CarMax, Inc. (KMX)
F2Q2011 Earnings Call Transcript
September 22, 2010 9:00 am ET
Katharine Kenny – VP, IR
Tom Folliard – President and CEO
Keith Browning – EVP and CFO
Tom Reedy – SVP, Finance
Simeon Gutman – Credit Suisse
Matt Nemer – Wells Fargo Securities
Sharon Zackfia – William Blair
Ryan Brinkman – Goldman Sachs
Elizabeth lane – Bank of America/Merrill Lynch
Scot Ciccarelli – RBC Capital
Himanshu Patel – JPMorgan
Rod Lache – Deutsche Bank
William Truelove – UBS
Craig Kennison – Robert W. Baird
Justin Maurer – Lord Abbett
Bill Armstrong – CL King & Associates
Scott Stember – Sidoti
Mark Mandel – ThinkEquity
Hardy Bowen [ph] – Bowen Associates [ph]
Clint Fendley – Davenport
Previous Statements by KMX
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Good morning. My name is Angelia, and I will be your conference operator today. At this time I would like to welcome everyone to the second quarter fiscal year 2011 conference call. (Operator instructions) I would now like to turn the call over to Ms. Katharine Kenny. Ms. Kenny, you may begin your conference.
Good morning. It is in fact 92 degrees here in Richmond today, and no rain in sight. But otherwise we’re really happy here. Thank you for joining our second quarter fiscal 2011 earnings conference call.
On the call with me today are Tom Folliard, our President and Chief Executive Officer; Keith Browning, our Executive Vice President and Chief Financial Officer; and also with us Tom Reedy, our Senior Vice President of Finance and our Treasurer.
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 will turn it over to Tom Folliard.
Thank you Katharine. Good morning everyone. Well, we are happy to report another record quarter for CarMax. Our 4% used unit comps were driven by improved sales conversion, which was higher due to continued strong execution and the increase in credit availability compared to last year’s second quarter. While traffic levels were flat compared to the second quarter of last year, we view this as a positive considering the spike in traffic caused by the "cash for clunkers" program in July and August of ‘09.
This quarter’s results showed sustained strength in many of our key areas. Our used vehicle gross profit per unit remained strong and increased by $85 year-over-year. The wholesale business also continued to perform well compared to last year’s second quarter. Our wholesale unit sales increased by 20%, again due to both higher appraisal traffic, and an improved buy ratio, which was nearly 30%, and our wholesale vehicle gross profit per unit grew by $32, and CAF income continues to be a strong contributor to the overall business.
I will now turn it over to Keith, and he will provide some more detail on CAF. Keith.
Thank you Tom and good morning. CAF’s results were relatively self explanatory this quarter, so I will just touch on a few points. Our strong CAF income reflects the historically higher financing spreads we have experienced now for a number of quarters. The average customer APR for current originations fell below 9% for this quarter due to the reduction in rates we made to some customer segments based on the testing that I mentioned last quarter.
Our loan loss experience was within the range of expectations. Recall that in last year’s second quarter, credit availability was somewhat lower because CAF had tightened lending standards and the program (inaudible) while they purchased a large portion of the loans that CAF previously originated was not launched until November of 2009.
Let me give you a current update on our third party lenders and overall credit availability. While we continue to enjoy one of our strongest banking relationships with Bank of America, they will no longer serve as our third-party lender for customers in our stores. Recently Bank of America’s loans to our customers represented roughly 1% of our sales, and only in the top end of prime lending where CAF also lends.
After previous testing, we believe there will be no adverse impact to sales, CAF originations, or payoffs from this change. Sub-prime penetration remains higher than last year at 7% compared to 4%, although we have started to see some increased willingness to test expanding credit to more customers at some of our nonprime lenders. In addition, we have active tests in place with other lenders. We believe that we now offer through CAF or through our third party relationships approximately the same credit availability that we offered prior to the recession.
Before I turn the conversation back to Tom Folliard, I will ask Tom Reedy to update you on our liquidity.
Thanks Keith. At August 31, we had just over 4 billion of total debt with all but $30 million non-recourse debt associated with CAF securitizations. Our $700 million revolving credit facility was in essence fully available to us as we used cash flow during the quarter to pay down the facility and build a modest cash balance.
As you recall, we now maintain to warehouse facilities for CAF originations, one which expired and was successfully renewed in August; and the second that expires in February of 2011. During the quarter, we increased the capacity of our second facility by $400 million bringing our total combined capacity to $1.6 billion. At quarter end, we utilized $718 million with $882 million available to us.