CarMax's Earnings: Seven Auto Retailers, Seven Comparison Metrics

The number 7
Have you ever asked yourself, why are we so fascinated with the number 7?

For example, many people will tell you their favorite or lucky number is 7. And the list goes on: There are 7 digits in a phone number (well if we ignore that area code thing), 7 habits of highly effective people, 7 "wonders" of the world, Seven seas, a Group of 7 (the "G7") countries that account for roughly 11% of the world's population, but roughly 60% of the world's economy.

We even divide up the cycles of our lives into 7. Think about it. . . There are 7 days in a week. And I understand those 7 days, were actually based on the ancient astrological notion that the seven known celestial bodies (the Sun, Moon, Mars, Mercury, Jupiter, Venus, and Saturn), influenced what happened on Earth.

Why does the number seven seem so popular? So important in our lives?

The answer resides in our brain capacity. No, I'm not kidding. The reason that seven likely comes up so often is because it is the natural capacity in which our brains process information.

In 1956 a psychologist by the name of George Miller wrote a paper called: "The Magical Number Plus or Minus Two: Some Limits on Our Capacity for Processing Information."

Richard Phillips (richardphillips.org) summarized Mr. Millers' paper:

This showed that the amount of information which people can process and remember is often limited to about seven items. One example of this is called the digit span.

Ask someone to repeat back to you exactly what you say. Begin with four digits chosen at random e.g. 6 6 2 5. Then give them five digits e.g. 5 8 4 5 0, then six, and so on. Carry on increasing the number of digits until they make a mistake. The longest number of digits they get completely right is called their digit span and for most people this is about seven digits.

CarMax fiscal 2007 earnings
So this morning CarMax (KMX) reported their fiscal 2007 results. I know, the stock is down more than 4% despite posting 12% used unit comps in the fourth quarter. Don't get caught up in the ebbs and flows. Like I said last quarter, emotions run deep with this near cult like stock and you tend to see over reactions (in both directions) to whatever the company reports.

I have yet to figure out the stock (although I have learned not to jump in when same store comps are running really strong). But the company's business model is beginning to make more and more sense every day. And I do think that folks like myself have underestimated the company's ability to optimize inventory and provide a more efficient form of financing used vehicles.

So if you haven't received a dozen emails by now regurgitating the figures, I'll leave it to someone else to provide that insight.

Instead, in honor of our ability to process only about 7 things at a given a time, I thought I would simply give you 7 metrics or data points. And then show you how those 7 metrics compare with the annual results of the 6 publicly traded franchised auto retailers and (where applicable) America's Car-Mart (CRMT) (one of the larges and only publicly traded buy here pay here used retailer).

Keep in mind, the term fiscal is simply a fancy way of saying financial. So it is CarMax's 12-month financial reporting period ended February 28, 2007. And that is a little different than the publicly traded franchised dealers, whose 12 month (reporting year) runs from January 1st through December 31st. But it is as close as we can get it.

I should also point out that these are the reported figures in the company filings and press releases. I did not try to make adjustments for "one time items" except in the case of Group 1 where I excluded an asset impairment from operating income.

7. CarMax's Gross Per Used Unit
CarMax sold 337,021 used vehicles in fiscal 2007 at an average price of $17,249. But they paid (on average), $15,346 to buy the car, as well as auction fees, transportation costs and reconditioning expenses. So when it was "all said and done" (well before "indirect expenses like marketing/advertising costs, the electricity bill, the accountants, etc). CarMax made ~$1,903 in gross profit on every used vehicle they sold.

UnitedAuto Group (UAG): made $2,427 on every used vehicle they sold (retail) in 2006. But keep in mind, UnitedAuto Group has about a third of its operations over seas (mostly in the United Kingdom) where a large amount of "demonstrator" vehicles are sold as used cars.

Lithia Motors (LAD): made $2,426 on every used vehicle they sold (retail) in 2006.

Asbury Auto (ABG): made $2,149 on every used vehicle they sold (retail) in 2006.

Group 1 (GPI): made $2,113 on every used vehicle they sold (retail) in 2006.

America's Car-Mart (CRMT): made $1,993 on every used vehicle they sold over the last nine months (for the period ending January 31, 2007). I should point out that this calculation was arrived at by taking the company's sales and interest income and then subtracting out their cost of sales and provision for credit losses (and then dividing that figure by the 19,282 used units they retailed over the nine months).

Sonic Automotive(SAH): made $1,925 on every used vehicle they sold in 2006 (although I think the gross margin % figure they provide in order for me to arrive at this number includes wholesale profits/losses as well).

AutoNation (AN): made $1,816 on every used vehicle they sold in 2006 (retail).

6. CarMax's gross per used unit
CarMax sold 18,563 new vehicles in fiscal 2007 at an average price of $23,833. But they paid (on average), $22,664 to buy the car from the manufacturers, as well as any transportation costs and maybe even some detailing. So when it was "all said and done" (once again before "indirect expenses like marketing/advertising costs, the electricity bill, the accountants, etc). CarMax made ~$1,169 in gross profit on every new vehicle they sold.

UnitedAuto Group: made $2,993 on every new vehicle they sold (retail) in 2006. Once again, keep in mind that nearly a third of the company's operations are over seas.

Sonic Automotive: made $2,460 on every new vehicle they sold in 2006.

Asbury Auto: made $2,311 on every new vehicle they sold (retail) in 2006.

AutoNation: made $2,211 on every new vehicle they sold in 2006 (retail).

Lithia Motors: made $2,129 on every new vehicle they sold (retail) in 2006.

Group 1: made $2,105 on every new vehicle they sold (retail) in 2006.

5. CarMax's finance and insurance per unit
CarMax is different than most of the publicly traded franchised auto retailers. CarMax has its own finance subsidiary (CarMax Auto Finance) CAF that makes a lot of the loans.

Whereas most of the publicly traded franchised auto retailers (and I am simplifying this a bit) essentially act as an agent for the bank and collect a "commission" (or spread) for arranging the loan. The spread is simply the difference of what the bank charges for the loan (let's say 6% on a $10,000 loan, so $600), and what rate the dealer charges the customer (let's say 7% on a $10,000 loan, so $700). Dealers generally get somewhere between 1% to 2% "spread" (so in the above example $100).

The franchised dealers also sell other finance related products like extended warranties, insurance products, and even things like satellite radio, and once again, essentially get a "commission" for arranging the sale.

So while not directly comparable then (since CarMax actually owns the finance subsidiary, if I take CarMax's third party "commissions" (extended service plan and third party finance), and the income they generated from CAF and divide it by the total number of new and used vehicles they retailed in fiscal 2007, I come up with a "finance and insurance" per vehicle figure of $762.97.

Management also said on the conference call that they have seen no change in vehicle originations. And that "sub prime" loans financed by drive represented less than 1% of the company's unit volumes in fiscal 2007.

CEO Tom Folliard also said that while the company has been easing lending standards since fiscal 2005, they estimate the favorable impact from this decision had less than a 1% impact on used unit same-store sales in fiscal 2007.

Lithia Motors: made $1,094 in "commissions" for arranging various finance and insurance product sales (on average) for every vehicle they retailed in 2006.

AutoNation: made $1,066 in "commissions" for arranging various finance and insurance product sales (on average) for every vehicle they retailed in 2006.

Group 1: made $977 in "commissions" for arranging various finance and insurance product sales (on average) for every vehicle they retailed in 2006.

Asbury Auto: made $937 in "commissions" for arranging various finance and insurance product sales (on average) for every vehicle they retailed in 2006.

Sonic Automotive: made $922 in "commissions" for arranging various finance and insurance product sales (on average) for every vehicle they retailed in 2006.

UnitedAuto Group: made $917 in "commissions" for arranging various finance and insurance product sales (on average) for every vehicle they retailed in 2006.

America's Car-Mart: made $916 in interest income per vehicle they retailed over the last nine months.

4. CarMax's SG&A as a % of gross profits
Remember those indirect expenses we discussed in the gross profit section? Basically any operating cost gets included in selling, general and administrative (SG&A) expenses.

The electricity bill, the accountants, the people that come by and clean the windows and of course any marketing or advertising expenses, which includes the sales commissions to employees. And CarMax has some really neat sales people. Like famous pro wrestler "Lanny Pofo Genius," who drove my friends lost vehicle registration (in the CarMax parking lot) to my friends place of work on Lanny's way home a couple month ago. Why? "Because at CarMax, the customer comes first" was Lanny's answer.

So for CarMax in fiscal 2007, for every $100 in gross profits they generated (including CAF), they spent about $70.33 in SG&A. If I don't include the CAF income, they spent about $80 in SG&A for every $100 in gross profits.

AutoNation: spent $71.10 in SG&A for every $100 in gross profits they generated in 2006. Keep in mind AutoNation owns the real estate in more than one out of every two stores, so they don't have rent expense for those stores in the SG&A figure like most of the other auto retailers (like CarMax).

Lithia Motors: spent $75.50 in SG&A for every $100 in gross profits they generated in 2006. Similar to AutoNation, Lithia owns the real estate in more than one out of every two stores, so they don't have rent expense for those stores in the SG&A figure like most of the other auto retailers (like CarMax).

Sonic Automotive: spent $76.30 in SG&A for every $100 in gross profits they generated in 2006.

Group 1: spent $76.70 in SG&A for every $100 in gross profits they generated in 2006.

Asbury Auto: spent $76.70 in SG&A for every $100 in gross profits they generated in 2006.

UnitedAuto Group: spent $79.60 in SG&A for every $100 in gross profits they generated in 2006.

America's Car-Mart: spent $57.74 in SG&A for every $100 in gross profits they generated in 2006 (and I determined gross by taking the sales and interest income less SG&A and provision for credit losses and depreciation).

3. Service and parts same store sales
This is when they fix the vehicle (and any parts sales associated with the repair/maintenance). I should point out one BIG difference between CarMax and the publicly traded franchised retailers. I believe the franchised auto retailers all include reconditioning work in their bays as same store sales. And many of the franchised auto retailers have been building/expanding the number of service bays at their stores.

For CarMax, they only record customer and warranty work done in their service bays. And to make (comparing CarMax's results to others) even more difficult, they only provide the total service and parts revenues, not a same store figure (meaning the same number of stores you had open last year versus this year). But, even with about 15% more new stores, CarMax saw a 3% decline (from fiscal 2006) in service and parts revenues.

CEO Tom Foliard said on the conference call that the main reason for the decline in service and parts sales was due to limited capacity (and technicians), and the strong used unit comps. Essentially the company prioritized reconditioning work (which remember does not get included in service and parts sales) over general service and repair work.

UnitedAuto Group: saw a 6.9% same-store sales increase in their service and parts business.

Asbury Auto: saw a 6.3% same-store sales increase in their service and parts business.

Lithia Motors: saw a 5.3% same-store sales increase in their service and parts business.

Sonic Automotive: saw a 5.2% same-store sales increase in their service and parts business.

AutoNation: saw a 2.6% same-store sales increase in their service and parts business.

Group 1: saw a 1.9% same-store sales increase in their service and parts business.

2. Operating income (including floor plan) per store
Floor plan interest expense is the daily interest you pay while the vehicle is sitting on the lot. And as such essentially is considered a "cost of good sold" in the car business. Unfortunately CarMax does not break out their floor plan interest expense in the release.

But given their operating income (so sales and CAF less cost of goods sold and SG&A), CarMax generated about $9.8 million in operating income per store in fiscal 2007. Although even if I subtract out CarMax's net interest expense (interest expense less interest income), I come up with only a little less than $9.8 million in operating income per store.

AutoNation: generated $2.5 million in operating income (less floor plan interest expense) per store in 2006.

Asbury Auto: generated $1.7 million in operating income (less floor plan interest expense) per store in 2006.

Group 1: generated $1.5 million in operating income (less floor plan interest expense) per store in 2006.

Sonic Automotive: generated $1.39 million in operating income (less floor plan interest expense) per store in 2006.

Lithia Motors: generated $771,000 in operating income (less floor plan interest expense) per store in 2006.

UnitedAuto Group: generated $769,000 in operating income (less floor plan interest expense) per franchise in 2006. But keep in mind, about a third of their business is over seas (particularly the United Kingdom) where throughput per store is typically lower (industry-wide). And unlike the rest of the franchised dealers, this is a per franchise count (as that is the only figure they disclose).

1. Tax rate
What you plan to pay "Uncle Sam" (and other foreign entities if you are overseas).

In fiscal 2007, CarMax figures they have to pay the United States government about $38.58 for every $100 in pre-tax income they generated.

UnitedAuto Group: figures about $33.80 for every $100 in pre-tax income they generated in 2006. They benefit from a lower tax rate over seas, but they also benefited from some one time items (it seems) due to good state tax planning.

Group 1: figures about $36.60 for every $100 in pre-tax income they generated in 2006.

Asbury Auto: figures about $37.60 for every $100 in pre-tax income they generated in 2006.

Lithia Motors: figures about $38.60 for every $100 in pre-tax income they generated in 2006.

AutoNation: figures about $38.90 for every $100 in pre-tax income they generated in 2006.

Sonic Automotive: figures about $40.40 for every $100 in pre-tax income they generated in 2006. There is probably some state tax planning (matching up losses and such) that can reduce this figure.

Comments

[eponymousLTC]

That's an excellent analysis. Great job!