CarMax Reports Record First Quarter Results
RICHMOND, Va., June 19 -- CarMax, Inc. today reported record results for the first quarter ended May 31, 2006.
-- Total sales increased 19% to $1.89 billion from $1.58 billion in the
first quarter of last year.
-- Comparable store used unit sales rose 6% for the quarter.
-- Total used unit sales grew 14% in the first quarter.
-- Net earnings increased 54% to $56.8 million, or 53 cents per diluted
share, compared with $37.0 million, or 35 cents per diluted share,
earned in the first quarter of fiscal 2006.
* Earnings for the current year's quarter included stock-based
compensation costs of $4.3 million net of tax effects, or 4 cents per
share, resulting from the adoption of Statement of Financial
Accounting Standards No. 123R. Results for the first quarter of
fiscal 2006 have been restated to reflect additional stock-based
compensation costs of $2.8 million, net of tax effects, or 3 cents per
share, related to this accounting change.
* Earnings for the current year's quarter included a benefit of 3 cents
per share from CarMax Auto Finance favorable items, while last year's
first quarter included CarMax Auto Finance favorable items totaling 4
cents per share.
Sales Components
(In millions) Three Months Ended May 31 (1)
2006 2005 Change
Used vehicle sales $1,461.1 $1,203.8 21.4 %
New vehicle sales 118.4 134.1 (11.7)%
Wholesale vehicle sales 247.3 189.5 30.5 %
Other sales and revenues:
Extended service plan revenues 28.8 24.5 17.4 %
Service department sales 23.2 22.6 2.3 %
Third-party finance fees, net 6.4 3.8 67.5 %
Total other sales and revenues 58.3 51.0 14.4 %
Net sales and operating revenues $1,885.1 $1,578.4 19.4 %
(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.
Retail Vehicle Sales Changes
Three Months Ended May 31
2006 2005
Comparable store vehicle sales:
Used vehicle units 6 % 6 %
New vehicle units (11)% 0 %
Total 4 % 5 %
Used vehicle dollars 13 % 9 %
New vehicle dollars (12)% 2 %
Total 11 % 8 %
Total vehicle sales:
Used vehicle units 14 % 19 %
New vehicle units (12)% (4)%
Total 12 % 17 %
Used vehicle dollars 21 % 22 %
New vehicle dollars (12)% (2)%
Total 18 % 19 %
Retail Vehicle Sales Mix
Three Months Ended May 31
2006 2005
Vehicle units:
Used vehicles 94% 93%
New vehicles 6 7
Total 100% 100%
Vehicle dollars:
Used vehicles 92% 90%
New vehicles 8 10
Total 100% 100%
Unit Sales
Three Months Ended May 31
2006 2005
Used vehicles 84,266 74,143
New vehicles 4,947 5,604
Wholesale vehicles 53,786 44,630
Average Selling Prices
Three Months Ended May 31
2006 2005
Used vehicles $17,167 $16,117
New vehicles $23,783 $23,763
Wholesale vehicles $4,483 $4,160
Earnings Highlights
(In millions except per share data) Three Months Ended May 31
2006 2005(2) Change
Net earnings $56.8 $37.0 53.5%
Diluted weighted average
shares outstanding 107.1 106.0 1.0%
Net earnings per share(1) $0.53 $0.35 51.4%
(1) Per share amounts are presented on a fully diluted basis.
(2) Fiscal 2006 results have been restated for the adoption of SFAS 123R.
Selected Operating Ratios
(In millions) Three Months Ended May 31
2006 % (1) 2005(2) % (1)
Net sales and operating revenues $1,885.1 100.0% $1,578.4 100.0%
Gross profit $248.3 13.2% $197.8 12.5%
CarMax Auto Finance income $32.4 1.7% $27.1 1.7%
Selling, general, and
administrative expenses $187.0 9.9% $163.8 10.4%
Operating profit (EBIT)(3) $93.7 5.0% $61.1 3.9%
Net earnings $56.8 3.0% $37.0 2.3%
(1) Calculated as the ratio of the applicable amount to net sales and
operating revenues.
(2) Fiscal 2006 results have been restated for the adoption of SFAS 123R.
(3) Operating profit equals earnings before interest and income taxes.
Gross Profit
Three Months Ended May 31
2006 2005
$/unit(1) % (2) $/unit(1) % (2)
Used vehicle gross profit $1,924 11.1% $1,801 11.1%
New vehicle gross profit $1,215 5.1% $804 3.4%
Wholesale vehicle gross profit $723 15.7% $631 14.9%
Other gross profit $462 70.7% $396 61.9%
Total gross profit $2,783 13.2% $2,480 12.5%
(1) Calculated as category gross profit divided by its respective units
sold, except the other and the total categories, which are divided by
total retail units sold.
(2) Calculated as a percentage of its respective sales or revenue.
First Quarter Business Performance Review
Sales. "We are very pleased with our first quarter sales performance," said Austin Ligon, president and chief executive officer. "We benefited from stronger traffic and continued excellent execution by our store teams. Also, we did not see a repeat of the unusually volatile sales patterns that we experienced in the first quarter of the two previous fiscal years.
"Used unit comps of 6% were modestly ahead of our expectations," said Ligon. "As anticipated, our curtailment of subprime sales in certain states, which adversely affected used unit comp sales by 3 percentage points, was largely offset by incremental sales financed by two new nonprime finance providers added in the second half of fiscal 2006.
"Wholesale unit sales climbed 21%, reflecting the expansion of our store base and a strong increase in appraisal traffic," said Ligon. "Our average wholesale selling prices were up 8% compared with last year's first quarter. Wholesale prices moderated over the course of this year's first quarter, reflecting a more normal seasonal pattern compared with the unusually sharp rise in wholesale prices experienced in the first quarter of last year.
"New vehicle unit sales declined, reflecting the softer new car industry trends, particularly for the domestic manufacturers that we represent, and our strategic decision to increase targeted gross margin dollars per unit on new vehicles," said Ligon. "Other sales and revenues increased, as extended service plan sales benefited from the growth in used car sales and third-party finance fees benefited from the decline in subprime-financed sales."
Margins. "Our used vehicle profits benefited from our steady, strong sales performance and some moderation in used vehicle wholesale pricing," said Ligon. "Lower wholesale prices favorably affect our used vehicle acquisition costs and often allow our retail used car sales and profits to expand. As expected, our wholesale gross profit per unit was also higher than last year's first quarter, reflecting the lessons we learned in the particularly difficult wholesale environments of the last two years. We have continued to refine our wholesale buying process, including the sales consultant's delivery of the offer to the consumer. Wholesale gross profit per unit was lower than the preceding quarter, however, as a result of the normal seasonal moderation in wholesale pricing."
CarMax Auto Finance. "CAF income increased 20% compared with last year's first quarter," said Ligon. "The increase was primarily the result of the growth in total sales and managed receivables, an increase in CAF's loan penetration, and an increase in the average amount financed. This year's first quarter CAF income included 3 cents per share of favorable items, while last year's CAF income included 4 cents per share of favorable items. The current quarter favorable items primarily related to lowering the loss rate assumptions on previously securitized receivables, resulting from continued favorable loss experience."
The gain on loans originated and sold as a percent of loans sold was 3.4% in this year's quarter, compared with 3.3% in the first quarter of fiscal 2006. The gain spread was slightly lower than expected, as increases in our funding costs continued to modestly outpace increases in consumer rates. The reported gain as a percent of loans sold, including the benefit of the favorable items, was 4.4% in this year's first quarter and 4.3% in last year's first quarter.
SG&A. "We are particularly pleased with the leverage generated by our strong sales performance," said Ligon. "The SG&A ratio declined 50 basis points to 9.9% from 10.4% in last year's first quarter, despite absorbing higher stock-based compensation costs and additional costs related to moving our data center. The SG&A ratio was slightly lower than expected as a result of shifts in the timing of certain planned spending, which we expect to incur later in the year."
CarMax adopted Statement of Financial Accounting Standards (SFAS) No. 123R, which modified SFAS No. 123, "Accounting for Stock-Based Compensation," in the first quarter of fiscal 2007. SFAS 123R requires that all stock-based compensation, including grants of employee stock options, be accounted for using a fair-value-based method and included in the company's results of operations. As permitted under the transition rules, SFAS 123R was adopted on a modified retrospective basis, and results for prior years were restated, enhancing comparability. In connection with the adoption of SFAS 123R, CarMax recognized $6.9 million of stock-based compensation expense in the first quarter of fiscal 2007, including $6.4 million reflected in selling, general, and administrative costs. Results for the first quarter of fiscal 2006 were restated to reflect an additional $4.5 million of stock-based compensation, all of which was included in selling, general, and administrative expense.
Earnings. "While our first quarter used vehicle unit sales growth was slightly higher than we expected, earnings came in considerably higher than our expectations," said Ligon. "The strength of our used vehicle sales and gross profit dollars per unit and CAF's continuing favorable loss performance were the primary factors contributing to our stronger-than-expected earnings performance."
Store Openings
CarMax opened four superstores during the first quarter of fiscal 2007. The company entered the Hartford, Conn., market with a standard superstore; the Columbus, Ohio, market with a standard and a satellite superstore; and the Oklahoma City, Okla., market with a standard superstore. The opening in Hartford represented the company's first store in the Northeast. CarMax plans to open an additional seven superstores during the second half of the fiscal year. Late in the first quarter, the company also opened its first CarMax Car Buying Center, which focuses on appraisals and vehicles purchases. This test site in the Atlanta market is part of a long-term effort to increase appraisal traffic and retail vehicle sourcing self-sufficiency.
Fiscal 2007 Expectations
"For the year, we continue to expect comparable store used unit growth in the range of 2 to 8%," said Ligon. "Although our first quarter earnings were significantly stronger than we expected, we think it is premature to change our fiscal year earnings expectations so early in the year. If sales trends were to continue as we have seen them in the first quarter, we would expect to hit the upper end of the $1.25 to $1.47 range. However, based on the volatility we've seen in recent years, we are not willing to adjust our estimate until we are further into the fiscal year."
Second Quarter Fiscal 2007 Earnings Release Date
CarMax currently plans to release second quarter sales and earnings results on Wednesday, September 20, 2006, before the opening of the New York Stock Exchange. The company will host a conference call for investors at 9:00 a.m. Eastern time on that date. Information on this conference call will be available on the company's investor information home page at http://investor.carmax.com/ in early September.
About CarMax
CarMax, a Fortune 500 company, and one of the Fortune 2006 "100 Best Companies to Work For," is the nation's largest retailer of used cars. Headquartered in Richmond, Va., CarMax currently operates 71 used car superstores in 34 markets. CarMax also operates seven new car franchises, all of which are integrated or co-located with its used car superstores. During the twelve month period ended May 31, 2006, the company sold 300,011 used cars, which is 94% of the total 320,255 vehicles the company retailed during that period. For more information, access the CarMax website at http://www.carmax.com/.
CARMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(In thousands except per share data)
Three Months Ended May 31
Restated
2006 %(1) 2005 %(1)
Sales and operating revenues:
Used vehicle sales $1,461,120 77.5 $1,203,805 76.3
New vehicle sales 118,408 6.3 134,093 8.5
Wholesale vehicle sales 247,296 13.1 189,492 12.0
Other sales and revenues 58,315 3.1 50,970 3.2
Net sales and operating revenues 1,885,139 100.0 1,578,360 100.0
Cost of sales 1,636,884 86.8 1,380,601 87.5
Gross profit 248,255 13.2 197,759 12.5
CarMax Auto Finance income 32,394 1.7 27,071 1.7
Selling, general, and
administrative expenses 186,966 9.9 163,765 10.4
Interest expense 1,947 0.1 1,194 0.1
Interest income 267 - 135 -
Earnings before income taxes 92,003 4.9 60,006 3.8
Provision for income taxes 35,227 1.9 23,026 1.5
Net earnings $56,776 3.0 $36,980 2.3
Weighted average common shares:
Basic 105,265 104,387
Diluted 107,056 105,982
Net earnings per share:
Basic $0.54 $0.35
Diluted $0.53 $0.35
(1) Percents are calculated as a percentage of net sales and operating
revenues and may not equal totals due to rounding.
CARMAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(In thousands)
Restated Restated
May 31 May 31 February 28
2006 2005 2006
ASSETS
Current assets:
Cash and cash equivalents $26,043 $21,543 $21,759
Accounts receivable, net 70,400 79,970 76,621
Automobile loan receivables
held for sale 11,834 35,559 4,139
Retained interests in
securitized receivables 167,899 144,363 158,308
Inventory 738,705 583,289 669,700
Prepaid expenses and other
current assets 12,123 4,975 11,211
Total current assets 1,027,004 869,699 941,738
Property and equipment, net 516,305 439,091 499,298
Deferred income taxes 28,605 14,476 24,576
Other assets 44,218 33,707 44,000
TOTAL ASSETS $1,616,132 $1,356,973 $1,509,612
LIABILITIES AND SHAREHOLDERS' equity
Current liabilities:
Accounts payable $224,301 $177,952 $188,614
Accrued expenses and other
current liabilities 77,050 65,035 85,316
Accrued income taxes 53,033 25,408 5,598
Deferred income taxes 8,821 24,602 23,562
Short-term debt 1,108 41,428 463
Current portion of long-term debt 30,781 100,351 59,762
Total current liabilities 395,094 434,776 363,315
Long-term debt, excluding
current portion 134,534 28,315 134,787
Deferred revenue and
other liabilities 32,937 30,325 31,407
Deferred income taxes - 4,315 -
TOTAL LIABILITIES 562,565 497,731 529,509
SHAREHOLDERS' EQUITY 1,053,567 859,242 980,103
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,616,132 $1,356,973 $1,509,612
CARMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended
May 31
Restated
2006 2005
Operating Activities:
Net earnings $56,776 $36,980
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 8,075 5,926
Stock-based compensation expense 6,686 4,311
(Gain) loss on disposition of assets (2) 12
Deferred income taxes benefit (18,770) (3,633)
Changes in operating assets and liabilities: -
Decrease (increase) in accounts receivable, net 6,221 (3,803)
Increase in automobile loan receivables
held for sale, net (7,695) (13,407)
(Increase) decrease in retained interests
in securitized receivables (9,591) 3,600
Increase in inventory (69,005) (6,722)
(Increase) decrease in prepaid
expenses and other current assets (912) 8,033
(Increase) decrease in other assets (218) 24
Increase in accounts payable, accrued
expenses and other current liabilities,
and accrued income taxes 74,990 31,467
Increase in deferred revenue
and other liabilities 1,530 688
Net cash provided by operating activities 48,085 63,476
Investing Activities:
Purchases of property and equipment (25,139) (55,056)
Proceeds from sales of assets 59 16,705
Net cash used in investing activities (25,080) (38,351)
Financing Activities:
Increase (decrease) in short-term debt, net 645 (23,769)
Payments on long-term debt (29,234) (83)
Equity issuances, net 6,313 1,979
Excess tax benefits from stock-based
payment arrangements 3,555 1,167
Net cash used in financing activities (18,721) (20,706)
Increase in cash and cash equivalents 4,284 4,419
Cash and cash equivalents at beginning of year 21,759 17,124
Cash and cash equivalents at end of period $26,043 $21,543
