As of
Financing Activities. During the first six months of fiscal 2022, net cash provided by financing activities totaled$1.77 billion compared with net cash used in financing activities of$86.0 million in the prior year period. Included in these amounts were net issuances of non-recourse notes payable of$1.21 billion compared with net payments of$230.9 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 2022, cash provided by financing activities was impacted by stock repurchases of$355.5 million as well as net borrowings on our long-term debt of$867.2 million . 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 . Page 43 -------------------------------------------------------------------------------- TOTAL DEBT AND CASH AND CASH EQUIVALENTS (In thousands) As of
Debt Description (1) Maturity Date 2021 2021
Revolving credit facility (2) June 2024 $ 872,667 $ -
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 529,573 533,578
Various dates through January
Non-recourse notes payable 2028 14,977,290 13,764,808
Total debt (3) 17,179,530 15,098,386
Cash and cash equivalents $ 58,095 $ 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 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 10 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 ofAugust 31, 2021 , we were in compliance with these financial covenants.
See Note 10 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, 2021 ,$11.80 billion and$3.18 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 2022, we funded a total of$3.59 billion in asset-backed term funding transactions. As ofAugust 31, 2021 , we had$1.64 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 10 for additional information on the warehouse facilities. We generally repurchase the receivables funded through our warehouse facilities when we enter into an asset-backed term funding transaction. If our counterparties were to refuse to permit these repurchases it could impact our ability to execute on our funding program. Additionally, the agreements related to the warehouse facilities include various representations and warranties, covenants and performance triggers. If these requirements are not met, we could be unable to continue to fund receivables through the warehouse facilities. In addition, warehouse facility investors could charge us a higher rate of interest and could have us replaced as servicer. Further, we could be required to deposit collections on the related receivables with the warehouse facility agents on a daily basis and deliver executed lockbox agreements to the warehouse facility agents. 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, 2021 , a total of$2 billion of board authorizations for repurchases was outstanding, with no expiration date, of which$991.5 million remained available for repurchase. See Note 11 for more information on share repurchase activity. Page 44 -------------------------------------------------------------------------------- Fair Value Measurements We recognize money market securities, mutual fund investments, certain equity investments and derivative instruments at fair value. See Note 7 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, inventory, market share, online purchases of vehicles from consumers, gross profit per used unit, revenue, margins, expenditures, liquidity, loan originations, CAF income, stock repurchases, indebtedness, earnings, market conditions or expectations with regards to the continued impact of the COVID-19 pandemic 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," "positioned," "predict," "target," "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 realize the expected benefits of strategic transactions, including our acquisition of Edmunds. •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. •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. Page 45 -------------------------------------------------------------------------------- •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 48 of this report, our Annual Report on Form 10-K for the fiscal year endedFebruary 28, 2021 , 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. 7865. 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 46 --------------------------------------------------------------------------------
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