CarMax Reports Record Third Quarter Results
Increases Fiscal 2007 Expectations
RICHMOND, Va., Dec. 20 -- CarMax, Inc. today reported results for the third quarter ended November 30, 2006.
* Total sales increased 24% to $1.77 billion from $1.42 billion in the
third quarter of last year.
* Comparable store used unit sales rose 13% for the quarter.
* Total used unit sales grew 18% for the quarter.
* Net earnings increased 98% to $45.4 million, or 42 cents per share,
compared with $22.9 million, or 22 cents per share, earned in the third
quarter of fiscal 2006.
-- Earnings for the third quarter of both years included share-based
compensation costs of 3 cents per share, resulting from the adoption
of Statement of Financial Accounting Standards (SFAS) No. 123R.
-- Earnings for the prior year's third quarter included a benefit of 3
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 performance in the range of 8% to 9%
and earnings per share in the range of $1.75 to $1.85.
Third Quarter Business Performance Review
"We are very pleased to announce stronger-than-anticipated third quarter results," said Tom Folliard, president and chief executive officer. "Similar to the first half of the year, we experienced widespread strength as reflected in our retail and wholesale sales and profit margins, CAF's performance, and the overhead leverage achieved."
Sales. "We are especially pleased with our robust sales performance," said Folliard. "Used unit comps climbed 13%, driven by a combination of strong store and Internet traffic, and continued excellent execution by our store teams. It is difficult to attribute our strong traffic flow to any single factor, as we believe a number of elements had a positive effect. We believe one contributing factor was our increased Internet visibility resulting from recent improvements to carmax.com and the expansion of our Internet classified advertising. We continued to see a rebound in sales of SUVs and trucks, which were adversely affected last year by consumer reaction to higher gas prices. Sales of luxury vehicles also continued to comprise a larger percentage of our sales.
"As a result of strong growth in wholesale units, our wholesale sales expanded by nearly 30% in this year's third quarter," said Folliard. "The increase in wholesale units reflected the growth in our store base and a substantial increase in appraisal traffic, in part spurred by the strong increase in retail sales."
Gross Profit. "Historically, our margins have been seasonally weakest in the third quarter, due to the effects of the model year changeover period and slowing customer traffic in the fall," said Folliard. "This quarter we are pleased to report a year-over-year increase in gross profit dollars per unit in all categories, including used, new, and wholesale vehicles, as well as in other sales and revenues. Similar to the first half of the year, our used vehicle profits benefited from our steady, consistent sales performance, resulting in fewer pricing reductions. While we had anticipated that our wholesale gross profit per unit would decline compared with the unusually strong level reported last year in the wake of Hurricane Katrina, we nevertheless achieved a modest improvement. The continuing success of our car-buying strategies benefited both our used retail and our wholesale gross profits per unit."
CarMax Auto Finance. "We had another quarter of solid performance at CAF," said Folliard. CAF income rose 14 percent, to $32.0 million, despite the challenging comparison with last year's quarter, which included $6.1 million, or 3 cents per share net of taxes, of favorable items. As in the first half of this year, CAF benefited from our strong sales performance, an increase in the average amount financed, and an improvement in the gain on loans originated and sold.
The gain on loans originated and sold as a percent of loans sold increased to 4.3% in this year's third quarter compared with 3.6% in the third quarter of fiscal 2006. "We had expected a gain in the range of 3.7% to 4.0%," said Folliard. "The relative stability in our funding cost allowed us to achieve a better-than-expected gain percentage."
SG&A. "This quarter's improvement in fixed overhead leverage was generated by our strong comparable store sales growth," said Folliard. The SG&A ratio declined 120 basis points, to 10.6% in this year's quarter compared with 11.8% in last year's quarter. The SG&A ratio benefited modestly from a shift in the timing of certain planned spending, which we now expect to incur in the fourth quarter of fiscal 2007.
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 $6.1 million, or 3 cents per share, of share-based compensation cost in the third quarter of fiscal 2007, including $5.6 million reflected in SG&A, compared with $5.6 million, or 3 cents per share, in last year's third quarter, all of which was included in SG&A.
Earnings. "We are gratified to report that from virtually every standpoint, the first nine months of this year have proven exceptional and reflect the increasing success of our long-term business strategy," said Folliard. "Given our many opportunities for geographic expansion, we remain excited about our long-term prospects."
Superstore Openings
We opened two superstores in late November: a satellite superstore in the Los Angeles, Calif., market; and a standard superstore in Fredericksburg, Virginia, which is part of the Washington, D.C., television market. In the first nine months of fiscal 2007, we opened six superstores, including four standard superstores and two satellite superstores. We plan to open four additional superstores during the fourth quarter of fiscal 2007.
Supplemental Financial Information
Sales Components
Three Months Ended Nine Months Ended
(In millions) November 30 (1) November 30 (1)
2006 2005 Change 2006 2005 Change
Used vehicle sales $1,377.6 $1,087.1 26.7 % $4,365.4 $3,527.4 23.8 %
New vehicle sales 109.9 113.3 (3.0)% 349.6 399.3 (12.5)%
Wholesale vehicle
sales 226.4 174.2 29.9 % 696.0 554.5 25.5 %
Other sales and
revenues:
Extended service
plan revenues 27.1 22.6 20.2 % 85.1 72.7 17.0 %
Service department
sales 21.6 23.0 (6.4)% 68.6 70.4 (2.7)%
Third-party finance
fees, net 5.6 3.8 49.6 % 18.2 11.8 54.6 %
Total other sales and
revenues 54.3 49.3 10.0 % 171.9 155.0 10.9 %
Net sales and
operating revenues $1,768.1 $1,424.0 24.2 % $5,582.8 $4,636.2 20.4 %
(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 Nine Months Ended
November 30 November 30
2006 2005 2006 2005
Comparable store
vehicle sales:
Used vehicle units 13 % 3 % 8 % 7 %
New vehicle units (3)% (6)% (12)% 2 %
Total units 12 % 3 % 7 % 6 %
Used vehicle dollars 21 % 7 % 16 % 10 %
New vehicle dollars (3)% (5)% (13)% 3 %
Total dollars 19 % 6 % 13 % 9 %
Total vehicle sales:
Used vehicle units 18 % 13 % 16 % 18 %
New vehicle units (3)% (2)% (12)% 1 %
Total units 17 % 12 % 14 % 17 %
Used vehicle dollars 27 % 17 % 24 % 22 %
New vehicle dollars (3)% (1)% (12)% 3 %
Total dollars 24 % 15 % 20 % 19 %
Retail Vehicle Sales Mix
Three Months Ended Nine Months Ended
November 30 November 30
2006 2005 2006 2005
Vehicle units:
Used vehicles 95 % 93 % 94 % 93 %
New vehicles 5 7 6 7
Total 100 % 100 % 100 % 100 %
Vehicle dollars:
Used vehicles 93 % 91 % 93 % 90 %
New vehicles 7 9 7 10
Total 100 % 100 % 100 % 100 %
Unit Sales
Three Months Ended Nine Months Ended
November 30 November 30
2006 2005 2006 2005
Used vehicles 79,009 66,680 250,121 216,439
New vehicles 4,532 4,675 14,610 16,599
Wholesale vehicles 51,833 40,228 158,267 132,357
Average Selling Prices
Three Months Ended Nine Months Ended
November 30 November 30
2006 2005 2006 2005
Used vehicles $17,247 $16,147 $17,273 $16,157
New vehicles $24,118 $24,081 $23,779 $23,896
Wholesale vehicles $ 4,258 $ 4,247 $ 4,288 $ 4,105
Selected Operating Ratios
Three Months Ended
(In millions) November 30
2006 %(1) 2005(2) %(1)
Net sales and
operating revenues $1,768.1 100.0 % $1,424.0 100.0 %
Gross profit $ 228.6 12.9 % $ 177.2 12.4 %
CarMax Auto Finance
income $32.0 1.8 % $28.0 2.0 %
Selling, general, and
administrative
Expenses $ 187.3 10.6 % $ 167.4 11.8 %
Operating profit
(EBIT) (3) $ 73.3 4.1 % $ 37.8 2.7 %
Net earnings $ 45.4 2.6 % $ 22.9 1.6 %
Nine Months Ended
(In millions) November 30
2006 %(1) 2005(2) %(1)
Net sales and
operating revenues $5,582.8 100.0 % $4,636.2 100.0 %
Gross profit $ 730.2 13.1 % $ 583.5 12.6 %
CarMax Auto Finance
income $ 100.9 1.8 % $ 78.9 1.7 %
Selling, general, and
administrative
Expenses $ 574.3 10.3 % $ 502.5 10.8 %
Operating profit
(EBIT) (3) $ 256.8 4.6 % $ 159.9 3.4 %
Net earnings $ 156.5 2.8 % $ 97.5 2.1 %
(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
November 30
2006 2005
$/unit (1) %(2) $/unit (1) %(2)
Used vehicle
gross profit $1,898 10.9 % $1,758 10.8 %
New vehicle
gross profit $1,108 4.6 % $866 3.6 %
Wholesale
vehicle gross
profit $742 17.0 % $726 16.8 %
Other gross
profit $421 64.8 % $374 54.0 %
Total gross
profit $2,736 12.9 % $2,483 12.4 %
Nine Months Ended
November 30
2006 2005
$/unit (1) %(2) $/unit (1) %(2)
Used vehicle
gross profit $1,929 11.1 % $1,807 11.1 %
New vehicle
gross profit $1,168 4.9 % $943 3.9 %
Wholesale
vehicle gross
profit $721 16.4 % $641 15.3 %
Other gross
profit $440 67.8 % $395 59.3 %
Total gross
profit $2,758 13.1 % $2,504 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.
Earnings Highlights
Three Months Ended Nine Months Ended
(In millions except November 30 November 30
per share data)
2006 2005(1) Change 2006 2005(1) Change
Net earnings $45.4 $22.9 98.1 % $156.5 $97.5 60.4 %
Diluted weighted
average shares
outstanding 108.9 106.5 2.2 % 107.9 106.3 1.4 %
Net earnings per
share(2) $0.42 $0.22 90.9 % $1.45 $0.92 57.6 %
(1) Restated to reflect the adoption of SFAS 123R.
(2) Per share amounts are presented on a fully diluted basis.
Fiscal 2007 Expectations
"Given our strong third quarter results, we believe that it is appropriate to increase our fiscal 2007 comparable store used unit growth and earnings per share expectations," said Folliard. The company now projects comparable store used unit growth in the range of 8% to 9%, an increase from the most recent guidance of 6% to 8%.
The company now expects fiscal 2007 EPS in the range of $1.75 to $1.85, representing growth in the range of 39% to 47%, compared with EPS of $1.26 in fiscal 2006 (after restatement for SFAS 123R). 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 nine months of this year, while fiscal 2006 full year's results included 9 cents per share of favorable CAF items. Fiscal 2007 EPS was previously expected to be in the range of $1.55 to $1.65.
"As always, our projections were not adjusted for the possibility of unusual winter weather, which could adversely affect our fourth quarter results," said Folliard. In the fourth quarter, we expect the opportunity for SG&A leverage will be limited by the combination of significantly higher store pre-opening costs in this year's quarter, the shift in timing of certain spending from the third quarter to the fourth quarter, and the challenging comparison to last year when we benefited from unexpectedly favorable healthcare and property tax costs.
Fiscal 2008 Superstore Opening Plan
During the fiscal year ending February 28, 2008, we expect to open 13 used car superstores, including 5 standard superstores and 8 satellite superstores. These store openings will expand our used car superstore base by approximately 17%, consistent with our target for used car superstore annual growth in the range of 15% to 20%. Planned store openings are as follows:
Television Standard Satellite
Location Market Market Status Superstores Superstores
Tucson, Arizona Tucson New market 1
Milwaukee, Wisconsin Milwaukee New market 2
Gastonia, North Charlotte Existing market 1
Carolina
Torrance, California Los Angeles Existing market 1
Roswell, Georgia Atlanta Existing market 1
Newport News, Norfolk / Existing market 1
Virginia Va. Beach
Ellicott City, DC /
Maryland Baltimore Existing market 1
San Diego, California San Diego New market 1
Modesto, California Sacramento Existing market 1
Omaha, Nebraska Omaha New market 1
Riverside, California Los Angeles Existing market 1
Jackson, Mississippi Jackson New market 1
5 8
"Our store opening plan for next year is fairly balanced," said Folliard. "We'll be entering five new markets and expanding our presence in six existing markets, geographically dispersed across the country. The opening plan also contains a mix of market sizes, ranging from San Diego, which is our first new large market in several years, to markets such as Omaha and Jackson."
Fourth Quarter Fiscal 2007 Earnings Release Date
CarMax currently plans to release fourth quarter sales and earnings results on Thursday, March 29, 2007, 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 March.
Conference Call Information
CarMax will host a conference call for investors at 9:00 a.m. Eastern time today, December 20, 2006. Domestic investors may access the call at 1-888-298-3261 (conference I.D.: 6134841). International investors should dial 1-706-679-7457 (conference I.D.: 6134841). A live webcast of the call also will be available on the company's investor information home page at http://investor.carmax.com/ or at http://www.streetevents.com/.
A webcast replay of the call will be available on the company's investor information home page beginning at approximately 1:00 p.m. Eastern time on December 20, 2006, through January 19, 2007. A telephone replay also will be available through December 27, 2007, 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 6134841.
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 74 used car superstores in 35 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 November 30, 2006, the company sold 323,570 used cars, which is 94% of the total 342,482 vehicles the company retailed during that period. For more information, access the CarMax website at http://www.carmax.com/.
For more details on factors that could affect expectations, see the company's Annual Report on Form 10-K for the fiscal year ended February 28, 2006, and its quarterly or current reports as filed with or furnished to the Securities and Exchange Commission. The company's filings are publicly available on the investor information home page at http://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.
CARMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(In thousands except per share data)
Three Months Ended
November 30
Restated(2)
2006 %(1) 2005 %(1)
Sales and operating revenues:
Used vehicle sales $1,377,551 77.9 $1,087,097 76.3
New vehicle sales 109,940 6.2 113,299 8.0
Wholesale vehicle sales 226,363 12.8 174,235 12.2
Other sales and revenues 54,293 3.1 49,349 3.5
Net sales and operating revenues 1,768,147 100.0 1,423,980 100.0
Cost of sales 1,539,538 87.1 1,246,807 87.6
Gross profit 228,609 12.9 177,173 12.4
CarMax Auto Finance income 31,974 1.8 27,971 2.0
Selling, general and
administrative expenses 187,318 10.6 167,351 11.8
Interest expense 167 -- 430 --
Interest income 406 -- 262 --
Earnings before income taxes 73,504 4.2 37,625 2.6
Provision for income taxes 28,085 1.6 14,694 1.0
Net earnings $45,419 2.6 $22,931 1.6
Weighted average common shares:
Basic 106,511 104,727
Diluted 108,883 106,507
Net earnings per share:
Basic $0.43 $0.22
Diluted $0.42 $0.22
Nine Months Ended
November 30
Restated(2)
2006 %(1) 2005 %(1)
Sales and operating revenues:
Used vehicle sales $4,365,409 78.2 $3,527,416 76.1
New vehicle sales 349,579 6.3 399,314 8.6
Wholesale vehicle sales 695,958 12.5 554,510 12.0
Other sales and revenues 171,882 3.1 154,953 3.3
Net sales and operating revenues 5,582,828 100.0 4,636,193 100.0
Cost of sales 4,852,599 86.9 4,052,677 87.4
Gross profit 730,229 13.1 583,516 12.6
CarMax Auto Finance income 100,880 1.8 78,866 1.7
Selling, general and
administrative expenses 574,333 10.3 502,517 10.8
Interest expense 4,449 0.1 1,999 --
Interest income 973 -- 588 --
Earnings before income taxes 253,300 4.5 158,454 3.4
Provision for income taxes 96,841 1.7 60,907 1.3
Net earnings $156,459 2.8 $97,547 2.1
Weighted average common shares:
Basic 105,895 104,547
Diluted 107,861 106,343
Net earnings per share:
Basic $1.48 $0.93
Diluted $1.45 $0.92
(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 SFAS123R
CARMAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(In thousands)
Restated(1) Restated(1)
November 30 November 30 February 28
2006 2005 2006
ASSETS
Current assets:
Cash and cash equivalents $12,352 $17,252 $21,759
Accounts receivable, net 53,092 55,616 76,621
Automobile loan receivables
held for sale 3,145 1,527 4,139
Retained interest in
securitized receivables 202,594 158,930 158,308
Inventory 760,816 606,366 669,700
Prepaid expenses and other
current assets 13,955 11,381 11,211
Total current assets 1,045,954 851,072 941,738
Property and equipment, net 585,109 465,990 499,298
Deferred income taxes 25,788 24,101 24,576
Other assets 47,817 44,209 44,000
TOTAL ASSETS $1,704,668 $1,385,372 $1,509,612
LIABILITIES AND
SHAREHOLDERS' equity
Current liabilities:
Accounts payable $222,205 $173,341 $188,614
Accrued expenses and other
current liabilities 83,623 75,266 85,316
Accrued income taxes 33,275 21,571 5,598
Deferred income taxes 10,151 19,572 23,562
Short-term debt 2,984 4,707 463
Current portion of
long-term debt 84,422 40,042 59,762
Total current liabilities 436,660 334,499 363,315
Long-term debt, excluding
current portion 34,012 85,036 134,787
Deferred revenue and other
liabilities 35,090 29,322 31,407
TOTAL LIABILITIES 505,762 448,857 529,509
SHAREHOLDERS' EQUITY 1,198,906 936,515 980,103
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,704,668 $1,385,372 $1,509,612
(1) Restated to reflect the adoption of SFAS123R.
CARMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine Months Ended
November 30
Restated(1)
2006 2005
Operating Activities:
Net earnings $156,459 $97,547
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 25,177 19,193
Share-based compensation expense 25,548 15,713
Loss (gain) on disposition of assets 259 (777)
Deferred income tax benefit (14,623) (22,603)
Changes in operating assets and liabilities:
Decrease in accounts receivable, net 23,529 20,551
Decrease in automobile loan receivables
held for sale, net 994 20,625
Increase in retained interest in
securitized receivables (44,286) (10,967)
Increase in inventory (91,116) (29,799)
(Increase) decrease in prepaid expenses and
other current assets (2,744) 1,627
Increase in other assets (3,817) (6,184)
Increase in accounts payable, accrued
expenses and other current liabilities,
and accrued income taxes 58,502 33,371
Increase in deferred revenue and other
liabilities 3,683 800
Net cash provided by operating activities 137,565 139,097
Investing Activities:
Capital expenditures (114,719) (153,490)
Proceeds from sales of assets 3,472 78,217
Net cash used in investing activities (111,247) (75,273)
Financing Activities:
Increase (decrease) in short-term debt, net 2,521 (60,490)
Issuance of long-term debt - 105,229
Payments on long-term debt (76,115) (116,764)
Equity issuances, net 27,449 5,108
Excess tax benefits from share-based payment
arrangements 10,420 3,221
Net cash used in financing activities (35,725) (63,696)
(Decrease) increase in cash and cash equivalents (9,407) 128
Cash and cash equivalents at beginning of year 21,759 17,124
Cash and cash equivalents at end of period $12,352 $17,252
(1) Restated to reflect the adoption of SFAS123R.