CarMax Reports First Quarter Results

CarMax, Inc. (NYSE:KMX) today reported results for the first quarter ended May 31, 2018. Year-over-year highlights include:

• Net sales and operating revenues increased 5.5% to $4.79 billion.
• Used unit sales in comparable stores declined 2.3%.
• Total used unit sales rose 1.6%.
• Total wholesale unit sales increased 9.6%.
• CarMax Auto Finance (CAF) income increased 5.7% to $115.6 million.
• Net earnings increased 12.7% to $238.7 million and net earnings per diluted share increased 17.7% to $1.33.

First Quarter Business Performance Review

Sales. Total used vehicle unit sales increased 1.6%, while comparable store used unit sales fell 2.3% versus the prior year’s first quarter. The comparable store sales performance primarily reflected lower store traffic, partially offset by improved conversion, as well as a tough comparison as we lapped our strongest prior year performance. "While our comparable store unit sales performance improved significantly from the February 2018 quarter, we believe macro pricing factors still had some effect on our first quarter sales,” said Bill Nash, president and chief executive officer.

Total wholesale vehicle unit sales increased 9.6% compared with the first quarter of fiscal 2018, largely driven by an increase in our appraisal buy rate and the growth in our store base.

Other sales and revenues increased 5.7% compared with the first quarter of fiscal 2018. Extended protection plan (EPP) revenues rose 8.9%, reflecting both cost decreases from plan providers and a $4.0 million benefit associated with the accelerated recognition of revenue related to extended service plans. The accelerated recognition resulted from our adoption of the new revenue recognition accounting standard in the first quarter of fiscal 2019. We experienced a $3.1 million reduction in third-party finance fees, reflecting shifts in our sales mix by finance channel, including a decline in our Tier 2 and an increase in our Tier 3 sales.

Gross Profit. Total gross profit increased 1.9% versus last year’s first quarter, to $661.3 million. Used vehicle gross profit rose 1.7%, reflecting the 1.6% increase in total used unit sales. Used vehicle gross profit per unit remained stable at $2,215 compared with $2,212 in the prior year period. Wholesale vehicle gross profit increased 9.6% versus the prior year’s quarter, driven by the 9.6% increase in wholesale unit sales. Wholesale vehicle gross profit per unit was also stable at $1,012 in both periods. Other gross profit declined 4.6%, reflecting decreases in service profits and net third-party finance fees, partially offset by the increase in EPP revenues. Service profits were affected by the reduced leverage of service department costs resulting from the decrease in comparable store used unit sales.

SG&A. Compared with the first quarter of fiscal 2018, SG&A expenses increased 8.6% to $438.2 million. Factors contributing to the increase included the 10% increase in our store base since the beginning of last year’s first quarter (representing the addition of 18 stores), and an $8.9 million increase in stock-based compensation expense. We also continued to update our technology platforms and support our core strategic initiatives as part of our focus on improving the customer experience. SG&A per used unit was $2,209 in the current quarter, up $143 year-over-year, largely reflecting the deleverage associated with the decline in comparable store used unit sales. The increase in stock-based compensation expense increased SG&A per unit by $43.

CarMax Auto Finance.⁽¹⁾ Compared with last year’s first quarter, CAF income increased 5.7% to $115.6 million. The increase reflected the combined effects of an 8.7% increase in average managed receivables and a slightly lower total interest margin percentage. The total interest margin percentage, which reflects the spread between interest and fees charged to consumers and our funding costs, was 5.7% of average managed receivables compared with 5.8% in last year’s first quarter. The provision for loan losses was $30.9 million, or 1.05% of average managed receivables, compared with $28.6 million, or 1.06%, in the prior year quarter. The allowance for loan losses as a percentage of ending managed receivables remained relatively stable at 1.13% as of May 31, 2018, compared with 1.18% as of May 31, 2017, and 1.11% as of February 28, 2018.

Interest Expense. Interest expense rose to $18.1 million from $16.8 million in the prior year’s first quarter, primarily reflecting higher interest rates in fiscal 2019.

Income Taxes. As anticipated, the effective tax rate fell to 25.3% in the first quarter of fiscal 2019 from 37.4% in the prior year’s first quarter, primarily due to the reduction in the federal statutory tax rate following the enactment of the 2017 Tax Act.

Store Openings. During the first quarter of fiscal 2019, we opened three stores. We added two stores in existing television markets (Dallas, Texas, and Miami, Florida), and we entered the Greenville, North Carolina television market. Subsequent to the end of the quarter, we opened a store in Santa Fe, New Mexico, representing our second store in the Albuquerque television market.

Share Repurchase Activity. During the first quarter of fiscal 2019, we repurchased 3.3 million shares of common stock for $207.4 million pursuant to our share repurchase program. As of May 31, 2018, we had $809.5 million remaining available for repurchase under the current authorization.

Supplemental Financial Information

Amounts and percentage calculations may not total due to rounding.

Sales Components

Unit Sales

Average Selling Prices

Vehicle Sales Changes

Comparable Store Used Vehicle Sales Changes ⁽¹⁾

Used Vehicle Financing Penetration by Channel (Before the Impact of 3-day Payoffs) ⁽¹⁾

Selected Operating Ratios

Gross Profit

Gross Profit per Unit

SG&A Expenses

Components of CAF Income and Other CAF Information

Earnings Highlights

Planned Store Openings

We currently plan to open the following stores within 12 months from May 31, 2018. During this period, we will be entering ten new television markets and expanding our presence in five existing television markets. Of the 15 stores we plan to open during the 12 months ending May 31, 2019, 9 will be in Metropolitan Statistical Areas having populations of 600,000 or less, which we define as small markets.

Normal construction, permitting or other scheduling delays could shift the opening dates of any of these stores into a later period.

Conference Call Information

We will host a conference call for investors at 9:00 a.m. ET today, June 22, 2018. 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 75172648. A live webcast of the call will be available on our investor information home page at investors.carmax.com.

A webcast replay of the call will be available at investors.carmax.com through September 25, 2018. A telephone replay also will be available through June 29, 2018, and may be accessed by dialing 1-855-859-2056 (international callers dial 1-404-537-3406). The conference I.D. for both domestic and international callers is 75172648.

Second Quarter Fiscal 2019 Earnings Release Date

We currently plan to release results for the second quarter ending August 31, 2018, on Wednesday, September 26, 2018, before the opening of trading on the New York Stock Exchange. We plan to 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 investors.carmax.com in early September 2018.

About CarMax

CarMax is the nation’s largest retailer of used cars, currently operating 192 stores in 41 states nationwide. CarMax revolutionized the auto industry by delivering the honest, transparent and high-integrity car buying experience customers want and deserve. For more than 20 years, CarMax has made car buying more ethical, fair and stress-free by offering a no-haggle, no-hassle experience and an incredible selection of vehicles. CarMax makes selling your car easy too, by offering no-obligation appraisals good for seven days. At CarMax, we’ll buy your car even if you don’t buy ours^®. CarMax has more than 25,000 associates nationwide and for 14 consecutive years has been named as one of the Fortune 100 Best Companies to Work For^®. During the twelve months ended February 28, 2018, the company retailed 721,512 used vehicles and sold 408,509 wholesale vehicles at its in-store auctions. For more information, access the CarMax website at www.carmax.com.

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, expenses, capital expenditures, debt obligations, tax rates or earnings, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by the use of words such as "anticipate,” "believe,” "could,” "estimate,” "expect,” "intend,” "may,” "outlook,” "plan,” "predict,” "should,” "will” and other similar expressions, whether in the negative or affirmative. 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 competitive landscape and/or our failure to successfully adjust to such changes.
• Events that damage our reputation or harm the perception of the quality of our brand.
• Changes in general or regional U.S. economic conditions.
• Changes in tax law, including the effect of the 2017 Tax Act.
• Changes in the availability or cost of capital and working capital financing, including changes related to the asset-backed securitization market.
• Our inability to recruit, develop and retain associates and maintain positive associate relations.
• The loss of key associates from our store, regional or corporate management teams or a significant increase in labor costs.
• Security breaches or other events that result in the misappropriation, loss or other unauthorized disclosure of confidential customer, associate or corporate information.
• Significant changes in prices of new and used vehicles.
• Changes in economic conditions or other factors that result in greater credit losses for CAF’s portfolio of auto loan receivables than anticipated.
• A reduction in the availability of or access to sources of inventory or a failure to expeditiously liquidate inventory.
• Changes in consumer credit availability provided by our third-party finance providers.
• Changes in the availability of extended protection plan products from third-party providers.
• Factors related to the regulatory and legislative environment in which we operate.
• Factors related to geographic and sales growth, including the inability to effectively manage our growth.
• The failure of or inability to sufficiently enhance key information systems.
• The effect of various litigation matters.
• Adverse conditions affecting one or more automotive manufacturers, and manufacturer recalls.
• The inaccuracy of estimates and assumptions used in the preparation of our financial statements, or the effect of new accounting requirements or changes to U.S. generally accepted accounting principles.
• The performance of the third-party vendors we rely on for key components of our business.
• Factors related to seasonal fluctuations in our business.
• The occurrence of severe weather events.
• Factors related to the geographic concentration of our stores.

For more details on factors that could affect expectations, see our Annual Report on Form 10-K for the fiscal year ended February 28, 2018, and our quarterly or current reports as filed with or furnished to the U.S. Securities and Exchange Commission. Our filings are publicly available on our investor information home page at investors.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. 4391. We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.

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