CarMax Reports Fourth Quarter and Fiscal Year 2005 Results; Releases Fiscal Year 2006 Expectations
RICHMOND, Va., March 30 -- CarMax, Inc. today reported results for the fourth quarter and fiscal year ended February 28, 2005.
* For the quarter, net earnings increased 32% to $29.7 million, or
28 cents per share, compared with $22.5 million, or 21 cents per share,
reported in the fourth quarter of fiscal 2004.
* For the year, net earnings were $112.9 million, or $1.07 per share, a
3% decrease compared with $116.5 million, or $1.10 per share, earned in
fiscal 2004.
Sales Components
Three Months Ended Fiscal Years Ended
(In millions) February 28 or 29(1) February 28 or 29(1)
2005 2004 Change 2005 2004 Change
Used vehicle sales $1,098.5 $844.0 30.2 % $3,997.2 $3,470.6 15.2 %
New vehicle sales 103.6 116.7 (11.3)% 492.1 515.4 (4.5)%
Wholesale vehicle
sales 148.0 115.5 28.2 % 589.7 440.6 33.8 %
Other sales and
revenues(2) 46.0 40.7 13.0 % 181.3 171.1 5.9 %
Net sales and
operating revenues $1,396.1 $1,116.9 25.0 % $5,260.3 $4,597.7 14.4 %
(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.
(2) Other sales and revenues include extended service plan revenues,
service department sales, third-party finance fees, and appraisal
purchase processing fees. The use of appraisal purchase processing
fees was phased out during the second quarter of fiscal 2004.
Retail Vehicle Sales Changes
Three Months Ended Fiscal Years Ended
February 28 or 29 February 28 or 29
2005 2004 2005 2004
Comparable store
vehicle sales:
Used vehicle units 12 % 5 % 1 % 6 %
New vehicle units (2)% 3 % 8 % (1)%
Total units 11 % 5 % 1 % 5 %
Used vehicle dollars 14 % 9 % 3 % 7 %
New vehicle dollars (2)% 7 % 8 % 1 %
Total dollars 13 % 9 % 3 % 6 %
Total vehicle sales:
Used vehicle units 27 % 17 % 13 % 18 %
New vehicle units (12)% (5)% (5)% (3)%
Total units 24 % 15 % 11 % 16 %
Used vehicle dollars 30 % 21 % 15 % 19 %
New vehicle dollars (11)% (1)% (5)% (1)%
Total dollars 25 % 18 % 13 % 16 %
Earnings Highlights
Three Months Ended Fiscal Years Ended
(In millions except February 28 or 29 February 28 or 29
per share data)
2005 2004 Change 2005 2004 Change
Net earnings $29.7 $22.5 31.8 % $112.9 $116.5 (3.0)%
Diluted weighted
average shares
outstanding 106.1 105.9 0.2 % 105.8 105.6 0.1 %
Net earnings per
share $0.28 $0.21 33.3 % $1.07 $1.10 (2.7)%
Selected Operating Ratios
Three Months Ended February 28 or 29
(In millions)
2005 %(1) 2004 %(1)
Net sales and
operating revenues $1,396.1 100.0% $1,116.9 100.0%
Gross profit $174.3 12.5% $133.8 12.0%
CarMax Auto Finance
income $19.7 1.4% $18.9 1.7%
Selling, general,
and administrative
expenses $144.0 10.3% $117.8 10.5%
Operating profit
(EBIT)(2) $49.9 3.6% $36.4 3.3%
Net earnings $29.7 2.1% $22.5 2.0%
Fiscal Years Ended February 28 or 29
(In millions)
2005 %(1) 2004 %(1)
Net sales and
operating revenues $5,260.3 100.0% $4,597.7 100.0%
Gross profit $650.2 12.4% $570.9 12.4%
CarMax Auto Finance
income $82.7 1.6% $85.0 1.8%
Selling, general,
and administrative
expenses $546.6 10.4% $468.4 10.2%
Operating profit
(EBIT)(2) $186.9 3.6% $189.8 4.1%
Net earnings $112.9 2.1% $116.5 2.5%
(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 Margin
Three Months Ended February 28 or 29
2005 2004
%(1) $/unit(2) %(1) $/unit(2)
Used vehicle gross
profit margin 11.4% $1,794 11.0% $1,705
New vehicle gross
profit margin 3.4% $832 3.0% $724
Total retail vehicle
gross profit margin 10.7% $1,739 10.0% $1,625
Wholesale vehicle
gross profit margin 14.7% $579 11.9% $432
Other gross profit
margin 52.8% $329 57.7% $395
Total gross profit
margin 12.5% $2,363 12.0% $2,253
Fiscal Years Ended February 28 or 29
2005 2004
%(1) $/unit(2) %(1) $/unit(2)
Used vehicle gross
profit margin 11.5% $1,817 11.3% $1,742
New vehicle gross
profit margin 3.6% $860 3.7% $872
Total retail vehicle
gross profit margin 10.6% $1,745 10.3% $1,666
Wholesale vehicle
gross profit margin 12.2% $464 10.4% $359
Other gross profit
margin 55.3% $366 67.7% $472
Total gross profit
margin 12.4% $2,375 12.4% $2,323
(1) Calculated as a percentage of its respective sales or revenue.
(2) Calculated as category gross profit dollars divided by the respective
units sold, except the other and the total categories, which are
divided by total retail units sold.
Business Performance Review
Sales and Earnings. "We were very encouraged by the way our business rebounded in the fourth quarter," said Austin Ligon, president and chief executive officer. "The strong fourth quarter sales growth was reflected in our fourth quarter earnings, with earnings up 32% on a 25% increase in revenues, even though store bonus payouts were higher than planned. Our superstores just kept beating their bonus targets, even as we continued to raise the targets in response to the improving sales trends. The rebound in sales and earnings growth also reinforced our belief that the softness we experienced in the first half of the fiscal year was due to external market factors, not to store execution issues. When traffic levels increased in the latter half of the year, so did our sales. Based on our confidence in our business model, we continued our planned store growth, opening nine superstores during the year, an 18% increase to our superstore base. Both our established and our newer stores in all our regions have shown renewed sales strength."
Margins. "Our used vehicle gross profit dollars per unit were within our range of expectations for the quarter," Ligon said. "For the year, we were able to reach our gross profit dollar targets for used vehicles despite disappointing first-half sales. In the fourth quarter, wholesale margins increased significantly, as is typical in the fourth quarter. Fourth quarter margins in other sales and revenues declined reflecting primarily the approximately 5% incremental increase in sales financed by DRIVE, our new subprime finance provider." DRIVE purchases subprime retail installment contracts at a discount. This discount is reflected in the CarMax income statement as an offset to the fees received from third-party providers of prime and nonprime auto financing.
CarMax Auto Finance. "CAF income was up modestly in the fourth quarter, as the benefit of the growth in our originations and managed receivables more than offset the decrease in the gain spread," said Ligon. "The gain spread, which represents the difference between average interest rates charged customers and our cost of funds, declined to 3.7% in this year's fourth quarter from 4.5% in last year's fourth quarter. For the year, CAF income was 3% below last year's level, reflecting the decline in the gain spread to 3.8% in fiscal 2005 from 4.7% in fiscal 2004. Throughout fiscal 2005, CAF income comparisons were challenged by an environment where our funding costs rose more rapidly than consumer finance rates."
SG&A. "Our strong sales generated modest expense leverage in the quarter, with the SG&A ratio declining to 10.3% compared with 10.5% in last year's fourth quarter," said Ligon. "We generated positive leverage despite both the higher-than-expected store unit bonuses and the growing proportion of our store base that is comprised of stores not yet at base maturity. For the year, the expense ratio was 10.4% this year versus 10.2% last year."
Accounting for Leases
In February, the Securities and Exchange Commission issued a letter to the American Institute of Certified Public Accountants addressing certain accounting issues and their application to generally accepted accounting principles relating to operating leases. The company has reviewed its accounting practices relative to leases and recorded cumulative adjustments amounting to $1.5 million, or 1 cent per share, as expenses in its consolidated statement of earnings in the fourth quarter of fiscal 2005. The company's consolidated balance sheets include reclassifications related to these non-cash adjustments. The cumulative impact of these adjustments is immaterial to the company's financial statements for fiscal 2005 and all prior periods presented.
Fiscal 2006 Expectations
Fiscal 2006 Comparable Store Used Unit Growth. "Assuming continuing healthy sales performance, we currently anticipate comp store used unit growth for fiscal 2006 in the range of 5 to 9%," said Ligon. "Comp growth should be stronger in the first half of the year simply because of the easier first half comparisons with last year. We are mindful that some of the factors that may have played a role in the weakness experienced last spring and summer are at play in the marketplace today: gas prices are rising once again; interest rates continue to increase; wholesale prices are again rising in the spring more than historical norms would indicate; and domestic auto manufacturers are struggling, which makes their incentive behavior difficult to anticipate. We are hopeful that these factors will not cause undue disruption in our market environment."
Fiscal 2006 Earnings Per Share. "We currently expect fiscal 2006 earnings per share in the range of $1.20 to $1.30," Ligon said. "We expect CAF income to increase only slightly from the fiscal 2005 level, as projected continuing interest rate increases will likely cause our cost of funds to once again rise more rapidly than consumer rates. Consequently, we expect CAF's gain spread for fiscal 2006 to be slightly below the normalized range of 3.5 to 4.5%. Our earnings expectations also reflect the rollout of marketwide advertising in Los Angeles for the first time as we open our fifth L.A. store. Finally, we expect between $2 million and $3 million in incremental costs related to separating our data center operation from Circuit City -- the last cost expected to be added as a result of our separation from Circuit City. As a consequence of these higher costs, we would expect to see modest SG&A leverage if we are at the upper end of our expected comp unit growth range. We currently expect our tax rate in fiscal 2006 to be approximately 38.4%."
First Quarter Fiscal 2006 Comparable Store Used Unit Growth. "We now expect comp store used unit growth in the first quarter to be in the range of 9 to 12%," said Ligon. "Our sales trends thus far in the quarter have been healthy." In the first quarter of fiscal 2005, CarMax reported comparable store used unit performance of -3%.
First Quarter Fiscal 2006 Earnings Per Share. "The cost pressures cited in our expectations for full year earnings -- especially the grand opening advertising in L.A. -- will put pressure on our first quarter, so we expect first quarter EPS in the range of 35 to 38 cents," Ligon said. "In addition, we expect CAF's gain spread in the first quarter to be roughly 3.25%, compared with 3.8% in the first quarter of fiscal 2005." CarMax reported earnings per share of 33 cents in the first quarter of fiscal 2005.
Accounting for Stock-Based Compensation
CarMax plans to adopt SFAS 123R, "Share-Based Payment," which modifies SFAS 123, "Accounting for Stock-Based Compensation," in the third quarter of fiscal 2006, ending November 30, 2005. This revised accounting standard requires that all stock-based compensation, including grants of employee stock options, be accounted for using a fair-value-based method and recorded as a charge to earnings. The company is still in the process of determining the effect of adopting SFAS 123R, and therefore earnings estimates provided for fiscal 2006 do not include any potential impact from the adoption of this new standard.
Planned First Quarter Fiscal 2006 Earnings Release Date
As previously announced, beginning with the first quarter of fiscal 2006, ending May 31, 2005, the company plans to issue one financial release per quarter covering sales and earnings performance and will cease issuing a separate sales release. The company currently plans to release first quarter results on Monday, June 20, 2005, before the opening of the New York Stock Exchange, and plans to host a conference call at 8:00 a.m. on that date.
About CarMax
CarMax, a Fortune 500 company and one of the Fortune 2005 "100 Best Companies to Work For," is the nation's leading specialty retailer of used cars. Headquartered in Richmond, Va., CarMax currently operates 59 used car superstores in 27 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 February 28, 2005, the company retailed 253,168 used cars, which is 92 percent of the total 273,804 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
(Amounts in thousands except per share data)
Three Months Ended
February 28 or 29
2005 %(1) 2004 %(1)
Sales and operating revenues:
Used vehicle sales $1,098,461 78.7 $843,995 75.6
New vehicle sales 103,573 7.4 116,703 10.4
Wholesale vehicle sales 148,046 10.6 115,491 10.3
Other sales and revenues 45,974 3.3 40,676 3.6
Net sales and operating revenues 1,396,054 100.0 1,116,865 100.0
Cost of sales 1,221,734 87.5 983,095 88.0
Gross profit 174,320 12.5 133,770 12.0
CarMax Auto Finance income 19,657 1.4 18,889 1.7
Selling, general, and
administrative expenses 143,992 10.3 117,825 10.5
Gain (loss) on franchise
dispositions, net (48) - 1,580 0.1
Interest expense 1,990 0.1 - -
Interest income 127 - 215 -
Earnings before income taxes 48,074 3.4 36,629 3.3
Provision for income taxes 18,380 1.3 14,103 1.3
Net earnings $29,694 2.1 $22,526 2.0
Weighted average common shares:
Basic 104,212 103,730
Diluted 106,101 105,935
Net earnings per share:
Basic $0.28 $0.22
Diluted $0.28 $0.21
Years Months Ended
February 28 or 29
2005 %(1) 2004 %(1)
Sales and operating revenues:
Used vehicle sales $3,997,218 76.0 $3,470,615 75.5
New vehicle sales 492,054 9.4 515,383 11.2
Wholesale vehicle sales 589,704 11.2 440,571 9.6
Other sales and revenues 181,286 3.4 171,122 3.7
Net sales and operating revenues 5,260,262 100.0 4,597,691 100.0
Cost of sales 4,610,066 87.6 4,026,803 87.6
Gross profit 650,196 12.4 570,888 12.4
CarMax Auto Finance income 82,656 1.6 84,963 1.8
Selling, general, and
administrative expenses 546,577 10.4 468,374 10.2
Gain (loss) on franchise
dispositions, net 633 - 2,327 0.1
Interest expense 2,806 0.1 1,137 -
Interest income 421 - 683 -
Earnings before income taxes 184,523 3.5 189,350 4.1
Provision for income taxes 71,595 1.4 72,900 1.6
Net earnings $112,928 2.1 $116,450 2.5
Weighted average common shares:
Basic 104,036 103,503
Diluted 105,779 105,628
Net earnings per share:
Basic $1.09 $1.13
Diluted $1.07 $1.10
(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
(Amounts in thousands)
At February 28 or 29
2005 2004
ASSETS
Current assets:
Cash and cash equivalents $29,099 $61,643
Accounts receivable, net 76,167 72,358
Automobile loan receivables held for sale 22,152 18,781
Retained interests in securitized receivables 147,963 145,988
Inventory 576,567 466,061
Prepaid expenses and other current assets 13,008 8,650
Total current assets 864,956 773,481
Property and equipment, net 406,301 251,459
Deferred income taxes - 185
Other assets 21,756 22,762
TOTAL ASSETS $1,293,013 $1,047,887
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $170,646 $145,517
Accrued expenses and other current liabilities 65,664 55,674
Accrued income taxes 1,179 4,050
Deferred income taxes 26,315 32,711
Short-term debt 65,197 4,446
Current installments of long-term debt 330 -
Total current liabilities 329,331 242,398
Long-term debt, excluding current installments 128,419 100,000
Deferred revenue and other liabilities 29,260 24,736
Deferred income taxes 5,027 -
TOTAL LIABILITIES 492,037 367,134
SHAREHOLDERS' EQUITY 800,976 680,753
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,293,013 $1,047,887
CARMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Years Ended
February 28 or 29
2005 2004
Operating Activities:
Net earnings $112,928 $116,450
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 20,145 16,181
Amortization of restricted stock awards 108 122
Gain on disposition of assets (1,486) (1,462)
Provision for deferred income taxes (1,184) (1,298)
Changes in operating assets and liabilities:
Increase in accounts receivable, net (3,809) (15,909)
Increase in automobile loan receivables
held for sale (3,371) (15,202)
Increase in retained interests in securitized
receivables (1,975) (10,972)
(Increase) decrease in inventory (110,506) 389
(Increase) decrease in prepaid expenses
and other current assets (4,358) 3,986
Decrease in other assets 42 4,647
Increase in accounts payable, accrued
expenses and other current liabilities, and
accrued income taxes 35,876 48,570
Increase in deferred revenue and other
liabilities 2,326 2,962
Net cash provided by operating activities 44,736 148,464
Investing Activities:
Purchases of property and equipment (230,080) (181,338)
Proceeds from sales of assets 88,999 107,493
Net cash used in investing activities (141,081) (73,845)
Financing Activities:
Increase (decrease) in short-term debt, net 60,751 (51,605)
Payments on long-term debt (509) -
Equity issuances, net 3,559 4,014
Net cash provided by (used in) financing
activities 63,801 (47,591)
(Decrease) increase in cash and cash
equivalents (32,544) 27,028
Cash and cash equivalents at beginning of year 61,643 34,615
Cash and cash equivalents at end of year $29,099 $61,643