CarMax pumps brakes on expansion, bolsters liquidity

CarMax has scaled back extensively to ensure its financial position amid the coronavirus epidemic, after finalizing plans to boost growth initiatives.

The used-car retailer has halted its “store expansion strategy” until the negative impact of coronavirus stabilizes, the company noted in its fourth-quarter earnings April 2. In fact, CarMax was set to open 13 stores during the company’s fiscal year ending February 2021, and open a “similar” number of stores in fiscal 2022. It also “halted its stock repurchase program.”

Moreover, CarMax has closed about half of its 210 stores nationwide, with some running under limited operations. For the stores still open, consumer demand has “progressively deteriorated,” the company said.

Yet, CarMax Auto Finance’s liquidity position remains strong.

Last quarter, CarMax Auto Finance originated $1.8 billion worth of loans at a 46% penetration rate when compared with third-party financiers on its network. Presuming that number halves in tandem with store closures, CarMax Auto Finance would need $900 million in liquidity to sustain its originations numbers in the coming quarter.

As of March 31, CarMax had about “$700 million of cash and cash equivalents on hand,” which includes its March 25 $510 million drawdown on a revolving line of credit. It also has $300 million of unused capacity on its revolving credit facility, according to the earnings report. In addition, the mega-retailer also has $2.5 billion worth of vehicle inventory and real estate assets with a net book value of over $1.8 billion.

None of CarMax’s lines of credit have any near-term maturities. In June 2019, the revolving credit facility was renewed and extended to 2024, and the total capacity was increased to $1.45 billion.

As for capital markets, CarMax Auto Finance brought $1.5 billion of prime auto loan receivables to market in January.

CarMax Auto Finance closed its fourth quarter strong, with a 7.9% increase in income to $111.9 million. Its managed portfolio also grew 8.2% to $13.5 billion. Of CarMax Auto Finance’s outstandings, $2.18 billion were funded through its warehouse facilities, which still have an unused capacity of $1.32 billion.

Other major automotive retail groups are also feeling the effects from COVID-19 on their operations. The nation’s largest retailer, AutoNation, has furloughed 7,000 employees; implemented a hiring freeze; and cut its marketing budget, planned capital expenditures, and executive pay after sales dropped in March more than 50% year over year, according to published reports.

Similarly, Asbury Automotive announced it would also furlough 2,300 employees, reducing pay for executives and employees, and temporarily stopping its 401(k) contribution matches. These changes come on the heels of Asbury canceling a planned $1 billion all-cash acquisition of Dallas-based Park Place Dealership in mid-March.