CarMax Reports Quarterly Results

CarMax, Inc. (NYSE:KMX) today reported results for the second quarter ended August 31, 2012.
  • Net sales and operating revenues increased 7% to $2.76 billion from $2.59 billion in the second quarter of last year.
  • Used unit sales in comparable stores increased 5% for the quarter.
  • Total used unit sales rose 8% in the second quarter.
  • Total wholesale unit sales declined 2% in the second quarter.
  • CarMax Auto Finance (CAF) income increased 19% to $75.7 million from $63.8 million in the prior year quarter.
  • Net earnings were $111.6 million, or $0.48 per diluted share, compared with $111.2 million, or $0.48 per diluted share, in the second quarter of fiscal 2012.

Second Quarter Business Performance Review

“We are pleased with our improved retail sales in the second quarter, as used unit comps strengthened and we continued to open new stores,” said Tom Folliard, president and chief executive officer. “Net earnings were flat, as the contributions from the growth in retail sales and CAF income were offset by higher SG&A costs, which were pressured by the ramp in our store growth rate, and the tough comparisons in our wholesale operations.”

Sales . Used vehicle sales improved, with total used units climbing 8% and comparable store used units up 5%. The comparable store used unit growth was driven by improved conversion, which was supported by better credit offers and continued strong in-store execution. The used vehicle average selling price was similar to the prior year’s quarter.

Wholesale vehicle unit sales declined 2% compared with last year’s quarter, following increases of 23% and 20% in the second quarters of the two previous fiscal years. Appraisal traffic in the current quarter was higher than in the prior year period; however, the appraisal buy rate was lower, which we believe reflected the effect of moderating wholesale vehicle valuations.

Other sales and revenues declined 1% compared with the prior year’s second quarter, as an increase in extended service plan (ESP) revenues was more than offset by a reduction in net third-party finance fees. Third-party subprime providers, who purchase subprime financings at a discount, originated 14% of used vehicle unit sales in the current quarter compared with 7% in the prior year quarter. ESP revenues climbed 18% largely due to the growth in our retail vehicle sales and an increase in ESP penetration.

Gross Profit . Total gross profit increased to $368.0 million from $354.3 million in the second quarter of fiscal 2012, as increased used vehicle gross profits more than offset modest reductions in wholesale, new and other gross profit. Used vehicle gross profit climbed 8% to $241.8 million driven by the 8% increase in used unit sales. Used gross profit per unit remained similar at $2,172 versus $2,178 in last year’s second quarter. Wholesale gross profit declined 5% to $75.1 million, reflecting the combination of the 2% decrease in wholesale unit sales and a 2% reduction in wholesale gross profit per unit to $907 from $929 in the prior year quarter. Other gross profit fell less than 1% to $49.5 million, similar to the change in other sales and revenues.

CarMax Auto Finance . CAF income increased 19% to $75.7 million compared with $63.8 million in last year’s second quarter. The improvement in CAF income was primarily due to the 14% increase in average managed receivables, which grew to $5.25 billion from $4.60 billion in last year’s second quarter. The increase in average managed receivables reflected the growth in CAF origination volume throughout fiscal 2012 and the first half of fiscal 2013 as we transitioned back to a pre-recession origination strategy, as well as higher average selling prices and retail unit sales growth over this period.

The allowance for loan losses increased modestly, to 0.9% of managed receivables as of August 31, 2012, compared with 0.8% as of August 31, 2011. Low unit charge-offs and strong recovery rates continued to largely offset the effect of the change in credit mix resulting from the transition in origination strategy.

SG&A . Selling, general and administrative expenses increased 11% to $254.7 million from $229.9 million in the prior year’s second quarter. The increase primarily reflected the 8% increase in our store base since the beginning of last year’s second quarter (representing the addition of eight stores) and higher growth-related costs resulting from the ramp in our store growth rate. Growth-related costs include pre-opening expenses, relocation expenses, and the cost of building and maintaining management bench strength to support future growth. SG&A per retail unit increased to $2,241 versus $2,197 in the prior year’s quarter mainly due to the costs associated with this year’s higher store growth rate.

Superstore Openings . We plan to open ten superstores in fiscal 2013, double the number opened in fiscal 2012. During the second quarter of fiscal 2013, we opened three used car superstores, entering the Ft. Myers, Florida, market with two stores and opening a third store in the Nashville, Tennessee, market.

Supplemental Financial Information

Sales Components
   

(In millions)
Three Months Ended Six Months Ended

August 31 (1)

August 31 (1)

2012
 

2011
 

Change

2012
 

2011
 

Change
Used vehicle sales $2,192.0 $2,015.0 8.8 % $4,380.9 $4,086.5 7.2 %
New vehicle sales 61.4 46.9 31.0 % 116.9 108.7 7.5 %
Wholesale vehicle sales 437.1 457.9 (4.5 )% 904.8 935.7 (3.3 )%
Other sales and revenues:
Extended service plan revenues 52.9 44.9 17.7 % 104.2 91.3 14.1 %
Service department sales 26.8 26.0 2.9 % 51.6 51.2 0.8 %
Third-party finance fees, net (12.1 )   (2.9 )   (322.4 )% (25.9 )   (6.2 )   (320.2 )%
Total other sales and revenues 67.6     68.1     (0.8 )% 129.9     136.3     (4.7 )%
Net sales and operating revenues $2,758.0     $2,587.8     6.6 % $5,532.4     $5,267.2     5.0 %
 

(1) Percent calculations and amounts shown are based on amounts presented on the attached consolidated statements of earnings and may not sum due to rounding.

Used Vehicle Sales Changes
   
Three Months Ended Six Months Ended
August 31 August 31

2012
 

2011

2012
 

2011
Comparable store vehicle sales:
Used vehicle units 5% (2)% 2% 2%
Used vehicle revenues 5%

5%
4% 8%
 
Total vehicle sales:
Used vehicle units 8% (1)% 6% 3%
Used vehicle revenues

9%

7%
7% 10%
 

Unit Sales
   
Three Months Ended Six Months Ended
August 31 August 31

2012
 

2011

2012
 

2011
Used vehicles 111,316 102,825 223,607 211,336
New vehicles 2,352 1,798 4,459 4,233
Wholesale vehicles 82,771 84,885 166,312 169,947
 

Average Selling Prices
   
Three Months Ended Six Months Ended
August 31 August 31

2012
 

2011

2012
 

2011
Used vehicles $ 19,494 $ 19,408 $ 19,389 $ 19,148
New vehicles $ 25,982 $ 25,927 $ 26,073 $ 25,559
Wholesale vehicles $ 5,133 $ 5,249 $ 5,292 $ 5,359
 

Selected Operating Ratios
   

(In millions)
Three Months Ended Six Months Ended
August 31 August 31

2012
 

% (1)
 

2011
 

% (1)

2012
 

% (1)
 

2011
 

% (1)
 
Net sales and operating revenues $ 2,758.0 100.0 % $ 2,587.8 100.0 % $ 5,532.4 100.0 % $ 5,267.2 100.0 %
Gross profit $ 368.0 13.3 % $ 354.3 13.7 % $ 749.9 13.6 % $ 737.4 14.0 %
CarMax Auto Finance income $ 75.7 2.7 % $ 63.8 2.5 % $ 150.9 2.7 % $ 133.5 2.5 %

Selling, general, and administrative expenses
$ 254.7 9.2 % $ 229.9 8.9 % $ 508.3 9.2 % $ 471.5 9.0 %
Interest expense $ 8.2 0.3 % $ 8.5 0.3 % $ 16.3 0.3 % $ 17.0 0.3 %
Earnings before income taxes $ 181.1 6.6 % $ 179.9 7.0 % $ 376.7 6.8 % $ 382.5 7.3 %
Net earnings $ 111.6 4.0 % $ 111.2 4.3 % $ 232.4 4.2 % $ 236.7 4.5 %
 

(1) Calculated as the ratio of the applicable amount to net sales and operating revenues.

Gross Profit
   

(In millions)
Three Months Ended Six Months Ended
August 31 August 31

2012
 

2011
 

Change

2012
 

2011
 

Change
Used vehicle gross profit $ 241.8 $ 224.0 8.0 % $ 491.2 $ 465.2 5.6 %
New vehicle gross profit 1.6 1.7 (6.7 )% 3.2 3.1 1.1 %
Wholesale vehicle gross profit 75.1 78.8 (4.8 )% 157.0 165.0 (4.9 )%
Other gross profit   49.5     49.8   (0.5 )%   98.6     104.0   (5.2 )%
Total gross profit $ 368.0   $ 354.3   3.9 % $ 749.9   $ 737.4   1.7 %
 

Gross Profit per Unit
   
Three Months Ended Six Months Ended
August 31 August 31

2012
 

2011

2012
 

2011
$

/unit (1)
 

% (2)
$

/unit (1)
 

% (2)
  $

/unit (1)
  % (2)   $

/unit (1)
  % (2)  
Used vehicle gross profit $ 2,172 11.0 % $ 2,178 11.1 % $ 2,197 11.2 % $ 2,201 11.4 %
New vehicle gross profit $ 676 2.6 % $ 948 3.6 % $ 713 2.7 % $ 744 2.9 %
Wholesale vehicle gross profit $ 907 17.2 % $ 929 17.2 % $ 944 17.3 % $ 971 17.6 %
Other gross profit $ 436 73.3 % $ 476 73.1 % $ 432 75.9 % $ 482 76.3 %
Total gross profit $ 3,237 13.3 % $ 3,386 13.7 % $ 3,288 13.6 % $ 3,421 14.0 %
 

(1) Calculated as category gross profit divided by its respective units sold, except the other and total categories, which are divided by total retail units sold. (2) Calculated as a percentage of its respective sales or revenue.

Components of CAF Income and Other CAF Information
   

(In millions)
Three Months Ended Six Months Ended
August 31 August 31

2012
 

2011

2012
 

2011

$
 

% (1)

$
 

% (1)

$
 

% (1)

$
 

% (1)
Interest and fee income $ 123.5 9.4 $ 111.8 9.7 $ 243.8 9.4 $ 219.7 9.8
Interest expense   (23.9 )   (1.8 )     (26.2 )   (2.3 )     (49.0 )   (1.9 )     (54.7 )   (2.4 )
Total interest margin 99.6 7.6 85.6 7.5 194.8 7.5 165.0 7.3
Provision for loan losses   (12.9 )   (1.0 )     (10.8 )   (0.9 )     (22.1 )   (0.9 )     (9.8 )   (0.4 )

Total interest margin after provision for loan losses
86.7 6.6 74.8 6.5 172.7 6.7 155.2 6.9
Other (loss) gain (0.2 ) -- 0.4 -- (0.2 ) -- 1.1 --
Direct CAF expenses   (10.8 )   (0.8 )     (11.4 )   (1.0 )     (21.6 )   (0.8 )     (22.8 )   (1.0 )
CarMax Auto Finance income $ 75.7     5.8     $ 63.8     5.6     $ 150.9     5.8     $ 133.5     5.9  
 
Total average managed receivables $ 5,245.4 $ 4,596.6 $ 5,160.3 $ 4,492.2
Net loans originated $ 822.4 $ 771.9 $ 1,609.2 $ 1,461.2
 
Ending allowance for loan losses $ 49.5 $ 36.2 $ 49.5 $ 36.2
 
Warehouse facility information:
Ending funded receivables $ 1,066.0 $ 1,559.0 $ 1,066.0 $ 1,559.0
Ending unused capacity $ 534.0 $ 441.0 $ 534.0 $ 441.0
 

(1) Annualized percent of total average managed receivables.

Earnings Highlights
   

(In millions except per share data)
Three Months Ended Six Months Ended

 
August 31 August 31

2012
 

2011
 

Change

2012
 

2011
 

Change
Net earnings $ 111.6 $ 111.2 0.4% $ 232.4 $ 236.7 (1.8)%
Diluted weighted average shares outstanding

231.7

230.7

0.4%

231.7

230.5

0.6 %
Net earnings per diluted share $ 0.48 $ 0.48 -- $ 1.00 $ 1.03 (2.9)%
 

Planned Store Openings

We currently plan to open the following superstores within 12 months from August 31, 2012:
     
Television Market Planned
Location   Market   Status   Opening Date
Des Moines, Iowa Des Moines New Q3 Fiscal 2013
Oxnard, California Los Angeles Existing Q3 Fiscal 2013
Denver (Federal Heights), Colorado Denver New Q3 Fiscal 2013
Denver (Littleton), Colorado Denver New Q4 Fiscal 2013
Jacksonville, Florida Jacksonville Existing Q4 Fiscal 2013
Harrisonburg, Virginia Harrisonburg New Q1 Fiscal 2014
Columbus, Georgia Columbus New Q1 Fiscal 2014
Savannah, Georgia Savannah New Q1 Fiscal 2014
Houston, Texas Houston Existing Q2 Fiscal 2014
Sacramento, California Sacramento Existing Q2 Fiscal 2014
Frederick, Maryland Washington/Baltimore Existing Q2 Fiscal 2014
 

Conference Call Information

We will host a conference call for investors at 9:00 a.m. ET today, September 20, 2012. Domestic investors may access the call at 1-888-298-3261 (international callers dial 1-706-679-7457). The conference I.D. for both domestic and international callers is 89958527. A live webcast of the call will be available on our investor information home page at investor.carmax.com and at www.streetevents.com.

A webcast replay of the call will be available at investor.carmax.com beginning at approximately 1:00 p.m. ET on September 20, 2012, through December 19, 2012. A telephone replay also will be available through September 28, 2012, and may be accessed by dialing 1-855-859-2056 (international callers dial 1-404-537-3406). The conference I.D. for both domestic and international callers is 89958527.

Third Quarter Fiscal 2012 Earnings Release Date

We currently plan to release third quarter results on Thursday, December 20, 2012, before the opening of the New York Stock Exchange. We will host a conference call for investors at 9:00 a.m. ET on that date. Information on this conference call will be available on our investor information home page at investor.carmax.com in early December.

About CarMax

CarMax, a member of the Fortune 500 and the S&P 500 , and one of the Fortune “100 Best Companies to Work For,” for eight consecutive years, is the nation’s largest retailer of used cars. Headquartered in Richmond, Va., CarMax currently operates 113 used car superstores in 56 markets. The CarMax consumer offer is structured around four customer benefits: low, no-haggle prices; a broad selection; high quality vehicles; and customer-friendly service. During the twelve months ended February 29, 2012, the company retailed 408,080 used cars and sold 316,649 wholesale vehicles at our in-store auctions. For more information, access the CarMax website at www.carmax.com.

Forward-Looking Statements

We caution readers that the statements contained in this release about our future business plans, operations, opportunities or prospects, including without limitation any statements or factors regarding expected sales, margins or earnings, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based upon management’s current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results to differ materially from anticipated results. Among the factors that could cause actual results and outcomes to differ materially from those contained in the forward-looking statements are the following:
  • Changes in general or regional U.S. economic conditions.
  • Changes in the availability or cost of capital and working capital financing, including changes related to the asset-backed securitization market.
  • Changes in consumer credit availability related to our third-party financing providers.
  • Changes in the competitive landscape within our industry.
  • Significant changes in retail prices for used and new vehicles.
  • A reduction in the availability of or access to sources of inventory.
  • Factors related to the regulatory and legislative environment in which we operate.
  • Security breaches or other events that result in the misappropriation, loss or other unauthorized disclosure of confidential customer information.
  • Events that damage our reputation or harm the perception of the quality of our brand.
  • Factors related to geographic growth, including the inability to acquire or lease suitable real estate at favorable terms or to effectively manage our growth.
  • The loss of key employees from our store, regional or corporate management teams or a significant increase in labor costs.
  • The failure of key information systems.
  • The effect of new accounting requirements or changes to U.S. generally accepted accounting principles.
  • The effect of various litigation matters.
  • Adverse conditions affecting one or more automotive manufacturers or manufacturer recalls.
  • The occurrence of severe weather events.
  • Factors related to the seasonal fluctuations in our business.
  • Factors related to the geographic concentration of our superstores.
  • Acts of terrorism, the outbreak of war, or other significant national or international events.

For more details on factors that could affect expectations, see our Annual Report on Form 10-K for the fiscal year ended February 29, 2012, and our quarterly or current reports as filed with or furnished to the Securities and Exchange Commission. Our filings are publicly available on our investor information home page at investor.carmax.com. Requests for information may also be made to the Investor Relations Department by email to investor_relations@carmax.com or by calling 1-804-747-0422 ext. 4287. We disclaim any intent or obligation to update our forward-looking statements.
   

CARMAX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(UNAUDITED)
(In thousands except per share data)

 
 
Three Months Ended August 31   Six Months Ended August 31
  2012  

% (1)
 

2011 (2)
 

% (1)
  2012   % (1)  

2011 (2)
 

% (1)
           
Sales and operating revenues:
  Used vehicle sales $ 2,191,964 79.5 $ 2,014,983 77.9 $ 4,380,871 79.2 $ 4,086,523 77.6
New vehicle sales 61,393 2.2 46,853 1.8 116,850 2.1 108,739 2.1
Wholesale vehicle sales 437,050 15.8 457,870 17.7 904,845 16.4 935,664 17.8
Other sales and revenues   67,597   2.5     68,113     2.6     129,858   2.3     136,310     2.6
Net sales and operating revenues 2,758,004 100.0 2,587,819 100.0 5,532,424 100.0 5,267,236 100.0
Cost of sales   2,390,011   86.7     2,233,544     86.3     4,782,516   86.4     4,529,866     86.0
Gross profit 367,993 13.3 354,275 13.7 749,908 13.6 737,370 14.0
CarMax Auto Finance income 75,676 2.7 63,826 2.5 150,855 2.7 133,487 2.5

Selling, general and administrative expenses
254,674 9.2 229,887 8.9 508,277 9.2 471,542 9.0
Interest expense 8,152 0.3 8,464 0.3 16,295 0.3 17,004 0.3
Interest income   259   --     110     --     544   --     213     --
Earnings before income taxes 181,102 6.6 179,860 7.0 376,735 6.8 382,524 7.3
Income tax provision   69,466   2.5     68,706     2.7     144,353   2.6     145,870     2.8
Net earnings $ 111,636   4.0   $ 111,154     4.3   $ 232,382   4.2   $ 236,654     4.5
 
Weighted average common shares:
Basic 228,366 226,300 228,069 225,935
Diluted 231,696 230,681 231,749 230,479
 
Net earnings per share:
Basic $ 0.49 $ 0.49 $ 1.02 $ 1.05
Diluted $ 0.48 $ 0.48 $ 1.00 $ 1.03
 
(1) Calculated as a percentage of net sales and operating revenues and sums may not equal totals due to rounding.
(2) As disclosed in our Annual Report on Form 10-K for the fiscal year ended February 29, 2012, fiscal 2012 reflects the revisions to correct our accounting for sale-leaseback transactions.
 

CARMAX, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)
(In thousands)

 
  August 31   August 31   February 29
  2012    

2011 (1)

 
    2012

ASSETS
Current assets:
Cash and cash equivalents $ 458,567 $ 181,913 $ 442,658
Restricted cash from collections on auto loan receivables 204,731 154,944 204,314
Accounts receivable, net 70,426 64,849 86,434
Inventory 1,198,013 1,061,309 1,092,592
Deferred income taxes 7,705 11,042 9,938
Other current assets   22,106     21,762       17,512
 
Total current assets 1,961,548 1,495,819 1,853,448
 
Auto loan receivables, net 5,315,232 4,699,074 4,959,847
Property and equipment, net 1,347,313 1,223,723 1,278,722
Deferred income taxes 143,754 120,658 133,134
Other assets   103,593     97,863       106,392
 
TOTAL ASSETS $ 8,871,440   $ 7,637,137     $ 8,331,543
 

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 221,430 $ 243,473 $ 324,827
Accrued expenses and other current liabilities 116,167 110,262 128,973
Accrued income taxes 557 7,451 3,125
Short-term debt 1,068 1,333 943
Current portion of finance and capital lease obligations 15,325 13,152 14,108
Current portion of non-recourse notes payable   171,292     129,565       174,337
 
Total current liabilities 525,839 505,236 646,313
 
Finance and capital lease obligations, excluding current portion 345,628 360,989 353,566
Non-recourse notes payable, excluding current portion 4,909,702 4,169,037 4,509,752
Other liabilities   140,684     103,563       148,800
 
TOTAL LIABILITIES 5,921,853 5,138,825 5,658,431
 
TOTAL SHAREHOLDERS’ EQUITY   2,949,587     2,498,312       2,673,112
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 8,871,440   $ 7,637,137     $ 8,331,543
 

(1) As disclosed in our Annual Report on Form 10-K for the fiscal year ended February 29, 2012, fiscal 2012 reflects the revisions to correct our accounting for sale-leaseback transactions.
 

CARMAX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)
(In thousands)

 
  Six Months Ended August 31
2012  

2011 (1)

Operating Activities:
 
Net earnings $ 232,382 $ 236,654

Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization 46,442 39,454
Share-based compensation expense 30,206 26,303
Provision for loan losses 22,090 9,783
Loss on disposition of assets 446 1,195
Deferred income tax (benefit) provision (76 ) 3,608
Net decrease (increase) in:
Accounts receivable, net 16,008 54,748
Inventory (105,421 ) (11,832 )
Other current assets (4,605 ) 11,648
Auto loan receivables, net (377,475 ) (388,282 )
Other assets 971 (1,969 )
Net decrease in:

Accounts payable, accrued expenses and other current liabilities and accrued income taxes
(132,469 ) (42,095 )
Other liabilities   (14,431 )     (15,139 )
Net cash used in operating activities   (285,932 )     (75,924 )
 

Investing Activities:
Capital expenditures (103,918 ) (80,225 )

(Increase) decrease in restricted cash from collectionson auto loan receivables
(417 ) 6,108
Increase in restricted cash in reserve accounts (3,151 ) (4,562 )
Release of restricted cash from reserve accounts 7,992 6,997
Purchases of money market securities, net (2,104 ) (291 )
Purchases of investments available-for-sale (1,227 ) (2,164 )
Sales of investments available-for-sale   318       --  
Net cash used in investing activities   (102,507 )     (74,137 )
 

Financing Activities:
Increase in short-term debt, net 125 331
Payments on finance and capital lease obligations (6,721 ) (6,093 )
Issuances of non-recourse notes payable 2,345,000 1,869,000
Payments on non-recourse notes payable (1,948,095 ) (1,584,059 )
Equity issuances, net 4,209 4,362
Excess tax benefits from share-based payment arrangements   9,830       7,312  
Net cash provided by financing activities   404,348       290,853  
 
Increase in cash and cash equivalents 15,909 140,792
Cash and cash equivalents at beginning of year   442,658       41,121  
Cash and cash equivalents at end of period $ 458,567     $ 181,913  
 

(1) As disclosed in our Annual Report on Form 10-K for the fiscal year ended February 29, 2012, fiscal 2012 reflects the revisions to correct our accounting for sale-leaseback transactions.

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