EX-99.1 2 exhibit991.htm EXHIBIT 99.1 FY09 1ST QTR EARNINGS RELEASE 061808 exhibit991.htm









CARMAX REPORTS FIRST QUARTER RESULTS


Richmond, Va., June 18, 2008 – CarMax, Inc. (NYSE:KMX) today reported results for the first quarter ended May 31, 2008.

§  
Total sales increased 3% to $2.21 billion from $2.15 billion in the first quarter of last year.  This increase was led by a 6% increase in used vehicle revenues.

§  
Comparable store used unit sales rose 1% for the first quarter.

§  
Total used unit sales grew 10% for the first quarter.

§  
Net earnings decreased 55% to $29.6 million, or $0.13 per diluted share, compared with $65.4 million, or $0.30 per diluted share, earned in the first quarter of fiscal 2008.

o  
Earnings for the first quarter of fiscal 2009 were reduced by $0.06 per share for higher funding costs related to CarMax Auto Finance (CAF) loans originated in prior fiscal years and by $0.02 per share for accruals related to litigation.
 
First Quarter Business Performance Review

Sales.  “The slowdown in the economy, the dramatic rise in gasoline and food costs and the related impact on consumer spending adversely affected our first quarter performance,” said Tom Folliard, president and chief executive officer.  For the first time in more than two years, we experienced a modest decline in customer traffic in our stores.  Additionally, credit availability from our third-party nonprime lenders declined slightly during the quarter.  However, solid execution by our store teams resulted in a small improvement in our conversion rate, and this, together with the benefit of an extra Saturday in the quarter, contributed to the 1% increase in comparable store used unit sales.  Despite the slower-than-expected sales, our data indicates that we continued to gain market share in the late-model used vehicle market.

Wholesale unit sales declined 2%, reflecting a decrease in both our appraisal traffic and our appraisal buy rate (defined as appraisal purchases as a percent of vehicles appraised).  We believe that the significant depreciation in wholesale market values for SUVs, trucks and other less fuel-efficient vehicles contributed to the decrease in the buy rate.  During the quarter, wholesale industry prices for SUVs and trucks declined nearly 25%, which is approximately four times the normal depreciation expected over this period and well in excess of the depreciation expected over a full year.  “This is the most rapid depreciation of any vehicle segment that we have experienced in our 15 years,” said Folliard.
 
 
 
 
 

 
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New vehicle unit sales declined 26%, reflecting the combination of the soft new car sales environment and the sale of our Orlando Chrysler Jeep Dodge franchise in the second quarter of fiscal 2008.  Other sales and revenues increased 4%.  Third-party finance fees, a component of other sales and revenues, declined 7%, primarily reflecting a slight increase in the percentage of our sales financed by the third-party subprime provider.  We record the discount at which this provider purchases loans as an offset to finance fee revenues received from other providers.

Gross Profit. The total gross profit per unit declined by $237 to $2,564 compared with $2,801 in the first quarter of fiscal 2008.  The majority of the decline resulted from the $192 per unit decrease in gross profit per used vehicle.  Several factors contributed to this decrease.  Our used vehicle gross profit per unit was pressured by the slowing sales environment.  The decline in appraisal traffic and the buy rate also adversely affected our gross profit per unit, as vehicles purchased directly from consumers generate more profit compared with vehicles sourced at auction.  The rapid decline in the wholesale market values for SUVs and trucks resulted in significant margin pressure on this segment of our inventory, and it led us to take supplemental pricing markdowns for these vehicles, which further pressured margins.  Compared with the fourth quarter of fiscal 2008, however, we achieved a $33 per unit improvement in total gross profit.

Wholesale gross profit per unit declined slightly, to $784 from $800 in the first quarter of fiscal 2008.  We continued to experience strong dealer-to-car ratios at our auctions, with the normal price competition among bidders contributing to the continued solid wholesale gross profit performance.

CarMax Auto Finance.  CAF income declined to $9.8 million from $37.1 million in the first quarter of fiscal 2008, reflecting the continuing effects of the disruption in global credit markets and the more challenging economic environment.  The gain percentage, which represents the gain on the sale of loans originated and sold as a percentage of loans originated and sold, decreased to 2.7% from 4.2% in the prior year’s first quarter.  The decrease reflected a combination of factors, including substantially higher funding costs in the warehouse facility, which we have been unable to offset through higher consumer rates in the current environment; an increase in the discount rate assumption used to calculate the gain on the sale of loans to 17% from 12% in the first quarter of last year; and a higher loss assumption on current quarter originations compared with the assumption used in the prior year’s quarter.

We are in the process of renewing our warehouse facility agreement, which expires in July.  Due to conditions in the credit markets, the funding cost in the facility will increase upon its renewal, and it will align more closely with the current funding costs in the public securitization market.  We have reflected these higher funding costs in the gain on sale recognized on all loans originated and sold in the first quarter of fiscal 2009.  The higher warehouse facility funding costs are expected to reduce the adjustments that may otherwise be necessary at the time the loans are refinanced in a public securitization, generally one or two quarters later.  We had originally expected some of these higher costs to be incurred when the public securitizations were completed and the warehouse facility was renewed in subsequent quarters.

CAF income for the first quarter of fiscal 2009 was reduced by $20.0 million for adjustments primarily related to loans originated during prior fiscal years.  This amount includes the impact of the increase in the funding costs for $750 million of loans that were refinanced from our warehouse facility in a private securitization completed in May 2008.  It also includes the applicable incremental warehouse facility funding costs applied to the remaining $95 million of loans that were originated in previous fiscal years and that were still in the warehouse facility at the end of the first quarter.  This $20.0 million of higher funding costs exceeded the $14 million that we had built into our fiscal 2009 expectations due to a further increase in funding costs spreads in the securitization markets.

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In the first quarter of fiscal 2009, we made no material changes to our loss assumptions on previously securitized receivables.

SG&A.  Selling, general and administrative expenses were 11.0% of total revenues in the first quarter of fiscal 2009 compared with 10.0% in the prior year’s first quarter.  The majority of this increase was expected, and it largely resulted from the combination of the modest level of comparable store used unit sales growth, our continued commitment to our store growth plan and the decline in the used vehicle average selling price.  In addition, in the first quarter of fiscal 2009 we accrued costs related to litigation that reduced net earnings by $0.02 per share.

Earnings and Earnings Per Share.  First quarter net earnings declined to $29.6 million, or $0.13 per share, from $65.4 million, or $0.30 per share, in fiscal 2008.  “The decrease in earnings was primarily related to the reductions in gross profit per unit and CAF income, as well as the lower-than-expected sales, all of which we believe were the direct result of external conditions,” said Folliard.  “We are encouraged, however, by our continued ability to execute in our stores and to gain market share, regardless of the external environment.”

Superstore Openings.  During the first quarter, we opened six used car superstores, entering the Phoenix, Arizona; Charleston, South Carolina; and Huntsville, Alabama, markets and expanding our presence in the San Antonio, Texas, and Sacramento, California, markets.  Despite the current weak economic conditions, we remain committed to executing our store growth plan for the long-term benefit of customers and shareholders, and we intend to open an additional eight used car superstores during the remainder of fiscal 2009.

We also expanded our car-buying center test with an opening in Dallas, Texas, in April and an opening in Baltimore, Maryland, shortly after the end of the first quarter.  We now have a total of five car-buying centers, at which we conduct appraisals and purchase, but do not sell, vehicles.  These centers represent a controlled concept test to determine whether we can achieve a meaningful increase in the percentage of vehicles sourced directly from consumers.  We will evaluate the performance of these five centers before deciding whether to open additional centers in future years.


Supplemental Financial Information

Sales Components

(In millions)
  
Three Months Ended May 31 (1)
  
   
2008
    
2007
    
Change
  
Used vehicle sales                                                                    
   $ 1,816.8     $ 1,708.4       6.3 %
New vehicle sales                                                                    
     82.1       112.6       (27.1 )%
Wholesale vehicle sales                                                                    
     242.3       261.2       (7.2 )%
Other sales and revenues:
                        
Extended service plan revenues                                                              
     36.5       33.9       7.8 %
Service department sales                                                              
     24.5       24.1       1.4 %
Third-party finance fees, net                                                              
     6.5       7.0       (6.6 )%
Total other sales and revenues                                                                    
     67.5       65.0       3.9 %
Net sales and operating revenues                                                                    
   $ 2,208.8     $ 2,147.1       2.9 %

(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.


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Retail Vehicle Sales Changes
   
Three Months Ended May 31
  
   
2008
       2007  
Comparable store vehicle sales:              
Used vehicle units      
     1 %     6 %
New vehicle units               
     (18 )%     (5 )%
Total                 
     0 %     5 %
                 
Used vehicle dollars                                                                            
     (3 )%     8 %
New vehicle dollars                                                                            
     (20 )%     (5 )%
Total                                                                            
     (4 )%     7 %
                 
Total vehicle sales:
                
Used vehicle units                                                                            
     10 %     15 %
New vehicle units                                                                            
     (26 )%     (5 )%
Total                                                                            
     9 %     14 %
                 
Used vehicle dollars                                                                            
     6 %     17 %
New vehicle dollars                                                                            
     (27 )%     (5 )%
Total                                                                            
     4 %     15 %


Retail Vehicle Sales Mix
   
Three Months Ended May 31
  
   
2008
    
2007
  
Vehicle units:
            
Used vehicles                                                                             
     97 %     95 %
New vehicles                                                                             
     3       5  
Total                                                                             
     100 %     100 %
                 
Vehicle dollars:
                
Used vehicles                                                                             
     96 %     94 %
New vehicles                                                                             
     4       6  
Total                                                                             
     100 %     100 %


Unit Sales
   
Three Months Ended May 31
  
   
2008
    
2007
  
Used vehicles                                                                                    
     106,747       96,766  
New vehicles                                                                                    
     3,515       4,720  
Wholesale vehicles                                                                                    
     56,329       57,714  


Average Selling Prices
   
Three Months Ended May 31
  
   
2008
    
2007
  
Used vehicles                                                                                     
   $ 16,852     $ 17,480  
New vehicles                                                                                     
   $ 23,211     $ 23,717  
Wholesale vehicles                                                                                     
   $ 4,184     $ 4,413  


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Selected Operating Ratios

(In millions)
  
Three Months Ended May 31
  
   
2008
       % (1)  
2007
       % (1)
                             
Net sales and operating revenues                                                            
   $ 2,208.8       100.0 %   $ 2,147.1       100.0 %
Gross profit                                                            
   $ 282.7       12.8 %   $ 284.2       13.2 %
CarMax Auto Finance income                                                            
   $ 9.8       0.4 %   $ 37.1       1.7 %
Selling, general, and administrative expenses
   $ 243.0       11.0 %   $ 213.8       10.0 %
Operating profit (EBIT) (2)                                                            
   $ 49.5       2.2 %   $ 107.5       5.0 %
Net earnings                                                            
   $ 29.6       1.3 %   $ 65.4       3.0 %

(1)  Calculated as the ratio of the applicable amount to net sales and operating revenues.
(2)  Operating profit equals earnings before interest and income taxes.

Gross Profit
   
Three Months Ended May 31
  
   
2008
    
2007
  
   
$/unit (1)
       % (2)  
$/unit (1)
       % (2)
Used vehicle gross profit                                                            
   $ 1,742       10.2 %   $ 1,934       11.0 %
New vehicle gross profit                                                            
   $ 860       3.7 %   $ 1,008       4.2 %
Wholesale vehicle gross profit                                                            
   $ 784       18.2 %   $ 800       17.7 %
Other gross profit                                                            
   $ 449       73.4 %   $ 455       71.0 %
Total gross profit                                                            
   $ 2,564       12.8 %   $ 2,801       13.2 %

(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.

CAF Income

(In millions)
  
Three Months Ended May 31
  
   
2008
    
2007
  
Gain on sales of loans originated and sold                                                                                              
   $ 17.1     $ 27.4  
Other (losses) gains                                                                                              
     (20.0 )     0.4  
Total (loss) gain                                                                                         
     (2.9 )     27.8  
Servicing fee and interest income                                                                                              
     21.3       16.7  
Direct CAF expenses                                                                                              
     8.6       7.4  
CarMax Auto Finance income                                                                                              
   $ 9.8     $ 37.1  
                 
Loans originated and sold                                                                                              
   $ 641.6     $ 647.0  
Gain on sales of loans originated and sold as a  percentage of loans originated and sold    
     2.7 %     4.2 %


Earnings Highlights

(In millions except per share data)
  
Three Months Ended May 31
  
   
2008
    
2007
    
Change
  
Net earnings                                                                            
   $ 29.6     $ 65.4       (54.8 )%
Diluted weighted average shares outstanding                                                                            
     221.3       220.1       0.6 %
Net earnings per share                                                                            
   $ 0.13     $ 0.30       (56.7 )%


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Fiscal 2009 Expectations

“Our first quarter sales were modestly below expectations and earnings were disappointing,” said Folliard.  “Sales slowed through the quarter, and since Memorial Day weekend, traffic and sales weakened further.  If the current trends persist, results for the full year could be significantly below the bottom of our original earnings guidance range.  As a result of the combination of the uncertain economic conditions, rising fuel and food costs and weak consumer sentiment, exacerbated by the rapid depreciation in SUVs and trucks, we are temporarily suspending guidance on comparable store sales and earnings for fiscal 2009.  We hope to provide updated guidance later in the year, when there is a more stable outlook for the economy and we have better visibility on trends.

“While this is clearly a difficult environment for many big-ticket retailers, we remain confident in our differentiated business model, our ability to consistently gain market share, and our ability to satisfy customers, all of which support our continued store growth plan,” said Folliard.

Conference Call Information

We will host a conference call for investors at 9:00 a.m. ET today, June 18, 2008.  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 26912950.  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 June 18, 2008, through September 19, 2008.  A telephone replay also will be available through June 25, 2008, and may be accessed by dialing 1-800-642-1687 (international callers dial 1-706-645-9291).  The conference I.D. for both domestic and international callers is 26912950.

Second Quarter Fiscal 2009 Earnings Release Date

We currently plan to release second quarter sales and earnings results on Friday, September 19, 2008, 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 September.

About CarMax

CarMax, a Fortune 500 company, and one of the Fortune 2008 “100 Best Companies to Work For,” is the nation’s largest retailer of used cars.  Headquartered in Richmond, Va., we currently operate 97 used car superstores in 45 markets.  The CarMax consumer offer is structured around four core equities: low, no-haggle prices; a broad selection; high quality vehicles; and customer-friendly service.  During the fiscal year ended February 29, 2008, we retailed 377,244 used vehicles and sold 222,406 wholesale vehicles at our in-store auctions.  For more information, access the CarMax website at www.carmax.com.

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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 the general U.S. or regional U.S. economy.
·  
Changes in the availability or cost of capital and working capital financing, including the availability or cost of long-term financing to support our geographic growth and the availability or cost of financing auto loan receivables.
·  
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 environment in which we operate.
·  
The loss of key employees from our store, regional or corporate management teams.
·  
The failure of key information systems.
·  
The effect of new accounting requirements or changes to U.S. generally accepted accounting principles.
·  
Security breaches or other events that result in the misappropriation, loss or other unauthorized disclosure of confidential customer information.
·  
The effect of various litigation matters.
·  
Our inability to acquire or lease suitable real estate at favorable terms.
·  
The occurrence of severe weather events.
·  
Factors related to the seasonal fluctuations in our business.
·  
Factors related to the geographic concentration of our superstores.
·  
The occurrence of certain other material 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, 2008, 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. 4489.  We disclaim any intent or obligation to update our forward-looking statements.


Contacts:

Investors and Financial Media:
Katharine Kenny, Assistant Vice President, Investor Relations, (804) 935-4591
Celeste Gunter, Manager, Investor Relations, (804) 935-4597

General Media:
Lisa Van Riper, Assistant Vice President, Public Affairs, (804) 935-4594
Trina Lee, Director, Public Relations (804) 747-0422, ext. 4197


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CARMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(In thousands except per share data)


   
Three Months Ended May 31
  
   
2008
       % (1)  
2007
       % (1)
                             
Sales and operating revenues:
                            
Used vehicle sales                                                     
   $ 1,816,848       82.3     $ 1,708,391       79.6  
New vehicle sales                                                     
     82,070       3.7       112,615       5.2  
Wholesale vehicle sales                                                     
     242,327       11.0       261,152       12.2  
Other sales and revenues                                                     
     67,518       3.1       64,976       3.0  
Net sales and operating revenues                                                           
     2,208,763       100.0       2,147,134       100.0  
Cost of sales                                                           
     1,926,049       87.2       1,862,913       86.8  
Gross profit                                                           
     282,714       12.8       284,221       13.2  
CarMax Auto Finance income                                                           
     9,819       0.4       37,068       1.7  
Selling, general and administrative expenses
     242,984       11.0       213,814       10.0  
Interest expense                                                           
     2,058       0.1       2,016       0.1  
Interest income                                                           
     264       --       378       --  
Earnings before income taxes                                                           
     47,755       2.2       105,837       4.9  
Provision for income taxes                                                           
     18,197       0.8       40,482       1.9  
Net earnings                                                           
   $ 29,558       1.3     $ 65,355       3.0  
                                 
Weighted average common shares:
                                
Basic                                                     
     217,094               215,293          
Diluted                                                     
     221,346               220,130          
                                 
Net earnings per share:
                                
Basic                                                     
   $ 0.14             $ 0.30          
Diluted                                                     
   $ 0.13             $ 0.30          
                                 
                                 
(1) Percents are calculated as a percentage of net sales and operating revenues and may not equal totals due to rounding.
  
                                 
                                 


 
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CARMAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 (In thousands)


   
May 31
2008
    
May 31
2007
    
February 29
2008
  
ASSETS
                  
Current assets:
                  
Cash and cash equivalents                                                                        
   $ 11,891     $ 22,029     $ 12,965  
Accounts receivable, net                                                                        
     75,393       68,367       73,228  
Auto loan receivables held for sale                                                                        
     10,009       1,410       4,984  
Retained interest in securitized receivables                                                                        
     268,613       221,894       270,761  
Inventory                                                                        
     933,957       863,511       975,777  
Prepaid expenses and other current assets                                                                        
     23,324       11,116       19,210  
                         
Total current assets                                                                        
     1,323,187       1,188,327       1,356,925  
                         
Property and equipment, net                                                                        
     926,348       702,431       862,497  
Deferred income taxes                                                                        
     79,352       43,694       67,066  
Other assets                                                                        
     47,186       42,698       46,673  
                         
TOTAL ASSETS                                                                        
   $ 2,376,073     $ 1,977,150     $ 2,333,161  
                         
LIABILITIES AND SHAREHOLDERS’ EQUITY
                        
Current liabilities:
                        
Accounts payable                                                                        
   $ 274,560     $ 249,327     $ 306,013  
Accrued expenses and other current liabilities                                                                        
     70,393       65,069       58,054  
Accrued income taxes                                                                        
     28,943       43,235       7,569  
Deferred income taxes                                                                        
     15,804       10,367       17,710  
Short-term debt                                                                        
     8,403       3,680       21,017  
Current portion of long-term debt                                                                        
     79,988       131,264       79,661  
                         
Total current liabilities                                                                        
     478,091       502,942       490,024  
                         
Long-term debt, excluding current portion                                                                        
     227,017       33,469       227,153  
Deferred revenue and other liabilities                                                                        
     134,124       112,370       127,058  
                         
TOTAL LIABILITIES                                                                        
     839,232       648,781       844,235  
                         
TOTAL SHAREHOLDERS’ EQUITY                                                                        
     1,536,841       1,328,369       1,488,926  
                         
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
   $ 2,376,073     $ 1,977,150     $ 2,333,161  
                         
                         




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CARMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 (In thousands)


   
Three Months Ended May 31
  
   
2008
    
2007
  
             
Operating Activities:
            
Net earnings                                                                             
   $ 29,558     $ 65,355  
Adjustments to reconcile net earnings to net cash provided
                
    by operating activities:
                
    Depreciation and amortization                                                                             
     13,248       10,835  
    Share-based compensation expense                                                                             
     9,921       9,332  
    Loss on disposition of assets                                                                             
     519       46  
    Deferred income tax benefit                                                                             
     (14,290 )     (6,486 )
    Net (increase) decrease in:
                
         Accounts receivable, net                                                                             
     (2,165 )     3,046  
         Auto loan receivables held for sale, net                                                                             
     (5,025 )     4,752  
         Retained interest in securitized receivables                                                                             
     2,148       (19,592 )
         Inventory                                                                             
     41,820       (27,395 )
         Prepaid expenses and other current assets                                                                             
     (4,122 )     3,952  
         Other assets                                                                             
     350       335  
    Net increase in:
                
         Accounts payable, accrued expenses and other current
                
            liabilities and accrued income taxes                                                                             
     328       10,522  
         Deferred revenue and other liabilities                                                                             
     7,066       20,697  
Net cash provided by operating activities                                                                             
     79,356       75,399  
                 
Investing Activities:
                
Capital expenditures                                                                             
     (75,732 )     (60,883 )
Proceeds from sales of assets                                                                             
     225       4  
(Purchases) sales of money market securities                                                                             
     (863 )     4,000  
Purchases of investments available-for-sale                                                                             
     --       (4,000 )
Net cash used in investing activities                                                                             
     (76,370 )     (60,879 )
                 
Financing Activities:
                
(Decrease) increase in short-term debt, net                                                                             
     (12,614 )     390  
Issuances of long-term debt                                                                             
     193,200       191,600  
Payments on long-term debt                                                                             
     (193,009 )     (209,054 )
Equity issuances, net                                                                             
     8,229       3,725  
Excess tax benefits from share-based payment arrangements
     134       1,393  
Net cash used in financing activities                                                                             
     (4,060 )     (11,946 )
                 
(Decrease) increase in cash and cash equivalents                                                                             
     (1,074 )     2,574  
Cash and cash equivalents at beginning of year                                                                             
     12,965       19,455  
Cash and cash equivalents at end of period                                                                             
   $ 11,891     $ 22,029  




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