CarMax (KMX)

Q3 2012 Earnings Call

December 21, 2011 9:00 am ET

Executives

Thomas J. Folliard - Chief Executive Officer, President and Director

Katharine W. Kenny - Vice President of Investor Relations

Thomas W. Reedy - Chief Financial Officer and Senior Vice President

Analysts

N. Richard Nelson - Stephens Inc., Research Division

Scot Ciccarelli - RBC Capital Markets, LLC, Research Division

William R. Armstrong - CL King & Associates, Inc.

Unknown Analyst

Amy L. Carroll - JP Morgan Chase & Co, Research Division

Ryan Brinkman - Goldman Sachs Group Inc., Research Division

Sharon Zackfia - William Blair & Company L.L.C., Research Division

Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

John Murphy - BofA Merrill Lynch, Research Division

Simeon Gutman - Crédit Suisse AG, Research Division

James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division

Jordan Hymowitz

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

Presentation

Operator

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Good morning, my name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn today's conference over to Katharine Kenny. Ma'am, you may begin your conference.

Katharine W. Kenny

Good morning. Thanks, Ashley and happy holidays to everyone. Thank you for joining our fiscal 2012 third quarter earnings conference call. On the call with me today are Tom Folliard, our President and Chief Executive Officer; and Tom Reedy, our Senior Vice President and CFO.

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, 2011, filed with the SEC. Tom?

Thomas J. Folliard

Thank you, Katharine. Good morning, everyone, and thanks for joining us today. We're pleased again to report solid financial results despite soft used unit comps. We believe our comps continue to be a reflection of weak economic conditions and low consumer confidence. In addition, we had an extremely difficult comparison to 16% comps in last year's third quarter. But as we said last quarter, we remain focused on our long-term growth and we are excited to report this quarter on our store opening plans for the next 4 years.

First, let me highlight some of the key factors that contributed to our results as compared to last year's third quarter. Total gross profit for CarMax increased by 2%, driven by growth in our retail and wholesale gross profit. Gross profit for used unit grew by 3% to $2,171. Our wholesale unit sales grew by 13% and wholesale gross profit per unit grew by $36 to $914. Our appraisal buy rate was 29% higher than historic levels but slightly lower than last year's buy rate. CAF quarterly income grew by 12% to $62.6 million.

During the quarter, our mix of vehicles changed somewhat. Sales of older vehicles 5-years plus increased to approximately 30% of sales compared with 16% a year ago and 24% in the second quarter. Meanwhile, sales of SUVs and trucks increased a few percentage points to 31%, up from 28%, while sales of smaller, more fuel-efficient vehicles decreased to 32% down from around 35%.

Our mix will clearly vary over time in reaction to market demand, again, reflecting the strength of our model and how quickly we can adjust our inventory mix to meet the needs of our customers. Now I'll ask Tom to share some information about CAF and our other lenders. Tom?

Thomas W. Reedy

Thanks, Tom. Good morning, everyone. As Tom mentioned, CAF income this quarter increased $7 million or 12% compared to the third quarter fiscal 2011. CAF portfolio grew 11%. Net loans originated were up 34% compared with the third quarter fiscal '11 due to continued higher CAF penetration and the increase in average selling prices.

CAF's net penetration for the quarter is approximately 38%, just similar to last quarter and up from 29% last year. As we discussed previously, we have elected to retain a greater portion of loans that CAF had historically approved. And our good business for CarMax, but in recent had been purchased by third-party partners.

The provision for loan losses grew by $6.5 million year-over-year, largely due to the fact that we originated and retained more loans with greater credit risk. CAF's interest margin expanded to $89 million, 7.4% of average managed receivables versus 6.9% in Q3 of that fiscal '11.

As far as the components of interest margin, interest in fee income grew by $7.5 million as the increase in managed receivables more than offset the decline in interest income as a percent of managed receivable. And portfolio interest expense fell $7.4 million year-over-year as older higher cost securitizations paid down and the deals with lower interest expense continue to become a greater portion of our financing.

Third-party subprime penetration grew to 9% of sales compared with 8% last year. This increase in subprime loans, which our lenders buy from us at a discount, as well as CAF's decision to retain more loans, were the primary drivers between our decrease in other sales and revenues.

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