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CarMax's 2009 Q4 Conference Call

|Includes: CarMax Group (KMX)

Operational observations for the 2009 Q4 Conference Call, CarMax (NYSE:KMX), for the quarter ended February 28, 2010.

·         CarMax posted a net income of $48 million, excluding special items, in their 4th quarter 2010. 

·         Operating Revenue increased 25% to $1.83 Billion in the quarter.

·         Used Vehicle sales increased 24.5%, yet New Vehicle sales dropped 17.9%.

·         CarMax’s gross profit on used vehicles has “remained above $2,000 for five consecutive quarters”.

While it is evident that KMX is improving operationally, it is still difficult to get meaningful same store, year over year analysis, due to the extreme nature of the retail car industry in Q4 2008.

This conference call, led by CEO Tom Folliard, provided several operational highlights; I found two extremely noteworthy items.

1-     CarMax announced the successful reduction of their reconditioning costs by $200 per used car.  They previously announced a $100 reduction in June.  They also stated that “wholesale vehicle sales surged 52.6% to $209.5 million driven by significant increases in both their appraisal traffic and appraisal buy rate of used vehicles.”

These two statements taken together suggest a serious operational improvement on CarMax’s behalf.  Increased appraisal purchases result in larger inventories that are “uncontrolled” at the time of purchase.  In other words, CarMax has zero control over which vehicles will come through their appraisal lane.   Usually, these types of vehicles will provide a more challenging reconditioning analysis and can result in increases in reconditioning costs. 

These numbers might slightly skew if customers are trading in an exceptionally high number of late model vehicles (due to the Toyota recall, for example).  However, the more likely scenario is that Mr. Folliard’s buying staff is once again making significant operational improvements to their reconditioning processes.  It should also be noted that these reconditioning costs were trimmed while improving their customer service scores (based on their comeback ratio and customer surveys), which makes this accomplishment even more noteworthy.

Mr. Folliard also touched on one of the most important trends affecting the used car industry… a tight supply and actual wholesale appreciation.  He stated, “It’s the most unusual year for appreciation in the wholesale business that we’ve ever seen”.

2-     CarMax announced they expect capex to increase to $90 million in fiscal 2011 as they resume their growth strategy.

CarMax said they are again pursuing their growth strategy, which will result in added real estate and construction costs.  Mr. Folliard also mentioned other areas that will receive attention; these include “continued improvements to as well as several other big IT projects and additional training for all of our associates.”

This kind of statement can easily become lost in a long conference call, yet it is a very telling statement.  First of all, given the past and current environments, this kind of statement is a signal of the company’s strength and a sign of their commitment to their long term strategy.  Any further improvements to CarMax’s information technology or their web presence will only widen their advantage over others in their industry.  Lastly, any retail automotive company operating in today’s environment that provides additional training for their associates is demonstrating their willingness to make the necessary investments today to reap future rewards.

For the complete Q4 transcript at Seeking Alpha, click here.

Disclosure: No Positions