CarMax Reports Record Second Quarter Results
Releases Third Quarter Expectations
RICHMOND, Va., Sept. 21 -- CarMax, Inc. today reported results for the second quarter ended August 31, 2005.
* Total sales increased 23% to $1.63 billion from $1.32 billion in the
second quarter of last year.
* Comparable store used unit sales rose 10% for the quarter.
* Total used unit sales grew 21% for the quarter.
* Net earnings increased 39% to $41.4 million, or 39 cents per share,
compared with $29.9 million, or 28 cents per share, earned in the
second quarter of fiscal 2005.
* For the third quarter of fiscal 2006 ending November 30, 2005, CarMax
expects comparable store used unit sales growth in the range of 2% to
8%, and earnings per share in the range of 19 cents to 25 cents.
Sales Components
Three Months Ended Six Months Ended
(In millions) August 31(1) August 31(1)
2005 2004 Change 2005 2004 Change
Used vehicle sales $1,236.5 $987.4 25.2% $2,440.3 $1,972.7 23.7%
New vehicle sales 151.9 137.5 10.5% 286.0 274.3 4.3%
Wholesale vehicle sales 190.8 152.1 25.4% 380.3 309.0 23.1%
Other sales and
revenues (2) 54.6 46.5 17.5% 105.6 92.5 14.2%
Net sales and operating
revenues $1,633.9 $1,323.5 23.4% $3,212.2 $2,648.5 21.3%
(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.
(2) Other sales and revenues include extended service plan revenues,
service department sales, and third-party finance fees.
Retail Vehicle Sales Changes
Three Months Ended Six Months Ended
August 31 August 31
2005 2004 2005 2004
Comparable store vehicle
sales:
Used vehicle units 10 % (7)% 8 % (5)%
New vehicle units 10 % 13 % 5 % 12 %
Total units 10 % (5)% 8 % (3)%
Used vehicle dollars 14 % (6)% 12 % (3)%
New vehicle dollars 10 % 13 % 6 % 12 %
Total dollars 14 % (4)% 11 % (1)%
Total vehicle sales:
Used vehicle units 21 % 4 % 20 % 6 %
New vehicle units 10 % (1)% 3 % (1)%
Total units 20 % 3 % 19 % 5 %
Used vehicle dollars 25 % 5 % 24 % 8 %
New vehicle dollars 10 % (1)% 4 % (1)%
Total dollars 23 % 4 % 21 % 7 %
Retail Vehicle Sales Mix
Three Months Ended Six Months Ended
August 31 August 31
2005 2004 2005 2004
Vehicle units:
Used vehicles 92 % 92 % 93 % 91 %
New vehicles 8 8 7 9
Total 100 % 100 % 100 % 100 %
Vehicle dollars:
Used vehicles 89 % 88 % 89 % 88 %
New vehicles 11 12 11 12
Total 100 % 100 % 100 % 100 %
Retail Unit Sales
Three Months Ended Six Months Ended
August 31 August 31
2005 2004 2005 2004
Used vehicles 75,616 62,396 149,759 124,749
New vehicles 6,320 5,756 11,924 11,600
Total 81,936 68,152 161,683 136,349
Average Retail Selling Prices
Three Months Ended Six Months Ended
August 31 August 31
2005 2004 2005 2004
Used vehicles $16,204 $15,693 $16,161 $15,678
New vehicles $23,878 $23,706 $23,824 $23,463
Weighted average $16,796 $16,370 $16,726 $16,340
Earnings Highlights
(In millions except per Three Months Ended Six Months Ended
share data) August 31 August 31
2005 2004 Change 2005 2004 Change
Net earnings $41.4 $29.9 38.7 % $81.2 $65.2 24.6 %
Diluted weighted average
shares outstanding 106.2 105.5 0.7 % 106.2 105.6 0.5 %
Net earnings per share(1) $0.39 $0.28 39.3 % $0.76 $0.62 22.6 %
(1) All per share amounts are presented on a fully diluted basis.
Selected Operating Ratios
Three Months Ended
(In millions) August 31
2005 %(1) 2004 %(1)
Net sales and operating revenues $1,633.9 100.0 % $1,323.5 100.0 %
Gross profit $208.6 12.8 % $163.2 12.3 %
CarMax Auto Finance income $23.8 1.5 % $20.7 1.6 %
Selling, general, and
administrative expenses $165.3 10.1 % $134.7 10.2 %
Operating profit (EBIT)(2) $67.1 4.1 % $49.2 3.7 %
Net earnings $41.4 2.5 % $29.9 2.3 %
Six Months Ended
(In millions) August 31
2005 %(1) 2004 %(1)
Net sales and operating revenues $3,212.2 100.0 % $2,648.5 100.0 %
Gross profit $406.3 12.6 % $330.4 12.5 %
CarMax Auto Finance income $50.9 1.6 % $42.6 1.6 %
Selling, general, and
administrative expenses $324.5 10.1 % $265.4 10.0 %
Operating profit (EBIT)(2) $132.7 4.1 % $107.6 4.1 %
Net earnings $81.2 2.5 % $65.2 2.5 %
(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
August 31
2005 2004
$/unit(1) %(2) $/unit(1) %(2)
Used vehicle gross profit $1,856 11.3 % $1,846 11.7 %
New vehicle gross profit $1,122 4.7 % $890 3.7 %
Wholesale vehicle gross
profit $578 14.4 % $406 11.0 %
Other gross profit $411 61.7 % $385 56.3 %
Total gross profit $2,546 12.8 % $2,395 12.3 %
Six Months Ended
August 31
2005 2004
$/unit(1) %(2) $/unit(1) %(2)
Used vehicle gross profit $1,829 11.2 % $1,855 11.7 %
New vehicle gross profit $973 4.1 % $859 3.6 %
Wholesale vehicle gross $604 14.6 % $423 11.3 %
profit
Other gross profit $404 61.8 % $398 58.7 %
Total gross profit $2,513 12.6 % $2,423 12.5 %
(1) Calculated as category gross profit divided by its respective units
sold, except the other and total categories, which are divided by
total retail units sold.
(2) Calculated as a percentage of its respective sales or revenue.
Business Performance Review
Sales. "We are very pleased with our second quarter results," said Austin Ligon, president and chief executive officer, "especially considering the constantly changing environment in the auto retailing marketplace. Continuing excellent execution by our store teams took advantage of a strong increase in store traffic, which we believe was helped in part by the new car employee pricing programs.
"We believe we benefit from pricing transparency in the marketplace, and the employee pricing programs made new car pricing more transparent," said Ligon. "Our no-haggle consumer offer makes price-comparing easy, giving us a unique advantage as consumers cross-shop.
"We also saw a solid increase in appraisal traffic," Ligon said. "We increased our radio advertising during the summer, focusing almost exclusively on our 'we buy cars' message. Even as prices on SUVs fell dramatically, we stayed active in the market, making a fair offer to purchase any consumer's vehicle. In addition, dealers lost some of their negotiating ability on trade-ins as prices of new cars were more transparent.
"Our subprime finance provider, DRIVE, contributed approximately 1 percentage point of our 10% used unit comp growth," Ligon said. "Following several months of testing, we rolled out DRIVE systemwide in August 2004. Having now anniversaried this rollout, we do not expect DRIVE to provide material incremental used unit comp growth in future quarters.
"We believe the new car pricing programs helped stimulate the robust increase in our appraisal traffic," Ligon said. "Consumers continue to learn that they can come to CarMax for a free appraisal of their cars. Doing so gives them an easy way to realize fair value for their cars if they choose to sell to us and a powerful negotiating tool if they choose to trade in at a new car dealer. The increase in appraisal traffic was the primary driver of the 25% increase in wholesale sales.
"Other sales and revenues benefited from increases in extended service plan revenues and service department sales," said Ligon. "Their growth was partially offset by a decline in third-party finance fees, resulting primarily from the DRIVE discount. Our prime and nonprime finance partners pay us an origination fee, while DRIVE purchases loan contracts at a discount."
Margins. "Used vehicle gross profit per unit rose slightly compared with last year's second quarter," Ligon said, "despite the expected pricing pressure on SUVs and trucks resulting from higher gas prices and despite a supplemental markdown in retail SUV valuation at the end of the quarter. While wholesale auction prices for SUVs and trucks plummeted, auction prices for other vehicles were above historical norms. We were able to hold margins because we are quickly adjusting our appraisal offers to be in sync with broader market trade-in offers and because we turn our inventory rapidly. We finished the quarter with our inventory on target going into the lower volume, model year changeover period.
"New car margins rose nicely," said Ligon. "We actually were able to increase new car prices modestly because our pricing had been below the employee pricing programs. In wholesale, we continued to benefit from our sharp attention to appraisal offer adjustments during the summer's very dynamic market environment. The other sales and revenues margin grew as a result of growth in our service margin, reflecting the greater overhead expense absorption that higher volumes provide."
CarMax Auto Finance. CarMax Auto Finance income increased 15% compared with the same quarter last year. CAF income benefited from the growth in total sales and a modest increase in penetration. The increase in originations and managed receivables more than offset the expected decline in gain spread. The gain on loans sold as a percent of loans sold was 3.3% in the second quarter, slightly below the normalized range of 3.5% to 4.5%. Similar to the past several quarters, increases in CAF's cost of funds outpaced increases in consumer rates. The gain spread was 3.8% in last year's second quarter.
SG&A. Selling, general, and administrative expenses as a percent of total sales declined modestly to 10.1% in this year's second quarter from 10.2% in last year's second quarter. "The overhead cost leverage provided by our strong sales growth was largely offset by a combination of factors," said Ligon. "This year's rollout of marketwide television advertising in Los Angeles and last year's lower-than-normal store and corporate bonuses both adversely affected the SG&A ratio comparison. In addition, we continue to see a larger percentage of our store base made up of stores not yet at basic maturity, which we define as four years. In this year's second quarter, 46% of our stores were newer stores, compared with 38% in last year's second quarter."
Earnings. "We finished the quarter with earnings at 39 cents per share, 2 cents higher than our revised guidance," Ligon said. "We benefited from strong margin performance in used, new, and wholesale vehicles. We also benefited from lower than expected health care costs."
Third Quarter Fiscal 2006 Expectations
"For the third quarter, we currently expect used unit comp growth in the range of 2 to 8% and earnings per share in the range of 19 to 25 cents," Ligon said. "We have again put a wide range on our quarterly expectations because market conditions continue to be uncertain and we are going into the ever- challenging model year changeover period. We continue to see SUV and light truck price declines. As these declines cause supplemental markdowns, we anticipate additional margin pressure. We expect the CAF gain on loans sold to be approximately 3.5%, the low end of our normalized range.
"Thus far in September, we've experienced a slight benefit from replacement purchases resulting from Hurricane Katrina," said Ligon. "However, we have no way of knowing if and to what extent our sales might continue to benefit. Consequently, our current expectations do not include any future benefit from possible replacement purchases." The company plans to release third quarter sales and earnings results on Wednesday, December 21, 2005, before the opening of the New York Stock Exchange.
Store Openings
CarMax opened one superstore during the second quarter, bringing to five the number of superstores opened in the first half of the fiscal year. The company entered the Salt Lake City market with a standard superstore, which opened on August 31, the last day of the quarter. CarMax's plans call for opening four additional superstores during the second half of the year, including two satellite superstores that have opened in September, one in Miami and one in Nashville.
About CarMax
CarMax, a Fortune 500 company, and one of the Fortune 2005 "100 Best Companies to Work For," is the nation's largest retailer of used cars. Headquartered in Richmond, Va., CarMax currently operates 65 used car superstores in 29 markets. CarMax also operates seven new car franchises, all of which are integrated or co-located with its used car superstores. During the twelve month period ended August 31, 2005, the company sold 278,178 used cars, which is 93 percent of the total 299,138 vehicles the company retailed during that period. For more information, access the CarMax website at http://www.carmax.com/.
CARMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(In thousands except per share data)
Three Months Ended
August 31
2005 %(1) 2004 %(1)
Sales and operating revenues:
Used vehicle sales $1,236,514 75.7 $987,359 74.6
New vehicle sales 151,922 9.3 137,516 10.4
Wholesale vehicle sales 190,783 11.7 152,118 11.5
Other sales and revenues 54,634 3.3 46,514 3.5
Net sales and operating revenues 1,633,853 100.0 1,323,507 100.0
Cost of sales 1,425,269 87.2 1,160,307 87.7
Gross profit 208,584 12.8 163,200 12.3
CarMax Auto Finance income 23,824 1.5 20,744 1.6
Selling, general, and
administrative expenses 165,274 10.1 134,726 10.2
Loss on franchise dispositions,
net - - 11 -
Interest expense 375 - 324 -
Interest income 191 - 66 -
Earnings before income taxes 66,950 4.1 48,949 3.7
Provision for income taxes 25,528 1.6 19,090 1.4
Net earnings $41,422 2.5 $29,859 2.3
Weighted average common shares:
Basic 104,528 104,002
Diluted 106,217 105,512
Net earnings per share:
Basic $ 0.40 $ 0.29
Diluted $ 0.39 $ 0.28
Six Months Ended
August 31
2005 %(1) 2004 %(1)
Sales and operating revenues:
Used vehicle sales $2,440,319 76.0 $1,972,734 74.5
New vehicle sales 286,015 8.9 274,281 10.4
Wholesale vehicle sales 380,275 11.8 308,989 11.7
Other sales and revenues 105,604 3.3 92,493 3.5
Net sales and operating revenues 3,212,213 100.0 2,648,497 100.0
Cost of sales 2,805,870 87.4 2,318,067 87.5
Gross profit 406,343 12.6 330,430 12.5
CarMax Auto Finance income 50,895 1.6 42,560 1.6
Selling, general, and
administrative expenses 324,509 10.1 265,414 10.0
Loss on franchise dispositions,
net - - 11 -
Interest expense 1,569 - 817 -
Interest income 326 - 119 -
Earnings before income taxes 131,486 4.1 106,867 4.0
Provision for income taxes 50,246 1.6 41,678 1.6
Net earnings $81,240 2.5 $65,189 2.5
Weighted average common shares:
Basic 104,457 103,933
Diluted 106,201 105,643
Net earnings per share:
Basic $0.78 $0.63
Diluted $0.76 $0.62
(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
(In thousands)
August 31 February 28
2005 2004 2005
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $53,800 $56,607 $29,099
Accounts receivable, net 62,037 69,795 76,167
Automobile loan receivables
held for sale 2,360 3,164 22,152
Retained interest in
securitized receivables 157,784 139,525 147,963
Inventory 585,248 492,011 576,567
Prepaid expenses and other
current assets 8,418 5,473 13,008
Total current assets 869,647 766,575 864,956
Property and equipment, net 434,835 310,316 406,301
Deferred income taxes - 1,635 -
Other assets 26,787 27,088 21,756
TOTAL ASSETS $1,331,269 $1,105,614 $1,293,013
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable $148,341 $131,495 $170,646
Accrued expenses and other
current liabilities 83,929 59,691 65,664
Accrued income taxes 12,333 2,676 1,179
Deferred income taxes 23,552 33,556 26,315
Short-term debt - 4,644 65,197
Current portion of
long-term debt 106,152 - 330
Total current liabilities 374,307 232,062 329,331
Long-term debt, excluding
current portion 35,279 100,000 128,419
Deferred revenue and other
liabilities 28,776 23,099 29,260
Deferred income taxes 4,112 - 5,027
TOTAL LIABILITIES 442,474 355,161 492,037
SHAREHOLDERS' EQUITY 888,795 750,453 800,976
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,331,269 $1,105,614 $1,293,013
CARMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six Months Ended
August 31
2005 2004
Operating Activities:
Net earnings $81,240 $65,189
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 12,194 8,844
Amortization of restricted stock awards 44 51
Gain on disposition of assets (829) (83)
Provision for deferred income taxes (3,678) (605)
Changes in operating assets and liabilities:
Decrease in accounts receivable, net 14,130 2,563
Decrease in automobile loan receivables
held for sale 19,792 15,617
(Increase) decrease in retained interest in
securitized receivables (9,821) 6,463
Increase in inventory (8,681) (25,950)
Decrease in prepaid expenses and other
current assets 4,590 3,177
(Increase) decrease in other assets (737) 71
Increase (decrease) in accounts payable,
accrued expenses and other current
liabilities, and accrued income taxes 10,385 (8,926)
Increase in deferred revenue and other
liabilities 254 1,313
Net cash provided by operating activities 118,883 67,724
Investing Activities:
Purchases of property and equipment (115,240) (118,624)
Proceeds from sales of assets 78,173 43,659
Net cash used in investing activities (37,067) (74,965)
Financing Activities:
(Decrease) increase in short-term debt, net (65,197) 198
Issuance of long-term debt 105,229 -
Payments on long-term debt (100,411) -
Equity issuances, net 3,264 2,007
Net cash (used in) provided by financing
activities (57,115) 2,205
Increase (decrease) in cash and cash equivalents 24,701 (5,036)
Cash and cash equivalents at beginning of year 29,099 61,643
Cash and cash equivalents at end of period $53,800 $56,607