CarMax Reports First Quarter Results

CarMax, Inc. (NYSE:KMX) today reported results for the first quarter ended May 31, 2008. --   Total sales increased 3% to $2.21 billion from $2.15 billion in the first quarter of last year. This increase was led by a 6% increase in used vehicle revenues.   -- Comparable store used unit sales rose 1% for the first quarter.   -- Total used unit sales grew 10% for the first quarter.   -- Net earnings decreased 55% to $29.6 million, or $0.13 per diluted share, compared with $65.4 million, or $0.30 per diluted share, earned in the first quarter of fiscal 2008.   --   Earnings for the first quarter of fiscal 2009 were reduced by $0.06 per share for higher funding costs related to CarMax Auto Finance (CAF) loans originated in prior fiscal years and by $0.02 per share for accruals related to litigation. First Quarter Business Performance Review Sales. "The slowdown in the economy, the dramatic rise in gasoline and food costs and the related impact on consumer spending adversely affected our first quarter performance,” said Tom Folliard, president and chief executive officer. For the first time in more than two years, we experienced a modest decline in customer traffic in our stores. Additionally, credit availability from our third-party nonprime lenders declined slightly during the quarter. However, solid execution by our store teams resulted in a small improvement in our conversion rate, and this, together with the benefit of an extra Saturday in the quarter, contributed to the 1% increase in comparable store used unit sales. Despite the slower-than-expected sales, our data indicates that we continued to gain market share in the late-model used vehicle market. Wholesale unit sales declined 2%, reflecting a decrease in both our appraisal traffic and our appraisal buy rate (defined as appraisal purchases as a percent of vehicles appraised). We believe that the significant depreciation in wholesale market values for SUVs, trucks and other less fuel-efficient vehicles contributed to the decrease in the buy rate. During the quarter, wholesale industry prices for SUVs and trucks declined nearly 25%, which is approximately four times the normal depreciation expected over this period and well in excess of the depreciation expected over a full year. "This is the most rapid depreciation of any vehicle segment that we have experienced in our 15 years,” said Folliard. New vehicle unit sales declined 26%, reflecting the combination of the soft new car sales environment and the sale of our Orlando Chrysler Jeep Dodge franchise in the second quarter of fiscal 2008. Other sales and revenues increased 4%. Third-party finance fees, a component of other sales and revenues, declined 7%, primarily reflecting a slight increase in the percentage of our sales financed by the third-party subprime provider. We record the discount at which this provider purchases loans as an offset to finance fee revenues received from other providers. Gross Profit. The total gross profit per unit declined by $237 to $2,564 compared with $2,801 in the first quarter of fiscal 2008. The majority of the decline resulted from the $192 per unit decrease in gross profit per used vehicle. Several factors contributed to this decrease. Our used vehicle gross profit per unit was pressured by the slowing sales environment. The decline in appraisal traffic and the buy rate also adversely affected our gross profit per unit, as vehicles purchased directly from consumers generate more profit compared with vehicles sourced at auction. The rapid decline in the wholesale market values for SUVs and trucks resulted in significant margin pressure on this segment of our inventory, and it led us to take supplemental pricing markdowns for these vehicles, which further pressured margins. Compared with the fourth quarter of fiscal 2008, however, we achieved a $33 per unit improvement in total gross profit. Wholesale gross profit per unit declined slightly, to $784 from $800 in the first quarter of fiscal 2008. We continued to experience strong dealer-to-car ratios at our auctions, with the normal price competition among bidders contributing to the continued solid wholesale gross profit performance. CarMax Auto Finance. CAF income declined to $9.8 million from $37.1 million in the first quarter of fiscal 2008, reflecting the continuing effects of the disruption in global credit markets and the more challenging economic environment. The gain percentage, which represents the gain on the sale of loans originated and sold as a percentage of loans originated and sold, decreased to 2.7% from 4.2% in the prior year’s first quarter. The decrease reflected a combination of factors, including substantially higher funding costs in the warehouse facility, which we have been unable to offset through higher consumer rates in the current environment; an increase in the discount rate assumption used to calculate the gain on the sale of loans to 17% from 12% in the first quarter of last year; and a higher loss assumption on current quarter originations compared with the assumption used in the prior year’s quarter. We are in the process of renewing our warehouse facility agreement, which expires in July. Due to conditions in the credit markets, the funding cost in the facility will increase upon its renewal, and it will align more closely with the current funding costs in the public securitization market. We have reflected these higher funding costs in the gain on sale recognized on all loans originated and sold in the first quarter of fiscal 2009. The higher warehouse facility funding costs are expected to reduce the adjustments that may otherwise be necessary at the time the loans are refinanced in a public securitization, generally one or two quarters later. We had originally expected some of these higher costs to be incurred when the public securitizations were completed and the warehouse facility was renewed in subsequent quarters. CAF income for the first quarter of fiscal 2009 was reduced by $20.0 million for adjustments primarily related to loans originated during prior fiscal years. This amount includes the impact of the increase in the funding costs for $750 million of loans that were refinanced from our warehouse facility in a private securitization completed in May 2008. It also includes the applicable incremental warehouse facility funding costs applied to the remaining $95 million of loans that were originated in previous fiscal years and that were still in the warehouse facility at the end of the first quarter. This $20.0 million of higher funding costs exceeded the $14 million that we had built into our fiscal 2009 expectations due to a further increase in funding costs spreads in the securitization markets. In the first quarter of fiscal 2009, we made no material changes to our loss assumptions on previously securitized receivables. SG&A. Selling, general and administrative expenses were 11.0% of total revenues in the first quarter of fiscal 2009 compared with 10.0% in the prior year’s first quarter. The majority of this increase was expected, and it largely resulted from the combination of the modest level of comparable store used unit sales growth, our continued commitment to our store growth plan and the decline in the used vehicle average selling price. In addition, in the first quarter of fiscal 2009 we accrued costs related to litigation that reduced net earnings by $0.02 per share. Earnings and Earnings Per Share. First quarter net earnings declined to $29.6 million, or $0.13 per share, from $65.4 million, or $0.30 per share, in fiscal 2008. "The decrease in earnings was primarily related to the reductions in gross profit per unit and CAF income, as well as the lower-than-expected sales, all of which we believe were the direct result of external conditions,” said Folliard. "We are encouraged, however, by our continued ability to execute in our stores and to gain market share, regardless of the external environment.” Superstore Openings. During the first quarter, we opened six used car superstores, entering the Phoenix, Arizona; Charleston, South Carolina; and Huntsville, Alabama, markets and expanding our presence in the San Antonio, Texas, and Sacramento, California, markets. Despite the current weak economic conditions, we remain committed to executing our store growth plan for the long-term benefit of customers and shareholders, and we intend to open an additional eight used car superstores during the remainder of fiscal 2009. We also expanded our car-buying center test with an opening in Dallas, Texas, in April and an opening in Baltimore, Maryland, shortly after the end of the first quarter. We now have a total of five car-buying centers, at which we conduct appraisals and purchase, but do not sell, vehicles. These centers represent a controlled concept test to determine whether we can achieve a meaningful increase in the percentage of vehicles sourced directly from consumers. We will evaluate the performance of these five centers before deciding whether to open additional centers in future years. Supplemental Financial Information       Sales Components   (In millions) Three Months Ended May 31 (1) 2008 2007 Change Used vehicle sales $ 1,816.8 $ 1,708.4 6.3 % New vehicle sales 82.1 112.6 (27.1 )% Wholesale vehicle sales 242.3 261.2 (7.2 )% Other sales and revenues: Extended service plan revenues 36.5 33.9 7.8 % Service department sales 24.5 24.1 1.4 % Third-party finance fees, net   6.5     7.0   (6.6 )% Total other sales and revenues   67.5     65.0   3.9 % Net sales and operating revenues $ 2,208.8   $ 2,147.1   2.9 % (1) Percent calculations and amounts shown are based on amounts presented on the attached consolidated statements of earnings and may not sum due to rounding.       Retail Vehicle Sales Changes   Three Months Ended May 31 2008 2007 Comparable store vehicle sales: Used vehicle units 1 % 6 % New vehicle units (18 )% (5 )% Total 0 % 5 %   Used vehicle dollars (3 )% 8 % New vehicle dollars (20 )% (5 )% Total (4 )% 7 %   Total vehicle sales: Used vehicle units 10 % 15 % New vehicle units (26 )% (5 )% Total 9 % 14 %   Used vehicle dollars 6 % 17 % New vehicle dollars (27 )% (5 )% Total 4 % 15 %       Retail Vehicle Sales Mix   Three Months Ended May 31 2008 2007 Vehicle units: Used vehicles 97 % 95 % New vehicles 3     5   Total 100 %   100 %   Vehicle dollars: Used vehicles 96 % 94 % New vehicles 4     6   Total 100 %   100 %       Unit Sales   Three Months Ended May 31 2008 2007 Used vehicles 106,747 96,766 New vehicles 3,515 4,720 Wholesale vehicles 56,329 57,714       Average Selling Prices   Three Months Ended May 31 2008 2007 Used vehicles $ 16,852 $ 17,480 New vehicles $ 23,211 $ 23,717 Wholesale vehicles $ 4,184 $ 4,413           Selected Operating Ratios   (In millions) Three Months Ended May 31 2008 %(1) 2007 %(1)   Net sales and operating revenues $ 2,208.8 100.0 % $ 2,147.1 100.0 % Gross profit $ 282.7 12.8 % $ 284.2 13.2 % CarMax Auto Finance income $ 9.8 0.4 % $ 37.1 1.7 % Selling, general, and administrative expenses $ 243.0 11.0 % $ 213.8 10.0 % Operating profit (EBIT) (2) $ 49.5 2.2 % $ 107.5 5.0 % Net earnings $ 29.6 1.3 % $ 65.4 3.0 % (1) Calculated as the ratio of the applicable amount to net sales and operating revenues. (2) Operating profit equals earnings before interest and income taxes.           Gross Profit   Three Months Ended May 31 2008 2007 $/unit (1) % (2) $/unit (1) % (2) Used vehicle gross profit $ 1,742 10.2 % $ 1,934 11.0 % New vehicle gross profit $ 860 3.7 % $ 1,008 4.2 % Wholesale vehicle gross profit $ 784 18.2 % $ 800 17.7 % Other gross profit $ 449 73.4 % $ 455 71.0 % Total gross profit $ 2,564 12.8 % $ 2,801 13.2 % (1) Calculated as category gross profit divided by its respective units sold, except the other and the total categories, which are divided by total retail units sold. (2) Calculated as a percentage of its respective sales or revenue.       CAF Income   (In millions) Three Months Ended May 31 2008 2007 Gain on sales of loans originated and sold $ 17.1 $ 27.4 Other (losses) gains   (20.0 )     0.4   Total (loss) gain (2.9 ) 27.8 Servicing fee and interest income 21.3 16.7 Direct CAF expenses   8.6       7.4   CarMax Auto Finance income $ 9.8     $ 37.1     Loans originated and sold $ 641.6 $ 647.0 Gain on sales of loans originated and sold as a percentage of loans originated and sold 2.7 % 4.2 %         Earnings Highlights   (In millions except per share data) Three Months Ended May 31 2008 2007 Change Net earnings $ 29.6 $ 65.4 (54.8 )% Diluted weighted average shares outstanding 221.3 220.1 0.6 % Net earnings per share $ 0.13 $ 0.30 (56.7 )%   Fiscal 2009 Expectations "Our first quarter sales were modestly below expectations and earnings were disappointing,” said Folliard. "Sales slowed through the quarter, and since Memorial Day weekend, traffic and sales weakened further. If the current trends persist, results for the full year could be significantly below the bottom of our original earnings guidance range. As a result of the combination of the uncertain economic conditions, rising fuel and food costs and weak consumer sentiment, exacerbated by the rapid depreciation in SUVs and trucks, we are temporarily suspending guidance on comparable store sales and earnings for fiscal 2009. We hope to provide updated guidance later in the year, when there is a more stable outlook for the economy and we have better visibility on trends. "While this is clearly a difficult environment for many big-ticket retailers, we remain confident in our differentiated business model, our ability to consistently gain market share, and our ability to satisfy customers, all of which support our continued store growth plan,” said Folliard. Conference Call Information We will host a conference call for investors at 9:00 a.m. ET today, June 18, 2008. Domestic investors may access the call at 1-888-298-3261 (international callers dial 1-706-679-7457). The conference I.D. for both domestic and international callers is 26912950. A live webcast of the call will be available on our investor information home page at investor.carmax.com and at www.streetevents.com. A webcast replay of the call will be available at investor.carmax.com beginning at approximately 1:00 p.m. ET on June 18, 2008, through September 19, 2008. A telephone replay also will be available through June 25, 2008, and may be accessed by dialing 1-800-642-1687 (international callers dial 1-706-645-9291). The conference I.D. for both domestic and international callers is 26912950. Second Quarter Fiscal 2009 Earnings Release Date We currently plan to release second quarter sales and earnings results on Friday, September 19, 2008, before the opening of the New York Stock Exchange. We will host a conference call for investors at 9:00 a.m. ET on that date. Information on this conference call will be available on our investor information home page at investor.carmax.com in early September. About CarMax CarMax, a Fortune 500 company, and one of the Fortune 2008 "100 Best Companies to Work For,” is the nation’s largest retailer of used cars. Headquartered in Richmond, Va., we currently operate 97 used car superstores in 45 markets. The CarMax consumer offer is structured around four core equities: low, no-haggle prices; a broad selection; high quality vehicles; and customer-friendly service. During the fiscal year ended February 29, 2008, we retailed 377,244 used vehicles and sold 222,406 wholesale vehicles at our in-store auctions. For more information, access the CarMax website at www.carmax.com. Forward-Looking Statements We caution readers that the statements contained in this release about our future business plans, operations, opportunities or prospects, including without limitation any statements or factors regarding expected sales, margins or earnings, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. 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. Among the factors that could cause actual results and outcomes to differ materially from those contained in the forward-looking statements are the following: Changes in the general U.S. or regional U.S. economy. Changes in the availability or cost of capital and working capital financing, including the availability or cost of long-term financing to support our geographic growth and the availability or cost of financing auto loan receivables. Changes in the competitive landscape within our industry. Significant changes in retail prices for used and new vehicles. A reduction in the availability of or access to sources of inventory. Factors related to the regulatory environment in which we operate. The loss of key employees from our store, regional or corporate management teams. The failure of key information systems. The effect of new accounting requirements or changes to U.S. generally accepted accounting principles. Security breaches or other events that result in the misappropriation, loss or other unauthorized disclosure of confidential customer information. The effect of various litigation matters. Our inability to acquire or lease suitable real estate at favorable terms. The occurrence of severe weather events. Factors related to the seasonal fluctuations in our business. Factors related to the geographic concentration of our superstores. The occurrence of certain other material events. For more details on factors that could affect expectations, see our Annual Report on Form 10-K for the fiscal year ended February 29, 2008, and our quarterly or current reports as filed with or furnished to the Securities and Exchange Commission. Our filings are publicly available on our investor information home page at investor.carmax.com. Requests for information may also be made to the Investor Relations Department by email to investor_relations@carmax.com or by calling 1-804-747-0422 ext. 4489. We disclaim any intent or obligation to update our forward-looking statements.   CARMAX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (In thousands except per share data)           Three Months Ended May 31 2008   % (1)   2007   % (1)   Sales and operating revenues: Used vehicle sales $ 1,816,848 82.3 $ 1,708,391 79.6 New vehicle sales 82,070 3.7 112,615 5.2 Wholesale vehicle sales 242,327 11.0 261,152 12.2 Other sales and revenues   67,518   3.1     64,976   3.0 Net sales and operating revenues 2,208,763 100.0 2,147,134 100.0 Cost of sales   1,926,049   87.2     1,862,913   86.8 Gross profit 282,714 12.8 284,221 13.2 CarMax Auto Finance income 9,819 0.4 37,068 1.7 Selling, general and administrative expenses 242,984 11.0 213,814 10.0 Interest expense 2,058 0.1 2,016 0.1 Interest income   264   --     378   -- Earnings before income taxes 47,755 2.2 105,837 4.9 Provision for income taxes   18,197   0.8     40,482   1.9 Net earnings $ 29,558   1.3   $ 65,355   3.0   Weighted average common shares: Basic 217,094 215,293 Diluted 221,346 220,130   Net earnings per share: Basic $ 0.14 $ 0.30 Diluted $ 0.13 $ 0.30   (1) Percents are calculated as a percentage of net sales and operating revenues and may not equal totals due to rounding.     CARMAX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands)         May 31 2008   May 31 2007   February 29 2008 ASSETS Current assets: Cash and cash equivalents $ 11,891 $ 22,029 $ 12,965 Accounts receivable, net 75,393 68,367 73,228 Auto loan receivables held for sale 10,009 1,410 4,984 Retained interest in securitized receivables 268,613 221,894 270,761 Inventory 933,957 863,511 975,777 Prepaid expenses and other current assets   23,324     11,116     19,210   Total current assets 1,323,187 1,188,327 1,356,925   Property and equipment, net 926,348 702,431 862,497 Deferred income taxes 79,352 43,694 67,066 Other assets   47,186     42,698     46,673   TOTAL ASSETS $ 2,376,073   $ 1,977,150   $ 2,333,161   LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 274,560 $ 249,327 $ 306,013 Accrued expenses and other current liabilities 70,393 65,069 58,054 Accrued income taxes 28,943 43,235 7,569 Deferred income taxes 15,804 10,367 17,710 Short-term debt 8,403 3,680 21,017 Current portion of long-term debt   79,988     131,264     79,661   Total current liabilities 478,091 502,942 490,024   Long-term debt, excluding current portion 227,017 33,469 227,153 Deferred revenue and other liabilities   134,124     112,370     127,058   TOTAL LIABILITIES 839,232 648,781 844,235   TOTAL SHAREHOLDERS’ EQUITY   1,536,841     1,328,369     1,488,926   TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 2,376,073   $ 1,977,150   $ 2,333,161     CARMAX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)     Three Months Ended May 31 2008   2007   Operating Activities: Net earnings $ 29,558 $ 65,355 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 13,248 10,835 Share-based compensation expense 9,921 9,332 Loss on disposition of assets 519 46 Deferred income tax benefit (14,290 ) (6,486 ) Net (increase) decrease in: Accounts receivable, net (2,165 ) 3,046 Auto loan receivables held for sale, net (5,025 ) 4,752 Retained interest in securitized receivables 2,148 (19,592 ) Inventory 41,820 (27,395 ) Prepaid expenses and other current assets (4,122 ) 3,952 Other assets 350 335 Net increase in: Accounts payable, accrued expenses and other current liabilities and accrued income taxes 328 10,522 Deferred revenue and other liabilities   7,066       20,697   Net cash provided by operating activities   79,356       75,399     Investing Activities: Capital expenditures (75,732 ) (60,883 ) Proceeds from sales of assets 225 4 (Purchases) sales of money market securities (863 ) 4,000 Purchases of investments available-for-sale   --       (4,000 ) Net cash used in investing activities   (76,370 )     (60,879 )   Financing Activities: (Decrease) increase in short-term debt, net (12,614 ) 390 Issuances of long-term debt 193,200 191,600 Payments on long-term debt (193,009 ) (209,054 ) Equity issuances, net 8,229 3,725 Excess tax benefits from share-based payment arrangements   134       1,393   Net cash used in financing activities   (4,060 )     (11,946 )   (Decrease) increase in cash and cash equivalents (1,074 ) 2,574 Cash and cash equivalents at beginning of year   12,965       19,455   Cash and cash equivalents at end of period $ 11,891     $ 22,029