Full Transcript of CarMax’s F3Q06 (Qtr Ending Nov 30, 2005) Conference Call - Prepared Remarks (KMX)

Dec.26.05 | About: CarMax Group (KMX)

Here’s the entire text of the prepared remarks from CarMax’s (ticker: KMX) fiscal Q3 2006 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Executives:

Dandy Barrett, Assistant Vice President, Investor Relations

Austin Ligon, President and Chief Executive Officer

Keith Browning, Executive Vice President and Chief Financial Officer

Analysts:

Mark Rozario, Goldman Sachs

Sharon Zackfia, William Blair

Scot Ciccarelli, RBC Capital Markets

Michael Heifler, Deutsche Bank

William Armstrong, CL King & Associates

John Zolidis, Buckingham Research

David Campbell, Owl Creek

Gabriel Holmes, Philadelphia Financial

Hardy Bowen, Arnhold & Bleichroeder

John Murphy with Merrill Lynch

Scott Nesson, Lehman Brothers

Operator

Good morning, my name is Shannon and I will be your conference facilitator. At this time I would like to welcome everyone to the CarMax Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remark there will be a question and answer session. If you would like to ask a question during this time simply press “*” then the “1” on your telephone keypad. If you would like to withdraw your question press “*” then the “2” on your telephone keypad. Thank you. I would now like to turn the call over Dandy Barrett, Assistant Vice President of Investor Relations. Please go ahead ma’am.

Dandy Barrett, Assistant Vice President, Investor Relations

Good morning, thank you for joining us this morning. On our call today are Austin Ligon, our President and Chief Executive Officer and Keith Browning, our Executive Vice President and Chief Financial Officer. Before we begin please let me remind you that our statements today about the company’s future business plans, prospects and financial performance are forward looking statements that we make relying on the Safe Harbor Precisions of the Private Securities Litigation Reform act of 1995. These statements are based on management’s current knowledge and assumptions about future events. They involve risks and uncertainties that could cause actual results to differ materially from our expectations. For additional information on important factors that could affects these expectations please see the companies annual report on Form-10Kfor the fiscal year ended February 28, 2005 and our quarterly and current reports on file with the SEC. Now I will turn the call over to Austin.

Austin Ligon, President and Chief Executive Officer

Thanks Dandy. Good morning, thanks for joining us, I know some of you have had some traffic challenges this morning, so we doubly appreciate you’re being here wherever you are. Today we reported third quarter sales and revenues increased 17%, including a 13% increase in total used units and a 3% increase in comp used units. I’ll point out that on a two-year basis the used unit comps were up 5% which is higher than the 3% two-year comp of first half. Traffic was up and execution continued to be strong. We sustained positive momentum even as the cross-shopping benefit from the new car employee pricing promotions ended. We saw a fair amount of sales volatility during the quarter including a significant slowdown in the last 10 days of November that dropped our comps for the quarter from 4% to 3%. The first three weeks of December have moved back to a fairly solid trend.

The new car unit sales and comps were down, reflecting the general trend in the overall new vehicle market. Wholesale sales increased 31%, driven by both higher average prices and unit growth. We didn’t see much of a deceleration in overall wholesale pricing as normally occurs in the fall despite a significant drop in SUV pricing. We believe contributing factors included the strength in compact and mid-size car prices resulting from higher gasoline costs and the fear of those costs and the limited availability of 2005 model year close-out vehicles following the success of the new car employee pricing programs.

Wholesale unit growth was consistent with our total used unit growth, and we achieved solid improvement in our appraisal purchase rate on a trend basis from the summer; it was actually down slightly on a year-over-year basis. Our overall gross profit per unit increased approximately $200. This level of increase was unusual for what is normally our toughest, most volatile quarter. Our used car gross profit per unit was similar to last year while our new car gross profit per unit declined modestly. Our wholesale gross profit per unit was up sharply, however. As we normally do in third quarter, we adjusted appraisal offers to incorporate the anticipated typical drop of wholesale prices. However, our wholesale auctions reflected the more modest actual price declines in the marketplace, giving us somewhat higher profit on wholesale.

Gross profit on other sales and revenues also improved, primarily from higher ASPs which carry a 100% gross margin the way that we report them and higher service margins which benefited from greater overhead absorption. As far as CarMax Auto Finance goes, CAF income was up 37% benefiting from a growth in unit sales and managed receivables, a $0.02 per share benefit from favorable valuation adjustment due to loss rate improvements. We had a similar benefit of $0.01 per share in last year’s quarter and $0.01 per share benefit from the new public securitization issued in September compared to expectations.

For the quarter, the gain on loans originated and sold was 3.6%, slightly higher than our original expectation of 3.5. The gain spread last year was 3.5%. SG&A ratio was up 11.4% this quarter, up 10 basis points from last year. The modest growth in unit comps was not sufficient to provide SG&A leverage. In addition, as we have noted before, the high ratio of stores in our base that are not yet at basic maturity, which we define as four years, was 49% this quarter compared to 40% last year. This continues to adversely affect SG&A leverage. This factor will begin to flatten out in third quarter next year.

As far as fourth quarter expectations, we now expect used unit comp growth in the range of minus 4 to plus 2%, assuming we don’t experience abnormal winter weather events. This would give us a range of positive 4% to positive 6% for the full year. We’re up against a challenging 12% comp in last year’s unusually strong fourth quarter. You may recall that last year’s comps included a 5 percentage point gain related to the rollout of our DRIVE subprime financing source. We do not anticipate any additional comp pickup from DRIVE this year

Given the volatile state of the domestic new car industry, we continue to be cautious and concerned about the potential for large short-term disruptive actions from the domestic manufacturers. We expect fourth quarter EPS to be in the range of $0.25 to $0.31 compared to $0.28 last year. This implies for a full-year EPS in the range of $1.27 to $1.33, representing annual earnings growth of 19% to 24%. We anticipate fourth quarter cap gain spreads at roughly 3.5%, similar to quarter 3, and still at the low end of our normalized range. The gain spread in last year’s fourth quarter was 3.7%.

As we noted in the release, we have decided to stop providing quarterly guidance at the beginning of this coming year, and we will provide only annual unit comp and earnings expectations. We’ve received a lot of feedback in the recent months from shareholders and other parties on our comp earnings and guidance practice, most of which we solicited. We recognize that over the last two years the market’s been more volatile than historically, making it more difficult for us to accurately forecast our short-term performance and we believe this has contributed to some volatility in our stock. We would prefer to place the emphasis externally as we do internally on the longer-term growth opportunities in the store based, Sales, Earnings and returns.

Our growth plan continues as expected. We opened Virginia Beach and Wichita as standard superstores in third quarter and added satellite superstores in Miami and Nashville. We opened a total of nine stores for the fiscal year, representing a 16% increase in our store base. We have no openings scheduled for fourth quarter. In fiscal year ending 2007, we currently plan to add 11 superstores, another 16% increase in the store base. This will include two more stores in our LA market in Burbank and Torrance; our first entry into the Northeast United States, first in Hartford and then in New Haven, they are both in the same TV market. So those of you in New York and Boston will actually have easier access to CarMax store, whether you want to buy or sell us a car, and includes our first test of the CarMax model in a smaller market. We’ll be opening a store in Charlottesville, Virginia which has a TV viewing audience or DMA of approximately 185,000 people. This will be a smaller physical format with different staffing and different inventory levels. We will be testing this to try to understand how the store, both standalone small markets as well as smaller trade areas in our larger markets, we expect to learn quite a bit from this and this will help us to continue our growth plan and get into some areas that we currently can’t get into. So with that I will be glad to take some questions.

Dandy Barrett, Assistant Vice President, Investor Relations

Shannon?

Question-and-Answer Session

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