CarMax's CEO Discusses Q4 2012 Results - Earnings Call Transcript

CarMax (KMX)

Q4 2012 Earnings Call

April 05, 2012 9:00 am ET

Executives

Katharine W. Kenny - Vice President of Investor Relations

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

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

Analysts

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

Austin Pauls - RBC Capital Markets, LLC, Research Division

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

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

Elizabeth Lane - BofA Merrill Lynch, Research Division

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

Simeon Gutman - Crédit Suisse AG, Research Division

Dan Galves - Deutsche Bank AG, Research Division

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Clint D. Fendley - Davenport & Company, LLC, Research Division

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

Unknown Analyst

David Whiston - Morningstar Inc., Research Division

Presentation

Operator

Good morning, my name is Bettina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Quarter 4 Fiscal Year 2012 Conference Call. [Operator Instructions] Ms. Kenny, you may begin your conference.

Katharine W. Kenny

Good morning. Thank you for joining our Fiscal 2012 Fourth Quarter Earnings Conference Call today. On the call with me today are Tom Folliard, our President and Chief Executive Officer; and Tom Reedy, our Executive 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 events -- 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. Thanks for joining us today. While we are pleased to report another year of record revenues and earnings, we achieved some major milestones this year, including total revenue of over $10 billion for the first time and retail used vehicle sales of over 400,000.

Some other highlights for the year include used unit comps increased by 1% compared to a very challenging 10% in the prior year. Net earnings, up 10% to $414 million. Wholesale unit sales increased by 20% to over 300,000 and total wholesale gross profit grew by 26%. CAF income, up 19%. And we ended our managed receivables at nearly $5 billion. We also estimate we increased our market share of late-model used vehicle sales by approximately 3%.

Highlights for the fourth quarter. Used unit comps increased by 4% compared to 12% in the previous year. Total used gross profit grew by 8%, and total wholesale gross profit grew by 20%. Wholesale unit sales, up 13% due to strong appraisal traffic. Our appraisal buy rate was similar to the last several quarters and last year's fourth quarter at a little over 29%. CAF quarterly income was also a strong contributor growing by 22% to $66.1 million.

During the quarter, sales of 5-year and older vehicles as a percentage of our total, were over 25% similar to what we reported in the third quarter. Sales of SUVs and trucks remained about the same as a percentage of our total last year, but fell from 31% to less than 21% -- less than 27% of our sales sequentially. As we've discussed before, our mix of vehicles would vary depending on the needs of our customers.

And I'll turn over to Tom Reedy. Tom?

Thomas W. Reedy

Good morning, everyone. As Tom mentioned, CAF had a strong quarter with income up $12 million or 22% compared to the fourth quarter fiscal 2011. Our portfolio grew 14% to nearly $5 billion. And net loans originated increased 36% compared with the fourth quarter fiscal 2011.

While the increase in unit sales and average selling price contributed to the portfolio growth, it was largely driven by the key motive impact of our decision to retain more of the loans we had historically approved, but in recent years had been purchased by third-party providers.

As of January this year, we have transitioned back to retaining all of these loans. CAF penetration for the quarter was approximately 37%, up from 29% last year. Interest margin as a percent of average receivables increased to 7.3% compared to last year of 6.9%.

While we have increased our retention of higher risk loans with higher APRs, we've also been providing more aggressive offers to attract and retain higher FICO customers. So while interest and fee income grew about $10 million year-over-year, it was down modestly as a percent of average receivables from 9.7% to 9.4%.

Interest expense has continued to decline as higher cost securitizations paid down and yields of lower interest expense continued to become a greater portion of our financing. As you may have seen, we closed the first 2012 ABS deal in mid-February. At this point, the market for auto paper seems to be quite healthy as we saw a strong demand for the deal and were able to upsize the transaction to $970 million.

Our provision for losses grew by $2.2 million year-over-year. That's the product of favorable loss experience dampening the impact of retaining more loans with greater credit risk in the growth in our receivables.

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