CarMax Reports Record Second Quarter Results; Updates Fiscal 2007 Expectations
RICHMOND, Va., Sept. 20 -- CarMax, Inc. today reported results for the second quarter ended August 31, 2006.
-- Total sales increased 18% to
$1.93 billion from $1.63 billion in the
second quarter of last year.
-- Comparable store used unit sales
rose 7% for the quarter.
-- Total used unit sales grew 15%
in the second quarter.
-- Net earnings increased 44% to $54.3
million, or 50 cents per dilutedshare,
compared with $37.6 million, or 35
cents per diluted share, earned in the
second quarter of fiscal 2006.
* Earnings for the current year's quarter include share-based
compensation costs of $8.1 million, net of tax effects, or 8 cents per
share, resulting from the adoption of Statement of Financial
Accounting Standards (SFAS) No. 123R. Results for the second quarter
of fiscal 2006 have been restated to reflect additional share-based
compensation costs of $3.8 million, net of tax effects, or 4 cents per
share, related to this accounting change.
* Earnings for the current year's quarter include a benefit of 4 cents
per share from favorable CarMax Auto Finance items.
-- For the fiscal year ending February 28, 2007, CarMax now expects
comparable store used unit sales in the range of 6% to 8% and earnings
per share in the range of $1.55 to $1.65.
Sales Components
Three Months Ended Six Months Ended
(In millions) August 31 (1) August 31 (1)
2006 2005 Change 2006 2005 Change
Used vehicle
sales $1,526.7 $1,236.5 23.5% $2,987.9 $2,440.3 22.4%
New vehicle sales 121.2 151.9 (20.2)% 239.6 286.0 (16.2)%
Wholesale vehicle
sales 222.3 190.8 16.5% 469.6 380.3 23.5%
Other sales and
revenues:
Extended service
plan revenues 29.2 25.7 13.8% 58.0 50.2 15.6%
Service department
sales 23.8 24.7 (3.7)% 47.0 47.4 (0.8)%
Third-party
finance fees, net 6.2 4.2 47.6% 12.6 8.0 57.0%
Total other sales
and revenues 59.3 54.6 8.5% 117.6 105.6 11.3%
Net sales and
operating
revenues $1,929.5 $1,633.9 18.1% $3,814.7 $3,212.2 18.8%
(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 Six Months Ended
August 31 August 31
2006 2005 2006 2005
Comparable store
vehicle sales:
Used vehicle units 7 % 10 % 6 % 8 %
New vehicle units (19)% 10 % (15)% 5 %
Total units 5 % 10 % 5 % 8 %
Used vehicle dollars 15 % 14 % 14 % 12 %
New vehicle dollars (21)% 10 % (17)% 6 %
Total dollars 11 % 14 % 11 % 11 %
Total vehicle sales:
Used vehicle units 15 % 21 % 14 % 20 %
New vehicle units (19)% 10 % (15)% 3 %
Total units 12 % 20 % 12 % 19 %
Used vehicle dollars 23 % 25 % 22 % 24 %
New vehicle dollars (20)% 10 % (16)% 4 %
Total dollars 19 % 23 % 18 % 21 %
Retail Vehicle Sales Mix
Three Months Ended Six Months Ended
August 31 August 31
2006 2005 2006 2005
Vehicle units:
Used vehicles 94 % 92 % 94 % 93 %
New vehicles 6 8 6 7
Total 100 % 100 % 100 % 100 %
Vehicle dollars:
Used vehicles 93 % 89 % 93 % 89 %
New vehicles 7 11 7 11
Total 100 % 100 % 100 % 100 %
Unit Sales
Three Months Ended Six Months Ended
August 31 August 31
2006 2005 2006 2005
Used vehicles 86,846 75,616 171,112 149,759
New vehicles 5,131 6,320 10,078 11,924
Wholesale vehicles 52,648 47,499 106,434 92,129
Average Selling Prices
Three Months Ended Six Months Ended
August 31 August 31
2006 2005 2006 2005
Used vehicles $17,399 $16,204 $17,285 $16,161
New vehicles $23,476 $23,878 $23,626 $23,824
Wholesale vehicles $4,120 $3,934 $4,303 $4,043
Earnings Highlights
(In millions except per share data)
Three Months Ended Six Months Ended
August 31 August 31
2006 2005(1) Change 2006 2005(1) Change
Net earnings $54.3 $37.6 44.2 % $111.0 $74.6 48.8 %
Diluted weighted
average shares
outstanding 107.7 106.3 1.3 % 107.4 106.3 1.0 %
Net earnings per
share(2) $0.50 $0.35 42.9 % $1.03 $0.70 47.1 %
(1) Restated to reflect the adoption of SFAS 123R.
(2) Per share amounts are presented on a fully diluted basis.
Selected Operating Ratios
(In millions)
Three Months Ended
August 31
2006 % (1) 2005 (2) % (1)
Net sales and
operating revenues $1,929.5 100.0 % $1,633.9 100.0 %
Gross profit $253.4 13.1 % $208.6 12.8 %
CarMax Auto Finance
income $36.5 1.9 % $23.8 1.5 %
Selling, general, and
administrative
expenses $200.0 10.4 % $171.4 10.5 %
Operating profit
(EBIT) (3) $89.8 4.7 % $61.0 3.7 %
Net earnings $54.3 2.8 % $37.6 2.3 %
Six Months Ended
(In millions) August 31
2006 % (1) 2005 (2) % (1)
Net sales and
operating revenues $3,814.7 100.0 % $3,212.2 100.0 %
Gross profit $501.6 13.1 % $406.3 12.6 %
CarMax Auto Finance
income $68.9 1.8 % $50.9 1.6 %
Selling, general, and
administrative
expenses $387.0 10.1 % $335.2 10.4 %
Operating profit
(EBIT) (3) $183.5 4.8 % $122.1 3.8 %
Net earnings $111.0 2.9 % $74.6 2.3 %
(1) Calculated as the ratio of the applicable amount to net sales and
operating revenues.
(2) Restated to reflect the adoption of SFAS 123R.
(3) Operating profit equals earnings before interest and income taxes.
Gross Profit
Three Months Ended
August 31
2006 2005
$/unit(1) %(2) $/unit(1) %(2)
Used vehicle gross
profit $1,963 11.2 % $1,856 11.3 %
New vehicle gross
profit $1,176 5.0 % $1,122 4.7 %
Wholesale vehicle
gross profit $699 16.5 % $578 14.4 %
Other gross profit $436 67.6 % $411 61.7 %
Total gross profit $2,755 13.1 % $2,546 12.8 %
Six Months Ended
August 31
2006 2005
$/unit(1) %(2) $/unit(1) %(2)
Used vehicle gross
profit $1,944 11.1 % $1,829 11.2 %
New vehicle gross
profit $1,195 5.0 % $973 4.1 %
Wholesale vehicle
gross profit $711 16.1 % $604 14.6 %
Other gross profit $449 69.1 % $404 61.8 %
Total gross profit $2,768 13.1 % $2,513 12.6 %
(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.
Second Quarter Business Performance Review
Sales. "We had another strong quarter, with solid contributions on many fronts," said Tom Folliard, president and chief executive officer. "Continued strong traffic and store execution were the primary drivers of our 7% used unit comps. We were particularly pleased with our robust sales performance given the difficult comparison with last year's second quarter when we reported 10% comps. Last year's quarter benefited from the domestic manufacturers' new car employee pricing programs, which drove traffic into the market and created greater pricing transparency.
"Wholesale sales climbed reflecting increases in both retail sales and appraisal traffic," said Folliard. "New vehicle unit sales were down, reflecting a combination of weaker new car industry trends and our strategic decision to increase targeted gross margin dollars per unit on new vehicles. The increase in other sales and revenues reflected an increase in extended service plan sales in line with our used unit sales growth and an increase in third-party finance fees resulting from a decline in subprime-financed sales."
Margins. "Similar to the first quarter, our used vehicle gross profit per unit benefited from a steady, consistent sales performance," said Folliard. "CarMax is a volume-based business, and we systematically cut prices based on our proprietary pricing algorithms in order to appropriately balance inventory turns and margin achievement. When our sales pace is consistently strong, we take fewer pricing reductions, which in turn maximizes gross profit dollars.
"As anticipated, our wholesale vehicle gross profit increased to nearly $700 per unit, reflecting the combined benefits of refinements in our car buying process and increased efficiencies in our in-store auctions over the past couple of years," said Folliard.
CarMax Auto Finance. "CAF income climbed 53% compared with last year's second quarter," said Folliard. "CAF income benefited from the growth in total sales and managed receivables, an increase in the average amount financed, an improvement in the gain spread, and a favorable valuation adjustment." This year's second quarter CAF income included a benefit of 4 cents per share, primarily due to lowering the loss rate assumptions on previously securitized receivables that continue to outperform previous loss estimates. The lower loss rate reflected both fewer defaults and improved recoveries.
"The gain on loans originated and sold as a percent of loans sold was 3.9% in this year's second quarter, compared with 3.3% in the second quarter of fiscal 2006," said Folliard. "Consumer rates typically lag movements in our funding costs, and the recent pause in interest rate increases allowed our funding costs to remain relatively stable during the second quarter, even as consumer rates continued to rise." The reported gain as a percent of loans sold including the benefit of the favorable item was 4.6% in this year's second quarter.
SG&A. "Our SG&A ratio declined to 10.4% compared with 10.5% last year," said Folliard. "This quarter we absorbed a nearly 30 basis point increase related to higher share-based compensation costs. This increase was driven, in large part, by the accelerated vesting of stock options this quarter upon the retirement of our former CEO."
As previously reported, CarMax adopted SFAS 123R in the first quarter of fiscal 2007, and results for the prior year have been restated to enhance comparability. SFAS 123R requires all share-based compensation to be accounted for using a fair-value-based method. CarMax recognized $13.1 million of share-based compensation expense ($8.1 million net of taxes) in the second quarter of the current year, including $12.5 million reflected in selling, general, and administrative expenses, compared with $6.2 million ($3.8 million net of taxes) in the second quarter of fiscal 2006, all of which is included in selling, general, and administrative expenses.
Earnings. "We are very pleased to have two back-to-back quarters where we experienced broad-based strength," said Folliard. "Earnings per share for the first half of the year were up 47%, with across-the-board contributions related to used and wholesale sales and gross profits, CAF, and SG&A leverage."
Store Openings
No new superstores were opened during the second quarter. CarMax plans to open two standard superstores and four satellite superstores during the balance of the fiscal year, bringing total fiscal 2007 store openings to ten. Normal construction delays have shifted the planned opening date of the company's third used car superstore in the Charlotte, N.C., market into the first quarter of fiscal 2008. This store was previously expected to open in the fourth quarter of fiscal 2007.
Fiscal 2007 Expectations
"Given our strong performance in the first half of the year, we believe it is appropriate to refine our comparable store used unit growth expectations and to increase our earnings per share expectations for the current fiscal year," said Folliard. "We now expect annual used unit comp growth in the range of 6% to 8%." Fiscal 2007 used unit comps were previously expected to be in the range of 2% to 8%.
"We now expect fiscal 2007 earnings per share in the range of $1.55 to $1.65, representing EPS growth in the range of 23% to 31%, compared with the $1.26 reported in fiscal 2006 after restatement for SFAS 123R," continued Folliard. "This revised range includes an estimated 19 or 20 cents per share of share-based compensation expense, compared with 13 cents per share recognized in the restated fiscal 2006 results. The revised range also includes the 7 cents per share of favorable CAF items reported in the first half of this year, while last year's results included 9 cents per share of favorable CAF items." Fiscal 2007 earnings per share were previously expected to be in the range of $1.25 to $1.47.
"Our revised expectations assume that we don't experience abnormal winter weather events," said Folliard. "Our outlook also assumes a decline in gross profit dollars per wholesale unit in the second half of the year compared with the unusually high levels reported in the second half of fiscal 2006. And, we now expect CAF's gain spread to be in the range of 3.7% to 4.0% in the second half of the year, assuming no significant changes in the interest rate environment."
Third Quarter Fiscal 2007 Earnings Release Date
CarMax currently plans to release third quarter sales and earnings results on Wednesday, December 20, 2006, before the opening of the New York Stock Exchange. The company will host a conference call for investors at 9:00 a.m. Eastern time on that date. Information on this conference call will be available on the company's investor information home page at http://investor.carmax.com/ in early December.
About CarMax
CarMax, a Fortune 500 company, and one of the Fortune 2006 "100 Best Companies to Work For," is the nation's largest retailer of used cars. Headquartered in Richmond, Va., CarMax currently operates 71 used car superstores in 34 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, 2006, the company sold 311,241 used cars, which is 94% of the total 330,296 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
Restated (2)
2006 % (1) 2005 % (1)
Sales and operating revenues:
Used vehicle sales $1,526,738 79.1 $1,236,514 75.7
New vehicle sales 121,231 6.3 151,922 9.3
Wholesale vehicle sales 222,299 11.5 190,783 11.7
Other sales and revenues 59,274 3.1 54,634 3.3
Net sales and
operating revenues 1,929,542 100.0 1,633,853 100.0
Cost of sales 1,676,177 86.9 1,425,269 87.2
Gross profit 253,365 13.1 208,584 12.8
CarMax Auto Finance
income 36,512 1.9 23,824 1.5
Selling, general, and
administrative
expenses 200,049 10.4 171,401 10.5
Interest expense 2,335 0.1 375 -
Interest income 300 - 191 -
Earnings before
income taxes 87,793 4.5 60,823 3.7
Provision for
income taxes 33,529 1.7 23,187 1.4
Net earnings $54,264 2.8 $37,636 2.3
Weighted average common shares:
Basic 105,916 104,528
Diluted 107,651 106,296
Net earnings per share:
Basic $0.51 $0.36
Diluted $0.50 $0.35
Six Months Ended
August 31
Restated (2)
2006 % (1) 2005 % (1)
Sales and operating revenues:
Used vehicle sales $2,987,858 78.3 $2,440,319 76.0
New vehicle sales 239,639 6.3 286,015 8.9
Wholesale vehicle sales 469,595 12.3 380,275 11.8
Other sales and revenues 117,589 3.1 105,604 3.3
Net sales and
operating revenues 3,814,681 100.0 3,212,213 100.0
Cost of sales 3,313,061 86.9 2,805,870 87.4
Gross profit 501,620 13.1 406,343 12.6
CarMax Auto Finance
income 68,906 1.8 50,895 1.6
Selling, general, and
administrative
expenses 387,015 10.1 335,166 10.4
Interest expense 4,282 0.1 1,569 -
Interest income 567 - 326 -
Earnings before
income taxes 179,796 4.7 120,829 3.8
Provision for
income taxes 68,756 1.8 46,213 1.4
Net earnings $111,040 2.9 $74,616 2.3
Weighted average common shares:
Basic 105,590 104,457
Diluted 107,353 106,262
Net earnings per share:
Basic $1.05 $0.71
Diluted $1.03 $0.70
(1) Percents are calculated as a percentage of net sales and operating
revenues and may not equal totals due to rounding.
(2) Restated to reflect the adoption of SFAS 123R.
CARMAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(In thousands)
Re- Re-
stated (1) stated (1)
August 31 August 3 February 28
2006 2005 2006
ASSETS
Current assets:
Cash and cash equivalents $23,781 $41,825 $21,759
Accounts receivable, net 66,690 62,037 76,621
Automobile loan receivables held
for sale 4,019 2,360 4,139
Retained interests in
securitized receivables 189,820 157,784 158,308
Inventory 734,364 585,248 669,700
Prepaid expenses and
other current assets 12,071 8,418 11,211
Total current assets 1,030,745 857,672 941,738
Property and equipment, net 533,335 434,835 499,298
Deferred income taxes 28,782 16,391 24,576
Other assets 43,856 38,762 44,000
TOTAL ASSETS $1,636,718 $1,347,660 $1,509,612
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $190,168 $148,341 $188,614
Accrued expenses and other current
liabilities 94,495 83,929 85,316
Accrued income taxes 37,701 12,333 5,598
Deferred income taxes 8,831 23,552 23,562
Short-term debt 1,915 -- 463
Current portion of long-term debt 103,402 106,152 59,762
Total current liabilities 436,512 374,307 363,315
Long-term debt, excluding current
portion 34,276 35,279 134,787
Deferred revenue and other liabilities 34,229 28,776 31,407
Deferred income taxes -- 4,112 --
TOTAL LIABILITIES 505,017 442,474 529,509
SHAREHOLDERS' EQUITY 1,131,701 905,186 980,103
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $1,636,718 $1,347,660 $1,509,612
(1) Restated to reflect the adoption of SFAS 123R.
CARMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended
August 31
Restated (1)
2006 2005
Operating Activities:
Net earnings $111,040 $74,616
Adjustments to reconcile net earnings to net
Cash provided by operating activities:
Depreciation and amortization 16,727 12,194
Share-based compensation expense 19,636 10,271
Loss (gain) on disposition of assets 86 (829)
Provision for deferred income taxes (18,937) (6,801)
Changes in operating assets and liabilities:
Decrease in accounts receivable, net 9,931 14,130
Decrease in automobile loan receivables
held for sale, net 120 19,792
Increase in retained interests in securitized
receivables (31,512) (9,821)
Increase in inventory (64,664) (8,681)
(Increase) decrease in prepaid expenses and
other current assets (860) 4,590
Decrease (increase) in other assets 144 (737)
Increase in accounts payable, accrued expenses
and other current liabilities, and accrued
income taxes 42,218 7,609
Increase in deferred revenue and other
liabilities 2,822 254
Net cash provided by operating activities 86,751 116,587
Investing Activities:
Capital expenditures (54,317) (115,240)
Proceeds from sales of assets 3,467 78,173
Net cash used in investing activities (50,850) (37,067)
Financing Activities:
Increase (decrease) in short-term debt, net 1,452 (65,197)
Issuance of long-term debt -- 105,229
Payments on long-term debt (56,871) (100,411)
Equity issuances, net 13,928 3,694
Excess tax benefits from share-based payment
arrangements 7,612 1,866
Net cash used in financing activities (33,879) (54,819)
Increase in cash and cash equivalents 2,022 24,701
Cash and cash equivalents at beginning of year 21,759 17,124
Cash and cash equivalents at end of period $23,781 $41,825
(1) Restated to reflect the adoption of SFAS 123R.