CarMax Reports Record Fourth Quarter and Fiscal Year Results

CarMax, Inc. (NYSE:KMX) today reported record results for the fourth quarter and fiscal year ended February 29, 2012.

• Net sales and operating revenues increased 10% to $2.48 billion from $2.25 billion in the fourth quarter of last year. For the fiscal year, net sales and operating revenues increased 11% to $10.00 billion from $8.98 billion in fiscal 2011.
• Comparable store used unit sales increased 4% in the fourth quarter and 1% in the fiscal year.
• Total used unit sales rose 6% in the fourth quarter and 3% in the fiscal year.
• Total wholesale unit sales increased 13% in the fourth quarter and 20% in the fiscal year.
• CarMax Auto Finance (CAF) income rose 22% to $66.1 million in the fourth quarter. For the fiscal year, CAF income rose 19% to $262.2 million.
• Fourth quarter net earnings increased 7% to $95.0 million, or $0.41 per diluted share, compared with $88.8 million, or $0.39 per diluted share, in the prior year quarter.
• Fiscal 2012 net earnings increased 10% to $413.8 million, or $1.79 per diluted share, compared with $377.5 million, or $1.65 per diluted share, in fiscal 2011.

"We are pleased to report strong fourth quarter and full year results,” said Tom Folliard, president and chief executive officer. "We hit some major milestones this year, including total revenues of $10 billion and annual used retail vehicle sales in excess of 400,000 units, and we look forward to continued growth as we expand our store base in the coming years.”

Fourth Quarter Business Performance Review

Sales. Comparable store used unit sales grew 4% compared with a 12% increase in last year’s fourth quarter. Used unit sales benefited from strong subprime-financed sales, as well as an extra day in the current year quarter due to leap year.

For the fiscal year, our data indicates that we increased our share of the late-model (0-to 6-year old) used vehicle market by approximately 3%. We remain confident that the strength of our consumer offer and the skill of our associates, combined with our resumption of store growth, will continue to drive future share gains.

Wholesale unit sales increased 13% compared with the fourth quarter of fiscal 2011. Similar to the last several quarters, our wholesale volumes benefited from a strong increase in appraisal traffic and a solid buy percentage. We believe appraisal traffic is benefiting from the increase in industry new car sales.

Other sales and revenues declined 12% compared with the prior year’s fourth quarter. The decrease was primarily due to a reduction in third-party finance fees, which resulted from a mix change among third-party finance providers. Subprime providers, who generally purchase subprime financings at a discount, originated 15% of used vehicle sales in the current year’s quarter compared with 9% in the prior year’s fourth quarter. At the same time, as CAF has continued to retain an increased portion of the loans that had been purchased by third-party providers, the fees received from these third parties have declined.

Gross Profit. Total gross profit increased 5% to $338.2 million from $320.7 million in the fourth quarter of fiscal 2011, reflecting a higher gross profit contribution from retail and wholesale vehicles, partly offset by a reduction in other gross profit.

Used vehicle gross profit increased 8% to $225.8 million from $209.5 million in the prior year period. The improvement resulted from the combination of the 6% increase in used units and a 2% increase in gross profit per unit, to $2,135 from $2,096 in the prior year quarter. Last year, we reported that our efforts to eliminate waste from our used vehicle reconditioning processes in recent years had allowed us to achieve a cumulative, sustainable reduction in average reconditioning costs of approximately $250 per vehicle. Adjusting for an increase in the average age of vehicles reconditioned and sold, we continued to realize $250 per unit in savings in fiscal 2012.

Wholesale gross profit increased 13% to $70.2 million compared with $62.4 million in the fourth quarter of the prior year, which was driven by the 13% increase in wholesale unit sales. Wholesale gross profit per unit of $950 was similar to the $956 in the prior year quarter. The strength of our wholesale gross profit per unit continued to be fueled by the strong demand and pricing at our auctions.

Other gross profit declined 14% to $40.8 million from $47.6 million in the prior year period. The decrease was similar to the decline in other sales and revenues and was primarily due to the change in third-party finance fees.

CarMax Auto Finance. CAF income increased 22% to $66.1 million compared with $54.1 million in last year’s fourth quarter, primarily due to an increase in interest margin, which rose to $88.9 million from $74.6 million. The growth in interest margin was driven by increases in both average managed receivables and the spread between the interest charged to consumers and our related funding costs.

CAF net loans originated increased 36% compared with the prior year quarter. The increase reflected our previously reported decision to retain an increased portion of the loans that third-party providers had been purchasing. As of January 2012, CAF had transitioned back to retaining all of these loans. The provision for loan losses was 0.9% of average receivables in both the current year and prior year quarter, as favorable loss experience in fiscal 2012 largely offset the cumulative effect of the origination and retention of loans with greater credit risk.

SG&A. Selling, general and administrative expenses increased 7% to $243.5 million from $226.9 million in the prior year’s fourth quarter. The increase in SG&A expenses reflected the expansion of our store base, increases in sales commissions and other variable costs, and higher growth-related costs, partly offset by lower advertising expense. Growth-related costs include store pre-opening expenses, relocation expenses and costs of maintaining management bench strength to support future growth. SG&A per used unit increased slightly, to $2,302 versus $2,270 in the prior year’s quarter. The SG&A ratio improved to 9.8% compared with 10.1% in the prior year quarter, reflecting the leverage associated with the increases in used and wholesale vehicle sales, and average selling prices.

Superstore Openings. During the fourth quarter of fiscal 2012, we entered the Chattanooga, Tennessee market. Subsequent to the end of the fiscal year, we opened a store in Lancaster, Pennsylvania.

Supplemental Financial Information

Store Opening Plan

We currently plan to open the following ten superstores during the fiscal year ending February 28, 2013:

Normal construction, permitting or other scheduling delays could shift the opening dates of any of these stores into a later period. We expect to open between 10 and 15 superstores during each of the three fiscal years following fiscal 2013.

We currently estimate capital expenditures will total approximately $280 million in fiscal 2013.

Lease Accounting Revisions

We have revised our previously issued consolidated financial statements to correct our accounting for sale-leasebacks entered into between 1995 and 2009. As a result of the revision, we have recorded certain properties subject to the sale-leasebacks as assets and the related sale proceeds as financing liabilities. Depreciation is being recognized on the assets. Payments on the leases are now recognized as interest expense and a reduction in the financing liabilities, rather than being recognized as rent expense. We have determined that our financial statements were not materially affected by the revision. As a result of the correction, reported net earnings per diluted share were reduced by $0.02 in both fiscal 2012 and fiscal 2011.

More detailed information will be provided in the annual consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended February 29, 2012. In addition, for the convenience of investors, a summary of our revised consolidated statements of earnings for each of the interim quarters in the fiscal years ended February 29, 2012, and February 28, 2011, is included in this release.

Conference Call Information

We will host a conference call for investors at 9:00 a.m. ET today, April 5, 2012. 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 89939336. 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 April 5, 2012, through June 20, 2012. A telephone replay also will be available through April 13, 2012, 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 89939336.

First Quarter Fiscal 2013 Earnings Release Date

We currently plan to release first quarter fiscal 2013 sales and earnings on Thursday, June 21, 2012, 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 June 2012.

About CarMax

CarMax, a member of the Fortune 500 and the S&P 500, and one of the Fortune 2012 "100 Best Companies to Work For,” is the nation’s largest retailer of used cars. Headquartered in Richmond, Va., CarMax currently operates 109 used car superstores in 54 markets. The CarMax consumer offer is structured around four customer benefits: low, no-haggle prices; a broad selection; high quality vehicles; and customer-friendly service. During the twelve months ended February 29, 2012, the company retailed 408,080 used cars and sold 316,649 wholesale vehicles at our 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 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 general or regional U.S. economic conditions.
• Changes in the availability or cost of capital and working capital financing, including changes related to the asset-backed securitization market.
• Changes in consumer credit availability related to our third-party financing providers.
• 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 and legislative environment in which we operate.
• Factors related to geographic growth, including the inability to acquire or lease suitable real estate at favorable terms or to effectively manage our growth.
• 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.
• Adverse conditions affecting one or more automotive manufacturers.
• 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 28, 2011, 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. 4287. We disclaim any intent or obligation to update our forward-looking statements.