CarMax Reports Second Quarter Results
RICHMOND, Va. Sept. 22, 2008 - CarMax, Inc. today reported results for the second quarter ended August 31, 2008.
|--||Total sales decreased 13% to $1.84 billion from $2.12 billion in the second quarter of last year.|
|--||Comparable store used unit sales declined 17% for the quarter.|
|--||Total used unit sales decreased 7% in the second quarter.|
|--||Net earnings declined to $14.0 million, or $0.06 per diluted share, compared with $65.0 million, or $0.29 per diluted share, earned in the second quarter of fiscal 2008.|
|-- Earnings for the second quarter of fiscal 2009 were reduced by $0.08 per share for CarMax Auto Finance (CAF) unfavorable items, including increases in cumulative net loss assumptions, a reduction in the fair value of retained subordinated bonds and an increase in the discount rate.|
Second Quarter Business Performance Review
Sales. “The slowdown in the economy and reductions in consumer spending power resulting from higher gasoline and food costs continued to create a difficult environment for our business,” said Tom Folliard, president and chief executive officer. Our comparable store used unit sales declined 17%, which was similar to the decline in customer traffic in our stores. Despite the current business environment, the solid execution by our store teams resulted in a conversion rate that was only marginally below the rate in the prior year’s second quarter. Our used vehicle average selling price declined 6% primarily as a result of the industry-wide decrease in used car prices, which reduced our inventory acquisition costs. Our data, which is available through July, indicates that our market share in the late-model used vehicle market declined slightly.
Wholesale unit sales declined 9%, reflecting a decrease in both appraisal traffic and our appraisal buy rate (defined as the number of appraisal purchases as a percent of vehicles appraised). Similar to our experience in the first quarter of this fiscal year, we believe the significant year-over-year decline in wholesale market values for SUVs, trucks and other less fuel-efficient vehicles contributed to the declines in both our appraisal traffic and buy rate.
Other sales and revenues decreased 6%. Third-party finance fees, which are a component of other sales and revenues, declined 51% due to the reduction in sales and a shift in mix among, and discount arrangements with, our third-party finance providers. The mix shift was largely the result of a tightening in credit availability from some of our third-party nonprime finance providers combined with a decline in the credit profile of our average customer.
Gross Profit. Total gross profit declined by $32.3 million to $255.9 million primarily because of the decrease in used unit sales. In addition, the gross profit per used unit declined by $112 to $1,870 compared with $1,982 in last year’s second quarter. As in the first quarter, the reduction in appraisal traffic and the appraisal buy rate led to our sourcing a larger percentage of our used vehicles at auction, which had an adverse effect on our gross profit per used unit.
Compared with the first quarter of this year, however, our gross profit per used vehicle increased by $128 to $1,870 from $1,742. We were able to achieve this sequential improvement, despite the double-digit decline in comparable store used unit sales. We believe this improvement was primarily the result of our success in rapidly reducing our vehicle inventories, which brought them back in line with current sales rates and minimized required pricing markdowns. Compared with inventory levels at stores open as of May 31, 2008, during the second quarter we reduced our used vehicle inventory by more than 13,300 units, representing a reduction in excess of $200 million.
Wholesale gross profit per unit was $897 in the second quarter, representing an increase of more than $100 compared with both the second quarter of last year and the first quarter of the current year. We continued to experience strong dealer attendance at our auctions, with the normal price competition among bidders contributing to the strong wholesale gross profit performance. With an average selling price of roughly $4,000, the majority of our wholesale units are older, higher mileage vehicles. We believe the current demand for these types of vehicles is particularly strong from dealers who specialize in selling to credit-challenged customers.
CarMax Auto Finance. CAF reported a pretax loss of $7.1 million compared with income of $33.4 million in last year’s second quarter. CAF results for the second quarter of fiscal 2009 were reduced by $28.2 million for adjustments primarily related to loans originated in prior fiscal years. These adjustments included the following:
|--||$15.7 million related to increases in loss rate assumptions, mainly for loans originated in fiscal 2006, 2007 and 2008. The upper end of our cumulative loss rate assumption range increased to 3.5% from 3.0%.|
|--||$7.7 million represented a mark-to-market reduction in the carrying value of subordinated bonds that we hold. These bonds have a face value of $115 million, and they were part of three securitizations completed earlier in calendar year 2008.|
|--||$4.1 million resulted from increasing the discount rate used to value our retained interest in securitized receivables to 19% from 17%.|
The adjustments related to reducing the fair value of the retained subordinated bonds and increasing the discount rate are non-cash charges that primarily affect the timing of the recognition of CAF income. If current conditions continue, these adjustments should result in positive contributions to CAF earnings in future periods.
The gain recognized on loans originated and sold in the second quarter of fiscal 2009 was also adversely affected by the disruption in the credit markets and worsening economic conditions. 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 1.8% from 4.0% in the second quarter of fiscal 2008. This decrease resulted from the combination of higher current funding costs that we have been unable to offset through higher consumer rates; the increase in the discount rate assumption to 19% from 12% utilized in the second quarter of last year; the use of a higher loss rate assumption for current quarter originations compared with the assumption used in the prior year’s quarter; and an increase in the credit enhancement requirements in the warehouse facility. In addition, CAF’s origination volume was negatively affected by the slowdown in unit sales, the decrease in average retail prices and a small decline in the percentage of sales financed by CAF.
SG&A. Selling, general and administrative expenses were 12.2% of total revenues in the second quarter of fiscal 2009 compared with 10.1% in the prior year’s second quarter. This increase in the SG&A ratio was the result of the significant declines in comparable store used unit sales and average selling price, and this increase was partially offset by our success in reducing costs. In the current market environment, we are focusing on reducing variable costs in an effort to control expenses. In our stores, thus far we have adjusted associate scheduling resulting in reduced hours worked, and we have allowed the natural attrition in the workforce to reduce variable store staffing. In addition, we have implemented a hiring freeze at the home office and are carefully monitoring expenses at CAF.
Earnings and Earnings Per Share. “We believe that the reduction in our second quarter earnings stems mainly from the effect of external conditions and that we are taking the necessary and appropriate steps to navigate through this difficult environment,” said Folliard. We have been successful in dramatically reducing inventories to align them with current sales, which in turn has allowed us to achieve an increase in our gross profit per unit compared with the first quarter. Our wholesale business performed strongly throughout this challenging period. We continue to focus on aligning overhead costs with current sales levels, and we expect to continue to find opportunities to further shrink costs. At the same time, we remain committed to delivering the exceptional customer service that underpins our long-term prospects.
Credit Facilities. During the second quarter, we increased the aggregate limit under our revolving credit facility by $200 million to a total of $700 million. We also increased the capacity of our warehouse facility used to securitize CAF auto loan receivables by $400 million to a total of $1.4 billion. We believe these increases will provide us with added resources and greater flexibility to operate in the current environment.
As of August 31, 2008, we had $210.3 million outstanding under the revolving credit facility. During the first half of fiscal 2009, we were able to reduce borrowings under this facility by $89.9 million, despite our lower earnings. In large part, this reflected our success in reducing inventories, which declined $239.6 million in the first half of fiscal 2009, even as we opened nine superstores. As of August 31, 2008, $600 million of auto loan receivables were securitized through the warehouse facility and unused warehouse capacity totaled $800 million.
Superstore Openings. During the second quarter, we opened three used car superstores, entering the Colorado Springs, Colorado, and the Tulsa, Oklahoma, markets with production superstores, and expanding our presence in the Los Angeles market with a non-production superstore in Costa Mesa, California.