CarMax CEO Discusses F3Q2011 Results - Earnings Call Transcript
CarMax, Inc. (KMX)
F3Q2011 (Qtr End 11/30/2010) Earnings Call
December 21, 2010 9:00 am ET
Executives
Katharine Kenny - VP, IR
Tom Folliard - President and CEO
Tom Reedy - SVP and CFO
Keith Browning - EVP, Finance
Analysts
Elizabeth Lane - Bank of America
Sharon Zackfia - William Blair
Matt Nemer - Wells Fargo Securities
Himanshu Patel - JPMorgan
Brian Nagel - Oppenheimer
Ryan Brinkman - Goldman Sachs
Simeon Gutman - Credit Suisse
Craig Kennison - Robert W. Baird
Scot Ciccarelli - RBC Capital Markets
Bill Armstrong - CL King
Dan Galves - Deutsche Bank
Mark Mandel - ThinkEquity
Scott Stember - Sidoti & Company
Presentation
Operator
At this time, I would like to welcome everyone to the Q3 FY '11 conference call. (Operator instructions) Ms. Kenny, you may begin your conference.
Katharine Kenny
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Good morning. It's Katharine Kenny, happy holiday. It's cold here, but it's sunny and it's going to be 45, so we're happy. We're also pretty happy about earnings this morning. Thanks for joining us on our third quarter earnings conference call.
On the call with me today are Tom Folliard, our President and Chief Executive Officer; Tom Reedy, our Senior Vice President and CFO; and Keith Browning, our Executive Vice President, Finance.
Before we begin, let me remind you that our statements today regarding the company's future business plans, prospects, and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
These statements are based on management's current knowledge and assumptions about future events that involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them.
For additional information on important factors that could affect these expectations, please see the company's Annual Report on Form 10-K for the fiscal year ended February 28, 2010, filed with the SEC.
Now, I'll turn it over to Tom Folliard.
Tom Folliard
Thank you, Katharine. Good morning everyone and thanks for joining us. Well, as you saw, we just finished up a record third quarter for CarMax, we are very pleased. Our 16% increase in used unit comps was driven by continued rebound in customer traffic and an improvement in sales conversion, partially due to increased consumer credit availability.
This quarter's result showed sustained strength in many of our key areas, compared to the third quarter of last year. Total gross profit for CarMax increased 23%, gross profit per retail unit increased by $127 year-over-year. Our wholesale business has also continued to outperform. Wholesale unit sales increased by 26%, again due to higher appraisal traffic and an improved buy ratio, which remained at similar levels to last quarter at nearly 30%, and our wholesale vehicle gross profit per unit, grew by $51. CAF income of $56 million also supported our very strong performance.
I'll now turn it over to Tom Reedy, and he'll discuss a few highlights from our finance area. Tom?
Tom Reedy
Thanks, Tom and good morning everyone. CAF income remains strong. Our portfolio continued to benefit from a relatively widespread between APR and cost of funds, which as you know is locked down on the loans we originate in future ties in the public market. This has been the case for the past several quarters and continued with the $650 million 2010-3 transaction that we closed in early November. Loan loss experience has also trended a bit better than our expectations, which is reflected in the current quarter's provision and ending allowance for losses.
As you saw in the release, we believe credit availability helped sales in the quarter. As we mentioned in September, credit availability was somewhat impaired last year because CAF had tightened lending standards and we did not introduce the program where Santander purchases a large portion of CAF loans that we used to originate until mid-November 2009.
This year, we had a similar arrangement with Wells Fargo, which has been in place for all of Q3. Unlike the Santander arrangement, which focuses only on CAF's lower tier credit customers, the Wells Fargo program considers financing opportunities throughout the full spectrum of customers that CAF approves.
As far as credit mix, we continue to see a higher portion of our sales financed by our sub-prime lenders. Sub-prime represented approximately 8% of our sales this quarter versus 6% a year ago. One last regarding to balance sheet before I turn it back over to Tom. We did end the quarter with significantly higher levels of inventory and this is largely due to an increase in sales and our solid results. Those results have also made us confident to build inventory in-line with more normal sales level, something we're hesitant to do during recession. Tom?
Tom Folliard
Thank you. I'll mention just a couple of other points before we open it up for questions. With the growing trend among consumers are doing more shopping on handheld devices. We have recently enhanced our website by launching a new mobile version. It's a streamline version at carmax.com. It allows customers to search for and view cars on their phones, as well as easily find and contact our nearest store. We are very excited about this next step forward and making it easier for our CarMax customers to find the perfect vehicle.
Let me note, that in addition to the three store openings for fiscal 2012 that we announced last quarter, we have this quarter reported on our planned opening for the third quarter of next year in North Attleborough, Massachusetts, which will be our first store in the Providence market.
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