This is a summary of the second quarter fiscal 2009 earnings call conducted by CarMax, Inc. (KMX) on September 22, 2008.
Management:
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President and CEO: Tom Folliard
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Executive VP and CFO: Keith Browning
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Head of IR: Katharine Kenny
Key Investor Issues:
- Earnings for the quarter fell to $14 million, or 6 cents per share, from $65 million, or 29 cents per share, in the same quarter last year.
- Total sales declined 13% to $1.84 billion from $2.12 billion a year ago. Same-store sales dropped 17% during the quarter.
- The company''s financing arm posted a pretax loss of $7.1 million vs. income of $33.4 million a year ago.
- New vehicle sales fell to $77.8 million from $104.8 million, while the average selling price of its used vehicles lost 6%.
Second Quarter Highlights:
Comp sales declined dramatically starting with Memorial Day weekend and remained weak throughout the second quarter. The 17% decline in used unit comp sales reflected a similar decline in traffic at the company’s stores while conversion actually held up well compared to last year’s second quarter.
CarMax has made significant progress in reducing inventory and variable expenses to bring them in line with the lower sales levels.
During the second quarter CarMax lowered its inventory by more than 13,300 units in excess of $200 million.
The company was also successful in shrinking costs including the reduction of labor hours although given the magnitude of the fixed costs and the sales decline the company still reported SG&A de-leverage for the quarter.
Despite the sharp decline in used unit comps CarMax made progress towards recapturing per vehicle used unit gross profit due to reduced acquisition costs the company was able to keep consumer prices low but still increase gross profit by $128 per unit sequentially over the first quarter of this fiscal year. By getting the inventory in line so quickly CarMax minimized the need for markdowns.
In the second quarter total sales decreased 13% to $1.84 billion compared with $2.12 billion in the second quarter of fiscal ’08.
The company opened three stores during the second quarter, a non-production store in the L.A. market and two production stores in new markets for CarMax, Colorado Springs and Tulsa, Oklahoma. At the end of the second quarter CarMax operated 98 stores in 46 US markets.
Used vehicle revenues declined 12% for the quarter due to the combination of a 6% decrease in average selling price and a 7% decrease in unit sales.
The average selling price was lower as a result of the decrease in industry used car prices which contributed to the reduced acquisition costs. Wholesale revenues decreased as well as unit sales fell by almost 9% and average selling price fell by 8%. Wholesale units again declined as a result of less appraisal traffic and a lower appraisal buy rate.
The decrease in second quarter total gross profit of $116 per unit compared with last year was due to several factors.
They included the sizeable sales decrease in the quarter and the company’s inability to achieve the normal seasonal gross profit improvement earlier in the year. In addition, as in the first quarter the reduction in appraisal traffic and the appraisal buy rate led to the sourcing of more used vehicles at auction which negatively impacted the average gross profit per unit.
Despite the lower appraisal buy rate and the resulting decreasing wholesale volume CarMax did report that its wholesale profit per unit increased by more than $100 to $897 in the second quarter of this fiscal year compared to last year. At the same time, although the buy rate was down, CarMax did see it gradually improve during the quarter.
The auctions continue to draw more attendance on a per vehicle basis and also on an absolute level and the company believes the wholesale inventory is even more attractive to dealers in this difficult environment, where more credit challenged customers may be looking for older higher mileage vehicles.
The results at CarMax Auto Finance (CAF) also continue to reflect the volatility in the financial markets.
Earnings for the second quarter were reduced by $0.08 per share, largely due to unfavorable adjustments of $28 million at CAF.
