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CarMax Reports First Quarter Results


PHOTO

RICHMOND, Va. June 22, 2010;--CarMax, Inc. today reported results for the first quarter ended May 31, 2010.

  • Net sales and operating revenues increased 23% to $2.26 billion from $1.83 billion in the first quarter of last year.
  • Comparable store used unit sales increased 9% for the quarter.
  • Total used unit sales rose 9% in the first quarter.
  • Net earnings increased 252% to $101.1 million, or $0.44 per diluted share, compared with $28.7 million, or $0.13 per diluted share, earned in the first quarter of fiscal 2010.
    • In the first quarter of this year, net earnings were positively affected by approximately $0.03 per share as a result of favorability in CAF's provision for loan losses versus expectations.
    • In the first quarter of last year, net earnings were reduced by $0.11 per share for increased funding costs and other adjustments related to CarMax Auto Finance (CAF) loans originated in prior fiscal years.
    • Last year’s first quarter net earnings were increased by $0.02 per share in connection with a favorable litigation settlement.

First Quarter Business Performance Review

Sales."We are pleased to report another quarter of healthy increases in both used and wholesale vehicle unit sales," said Tom Folliard, president and chief executive officer. Our 9% increase in comparable store used unit sales reflected the benefit of a continuing gradual rebound in customer traffic, as well as the easy year-over-year comparison. Sales execution remained strong, as our stores were able to maintain the recent gains in the sales conversion rate.

Wholesale unit sales increased 52% compared with the first quarter of fiscal 2010. The improvement reflected significant increases in both appraisal traffic and our appraisal buy rate, as well as the easy comparison with the prior year period. Our buy rate has steadily strengthened over the last several quarters to slightly over 30% in the first quarter of this year. We believe this reflected favorable consumer response to our higher appraisal offers, which largely resulted from the strength of wholesale industry used vehicle pricing.

Other sales and revenues declined 4% versus those reported in the first quarter of last year. Extended service plan revenues increased 20%, reflecting both the growth in our retail vehicle sales and the fiscal 2010 rollout of a guaranteed asset protection product. However, this increase was more than offset by the decline in net third-party finance fees. The change in third-party finance fees primarily reflected a mix shift among providers, including a significant increase in the percentage of vehicle sales financed by our subprime finance provider.

Our previously announced arrangement with Santander Consumer USA was renewed on favorable terms. Under this agreement, Santander is purchasing a large portion of the loans that CAF would have originated prior to CAF's tightening of lending standards in 2009.

Gross Profit. Total gross profit increased 21% to $333.5 million from $276.2 million in the first quarter of fiscal 2010, reflecting the combination of the increase in unit sales and an improvement in our total gross profit dollars per retail unit, which increased $325 per unit to $3,236 in the current quarter from $2,911 in the corresponding prior year period.

Used vehicle gross profit per unit increased to $2,212 per unit from $2,001 per unit in the prior year quarter. The continued strength of our used vehicle gross profit reflected the combination of several factors, including a year-over-year increase in the percentage of retail vehicles sourced directly from consumers through our appraisal process, the support provided by the continued strength in wholesale industry valuations, benefits realized from our initiatives to reduce vehicle reconditioning costs and our strong inventory turns.

Wholesale vehicle gross profit per unit increased to $942 per unit from $904 per unit in the first quarter of fiscal 2010. The strong industry wholesale price appreciation continuing from last year contributed to the increase in gross profit per unit, and we continued to achieve strong dealer attendance and dealer-to-car ratios at our auctions.

CarMax Auto Finance. Effective March 1, 2010, we adopted Accounting Standards Update (ASU) Nos. 2009-16 and 2009-17 on a prospective basis. Pursuant to these pronouncements, we now recognize all existing and future transfers of auto loan receivables into term securitizations as secured borrowings, which results in recognizing the auto loan receivables and the related non-recourse notes payable to investors on our balance sheet. We also account for all transfers of auto loan receivables into the warehouse facility on or after March 1, 2010, as secured borrowings. Beginning March 1, 2010, CAF income no longer includes a gain on the sale of loans originated and sold, but instead primarily reflects the net interest margin generated by the auto loan receivables, less direct CAF expenses. The net interest margin includes the interest and certain other income associated with the auto loan receivables less the interest expense associated with the non-recourse debt issued to fund these receivables and a provision for estimated loan losses.

CAF reported income of $57.5 million compared with a loss of $21.6 million in the first quarter of the prior year. In the prior year period, CAF results were reduced by adjustments totaling $40.4 million related to loans originated in previous fiscal years. These adjustments included $57.6 million of increased funding costs related to the $1.22 billion of auto loan receivables that were funded in the warehouse facility at the end of the previous fiscal year, partially offset by $17.2 million of favorable valuation adjustments.

In the first quarter of fiscal 2011, on an annualized basis, CAF income was 5.5% of average managed receivables. CAF's current profits reflected both the low benchmark interest rates and the dramatic improvement in credit spreads in the term securitization market. In addition, the provision for loan losses in the quarter reflected favorable trends in net charge-offs and a very high recovery rate relative to historical norms. Net charge-offs in the first quarter were significantly below both our forecast and prior year trends. The lower-than-expected losses and the resulting adjustment to the allowance for loan losses related to future periods favorably affected net income by approximately $0.03 per share.

We provided one-time guidance on CAF income at the beginning of fiscal 2011 to assist investors with the transition in the securitization accounting rules. However, we will neither be providing nor updating that guidance on a going-forward basis, as is consistent with our current earnings guidance practice.

SG&A. Selling, general and administrative expenses increased 10% to $226.7 million from $206.2 million in the prior year's first quarter, compared with the 23% increase in total revenues. The increase in SG&A primarily reflected the increase in sales commissions and other variable costs associated with the 9% increase in used unit sales, as well as the absence of the $0.02 per share litigation benefit reflected in the prior year quarter. In addition, we modestly increased our advertising spending per unit sold, and we incurred preopening costs in connection with the resumption of store growth this year. The SG&A ratio improved to 10.0% in the current year's quarter compared with 11.2% in the prior year quarter, reflecting the leverage associated with the increases in both average selling prices and unit sales.

Net Earnings. "We are once again extremely pleased with our ability to generate strong earnings growth, through a combination of comparable store sales increases, enhanced gross profits, a strong CAF contribution and continuing efforts to control costs and reduce waste throughout the organization," said Folliard. However, while customer traffic appears to be gradually improving, the sales environment remains well below pre-recession levels.

Superstore Openings. During the first quarter, we opened one used car superstore, entering the Augusta, Georgia, market. Subsequent to the end of the quarter, we opened the two remaining new stores planned for the current fiscal year, in Cincinnati and Dayton, Ohio.

Supplemental Financial Information

 

Sales Components

 
(In millions) Three Months Ended May 31 (1)
2010   2009   Change
Used vehicle sales $ 1,832.1 $ 1,549.3 18.3 %
New vehicle sales 50.9 48.6 4.8 %
Wholesale vehicle sales 316.5 171.5 84.5 %
Other sales and revenues:
Extended service plan revenues 41.4 34.6 19.7 %
Service department sales 26.3 26.6 (1.0 )%
Third-party finance fees, net   (5.3 )     3.8   (237.9 )%
Total other sales and revenues   62.5       65.0   (3.9 )%
Net sales and operating revenues $ 2,261.9     $ 1,834.3   23.3 %

(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.

 

Retail Vehicle Sales Mix

 
Three Months Ended May 31
2010   2009
Vehicle units:
Used vehicles 98% 98%
New vehicles 2   2
Total 100%   100%
 
Vehicle dollars:
Used vehicles 97% 97%
New vehicles 3   3
Total 100%   100%
 

Retail Vehicle Sales Changes

 
Three Months Ended May 31
2010   2009
Comparable store vehicle sales:
Used vehicle units 9% (17)%
New vehicle units 5% (42)%
Total 8% (18)%
 
Used vehicle dollars 18% (19)%
New vehicle dollars 5% (41)%
Total 18% (20)%
 
Total vehicle sales:
Used vehicle units 9% (13)%
New vehicle units 5% (42)%
Total 9% (14)%
 
Used vehicle dollars 18% (15)%
New vehicle dollars 5% (41)%
Total 18% (16)%
 

Unit Sales

 
Three Months Ended May 31
2010   2009
Used vehicles 100,925 92,863
New vehicles 2,134 2,031
Wholesale vehicles 64,359 42,226
 

Average Selling Prices

 
Three Months Ended May 31
  2010     2009
Used vehicles $ 17,964 $ 16,489
New vehicles $ 23,721 $ 23,773
Wholesale vehicles $ 4,786 $ 3,936
 

Selected Operating Ratios

 
(In millions) Three Months Ended May 31
2010   %(1)   2009   % (1)
Net sales and operating revenues $ 2,261.9 100.0 % $ 1,834.3 100.0 %
Gross profit $ 333.5 14.7 % $ 276.2 15.1 %
CarMax Auto Finance income (loss) $ 57.5 2.5 % $ (21.6 ) (1.2 )%
Selling, general and administrative expenses $ 226.7 10.0 % $ 206.2 11.2 %
Operating profit (EBIT) (2) $ 164.4 7.3 % $ 48.4 2.6 %
Net earnings $ 101.1 4.5 % $ 28.7 1.6 %

(1)

 

Calculated as the ratio of the applicable amount to net sales and operating revenues.

(2)

Equals earnings before interest and income taxes.

 

Gross Profit

 
(In millions) Three Months Ended May 31 (1)
2010   2009   Change
Used vehicle gross profit $ 223.2 $ 185.8 20.2 %
New vehicle gross profit 1.5 1.1 42.9 %
Wholesale vehicle gross profit 60.7 38.2 58.8 %
Other gross profit   48.1     51.2   (6.0 )%
Total gross profit $ 333.5   $ 276.2   20.7 %
 

Gross Profit per Unit

 
Three Months Ended May 31
2010   2009

$/unit (1)

  % (2)

$/unit (1)

  % (2)
Used vehicle gross profit $ 2,212 12.2 % $ 2,001 12.0 %
New vehicle gross profit $ 724 3.0 % $ 532 2.2 %
Wholesale vehicle gross profit $ 942 19.2 % $ 904 22.3 %
Other gross profit $ 467 77.0 % $ 539 78.8 %
Total gross profit $ 3,236 14.7 % $ 2,911 15.1 %

(1)

 

Calculated as category gross profit divided by its respective units sold, except the other and the total categories, which are divided by total retail units sold.

(2)

Calculated as a percentage of its respective sales or revenue.

 

CAF Information

 
(In millions) Three Months Ended May 31

2010 (1)

  2009
Total managed portfolio income $ 102.3   $ 26.8
Gain (loss):
Gain on sales of loans originated and sold -- 3.1
Other gains (losses)   2.6       (40.4 )
Total gain (loss) 2.6 (37.3 )
Expenses:
Interest expense 35.2 --
Provision for loan losses 0.9 --
Direct CAF expenses   11.3       11.1  
Total expenses   47.4       11.1  
CarMax Auto Finance income (loss) $ 57.5     $ (21.6 )
 
Net loans originated $ 535.4 $ 468.5
Average managed receivables $ 4,146.1 $ 4,024.6
 
Ending receivables funded in the warehouse facility $ 795.0 $ 636.0

(1)

 

Reflects the adoption of ASU Nos. 2009-16 and 2009-17 effective March 1, 2010.

 

Earnings Highlights

 
(In millions except per share data) Three Months Ended May 31
2010   2009   Change
Net earnings $ 101.1 $ 28.7 251.7 %
Diluted weighted average shares outstanding 226.2 218.8 3.4 %
Net earnings per share $ 0.44 $ 0.13 238.5 %

Conference Call Information

We will host a conference call for investors at 9:00 a.m. ET today, June 23, 2010. Domestic investors may access the call at 1-888-298-3261 begin_of_the_skype_highlighting              1-888-298-3261      end_of_the_skype_highlighting (international callers dial 1-706-679-7457). The conference I.D. for both domestic and international callers is 20364160. 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 June 23, 2010, through September 21, 2010. A telephone replay also will be available through June 30, 2010, 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 20364160.

Second Quarter Fiscal 2011 Earnings Release Date

We currently plan to release second quarter sales and earnings results on Wednesday, September 22, 2010, 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. Information on this conference call will be available on our investor information home page at investor.carmax.com in early September.

About CarMax

CarMax, a Fortune 500 company, and one of the Fortune 2010 “100 Best Companies to Work For,�?? is the nation’s largest retailer of used cars. Headquartered in Richmond, Va., we currently operate 103 used car superstores in 49 markets. The CarMax consumer offer is structured around four customer benefits: low, no-haggle prices; a broad selection; high quality vehicles; and customer-friendly service. During the fiscal year ended February 28, 2010, we retailed 357,129 used vehicles and sold 197,382 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 May 31

2010 (1)

  % (2)   2009   % (2)
     
Sales and operating revenues:
Used vehicle sales $ 1,832,066 81.0 $ 1,549,275 84.5
New vehicle sales 50,898 2.3 48,553 2.6
Wholesale vehicle sales 316,489 14.0 171,496 9.3
Other sales and revenues   62,459     2.8     64,976     3.5  
Net sales and operating revenues 2,261,912 100.0 1,834,300 100.0
Cost of sales   1,928,364     85.3     1,558,063     84.9  
Gross profit 333,548 14.7 276,237 15.1
CarMax Auto Finance income (loss) 57,495 2.5 (21,636 ) (1.2 )
Selling, general and administrative expenses 226,692 10.0 206,225 11.2
Interest expense 72 -- 1,066 0.1
Interest income   80     --     183     --  
Earnings before income taxes 164,359 7.3 47,493 2.6
Income tax provision   63,240     2.8     18,745     1.0  
Net earnings $ 101,119     4.5   $ 28,748     1.6  
 
Weighted average common shares:
Basic 222,221 218,004
Diluted 226,179 218,840
 
Net earnings per share:
Basic $ 0.45 $ 0.13
Diluted $ 0.44 $ 0.13

(1)

 

Reflects the adoption of ASU Nos. 2009-16 and 2009-17 effective March 1, 2010.

(2)

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

(UNAUDITED)

(In thousands)
 
  May 31, 2010 (1)   May 31, 2009   Feb. 28, 2010

ASSETS

   
Current assets:
Cash and cash equivalents $ 13,708 $ 133,580 $ 18,278
Restricted cash 147,016 -- --
Accounts receivable, net 84,898 74,692 99,434
Auto loan receivables held for sale -- 22,539 30,578
Retained interest in securitized receivables -- 433,300 552,377
Inventory 894,665 781,085 843,133
Deferred income taxes 7,841 -- 5,595
Prepaid expenses and other current assets   7,630     8,308     7,017
 
Total current assets 1,155,758 1,453,504 1,556,412
 
Auto loan receivables, net 4,136,479 -- --
Property and equipment, net 886,652 922,950 893,453
Deferred income taxes 95,210 124,819 57,234
Other assets   97,851     49,403     49,092
 
TOTAL ASSETS $ 6,371,950   $ 2,550,676   $ 2,556,191
 

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable $ 251,162 $ 252,702 $ 253,267
Accrued expenses and other current liabilities 87,872 81,841 94,557
Accrued income taxes 51,637 55,159 6,327
Deferred income taxes -- 10,830 --
Short-term debt 153 1,195 883
Current portion of long-term debt 59,137 238,488 122,317
Current portion of non-recourse notes payable   118,485     --     --
 
Total current liabilities 568,446 640,215 477,351
 
Long-term debt, excluding current portion 27,180 177,889 27,371
Non-recourse notes payable 3,699,864 -- --
Deferred revenue and other liabilities   118,173     106,106     117,887
 
TOTAL LIABILITIES 4,413,663 924,210 622,609
 
TOTAL SHAREHOLDERS’ EQUITY   1,958,287     1,626,466     1,933,582
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 6,371,950   $ 2,550,676   $ 2,556,191

(1)

 

Reflects the adoption of ASU Nos. 2009-16 and 2009-17 effective March 1, 2010. Pursuant to these pronouncements, we recognize (a) all transfers of auto loan receivables into term securitizations and (b) transfers of auto loan receivables into the warehouse facility on or after March 1, 2010, as secured borrowings.

 

CARMAX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

  Three Months Ended May 31
2010   2009
 

Operating Activities:

Net earnings $ 101,119 $ 28,748

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:

Depreciation and amortization 14,432 15,032
Share-based compensation expense 13,461 12,493
Provision for loan losses 880 --
Loss on disposition of assets 303 241
Deferred income tax provision (benefit) 15,144 (22,949 )
Net decrease (increase) in:
Restricted cash 15,592 --
Accounts receivable, net (5,839 ) 1,184
Auto loan receivables held for sale, net -- (12,791 )
Retained interest in securitized receivables 43,746 (85,038 )
Inventory (51,532 ) (77,928 )
Prepaid expenses and other current assets (613 ) 1,804
Auto loan receivables, net (93,764 ) --
Other assets (2,827 ) (471 )
Net increase (decrease) in:

Accounts payable, accrued expenses and other current liabilities and accrued income taxes

24,199 71,426
Deferred revenue and other liabilities   (3,051 )     (11,168 )
Net cash provided by (used in) operating activities   71,250       (79,417 )
 

Investing Activities:

Capital expenditures (9,154 ) (5,662 )
Proceeds from sales of assets -- 50
Increase in non-current restricted cash (2,098 ) --
Sales of money market securities, net   1       185  
Net cash used in investing activities   (11,251 )     (5,427 )
 

Financing Activities:

(Decrease) increase in short-term debt, net (730 ) 317
Issuances of long-term debt 151,300 256,000
Payments on long-term debt (214,671 ) (175,792 )
Issuances of non-recourse notes payable 748,000 --
Payments on non-recourse notes payable (756,061 ) --
Equity issuances, net 5,355 (2,737 )
Excess tax benefits from share-based payment arrangements   2,238       39  
Net cash (used in) provided by financing activities   (64,569 )     77,827  
 
Decrease in cash and cash equivalents (4,570 ) (7,017 )
Cash and cash equivalents at beginning of year   18,278       140,597  
Cash and cash equivalents at end of period $ 13,708     $ 133,580