CarMax Reports Third Quarter Results
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Revises Fiscal 2008 Expectations
RICHMOND, Va., Dec. 19 -- CarMax, Inc. today reported results for the third fiscal quarter ended November 30, 2007.
-- Total sales increased 7% to $1.89 billion from $1.77 billion in the
third quarter of last year.
-- Comparable store used unit sales were flat compared with a 13% increase
during the prior year's third quarter.
-- Total used unit sales grew 9% versus an 18% increase in the third
quarter of fiscal 2007.
-- Net earnings declined 34% to $29.8 million, or $0.14 per share,
compared with $45.4 million, or $0.21 per share, earned in the third
quarter of last year.
* As previously reported and included in the September revision to our
fiscal 2008 expectations, CarMax Auto Finance (CAF) income was
adversely affected by increased funding costs for our 2007-3 public
securitization, which reduced CAF income by $8 million before taxes.
* An increase in the cost of funding receivables through the asset-
backed commercial paper market resulted in an additional $4.6 million
pretax reduction in third quarter CAF gain income related to
receivables in the warehouse facility that had been originated in
previous quarters.
* The increase in the cost of funding receivables through the asset-
backed commercial paper market also had an adverse impact on CAF's
gain percentage in the third quarter. CAF's gain on loans originated
and sold in the quarter declined to 3.6% compared with 4.3% in last
year's third quarter.
-- For the fiscal year ending February 29, 2008, we now expect comparable
store used unit sales growth of approximately 2% and earnings per share
in the range of $0.87 to $0.93. Compared with our prior expectations,
the decline in the expected earnings range is largely the result of
higher funding costs at CAF.
Third Quarter Business Performance Review
Sales. "Current economic conditions clearly affected our performance this quarter," said Tom Folliard, president and chief executive officer. Our flat comparable store used unit sales reflected the combination of the near-term decline in consumer confidence and a slowing sales pace for the automotive retail industry, as well as the challenging comparison with our 13% increase in last year's third quarter. However, considering the difficult economic environment, we are pleased with our performance, and we achieved sales and gross profits consistent with our previously revised expectations. In addition, our data indicates that we continue to gain market share in the late-model used vehicle market.
We continued to experience healthy consumer traffic, which we believe benefited from the favorable response to the improvements to carmax.com made over the last several quarters. However, compared with the prior year period, our sales conversion rate declined as consumers appeared to be more hesitant in committing to big-ticket purchases. Sales were supported by the continued consistent availability of credit from CAF and our third-party finance providers.
Wholesale sales increased by 4% in the quarter, slower than our used retail sales growth, reflecting the challenging comparison with the prior year, when wholesale sales climbed 30%. Our wholesale sales represent customer vehicle trade-ins and appraisal purchases that do not meet our retail standards.
New vehicle sales declined by 30%, reflecting the combination of the soft new car sales environment and the sale of our Orlando Chrysler Jeep Dodge franchise in the second quarter. Other sales and revenues increased 9%, similar to our used vehicle sales growth.
Gross Profit. Our total gross profit per unit declined slightly to $2,723 compared with $2,736 in last year's third quarter. Our retail used vehicle gross profit per unit was $1,886, only $12 lower than the prior year. The year-over-year $32 increase in our wholesale profit per unit reflected the continued benefit of our superior car-buying process, as well as continued strong dealer attendance at our auctions.
Compared with the second quarter of this year, the total gross profit per unit declined by $146, with decreases in all vehicle categories. We expect gross profits to decrease sequentially from the second quarter to the third quarter, reflecting the normal seasonal slowdown in traffic, the higher vehicle depreciation that typically occurs during the model-year changeover period and our resulting lower margin targets.
CarMax Auto Finance. CAF income declined 49% to $16.3 million from $32.0 million in last year's third quarter. As previously reported and included in our revised expectations, the current quarter CAF income was adversely affected by wider spreads and higher swap unwind costs related to our 2007-3 public securitization at the beginning of the quarter, which reduced CAF income by $8 million.
In addition, continuing turmoil in the asset-backed credit markets drove funding costs higher in CAF's warehouse facility as the spread between asset-backed commercial paper rates and benchmark rates widened significantly during the quarter. As a result, CAF income was reduced by an additional $4.6 million related to loans remaining in the warehouse facility that were originated in prior quarters. The wider spreads on asset-backed commercial paper also reduced CAF's gain percentage on loans originated during the quarter. CAF's gain on loans originated and sold during the third quarter declined to 3.6% compared with 4.3% in the prior year's quarter.
CAF income for the current year's quarter was also adversely affected by $1.5 million primarily related to adjustments in loss assumptions on pools of previously securitized loans.
SG&A. The SG&A ratio increased to 11.2% in this year's third quarter compared with 10.6% in the corresponding quarter of last year. The increase in rate largely resulted from our flat comparable store used unit sales and our commitment to our ongoing growth plans, as well as our decision to continue spending on our strategic, operational and Internet initiatives during the quarter.
Earnings and Earnings Per Share. As expected, comparable store sales growth was more challenging in the weak near-term economic environment, but we generally achieved our revised sales and margin targets. Our 34% decline in net earnings for the quarter was primarily associated with the impact of higher CAF funding costs. Notwithstanding these higher current funding costs, we continue to believe that having our own finance operation provides us with strategic advantages and increased profitability over the long term.
Store Openings. During the third quarter, we opened five superstores, including one production superstore in Charlotte, N.C., and four non- production superstores in Atlanta, Ga.; Newport News, Va.; Los Angeles, Calif.; and San Diego, Calif. Through the first nine months of fiscal 2008, we opened nine superstores, including two production superstores and seven non-production superstores.
Early in the fourth quarter, we opened production superstores in Omaha, Neb., and Jackson, Miss., and we plan to open a non-production superstore in Baltimore, Md., in February 2008. In total, we expect to open 12 superstores during fiscal 2008, expanding our store base by 16%, consistent with our target for used car superstore annual growth in the range of 15% to 20%. The opening date for our store in Modesto, Calif., previously planned for February, has been shifted to March as a result of normal construction scheduling changes.
During the first nine months of fiscal 2008, we expanded our car-buying center test with the opening of buying centers in the Raleigh, N.C., and Tampa, Fla., markets. At these locations, we conduct appraisals and purchase cars, but do not sell vehicles. These test centers are part of our long-term plan to increase both appraisal traffic and retail vehicle sourcing self- sufficiency. In the coming months, we plan to further expand this test by opening car-buying centers in Dallas, Tex., and Baltimore, Md.
Supplemental Financial Information
Sales Components
Three Months Ended Nine Months Ended
(In millions) November 30 (1) November 30 (1)
2007 2006 Change 2007 2006 Change
Used vehicle sales $1,514.3 $1,377.6 9.9% $4,909.8 $4,365.4 12.5%
New vehicle sales 77.0 109.9 (30.0)% 294.4 349.6 (15.8)%
Wholesale vehicle
sales 234.7 226.4 3.7% 761.2 696.0 9.4%
Other sales and
revenues:
Extended service
plan revenues 30.1 27.1 11.2% 97.2 85.1 14.3%
Service department
sales 23.2 21.6 7.7% 72.6 68.6 5.9%
Third-party finance
fees, net 5.9 5.6 4.8% 19.7 18.2 8.4%
Total other sales and
revenues 59.3 54.3 9.1% 189.6 171.9 10.3%
Net sales and
operating revenues $1,885.3 $1,768.1 6.6% $6,155.0 $5,582.8 10.2%
(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
2007 2006 2007 2006
Comparable store vehicle sales:
Used vehicle units 0 % 13 % 3 % 8 %
New vehicle units (20)% (3)% (12)% (12)%
Total units (1)% 12 % 2 % 7 %
Used vehicle dollars 0 % 21 % 4 % 16 %
New vehicle dollars (21)% (3)% (12)% (13)%
Total dollars (1)% 19 % 3 % 13 %
Total vehicle sales:
Used vehicle units 9 % 18 % 11 % 16 %
New vehicle units (29)% (3)% (16)% (12)%
Total units 7 % 17 % 10 % 14 %
Used vehicle dollars 10 % 27 % 12 % 24 %
New vehicle dollars (30)% (3)% (16)% (12)%
Total dollars 7 % 24 % 10 % 20 %
Retail Vehicle Sales Mix
Three Months Ended Nine Months Ended
November 30 November 30
2007 2006 2007 2006
Vehicle units:
Used vehicles 96% 95% 96% 94%
New vehicles 4 5 4 6
Total 100% 100% 100% 100%
Vehicle dollars:
Used vehicles 95% 93% 94% 93%
New vehicles 5 7 6 7
Total 100% 100% 100% 100%
Unit Sales
Three Months Ended Nine Months Ended
November 30 November 30
2007 2006 2007 2006
Used vehicles 85,973 79,009 278,841 250,121
New vehicles 3,224 4,532 12,309 14,610
Wholesale vehicles 52,960 51,833 171,150 158,267
Average Selling Prices
Three Months Ended Nine Months Ended
November 30 November 30
2007 2006 2007 2006
Used vehicles $17,433 $17,247 $17,434 $17,273
New vehicles $23,751 $24,118 $23,778 $23,779
Wholesale vehicles $4,322 $4,258 $4,337 $4,288
Selected Operating Ratios
Three Months Ended
(In millions) November 30
2007 %(1) 2006 %(1)
Net sales and operating revenues $1,885.3 100.0% $1,768.1 100.0%
Gross profit $242.9 12.9% $228.6 12.9%
CarMax Auto Finance income $16.3 0.9% $32.0 1.8%
Selling, general, and administrative
expenses $210.5 11.2% $187.3 10.6%
Operating profit (EBIT)(2) $48.7 2.6% $73.3 4.1%
Net earnings $29.8 1.6% $45.4 2.6%
Nine Months Ended
(In millions) November 30
2007 %(1) 2006 %(1)
Net sales and operating revenues $6,155.0 100.0% $5,582.8 100.0%
Gross profit $815.3 13.2% $730.2 13.1%
CarMax Auto Finance income $86.8 1.4% $100.9 1.8%
Selling, general, and administrative
expenses $638.5 10.4% $574.3 10.3%
Operating profit (EBIT)(2) $264.3 4.3% $256.8 4.6%
Net earnings $160.2 2.6% $156.5 2.8%
(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
November 30
2007 2006
$/unit(1) %(2) $/unit(1) %(2)
Used vehicle gross profit $1,886 10.7% $1,898 10.9%
New vehicle gross profit $1,043 4.4% $1,108 4.6%
Wholesale vehicle gross profit $774 17.5% $742 17.0%
Other gross profit $408 61.4% $421 64.8%
Total gross profit $2,723 12.9% $2,736 12.9%
Nine Months Ended
November 30
2007 2006
$/unit(1) %(2) $/unit(1) %(2)
Used vehicle gross profit $1,936 11.0% $1,929 11.1%
New vehicle gross profit $1,040 4.3% $1,168 4.9%
Wholesale vehicle gross profit $790 17.8% $721 16.4%
Other gross profit $438 67.2% $440 67.8%
Total gross profit $2,800 13.2% $2,758 13.1%
(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 per November 30 November 30
share data) 2007 2006 Change 2007 2006 Change
Net earnings $29.8 $45.4 (34.3)% $160.2 $156.5 2.4%
Diluted weighted average
shares outstanding 220.6 217.8 1.3% 220.4 215.7 2.2%
Net earnings per diluted
share $0.14 $0.21 (33.3)% $0.73 $0.73 0.0%
Fiscal 2008 Expectations
"Our sales performance in the quarter was generally consistent with our revised expectations and, accordingly, we now expect comparable store used unit sales growth of approximately 2% for fiscal 2008," said Folliard. Previously, we expected fiscal 2008 comparable store used unit sales growth in the range of 1% to 3%. Comparable store used unit sales increased by 9% in fiscal 2007. As always, our projections are not adjusted for the possibility of unusual winter weather, which could adversely affect our fourth quarter sales.
"Primarily as a result of the continued turmoil in the asset-backed credit markets and the resulting higher funding costs, we are further reducing our fiscal 2008 earnings expectations," said Folliard. We now expect earnings per share in the range of $0.87 to $0.93. Previously, we expected earnings per share in the range of $0.92 to $0.98. We earned $0.92 per share in fiscal 2007.
Our revised forecast includes provisions for higher CAF funding costs resulting from wider spreads that we expect to continue into the fiscal fourth quarter. We currently intend to execute our next public securitization in the fourth quarter, assuming the markets stabilize somewhat. However, given the unprecedented recent instability of the asset-backed public market, we have temporarily increased our warehouse facility capacity by $300 million in order to provide us with additional funding flexibility.
The wide range of earnings expectations, despite having only one quarter remaining in fiscal 2008, reflects the uncertainty surrounding the credit markets and CAF's funding costs.
Future Superstore Opening Plan
During the twelve months ending November 30, 2008, we currently expect to open 13 used car superstores, including 8 production stores and 5 non-production stores. Details of the planned store openings are as follows:
Production Non-Production
Television Market Super- Super-
Location Market Status stores(1) stores(2)
Fiscal 2008 - Q4:
Omaha, Nebraska(3) Omaha New market 1
Jackson,
Mississippi(3) Jackson New market 1
Ellicott City,
Maryland Baltimore Existing market 1
Fiscal 2009 - Q1
through Q3:
San Antonio,
Texas San Antonio Existing market 1
Modesto,
California Sacramento Existing market 1
Phoenix, Arizona Phoenix New market 2
Charleston,
South Carolina Charleston New market 1
Huntsville,
Alabama Huntsville New market 1
Colorado
Springs, Colorado
Colorado Springs New market 1
Tulsa, Oklahoma Tulsa New market 1
Costa Mesa,
California Los Angeles Existing market 1
Hickory,
North Carolina Charlotte Existing market 1
8 5
(1) Previously referred to as standard superstores, these are stores at
which vehicle reconditioning is performed.
(2) Previously referred to as satellite superstores, these are stores that
do not have vehicle reconditioning capabilities.
(3) Store opened in December 2007.
Normal construction, permitting, or other scheduling delays could shift the opening dates of any stores into a later period.
Fourth Quarter Fiscal 2008 Earnings Release Date
We currently plan to release sales and earnings for the fourth quarter and fiscal year ended February 29, 2008, on Wednesday, April 2, 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. Further information on this conference call will be available on our investor information home page at investor.carmax.com in March 2008.
Conference Call Information
We will host a conference call for investors at 9:00 a.m. ET today, December 19, 2007. Domestic investors may access the call at 1-888-298-3261 (international investors should dial 1-706-679-7457). The conference I.D. for both domestic and international callers is 9752175. 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 December 19, 2007, through January 18, 2008. A telephone replay also will be available through December 26, 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 9752175.
About CarMax
CarMax, a Fortune 500 company, and one of the Fortune 2007 "100 Best Companies to Work For," is the nation's largest retailer of used cars. Headquartered in Richmond, Va., CarMax currently operates 88 used car superstores in 41 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 28, 2007, we retailed 337,021 used cars and sold 208,959 wholesale vehicles at our in-store auctions. For more information, access the CarMax website at www.carmax.com.
CARMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(In thousands except per share data)
Three Months Ended November 30
2007 %(1) 2006 %(1)
Sales and operating revenues:
Used vehicle sales $1,514,302 80.3 $1,377,551 77.9
New vehicle sales 76,999 4.1 109,940 6.2
Wholesale vehicle sales 234,739 12.5 226,363 12.8
Other sales and revenues 59,260 3.1 54,293 3.1
Net sales and operating revenues 1,885,300 100.0 1,768,147 100.0
Cost of sales 1,642,417 87.1 1,539,538 87.1
Gross profit 242,883 12.9 228,609 12.9
CarMax Auto Finance income 16,347 0.9 31,974 1.8
Selling, general and
administrative expenses 210,508 11.2 187,318 10.6
Gain on franchise disposition -- -- -- --
Interest expense 44 -- 167 --
Interest income 285 -- 406 --
Earnings before income taxes 48,963 2.6 73,504 4.2
Provision for income taxes 19,117 1.0 28,085 1.6
Net earnings $29,846 1.6 $45,419 2.6
Weighted average common shares:(2)
Basic 216,301 213,022
Diluted 220,558 217,767
Net earnings per share:(2)
Basic $0.14 $0.21
Diluted $0.14 $0.21
Nine Months Ended November 30
2007 %(1) 2006 %(1)
Sales and operating revenues:
Used vehicle sales $4,909,835 79.8 $4,365,409 78.2
New vehicle sales 294,393 4.8 349,579 6.3
Wholesale vehicle sales 761,173 12.4 695,958 12.5
Other sales and revenues 189,563 3.1 171,882 3.1
Net sales and operating revenues 6,154,964 100.0 5,582,828 100.0
Cost of sales 5,339,666 86.8 4,852,599 86.9
Gross profit 815,298 13.2 730,229 13.1
CarMax Auto Finance income 86,827 1.4 100,880 1.8
Selling, general and
administrative expenses 638,518 10.4 574,333 10.3
Gain on franchise disposition 740 -- -- --
Interest expense 3,010 -- 4,449 0.1
Interest income 908 -- 973 --
Earnings before income taxes 262,245 4.3 253,300 4.5
Provision for income taxes 102,049 1.7 96,841 1.7
Net earnings $160,196 2.6 $156,459 2.8
Weighted average common shares:(2)
Basic 215,826 211,790
Diluted 220,421 215,722
Net earnings per share:(2)
Basic $0.74 $0.74
Diluted $0.73 $0.73
(1) Percents are calculated as a percentage of net sales and operating
revenues and may not equal totals due to rounding.
(2) Share and per share amounts have been adjusted for the effect of our
2-for-1 stock split in March 2007.
CARMAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
November 30 November 30 February 28
2007 2006 2007
(Unaudited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $8,380 $12,352 $19,455
Accounts receivable, net 52,769 53,092 71,413
Automobile loan receivables held for
sale 4,700 3,145 6,162
Retained interest in securitized
receivables 233,662 202,594 202,302
Inventory 892,228 760,816 836,116
Prepaid expenses and other current
assets 20,498 13,955 15,068
Total current assets 1,212,237 1,045,954 1,150,516
Property and equipment, net 804,545 585,109 651,850
Deferred income taxes 45,607 25,788 40,174
Other assets 47,003 47,817 43,033
TOTAL ASSETS $2,109,392 $1,704,668 $1,885,573
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $265,933 $222,205 $254,895
Accrued expenses and other current
liabilities 69,113 63,859 68,885
Accrued income taxes 232 33,275 23,377
Deferred income taxes 16,132 10,151 13,132
Short-term debt 3,137 2,984 3,290
Current portion of long-term debt 155,541 84,422 148,443
Total current liabilities 510,088 416,896 512,022
Long-term debt, excluding current
portion 27,280 34,012 33,744
Deferred revenue and other liabilities 117,695 54,854 92,432
TOTAL LIABILITIES 655,063 505,762 638,198
SHAREHOLDERS' EQUITY 1,454,329 1,198,906 1,247,375
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $2,109,392 $1,704,668 $1,885,573
CARMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
Nine Months Ended November 30
2007 2006
Operating Activities:
Net earnings $160,196 $156,459
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 34,168 25,177
Share-based compensation expense 25,856 25,548
Loss on disposition of assets 35 259
Deferred income taxes benefit (3,332) (14,623)
Net decrease (increase) in:
Accounts receivable, net 18,644 23,529
Automobile loan receivables held for
sale, net 1,462 994
Retained interest in securitization
receivables (31,360) (44,286)
Inventory (56,112) (91,116)
Prepaid expenses and other current assets (5,430) (2,744)
Other assets (3,970) (3,817)
Net increase (decrease) in:
Accounts payable, accrued expenses
and other current liabilities, and
accrued income taxes (11,881) 57,183
Deferred revenue and other liabilities 25,641 5,002
Net cash provided by operating activities 153,917 137,565
Investing Activities:
Capital expenditures (192,440) (114,719)
Proceeds from sales of assets 1,457 3,472
Net cash used in investing activities (190,983) (111,247)
Financing Activities:
(Decrease) increase in short-term debt, net (153) 2,521
Issuance of long-term debt 69,300 --
Payments on long-term debt (62,111) (76,115)
Equity issuances, net 13,157 27,449
Excess tax benefits from share-based
arrangements 5,798 10,420
Net cash provided by (used in) financing
activities 25,991 (35,725)
Decrease in cash and cash equivalents (11,075) (9,407)
Cash and cash equivalents at beginning of year 19,455 21,759
Cash and cash equivalents at end of period $8,380 $12,352
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