This is a summary first quarter fiscal 2009 earnings call conducted by CarMax Inc, (KMX) on June 18, 2008
Management:
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President, CEO, Dir: Thomas J. Folliard
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EVP, CFO, Dir: Keith D. Browning
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VP, Treasurer: Tom Reedy
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AVP, IR: Katharine Kenny
Key investor issues:
- Sales increased 3% to $2.21 billion from $2.15 billion in fiscal 2008.
- Earnings declined 55% to $29.6 million or 13 cents a share from $65.4 million or 30 cents per share in the prior year.
- Wholesale unit sales declined 2%, reflecting a decrease in both the appraisal traffic and the appraisal buy rate.
First Quarter Highlights:
Sales increased 3% to $2.21 billion, compared with $2.15 billion in the prior year driven by a 6% increase in used vehicle revenues coupled with the opening of six more new stores.
- New stores included two in existing markets, four in new markets, including two in Phoenix, Arizona, one in Charleston, South Carolina and one in Huntsville, Alabama.
-Wholesale unit sales declined 2%, reflecting a decrease in both appraisal traffic and appraisal buy rate.
-The depreciation in wholesale market values for SUVs, trucks and other less fuel-efficient vehicles contributed to the decrease in the buy rate.
Wholesale industry prices for SUVs and trucks declined nearly 25%, which is four times the normal depreciation expected over this period and in excess of the depreciation expected over a full year.
- New vehicle unit sales declined 26%, reflecting the combination of the soft new car sales environment and the sale of the 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%, reflecting a slight increase in the percentage of the sales financed by the third-party subprime provider.
Gross profit per unit declined by $237 to $2,564 compared with $2,801 in the prior year with the majority of the decline resulting from the $192 per unit decrease in gross profit per used vehicle.
- 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 gross profit per unit, as vehicles purchased directly from consumers generate more profit compared with vehicles sourced at auction.
- The decline in the market values for SUVs and trucks resulted in significant margin pressure and it led to supplemental pricing markdowns which further pressured margins.
Wholesale gross profit per unit declined slightly, to $784 from $800 in the first quarter of fiscal 2008 as the firm continued to experience strong dealer-to-car ratios at its auctions.
- CarMax Auto Finance 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 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 substantially higher funding costs in the warehouse facility, which has been unable to offset through higher consumer rates in the current environment.
- It also reflected 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.
Selling, general and administrative expenses were 11.0% of total revenues compared with 10.0% in the prior year''s first quarter.
- This resulted from the modest level of comparable store used unit sales growth the continued commitment to store growth plan and the decline in the used vehicle average selling price.
- The company accrued costs related to litigation that reduced net earnings by 2 cents per share.
- Net income decreased 55% to $29.6 million or 13 cents a share from $65.4 million or 30 cents per share in the prior year caused by the weak economy, the dramatic increase in the price of gas, food, and the resulting decrease in consumer sentiment.
- The decrease in earnings was related to the reductions in gross profit per unit and CAF income.
Fiscal 2009 Outlook
- The firm will open 14 stores, three in the second quarter, five in the second half of the year.
- The firm expects to open its first store in the Philadelphia market at the beginning of fiscal 2010.
- In the fourth quarter of the fiscal year, the company intends to open Potomac Mills, a non-production store in the Washington, D.C. market.
- Management remains committed to long-term store growth plans.
Key questions and answers from the first quarter of fiscal 2009 conducted by CarMax Inc. (KMX) on June 18, 2008
Matthew Fassler:
Are you experiencing margin pressure due to depreciation of the inventory you have had in stock over the course of the quarter?
