CarMax (KMX)

Q4 2011 Earnings Call

March 31, 2011 9:00 am ET


Tom Reedy - Chief Financial Officer and Senior Vice President

Thomas Folliard - Chief Executive Officer, President and Director

Katharine Kenny - Vice President of Investor Relations


Clint Fendley - Davenport & Company, LLC

Dan Galves - Deutsche Bank AG

Sharon Zackfia - William Blair & Company L.L.C.

Mark Mandel - Wedbush Morgan Securities

Craig Kennison - Robert W. Baird & Co. Incorporated

Ryan Brinkman - JPMorgan

William Armstrong - CL King & Associates, Inc

Vivek Aalok

Rupesh Parikh

Patrick Duff

Matt Nemer - Wells Fargo Securities, LLC

Austin Pauls

Simeon Gutman - Goldman Sachs

John Murphy - BofA Merrill Lynch



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Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Quarter Four Fiscal Year 2011 Conference Call. [Operator Instructions] Ms. Katharine Kenny, you may begin the conference.

Katharine Kenny

Thank you. Good morning. I'm not going to talk about the weather today. I guess I'll just introduce everyone who is on the call today. I'm Katharine Kenny, obviously, Vice President of Investor Relations, and I want to thank you for joining the call. We have Tom Folliard, our President and Chief Executive Officer on the call; 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.

Let me also take a moment to remind all of you that we do have an Analyst Day coming up here in Richmond on April 14, and we would love to have you join us. Now I'll turn the call over to Tom Folliard.

Thomas Folliard

Thank you, Katharine. Good morning, everyone. I do have to say we almost had to cancel the call today with all the excitement in Richmond over the VCU Rams in the Final Four, so go Rams. I'm going to talk about the year and the first quarter. I'll first give you some highlights from our fiscal year and then I'll talk about the fourth quarter a little bit and turn it over to Tom for some finance highlights.

We're pleased to report another record year for CarMax. We reported net earnings of $381 million, an increase of 35% over the record results achieved in the previous fiscal year. Our used unit comps increased by 10% for the year compared to a 1% increase in fiscal 2010. This was largely due to the increase in traffic, but also to an improvement in sales conversion. We estimate that we increased our share of the late-model used vehicle market by approximately 7%.

We achieved an important milestone by recording over $1 billion in annual wholesale vehicle sales. And even though we restarted our growth plan this year, we still reported some modest SG&A leverage.

Onto the fourth quarter. Highlights included used unit comps increased by 12%, despite facing the toughest comparison of the year. This was due to our continued growth in traffic. Total gross profit for CarMax increased by 21% and we achieved gross profit per used unit of over $2,000 for the ninth consecutive quarter, and our wholesale unit sales grew by 41%, largely due to a significant increase in our appraisal traffic, while at the same time, our appraisal buy rate remains higher than historical averages at nearly 30%. All in all, a very good quarter and an excellent year.

I'll turn it over to Tom to talk about the finance side of our business.

Tom Reedy

Thanks, Tom, and good morning. CAF income for the quarter remains strong. For the year, it was higher than we originally anticipated due to the factors mentioned in this morning's press release. First, the continuing environment where the margin between APR charge to the customer and our funding cost remained high relative to historical norms. Additionally, we had better-than-anticipated loss experience, which drove reduction in our allowance for loan losses and our loss provision.

Our in-house lending network continued to support sales this year. Credit availability during the quarter and all year was greater than in fiscal 2010. More than 80% of customers applying for credit received enough from CAF and/or one of our lending partners. The share of sales financed to our subprime lenders in the fourth quarter remained consistent to a year ago at 9%, reflecting the normal spike in subprime lending during tax refund season. For the full year, subprime accounted for approximately 8% of our sales versus 6% in fiscal 2010.

As you know, we do not normally give guidance, and don't plan on giving guidance in the future. However, given that this will be just the second year under the new accounting rules for CarMax Auto Finance, we chose to provide a range of guidance for CAF income in fiscal 2012. Underlying our estimate of $205 million to $235 million is an assumption that during the quarter or during the course of the year, the margin between APR charge to the customer and our funding cost will compress for new originations, but not all the way back to historical levels. Also we anticipate that our provision for loan losses will be approximately 1% of managed receivables.

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