The largest retailer of used cars in the USA recently posted some financial results, showng the impact of Covid-19;
“We accomplished a lot this quarter, despite the challenges the pandemic posed,” said Bill Nash, president and chief executive officer. “We continued our omni-channel rollout and launched new initiatives, such as contactless curbside pickup, a temporary extension of our 90-day warranty and CAF payment assistance to meet the near-term needs of our customers; we introduced social distancing and enhanced sanitation procedures; and we shifted our entire wholesale business from in-person to online auctions. In addition, we continued to keep our appraisal lanes open where possible for customers who wanted or needed to sell their cars.”
Nash mentioned that throughout the first quarter, CarMax spent approximately $30 million supporting associates impacted by the Coronavirus, store closures and furloughs. This included providing associates with at least 14 days of pay continuity upon store closure or quarantine, along with continuing medical benefits for associates who were furloughed. “Our associates are crucial to our culture and our long history of success. While the furlough was a difficult decision, we’re pleased to have called back more than 85% of these associates,” added Nash.
Looking to the future, Nash noted that he is encouraged by recent trends experienced in late May and June. Used unit sales have continued to gain strength, web traffic is up year-over-year and reaching new highs, and leads to our Customer Experience Centers have returned to pre-Coronavirus levels.
First Quarter Business Performance Review:
Summary Results. Net sales and operating revenues declined 39.8% to $3.23 billion. Net earnings declined 98.1% to $5.0 million and net earnings per diluted share declined 98.1% to $0.03. The current quarter’s results included $122.0 million in the CarMax Auto Finance (CAF) provision for loan losses, which included an increase of $84.0 million, or $0.38 per diluted share, in our estimate of lifetime losses on existing loans resulting from the Coronavirus-related turmoil and worsening economic factors. Net earnings per diluted share for the current quarter also included a one-time benefit of $0.18 in connection with our receipt of settlement proceeds in a previously disclosed class action lawsuit.
STILL IN BUSINESS
Liquidity. As of May 31, 2020, we had $658.0 million in cash and cash equivalents on hand and $1.08 billion of unused capacity on our revolving credit facility, compared with $58.2 million and $997.3 million, respectively, as of February 29, 2020. Total long-term debt, excluding non-recourse notes payable, declined to $1.71 billion as of May 31, 2020, compared with $1.79 billion as of February 29, 2020.
Sales. Total used vehicle unit sales declined 39.8%, including a 41.8% decrease in comparable store used unit sales compared with the prior year’s first quarter. The comparable store sales performance reflected the combined effects of Coronavirus-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.
Total wholesale vehicle unit sales declined 47.6% compared with the first quarter of fiscal 2020. While we continued to make offers to all appraisal customers, the decline in wholesale volume reflected both lower appraisal traffic and a reduction in our appraisal buy rate. The buy rate typically declines during periods of weaker wholesale industry pricing as we adjust our appraisal offers in response to the wholesale pricing environment. Prior to the current quarter, almost all of our auctions were conducted as in-person, physical auctions. During the quarter, we successfully transitioned our wholesale auctions to an online platform, which allowed us to continue selling our wholesale units despite restrictions on our in-person operations.
Other sales and revenues declined 38.9% compared with the first quarter of fiscal 2020, reflecting decreases in extended protection plan (EPP) net revenues, and new car and service department sales. EPP revenues declined $37.9 million, largely reflecting the reduction in our used unit sales. The current quarter’s EPP revenue included a year-over-year benefit of $6.7 million related to the receipt of profit-sharing revenue and a favorable change in cancellation reserves. The new car and service department sales declines reflected both store closures and reduced customer traffic.
Gross Profit. Total gross profit declined 52.3% versus last year’s first quarter to $354.2 million. Used vehicle gross profit decreased 47.4%, reflecting the reduction in total used unit sales and a decline of $278 per unit in used vehicle gross profit to $1,937. Our used gross profit per unit was pressured by pricing adjustments made to better align inventory levels with sales.
Wholesale vehicle gross profit declined 50.8% versus the prior year’s quarter, driven by both the reduction in wholesale unit sales and a decrease of $65 per unit in wholesale vehicle gross profit to $978. 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 quarter.
Other gross profit declined 74.3%, including a $55.1 million decline in service department profits, together with the $37.9 million decrease in EPP revenues. The current quarter’s service results 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, as we reduced our inventory. Service results also continued to be adversely affected by the increase in our post-sale warranty period from 30 to 90 days implemented in May 2019.
SG&A. Compared with the first quarter of fiscal 2020, SG&A expenses declined 23.7% to $373.7 million. The current quarter SG&A included a one-time benefit of $40.3 million, representing our receipt of settlement proceeds in a class action lawsuit related to the economic loss associated with vehicles containing Takata airbags. Excluding this item, SG&A expenses declined 15.4%. This reduction was due to a combination of factors, including the decline in variable expenses associated with the reduction in sales volumes, a $17.2 million reduction in stock-based compensation expense, the furlough of associates, a reduction in advertising costs, and the alignment of other costs to the state of the business. Partially offsetting these reductions was the effect of the 8% increase in our store base since the beginning of last year’s first quarter (representing the addition of 17 stores). SG&A per used unit was $2,768 in the current quarter, up $585 year-over-year, reflecting the deleverage resulting from the decline in unit sales.
CarMax Auto Finance. Compared with last year’s first quarter, CAF income declined 56.1% to $51.0 million, reflecting a substantial increase in the provision for loan losses, to $122.0 million from $38.2 million in the prior year quarter. We adopted the new Current Expected Credit Loss accounting standard (CECL) as of March 1, 2020. In connection with the adoption, we recorded a $202.0 million increase in the allowance for loan losses on the first quarter opening consolidated balance sheet, with a corresponding adjustment of $153.3 million, net of tax, to retained earnings. The $122.0 million provision for loan losses in the current year’s quarter included an increase of $84.0 million in our estimate of lifetime losses on existing loans, which was a nearly 25% increase in our loss expectations, largely resulting from Coronavirus-related turmoil and worsening economic factors. The remaining $38.0 million largely reflected our estimate of lifetime losses on current quarter originations. As of May 31, 2020, the allowance for loan losses of $437.2 million was 3.32% of ending managed receivables.
CAF’s total interest margin percentage, which represents the spread between interest and fees charged to consumers and our funding costs, improved to 5.9% of average managed receivables from 5.6% in the prior year’s first quarter, due to lower funding costs. After the effect of 3-day payoffs, CAF financed 36.1% of units sold in the current quarter, down from 41.4% in the prior year’s first quarter. This decrease reflected the combined effects of a shift in customer credit mix, adjustments to CAF’s credit policies made in response to the Coronavirus crisis and testing of loan routing to our third-party partners.
Share Repurchase Activity. Prior to pausing our share repurchase program, we repurchased 515,500 shares of common stock for $40.7 million during the first quarter of fiscal 2021. As of May 31, 2020, we had $1.51 billion remaining available for repurchase under the outstanding authorization.