CarMax Reports Record Quarterly Earnings

Tuesday, Sep 22,2009, 7:54:15 PM Click:

CarMax, Inc. (NYSE:KMX) today reported results for the second quarter ended August 31, 2009.

-- Net sales and operating revenues increased 13% to $2.08 billion from $1.84 billion in the second quarter of last year.

-- Comparable store used unit sales increased 8% for the quarter.

-- Total used unit sales rose 10% in the second quarter.

-- Net income increased to $103.0 million, or $0.46 per diluted share, compared with $14.0 million, or $0.06 per diluted share, earned in the second quarter of fiscal 2009. -- In the second quarter of fiscal 2010, net income was increased by $0.10 per share for CarMax Auto Finance (CAF) favorable adjustments, primarily related to an increase in the fair value of retained subordinated bonds.

-- In the second quarter of fiscal 2009, net income was reduced by $0.08 per share for CAF unfavorable items, including increases in cumulative net loss assumptions, a reduction in the fair value of retained subordinated bonds and an increase in the discount rate.

Second Quarter Business Performance Review

Sales. "We are pleased to report healthy increases in both used and wholesale vehicle unit sales," said Tom Folliard, president and chief executive officer. In part, the sales growth was the result of easier year-over-year comparisons; however, it also reflected improving customer traffic trends and an improvement in sales execution. While customer traffic in the second quarter remained slightly below the prior year level, it has steadily strengthened throughout the first half of the current fiscal year. The government's CARS, or "cash for clunkers," program resulted in a spike in traffic in late July and August. Similar to our experience with previous successful, broad-based new car incentive programs, we believe this program had a beneficial effect on our sales.

The improvement in sales execution occurred despite a further tightening of CAF lending standards implemented at the start of this year's second quarter. We believe several factors may have contributed to the improvement in the sales conversion rate, including the effects of our new sales training initiatives and increased inventory levels, as well as having a larger percentage of motivated buyers. We estimate the combined effect of the tightening in CAF lending standards in the second half of fiscal 2009 and in the current year adversely affected second quarter comparable store used unit sales growth by several percentage points. The current quarter tightening, which we expect to significantly reduce loss rates, was implemented to reduce the credit enhancements associated with future CAF securitizations.

Our wholesale unit sales increased 5% compared with the second quarter of fiscal 2009. While our appraisal traffic improved from the first quarter, it remained significantly below the prior year's second quarter. However, we experienced a substantial improvement in our appraisal buy rate, which more than offset the lower appraisal traffic. We believe the strong industry wholesale pricing environment and the resulting increases in our appraisal offers, together with the increased percentage of motivated buyers, had a favorable effect on the buy rate.

Gross Profit. Total gross profit increased 23% to $314.5 million from $255.9 million in the second quarter of fiscal 2009, reflecting the combination of the increase in unit sales plus an improvement in total gross profit dollars per retail unit, which increased $363 per unit to $3,116 in the current quarter from $2,753 in the corresponding prior year quarter.

Used vehicle gross profit increased to $2,120 per unit from $1,870 per unit in the prior year quarter. The improvement resulted from a combination of factors, including the continued appreciation in used car wholesale values since January 2009, an increase in our inventory turns and the robust sales environment experienced in the quarter.

Wholesale gross profit per unit declined to $826 in the current quarter, compared with $897 in the second quarter of last year, primarily reflecting the challenging comparison with the prior year period. Other gross profit increased to $551 per unit from $385 per unit in the second quarter of last year. Service department profits grew because our retail sales growth outpaced fixed service overhead costs, and extended service plan profits benefited from the successful introduction of a guaranteed asset protection product.

CarMax Auto Finance. CAF reported income of $72.1 million compared with a loss of $7.1 million in last year's second quarter. In both periods, CAF results were affected by adjustments related to loans originated in previous fiscal periods. In the second quarter of fiscal 2010, the adjustments increased CAF income by $36.2 million and they included:

-- $28.5 million of favorable mark-to-market adjustments on retained subordinated bonds. As of August 31, 2009, the retained subordinated bonds had a fair value of $219.7 million.

-- A $5.6 million benefit related to modestly more favorable funding terms and costs for the $636.0 million of auto loan receivables that were funded in the warehouse facility at the start of the second quarter.

-- $2.0 million of other net favorable adjustments, including decreases in prepayment speed assumptions, partially offset by modest changes in cumulative net loss rate assumptions on select pools of loans.

In the second quarter of last year, the adjustments reduced CAF income by $28.2 million, which included $15.7 million related to increases in cumulative net loss rate assumptions, $7.7 million of mark-to-market write-downs and $4.1 million resulting from an increase in the discount rate assumption.

Excluding these adjustments from both periods, CAF income increased to $36.0 million in the second quarter of fiscal 2010 from $21.0 million in the second quarter of fiscal 2009. CAF's gain on loans originated and sold was $19.9 million, or 4.2% of loans originated and sold, in the current quarter versus $9.4 million, or 1.8%, in the prior year quarter. Compared with the prior year period, the increase in the gain as a percentage of loans originated and sold reflected an increase in the spread between the rates charged customers and CAF's funding cost, primarily due to lower benchmark rates. In addition, the increase in the credit quality of the loans originated in the quarter resulted in reduced credit enhancement requirements for these loans.

SG&A. Selling, general and administrative expenses declined to $218.1 million in the second quarter of fiscal 2010 from $225.1 million in the prior year's quarter, despite the increase in unit sales. The decline was primarily the result of lower levels of advertising spending and decreases in growth-related costs. The SG&A ratio improved to 10.5% in the current year quarter compared with 12.2% in the prior year quarter, due to both the reduction in absolute SG&A spending and the leverage associated with the increases in used unit sales and average selling prices.

Earnings and Earnings Per Share. "We are extremely pleased to report a record level of quarterly income, despite the continued challenging economic environment," said Folliard. "We are especially encouraged by the breadth of factors contributing to the earnings improvement, from the strong sales execution to our continued achievement of solid gross profit per unit, and from the improved CAF income to our ability to generate solid SG&A leverage. While cash for clunkers certainly had a positive effect on traffic and sales, this was only one of many elements that drove our success this quarter."

Credit Facilities. As of August 31, 2009, we had net debt of $257.2 million, consisting of $351.1 million outstanding under the revolving credit facility and $28.4 million of capitalized leases, net of $122.3 million of cash and cash equivalents. At that date, based on then-current inventory levels, we had additional borrowing capacity of $245.6 million under the revolving credit facility, which expires in December 2011.

During the second quarter of fiscal 2010, we renewed our warehouse facility, which has a 364-day term. The size of the warehouse facility was reduced to $1.2 billion from the previous $1.4 billion. As of August 31, 2009, $575.0 million of auto loan receivables were funded in the warehouse facility and unused warehouse capacity totaled $625.0 million.

Supplemental Financial
Information
Sales Components
(In millions)                     Three Months Ended             Six Months Ended
                                  August 31 (1)                  August 31 (1)
                                  2009      2008      Change     2009      2008      Change
Used vehicle sales                $1,706.6  $1,476.3  15.6  %    $3,255.9  $3,293.2  (1.1  )%
New vehicle sales                 63.2      77.8      (18.8 )%   111.8     159.9     (30.1 )%
Wholesale vehicle sales           237.0     223.3     6.1   %    408.5     465.6     (12.3 )%
Other sales and revenues:
Extended service plan revenues    39.9      31.7      25.7  %    74.4      68.3      9.0   %
Service department sales          26.8      26.5      1.2   %    53.5      51.0      4.8   %
Third-party finance fees, net     3.1       3.4       (7.3  )%   6.9       9.9       (29.8 )%
Total other sales and revenues    69.9      61.7      13.3  %    134.8     129.2     4.4   %
Net sales and operating revenues  $2,076.7  $1,839.1  12.9  %    $3,911.0  $4,047.8  (3.4  )%

(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  Six Months Ended
                                 August 31           August 31
                                 2009    2008        2009   2008
Comparable store vehicle sales:
Used vehicle units               8 %     (17)%       (6)%   (8)%
New vehicle units                (19)%   (20)%       (31)%  (19)%
Total units                      7 %     (17)%       (7)%   (8)%
Used vehicle dollars             13 %    (22)%       (4)%   (12)%
New vehicle dollars              (19)%   (21)%       (30)%  (20)%
Total dollars                    12 %    (22)%       (6)%   (13)%
Total vehicle sales:
Used vehicle units               10 %    (7)%        (3)%   2 %
New vehicle units                (19)%   (24)%       (31)%  (25)%
Total units                      9 %     (7)%        (4)%   1 %
Used vehicle dollars             16 %    (12)%       (1)%   (3)%
New vehicle dollars              (19)%   (26)%       (30)%  (26)%
Total dollars                    14 %    (13)%       (2)%   (4)%

Retail Vehicle Sales Mix
                  Three Months Ended  Six Months Ended
                  August 31           August 31
                  2009     2008       2009     2008
Vehicle units:
Used vehicles     97  %    96  %      98  %    97  %
New vehicles      3        4          2        3
Total             100 %    100 %      100 %    100 %
Vehicle dollars:
Used vehicles     96  %    95  %      97  %    95  %
New vehicles      4        5          3        5
Total             100 %    100 %      100 %    100 %

Unit Sales
                    Three Months Ended  Six Months Ended
                    August 31           August 31
                    2009    2008        2009     2008
Used vehicles       98,260  89,664      191,123  196,411
New vehicles        2,689   3,300       4,720    6,815
Wholesale vehicles  57,790  55,124      100,016  111,453

Average Selling Prices
                    Three Months Ended      Six Months Ended
                    August 31               August 31
                    2009        2008        2009        2008
Used vehicles       $   17,185  $   16,278  $   16,847  $   16,590
New vehicles        $   23,373  $   23,434  $   23,545  $   23,319
Wholesale vehicles  $   3,978   $   3,935   $   3,960   $   4,061

Selected Operating Ratios
(In millions)                                  Three Months Ended                           Six Months Ended
                                               August 31                                    August 31
                                               2009        % (1)     2008         % (1)     2009        % (1)     2008        % (1)
Net sales and operating revenues               $  2,076.7  100.0 %   $ 1,839.1    100.0 %   $  3,911.0  100.0 %   $  4,047.8  100.0 %
Gross profit                                   $  314.5    15.1  %   $ 255.9      13.9  %   $  590.8    15.1  %   $  538.6    13.3  %
CarMax Auto Finance income (loss)              $  72.1     3.5   %   $ (7.1    )  (0.4  )%  $  50.5     1.3   %   $  2.7      0.1   %
Selling, general, and administrative expenses  $  218.1    10.5  %   $ 225.1      12.2  %   $  424.3    10.9  %   $  468.1    11.6  %
Operating profit (EBIT) (2)                    $  168.6    8.1   %   $ 23.6       1.3   %   $  216.9    5.5   %   $  73.2     1.8   %
Net earnings                                   $  103.0    5.0   %   $ 14.0       0.8   %   $  131.7    3.4   %   $  43.6     1.1   %

(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
(In millions)                   Three Months Ended        Six Months Ended
                                August 31                 August 31
                                2009    2008    Change    2009    2008    Change
Used vehicle gross profit       $208.3  $167.7  24.3 %    $394.1  $353.6  11.5  %
New vehicle gross profit        2.9     3.0     (4.9 )%   3.9     6.0     (34.7 )%
Wholesale vehicle gross profit  47.7    49.5    (3.5 )%   85.9    93.6    (8.3  )%
Other gross profit              55.6    35.8    55.4 %    106.8   85.3    25.2  %
Total gross profit              $314.5  $255.9  22.9 %    $590.8  $538.6  9.7   %

Gross Profit per Unit
                                Three Months Ended                      Six Months Ended
                                August 31                               August 31
                                2009                2008                2009                2008
                                $/unit (1)   % (2)  $/unit (1)   % (2)  $/unit (1)   % (2)  $/unit (1)   % (2)
Used vehicle gross profit       $     2,120  12.2%  $     1,870  11.4%  $     2,062  12.1%  $     1,800  10.7%
New vehicle gross profit        $     1,060  4.5%   $     909    3.9%   $     833    3.5%   $     883    3.8%
Wholesale vehicle gross profit  $     826    20.1%  $     897    22.2%  $     859    21.0%  $     840    20.1%
Other gross profit              $     551    79.6%  $     385    58.0%  $     545    79.2%  $     420    66.1%
Total gross profit              $     3,116  15.1%  $     2,753  13.9%  $     3,017  15.1%  $     2,650  13.3%

(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.

CAF Income (Loss)
(In millions)                                                  Three Months Ended        Six Months Ended
                                                               August 31                 August 31
                                                               2009         2008         2009         2008
Gain on sales of loans originated and sold                     $  19.9      $  9.4       $  24.7      $  23.6
Other gains (losses)                                              36.2         (28.2 )      (6.0  )      (45.2   )
Total gain (loss)                                                 56.1         (18.8 )      18.7         (21.6   )
Servicing fee income                                              10.4         10.4         20.9         20.6
Interest income                                                   16.3         11.2         32.7         22.2
Direct CAF expenses                                               10.7         10.0         21.8         18.6
CarMax Auto Finance income (loss)                              $  72.1      $  (7.1  )   $  50.5      $  2.7
Loans originated and sold                                      $  475.2     $  526.9     $  935.7     $  1,153.4
Gain on sales of loans originated and sold as a percentage of     4.2   %      1.8   %      2.6   %      2.0     %
loans originated and sold

Earnings Highlights
(In millions except per share data)          Three Months Ended             Six Months Ended
                                             August 31                      August 31
                                             2009      2008      Change     2009      2008      Change
Net earnings                                 $  103.0  $  14.0   635.2 %    $  131.7  $  43.6   202.4 %
Diluted weighted average shares outstanding     221.3     220.0  0.6   %       220.1     220.2  (0.1  )%
Net earnings per share                       $  0.46   $  0.06   666.7 %    $  0.59   $  0.20   195.0 %

Conference Call Information

We will host a conference call for investors at 9:00 a.m. ET today, September 22, 2009. Domestic investors may access the call at 1-888-298-3261 (international callers dial 1-706-679-7457). The conference I.D. for both domestic and international callers is 66399029. 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 September 22, 2009, through December 17, 2009. A telephone replay also will be available through September 29, 2009, 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 66399029.

Third Quarter Fiscal 2010 Earnings Release Date

We currently plan to release third quarter sales and earnings on Friday, December 18, 2009, 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 December.

About CarMax

CarMax, a Fortune 500 company, and one of the Fortune 2009 "100 Best Companies to Work For," is the nation's largest retailer of used cars. Headquartered in Richmond, Va., CarMax currently operates 100 used car superstores in 46 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 twelve months ended February 28, 2009, the company retailed 345,465 used cars and sold 194,081 wholesale vehicles at our in-store auctions. For more information, access the CarMax website at www.carmax.com.

Forward-Looking Statements

We caution readers that the statements contained in this release about our future business plans, operations, opportunities or prospects, including without limitation any statements or factors regarding expected sales, margins or earnings, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based upon management's current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results to differ materially from anticipated results. Among the factors that could cause actual results and outcomes to differ materially from those contained in the forward-looking statements are the following:

-- Changes in general or regional U.S. economic conditions.

-- Changes in the availability or cost of capital and working capital financing.

-- Changes in consumer credit availability related to our third-party financing providers.

-- Changes in the competitive landscape within our industry.

-- Significant changes in retail prices for used or new vehicles.

-- A reduction in the availability of or access to sources of inventory.

-- Factors related to the regulatory and legislative environment in which we operate.

-- The loss of key employees from our store, regional or corporate management teams.

-- The failure of key information systems.

-- The effect of new accounting requirements or changes to U.S. generally accepted accounting principles.

-- Security breaches or other events that result in the misappropriation, loss or other unauthorized disclosure of confidential customer information.

-- The effect of various litigation matters.

-- Adverse conditions affecting one or more domestic-based automotive manufacturers.

-- The occurrence of severe weather events.

-- Factors related to the seasonal fluctuations in our business.

-- Factors related to the geographic concentration of our superstores.

-- Our inability to acquire or lease suitable real estate at favorable terms.

-- The occurrence of certain other material events.

For more details on factors that could affect expectations, see our Annual Report on Form 10-K for the fiscal year ended February 28, 2009, and our quarterly or current reports as filed with or furnished to the Securities and Exchange Commission. Our filings are publicly available on our investor information home page at 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. 4287. We disclaim any intent or obligation to update our forward-looking statements.

CARMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
EARNINGS
(UNAUDITED)
(In thousands except per share data)
                                                 Three Months Ended August 31                 Six Months Ended August 31
                                                 2009        %(1)   2008           %(1)       2009         %(1)   2008         %(1)
Sales and operating revenues:
                       Used vehicle sales        $1,706,616  82.2   $1,476,317     80.3       $ 3,255,891  83.3   $ 3,293,165  81.4
                       New vehicle sales         63,206      3.0    77,818         4.2        111,759      2.9    159,888      3.9
                       Wholesale vehicle sales   236,991     11.4   223,269        12.1       408,487      10.4   465,596      11.5
                       Other sales and revenues  69,858      3.4    61,650         3.4        134,834      3.4    129,168      3.2
Net sales and operating revenues                 2,076,671   100.0  1,839,054      100.0      3,910,971    100.0  4,047,817    100.0
Cost of sales                                    1,762,122   84.9   1,583,141      86.1       3,320,185    84.9   3,509,190    86.7
Gross profit                                     314,549     15.1   255,913        13.9       590,786      15.1   538,627      13.3
CarMax Auto Finance income (loss)                72,130      3.5    (7,141     )   (0.4  )    50,494       1.3    2,678        0.1
Selling, general and administrative expenses     218,122     10.5   225,148        12.2       424,347      10.9   468,132      11.6
Interest expense                                 1,348       0.1    1,477          0.1        2,414        0.1    3,535        0.1
Interest income                                  190         --     354            --         373          --     618          --
Earnings before income taxes                     167,399     8.1    22,501         1.2        214,892      5.5    70,256       1.7
Provision for income taxes                       64,428      3.1    8,495          0.5        83,173       2.1    26,692       0.7
Net earnings                                     $ 102,971   5.0    $ 14,006       0.8        $ 131,719    3.4    $ 43,564     1.1
Weighted average common shares: (2)
                       Basic                     218,747            217,600                   218,376             217,347
                       Diluted                   221,334            219,956                   220,087             220,220
Net earnings per share: (2)
                       Basic                     $ 0.47             $ 0.06                    $ 0.60              $ 0.20
                       Diluted                   $ 0.46             $ 0.06                    $ 0.59              $ 0.20
(1) Percents are calculated as a percentage of
net sales and operating revenues and may not equal totals due to
rounding.
(2) Reflects the implementation of FASB Staff
Position Emerging Issues Task Force 03-6-1, "Determining Whether
Instruments Granted in Share-Based Payment Transactions Are
Participating Securities" and the resulting restatement of the
diluted share count for the three months and the six months ended
August 31, 2008.

CARMAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
                                                August 31       August 31       February 28
                                                2009            2008            2009
ASSETS
Current assets:
Cash and cash equivalents                       $    122,347    $    10,917     $     140,597
Accounts receivable, net                             79,110          59,149           75,876
Auto loan receivables held for sale                  25,679          31,037           9,748
Retained interest in securitized receivables         486,120         311,027          348,262
Inventory                                            790,081         736,131          703,157
Deferred income taxes                                8,052           --               --
Prepaid expenses and other current assets            10,193          15,050           10,112
Total current assets                                 1,521,582       1,163,311        1,287,752
Property and equipment, net                          916,162         960,524          938,259
Deferred income taxes                                100,699         89,420           103,163
Other assets                                         48,857          50,897           50,013
TOTAL ASSETS                                    $    2,587,300  $    2,264,152  $     2,379,187
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable                                $    224,835    $    228,578    $     237,312
Accrued expenses and other current liabilities       92,925          62,038           55,793
Accrued income taxes                                 36,183          23,380           26,551
Deferred income taxes                                --              17,468           12,129
Short-term debt                                      1,937           12,600           878
Current portion of long-term debt                    199,855         48,229           158,107
Total current liabilities                            555,735         392,293          490,770
Long-term debt, excluding current portion            177,716         176,864          178,062
Deferred revenue and other liabilities               109,622         134,049          117,288
TOTAL LIABILITIES                                    843,073         703,206          786,120
SHAREHOLDERS' EQUITY                                 1,744,227       1,560,946        1,593,067
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY      $    2,587,300  $    2,264,152  $     2,379,187

CARMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
UNAUDITED
(In thousands)
                                                                  Six Months Ended August 31
                                                                  2009              2008
Operating Activities:
Net earnings                                                      $   131,719       $   43,564
Adjustments to reconcile net earnings to net cash (used in)
provided by operating activities:
Depreciation and amortization                                         29,579            27,494
Share-based compensation expense                                      22,654            19,095
Loss on disposition of assets                                         276               1,547
Deferred income tax benefit                                           (17,711  )        (22,777  )
Net (increase) decrease in:
Accounts receivable, net                                              (3,234   )        14,079
Auto loan receivables held for sale, net                              (15,931  )        (26,053  )
Retained interest in securitized receivables                          (137,858 )        (40,266  )
Inventory                                                             (86,924  )        239,646
Prepaid expenses and other current assets                             (81      )        4,152
Other assets                                                          1,152             (215     )
Net increase (decrease) in:
Accounts payable, accrued expenses and other current liabilities      35,365            (48,356  )
and accrued income taxes
Deferred revenue and other liabilities                                (10,295  )        6,991
Net cash (used in) provided by operating activities                   (51,289  )        218,901
Investing Activities:
Capital expenditures                                                  (14,328  )        (137,519 )
Proceeds from sales of assets                                         50                1,254
Insurance proceeds related to damaged property                        447               --
Purchases of money market securities, net                             (2,196   )        (4,009   )
Sales of investments available-for-sale                               2,200             --
Net cash used in investing activities                                 (13,827  )        (140,274 )
Financing Activities:
Increase (decrease) in short-term debt, net                           1,059             (8,417   )
Issuances of long-term debt                                           386,000           278,200
Payments on long-term debt                                            (344,598 )        (359,921 )
Equity issuances, net                                                 3,819             9,100
Excess tax benefits from share-based payment arrangements             586               363
Net cash provided by (used in) financing activities                   46,866            (80,675  )
Decrease in cash and cash equivalents                                 (18,250  )        (2,048   )
Cash and cash equivalents at beginning of year                        140,597           12,965
Cash and cash equivalents at end of period                        $   122,347       $   10,917

SOURCE: CarMax, Inc.