CarMax Reports Fourth Quarter and Fiscal Year 2008 Results
 |
Provides Fiscal 2009 Expectations
RICHMOND, Va., April 2, 2008 -- CarMax, Inc. today reported results for the fourth quarter and fiscal year ended February 29, 2008.
-- Total sales increased 9% to $2.04 billion from $1.88 billion in the
fourth quarter of fiscal 2007. For the fiscal year, total sales
increased 10% to $8.20 billion from $7.47 billion.
-- Comparable store used unit sales increased 3% for both the fourth
quarter and the fiscal year.
-- Total used unit sales grew 13% in the fourth quarter and 12% for the
fiscal year.
-- For the fourth quarter, net earnings declined 48% to $21.8 million, or
$0.10 per share, compared with $42.1 million, or $0.19 per share, in
the fourth quarter of fiscal 2007. For the fiscal year, net earnings
declined 8% to $182.0 million, or $0.83 per share, compared with
$198.6 million, or $0.92 per share, in fiscal 2007.
-- In the fourth quarter of fiscal 2008, CarMax Auto Finance (CAF) income
was reduced by $34.6 million before taxes, or $0.10 per share, for
retained interest adjustments and the effect of higher funding costs.
Fourth Quarter Business Performance Review
Sales. "While business conditions in the automotive retail market remained challenging, our used car sales were stronger than we anticipated at the start of the quarter," said Tom Folliard, president and chief executive officer. We continued to experience healthy consumer traffic, which we believe reflects the strength of our consumer offer, as well as improvements made to carmax.com over the last several quarters. Fourth quarter sales were supported by the continued consistent availability of credit from CAF and third-party financing providers. Leap year added one extra selling day to the fourth quarter, and, as expected, this benefited our comparable store used unit sales by approximately 1%.
Given the continuation of the more difficult economic environment, we moderately reduced our margin targets in order to create additional value for our customers and drive sales. Execution by our store teams improved and conversion rates increased modestly compared with the prior year's quarter. In addition, our data indicates that we continued to gain market share in the late-model used vehicle market.
Fourth quarter wholesale sales were similar to the prior year level. Wholesale unit sales grew at a slower pace than our used retail unit sales, reflecting a decrease in our appraisal buy rate (defined as appraisal purchases as a percent of vehicles appraised).
New vehicle sales declined by 20%, reflecting the combination of the soft new car sales environment and the sale of our Orlando Chrysler Jeep Dodge franchise in the second quarter of fiscal 2008. Other sales and revenues increased 13%, similar to the increase in our used vehicle sales.
Gross Profit. Our total gross profit per unit declined by $120 to $2,531 compared with $2,651 in the fourth quarter of fiscal 2007. The majority of the decline resulted from a $111 per unit decrease in gross profit per used vehicle. In the more challenging consumer environment, we were willing to sacrifice some margin when we felt doing so could benefit sales, consistent with our long-term strategy to deliver a superior customer experience and grow market share.
Wholesale gross profit per unit increased slightly to $809 per unit compared with $805 per unit in the fourth quarter of fiscal 2007. We continued to experience strong dealer attendance at our auctions, despite the challenging economic environment.
CarMax Auto Finance. CAF generated a pre-tax loss of $1.0 million compared with income of $31.7 million in the fourth quarter of fiscal 2007. Primarily as a result of the continuing turmoil and illiquidity in the global asset-backed credit markets, we incurred unfavorable adjustments and higher funding costs at CAF totaling $34.6 million before taxes, or $0.10 per share. "It is disappointing to have incurred these significant and largely external, market-driven expenses, which adversely affected CAF income," said Folliard. "However, we remain committed to our finance operation. We are confident CAF provides a competitive advantage for CarMax, and it allows us to maximize market share gains in all economic environments. Even including the effects of the unfavorable CAF income adjustments and high funding costs in fiscal 2008, CAF provided greater profitability and greater business stability compared with being entirely reliant on third-party financing sources."
The CAF adjustments and higher funding costs for the fourth quarter of fiscal 2008 included the following items:
-- We increased the discount rate used to value our retained interest in
securitized receivables from 12% to 17%, resulting in a non-cash
adjustment that reduced CAF income by $14.7 million, for current and
prior quarter originations. The change in the discount rate was
largely driven by external financial market conditions, which resulted
in an increase in the risk premium included within the discount rate
assumption. Changes in the discount rate primarily affect the timing
of income recognition, and this adjustment should result in higher
levels of CAF interest income in future periods.
-- We increased our loss assumptions on the outstanding receivables in
the 2007-1, 2007-2, 2007-3 and 2008-1 pools of receivables to a range
of 2.9% to 3.0% from the previous range of 2.3% to 2.8%. We also
increased the loss assumption on receivables in the warehouse
facility. These adjustments reduced CAF income by $8.7 million.
-- As previously disclosed, we incurred increased funding costs for the
2008-1 public securitization completed in January 2008, which reduced
CAF income by $6.1 million. This adjustment had been factored into
our guidance for fiscal 2008 earnings that we provided when we
released third quarter results in December 2007.
-- Other adjustments of $5.1 million included a $2.7 million mark-to-
market reduction in the carrying value of the subordinated bonds we
continue to hold that were part of the 2008-1 public securitization,
and $2.0 million related to increased funding costs for receivables in
the warehouse facility that had been originated in previous quarters.
Excluding the effect of adjustments related to loans originated in prior quarters, CAF's gain on loans originated and sold as a percentage of loans originated and sold (the gain percentage) was 3.6% in this year's fourth quarter compared with 4.0% in the fourth quarter of fiscal 2007.
SG&A. Selling, general and administrative expenses were 10.8% of total revenues in the fourth quarter of fiscal 2008 compared with 10.7% in the prior year's fourth quarter. The increase largely resulted from the modest level of comparable store sales increases and our commitment to our ongoing growth plans, as well as our decision to continue spending on strategic, operational and Internet initiatives in fiscal 2008. In addition, the SG&A ratio in the fourth quarter of fiscal 2007 was adversely affected by a high level of pre- opening costs and a $4.9 million impairment charge associated with a subsequently divested new car franchise.
Earnings and Earnings per Share. Fourth quarter net earnings declined to $21.8 million, or $0.10 per share, from $42.1 million, or $0.19 per share, in fiscal 2007. "While the decline in the economy had a dampening effect on our sales and profits, the unprecedented turbulence in the capital markets and its effect on CAF income represented the majority of the decrease in our earnings," said Folliard.
Store Openings. During the fourth quarter, we opened two production superstores, in Omaha, Nebraska, and Jackson, Mississippi, and a non- production superstore in Baltimore, Maryland.
For the fiscal year, we opened a total of 12 superstores, expanding our store base by 16%. We entered five new markets and expanded our presence in five existing markets. These openings included four production superstores and eight non-production superstores.
During fiscal 2008, we also expanded our car-buying center test with the opening of buying centers in the Raleigh, North Carolina, and Tampa, Florida, markets. At these locations, we conduct appraisals and purchase, 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.
Supplemental Financial Information
Sales Components
(in millions) Three Months Ended Fiscal Years Ended
February 29 or 28 (1) February 29 or 28 (1)
2008 2007 Change 2008 2007 Change
Used vehicle
sales $1,679.5 $1,507.4 11.4% $6,589.3 $5,872.8 12.2%
New vehicle
sales 76.2 95.6 (20.3)% 370.6 445.1 (16.7)%
Wholesale
vehicle sales 223.9 222.5 0.6% 985.0 918.4 7.3%
Other sales and
revenues:
Expended service
plan revenues 35.2 29.3 20.3% 132.4 114.4 15.8%
Service
department
sales 23.4 22.0 6.3% 96.0 90.6 6.0%
Third-party
finance fees,
net 6.4 6.1 4.8% 26.1 24.3 7.5%
Total other sales
and revenues 65.0 57.4 13.3% 254.6 229.3 11.0%
Net sales and
operating
revenues $2,044.6 $1,882.8 8.6% $8,199.6 $7,465.7 9.8%
(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 Fiscal Years Ended
February 29 or 28 February 29 or 28
2008 2007 2008 2007
Comparable store vehicle sales:
Used vehicle units 3% 12% 3% 9%
New vehicle units (9)% (8)% (11)% (11)%
Total units 3% 11% 2% 8%
Used vehicle dollars 2% 14% 3% 16%
New vehicle dollars (10)% (8)% (11)% (12)%
Total dollars 1% 13% 2% 13%
Total vehicle sales:
Used vehicle units 13% 18% 12% 16%
New vehicle units (20)% (8)% (17)% (11)%
Total units 12% 17% 10% 14%
Used vehicle dollars 11% 21% 12% 23%
New vehicle dollars (20)% (8)% (17)% (11)%
Total dollars 10% 19% 10% 20%
Retail Vehicle Sales Mix
Three Months Ended Fiscal Years Ended
February 29 or 28 February 29 or 28
2008 2007 2008 2007
Vehicle units:
Used vehicles 97% 96% 96% 95%
New vehicles 3 4 4 5
Total 100% 100% 100% 100%
Vehicle dollars:
Used vehicles 96% 94% 95% 93%
New vehicles 4 6 5 7
Total 100% 100% 100% 100%
Unit Sales
Three Months Ended Fiscal Years Ended
February 29 or 28 February 29 or 28
2008 2007 2008 2007
Used vehicles 98,403 86,900 377,244 337,021
New vehicles 3,176 3,953 15,485 18,563
Wholesale vehicles 51,256 50,692 222,406 208,959
Average Selling Prices
Three Months Ended Fiscal Years Ended
February 29 or 28 February 29 or 28
2008 2007 2008 2007
Used vehicles $16,915 $17,180 $17,298 $17,249
New vehicles $23,862 $24,031 $23,795 $23,833
Wholesale vehicles $4,256 $4,277 $4,319 $4,286
Selected Operating Ratios
(in millions) Three Months Ended
February 29 or 28
2008 % (1) 2007 % (1)
Net sales and operating
revenues $2,044.6 100.0% $1,882.8 100.0%
Gross profit $257.1 12.6% $240.8 12.8%
CarMax Auto Finance (loss)
income $(1.0) - $31.7 1.7%
Selling, general, and
administrative expenses $219.9 10.8% $201.8 10.7%
Operating profit (EBIT) (2) $36.3 1.8% $70.7 3.8%
Net earnings $21.8 1.1% $42.1 2.2%
(in millions) Fiscal Years Ended
February 29 or 28
2008 % (1) 2007 % (1)
Net sales and operating
revenues $8,199.6 100.0% $7,465.7 100.0%
Gross profit $1,072.4 13.1% $971.1 13.0%
CarMax Auto Finance (loss)
income $85.9 1.0% $132.6 1.8%
Selling, general, and
administrative expenses $858.4 10.5% $776.2 10.4%
Operating profit (EBIT) (2) $300.7 3.7% $327.5 4.4%
Net earnings $182.0 2.2% $198.6 2.7%
(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
February 29 or 28
2008 2007
$/unit (1) % (2) $/unit (1) % (2)
Used vehicle gross profit $1,715 10.1% $1,826 10.5%
New vehicle gross profit $813 3.4% $1,172 4.8%
Wholesale vehicle gross profit $809 18.5% $805 18.4%
Other gross profit $436 68.1% $404 64.0%
Total gross profit $2,531 12.6% $2,651 12.8%
Fiscal Years Ended
February 29 or 28
2008 2007
$/unit (1) % (2) $/unit (1) % (2)
Used vehicle gross profit $1,878 10.8% $1,903 10.9%
New vehicle gross profit $994 4.2% $1,169 4.9%
Wholesale vehicle gross profit $794 17.9% $742 16.9%
Other gross profit $437 67.5% $431 66.8%
Total gross profit $2,731 13.1% $2,731 13.0%
(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
(in millions except
per share data) Three Months Ended Fiscal Years Ended
February 29 or 28 February 29 or 28
2008 2007 Change 2008 2007 Change
Net earnings $21.8 $42.1 (48.2)% $182.0 $198.6 (8.3)%
Diluted weighted average
shares outstanding 220.8 219.8 0.5% 220.5 216.7 1.7%
Net earnings per diluted
share $0.10 $0.19 (47.4)% $0.83 $0.92 (9.8)%
Expectations for Fiscal Year Ending February 28, 2009
Fiscal 2009 Superstore Openings and Capital Expenditures.
In fiscal 2009, we plan to expand our used car superstore base by approximately 16%, opening 14 used car superstores, including 7 production and 7 non-production stores. We plan to enter nine new markets and expand our presence in four existing markets. Details of the planned store openings and other material construction projects are included in the following table. Normal construction, permitting or other scheduling delays could shift the opening dates of any stores into a later period.
Produc- Non-
Television Market tion Production
Location Market Status Super- Super-
stores(1) stores(2)
Superstore Openings:
San Antonio, Texas(3) San Antonio Existing market - 1
Modesto, California Sacramento Existing market 1 -
Phoenix, Arizona Phoenix New market 1 1
Charleston,
South Carolina Charleston New market - 1
Huntsville, Alabama Huntsville New market 1 -
Colorado Springs,
Colorado Colorado Springs New market 1 -
Costa Mesa,
California Los Angeles Existing market - 1
Tulsa, Oklahoma Tulsa New market 1 -
Hickory,
North Carolina Charlotte Existing market - 1
Augusta, Georgia Augusta New market - 1
Dayton, Ohio Dayton New market 1 -
Cincinnati, Ohio Cincinnati New market 1 -
King of Prussia,
Pennsylvania Philadelphia New market - 1
Total planned superstore openings 7 7
Other Major Construction Projects: Project Description
Ontario, California Los Angeles Reconditioning expansion
Baltimore, Maryland Baltimore Central reconditioning facility
(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 at
which vehicle reconditioning is not performed.
(3) Opened in March 2008.
In fiscal 2009, we plan to open a central reconditioning facility in the Washington, D.C. / Baltimore market, where we currently have six superstores. We have experienced strong sales growth in this market, and this facility will support additional expected market share gains. In addition, we are converting our non-production store in Ontario, California, to a production store with the addition of reconditioning facilities, which will support our continued growth in the Los Angeles market.
In fiscal 2009, we also plan to expand our car-buying center test with the opening of our fourth and fifth centers, in Dallas, Texas, (opened in April 2008) and in Baltimore, Maryland. We will continue to evaluate the performance of these five test centers before deciding whether to open additional car-buying centers in future years.
We currently estimate gross capital expenditures will total approximately $350 million in fiscal 2009. Planned expenditures primarily relate to new store construction and land purchases associated with future year store openings.
We have revised our long-term store opening expectations to better reflect the actual pace of store openings in recent years and our current assessment of the optimal growth speed in future years. We now expect to open used car superstores at a rate of approximately 15% of our used car superstore base each year. Previously, we expected annual store openings in the range of 15% to 20% of our superstore base.
Fiscal 2009 Sales. "We currently anticipate comparable store used unit sales in the range of (2)% to 5% in fiscal 2009," said Folliard. The wide range reflects an expectation of continued volatility in the market for late- model used cars. We expect total revenues to increase between 7% and 14%, reflecting our planned new store openings, the comparable store sales performance and anticipated declines in both used vehicle average selling prices and new car revenues.
We are not anticipating any material change in credit availability for our customers in fiscal 2009, despite the fact that AmeriCredit Corp. is no longer one of our third-party financing providers effective April 1, 2008. We anticipate the majority of loans previously financed by AmeriCredit will be financed by other third-party providers.
Fiscal 2009 Earnings Per Share. "We currently expect fiscal 2009 earnings per share in the range of $0.78 to $0.94," continued Folliard. The width of this range reflects the uncertainty of current market conditions, especially in the capital markets. We expect to maintain our used and wholesale vehicle gross profits per unit at levels similar to those in fiscal 2008.
We are anticipating that the disruption in the capital markets will continue to adversely affect CAF income throughout fiscal 2009 relative to historical norms. We expect that funding costs for CAF will remain volatile in fiscal 2009. Based on the spreads achieved in recent comparable auto ABS transactions, we estimate that CAF will have to absorb approximately $14 million of incremental funding costs upon the refinancing of the $855 million that was outstanding in the warehouse facility at the end of fiscal 2008. In addition, we continue to explore alternate funding structures to the ABS markets. We currently believe that the CAF gain percentage in fiscal 2009 will be well below the normalized range of 3.5% to 4.5%. We expect that cumulative net loss rates on fiscal 2009 originations will be consistent with losses currently anticipated on loans originated in fiscal 2008, primarily due to the stresses of the current economy.
Our fiscal 2009 earnings estimates also reflect an expected increase in our SG&A ratio. The combination of the anticipated comparable store sales performance and the decline in average selling price, together with our continued investments supporting our growth plan will likely cause the SG&A ratio to increase in fiscal 2009. Interest expense is also expected to increase as we contemplate higher debt levels.
"While fiscal 2009 will clearly be another challenging year for us, our confidence in the strength of the CarMax model remains as high as ever," said Folliard. "We still have a huge growth opportunity ahead of us, and we continue to believe our long-term opportunity to increase earnings and grow market share remains enormous."
First Quarter Fiscal 2009 Earnings Release Date
We currently plan to release sales and earnings for the first quarter ended May 31, 2008, on Wednesday, June 18, 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 June 2008.
About CarMax
CarMax, a Fortune 500 company, and one of the Fortune 2008 "100 Best Companies to Work For," is the nation's largest retailer of used cars. Headquartered in Richmond, Va., CarMax currently operates 90 used car superstores in 41 markets. The CarMax consumer offer provides our customers the opportunity to shop for vehicles the way they shop for items at other national retailers, and it is structured around four customer benefits: low, no-haggle prices; a broad selection; high quality vehicles; and a customer- friendly sales process. During the fiscal year ended February 29, 2008, we retailed 377,244 used cars and sold 222,406 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 February 29 or 28
2008 %(1) 2007 %(1)
Sales and operating revenues:
Used vehicle sales $1,679,507 82.1 $1,507,407 80.1
New vehicle sales 76,210 3.7 95,565 5.1
Wholesale vehicle sales 223,875 10.9 222,450 11.8
Other sales and revenues 65,015 3.2 57,406 3.0
Net sales and operating revenues 2,044,607 100.0 1,882,828 100.0
Cost of sales 1,787,480 87.4 1,641,995 87.2
Gross profit 257,127 12.6 240,833 12.8
CarMax Auto Finance (loss) income (962) -- 31,745 1.7
Selling, general and administrative
expenses 219,854 10.8 201,835 10.7
Gain on franchise disposition -- -- -- --
Interest expense 1,945 0.1 924 --
Interest income 458 -- 230 --
Earnings before income taxes 34,824 1.7 70,049 3.7
Provision for income taxes 12,995 0.6 27,911 1.5
Net earnings $21,829 1.1 $42,138 2.2
Weighted average common shares:(2)
Basic 216,705 214,482
Diluted 220,830 219,828
Net earnings per share:(2)
Basic $0.10 $0.20
Diluted $0.10 $0.19
Fiscal Years Ended February 29 or 28
2008 %(1) 2007 %(1)
Sales and operating revenues:
Used vehicle sales $6,589,342 80.4 $5,872,816 78.7
New vehicle sales 370,603 4.5 445,144 6.0
Wholesale vehicle sales 985,048 12.0 918,408 12.3
Other sales and revenues 254,578 3.1 229,288 3.1
Net sales and operating revenues 8,199,571 100.0 7,465,656 100.0
Cost of sales 7,127,146 86.9 6,494,594 87.0
Gross profit 1,072,425 13.1 971,062 13.0
CarMax Auto Finance (loss) income 85,865 1.0 132,625 1.8
Selling, general and administrative
expenses 858,372 10.5 776,168 10.4
Gain on franchise disposition 740 -- -- --
Interest expense 4,955 0.1 5,373 0.1
Interest income 1,366 -- 1,203 --
Earnings before income taxes 297,069 3.6 323,349 4.3
Provision for income taxes 115,044 1.4 124,752 1.7
Net earnings $182,025 2.2 $198,597 2.7
Weighted average common shares:(2)
Basic 216,045 212,454
Diluted 220,522 216,739
Net earnings per share:(2)
Basic $0.84 $0.93
Diluted $0.83 $0.92
(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
(UNAUDITED)
(In thousands)
February 29 February 28
2008 2007
ASSETS
Current assets:
Cash and cash equivalents $12,965 $19,455
Accounts receivable, net 73,228 71,413
Auto loan receivables held for sale 4,984 6,162
Retained interest in securitized receivables 270,761 202,302
Inventory 975,777 836,116
Prepaid expenses and other current assets 19,210 15,068
Total current assets 1,356,925 1,150,516
Property and equipment, net 862,497 651,850
Deferred income taxes 67,066 40,174
Other assets 46,673 43,033
TOTAL ASSETS $2,333,161 $1,885,573
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $306,013 $254,895
Accrued expenses and other current liabilities 58,054 68,885
Accrued income taxes 7,569 23,377
Deferred income taxes 17,710 13,132
Short-term debt 21,017 3,290
Current portion of long-term debt 79,661 148,443
Total current liabilities 490,024 512,022
Long-term debt, excluding current portion 227,153 33,744
Deferred revenue and other liabilities 127,058 92,432
TOTAL LIABILITIES 844,235 638,198
TOTAL SHAREHOLDERS' EQUITY 1,488,926 1,247,375
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,333,161 $1,885,573
CARMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Fiscal Years Ended
February 29 or 28
2008 2007
Operating Activities:
Net earnings $182,025 $198,597
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 46,615 34,551
Share-based compensation expense 33,467 31,826
Loss on disposition of assets 1,404 88
Deferred income tax benefit (24,405) (14,169)
Impairment of long-lived assets -- 4,891
Net (increase) decrease in:
Accounts receivable, net (1,815) 5,208
Auto loan receivables held for sale, net 1,178 (2,023)
Retained interest in securitized receivables (68,459) (43,994)
Inventory (139,661) (166,416)
Prepaid expenses and other current assets (4,148) (3,857)
Other assets 1,360 (3,924)
Net increase in:
Accounts payable, accrued expenses and
other current liabilities, and accrued
income taxes 14,561 85,633
Deferred revenue and other liabilities 37,398 10,389
Net cash provided by operating activities 79,520 136,800
Investing Activities:
Capital expenditures (253,106) (191,760)
Proceeds from sales of assets 1,089 4,569
(Purchases) sales of money market securities (19,565) 16,765
Purchases of investments available for sale (7,100) (20,975)
Sales of investments available for sale 21,665 4,210
Net cash used in investing activities (257,017) (187,191)
Financing Activities:
Increase in short-term debt, net 17,727 2,827
Issuances of long-term debt 972,300 1,232,400
Payments on long-term debt (841,119) (1,244,762)
Equity issuances, net 14,730 35,411
Excess tax benefits from share-based payment
arrangements 7,369 22,211
Net cash provided by financing activities 171,007 48,087
Decrease in cash and cash equivalents (6,490) (2,304)
Cash and cash equivalents at beginning of year 19,455 21,759
Cash and cash equivalents at end of year $12,965 $19,455