車美仕 (KMX) 2007 Q1 法說會逐字稿

Good morning; my name is Mandy and I will be your conference operator today.

At this time I would like to welcome everyone to the Assistant Vice President Investor Relations conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

Ms. Dandy Barrett, you may begin your conference.

Good morning, everybody.

Obviously it is not the Assistant Vice President's call' it is CarMax's call for the first quarter of our fiscal year '07 earnings release.

I want to thank you for joining us on the call this morning and we have with us Austin Ligon, President and Chief Executive Officer;

Tom Folliard, Executive Vice President Store Operations and CEO-elect; and Keith Browning, Executive Vice President and Chief Financial Officer.

Before we begin, please let me remind you that any 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 provisions 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 affect these expectations, please see the Company's annual report on Form 10-K for the fiscal year ended February 28, 2006 and our quarterly and current reports on file with the SEC.

Now I'll turn the call over to Austin.

Good morning.

As you've seen from our press release, we had a pretty terrific quarter that we're very happy with.

As far as sales go, the stronger traffic in our store was complemented by increased traffic on CarMax.com.

We had continued excellent execution by our store teams and the return to a less volatile more normal sales pattern than we've seen in the first quarter for the past two years.

All of these contributed to both our sales and earnings results.

First-quarter total sales and revenues increased 19% including a 14% increase in total used units and a 6% increase in comp used units.

Wholesale units were up 21% driven by our expanding store base and a strong increase in appraisal traffic.

Our new car units declined, primarily our domestic brands, reflecting softer new car industry trends and our decision to sacrifice some sales to gain margin in our new car business, particularly on domestic brands.

As far as gross margin goes; our total gross profit increased more than 25%, used vehicle gross profit dollars per car increased to $1,924 benefiting from our strong steady sales performance and from some moderation in wholesale pricing which can favorably affect acquisition costs.

Also from the fact that the new car industry appears to be trying to hold or increase prices of new cars -- tends to help very late model used car margins.

Wholesale vehicle gross profit dollars per car were $723, higher than last year's first quarter but meaningfully below the fourth quarter we just left.

This benefited from our continuing enhancement of our wholesale buying process and reflected the normal seasonal moderation in wholesale pricing which we've not seen in the past two years.

As far as CarMax auto finance goes, CAF income increased 20% due to growth in total sales and managed receivables, an increase in loan penetration and an increase in the average amount financed.

We also benefited from lower loss rate assumptions which added about $0.03 to this quarter's earnings.

The gain spreads at CAF remain slightly under our normal rate of 3.5 to 4.5% reflecting the ongoing increases in interest rates.

As far as SG&A went, we were very happy with that, 9.9% SG&A ratio this quarter was down 50 basis points.

We saw the leverage that 6% used unit comps can deliver.

We delivered a lower SG&A ratio despite our higher stock-based compensation cost and additional costs related to moving our data center.

But there are a couple million dollars of favorable timing that we expect to come back and hit us later on in the year.

As far as FY '07 expectations -- for the fiscal year we continue to expect comp store used unit growth in the range of 2 to 8%.

We think it's premature to change our fiscal year earnings expectations so early in the year, so our earnings expectation range remains the $1.25 to $1.47 that we gave at the beginning of the year.

As we've said, this range includes stock compensation expense of $0.18 to $0.20 which now does include the options granted to Tom as part of his new compensation package.

If sales trends continue as we've seen in the first quarter we would expect earnings to be at the upper end of the range.

However, as you know, market conditions have been very volatile for the previous two years and we're not willing to adjust our estimate if necessary until we're further into the fiscal year.

We also have some pretty tough comparisons in the second half especially related to wholesale gross profit.

In addition, we had anticipated that interest rate increases would begin to moderate by now and we've not seen that happen yet, which could put pressure on CAF's gain spread later in the year.

As far as our growth plan goes, we continued our growth plan opening four stores in the first quarter.

We entered Columbus, Ohio market with a standard superstore and a satellite.

We entered Hartford with the first of two stores -- Hartford came now and New Haven will come later in the year.

And Oklahoma City market was our fourth market with a standard superstore.

We plan to open seven more stores this year entering the Fresno market with a standard superstore and adding a standard superstore in Fredericksburg, Virginia and in Gastonia, North Carolina which is a subsidiary market of Charlotte.

We also plan to add satellite superstores in three markets -- L.A. with a Burbank store, Hartford New Haven in New Haven and Austin with the South Austin store.

And we also plan to open our small market test satellite superstore in Charlottesville, Virginia later in the year.

So with that we'll be happy to take some questions.

(OPERATOR INSTRUCTIONS).

Matthew Fassler, Goldman Sachs.

Thanks a lot.

Good morning.

Austin, is this your last call?

Yes, it is.

All the best.

Two questions for you.

First of all, you made reference to the OEMs looking to hold their increased pricing; some color on that would be helpful as well as a little more detail on how that impacts you.

And then secondly, the expense performance that you showed this quarter was really standout and one of the big differentiators I think from prior quarters.

If you could give us color on really what worked from an expense perspective where you found those efficiencies.

Okay.

I'll comment on the first, then I'll let the CEO-elect comment on the second.

As far as the manufacturer pricing, I think it's widely known that Ford and General Motors need to stop discounting at the rate they have been because obviously can't get them the volume to fill their factories and they can't afford the lower volume and discounts.

Now that doesn't mean it's going to succeed, but that's definitely what they've been trying to do.

In terms of what impact it has on us -- to the degree they're able to hold prices, it simply stabilizes the relationship between new cars and used cars and makes it easier for the wholesale market to stay efficient.

As we've said before, incentives are not a bad thing; the only issue is how quickly do they come and how long does it take for the wholesale market to absorb the information and adjust.

So we certainly have seen some softness in their sales, and one of the big questions is are they going to cut is more on production or are they going to try to hold production and discount more and that's one of the reasons we don't want to adjust our annual estimate yet because you never know what they're going to do.

Rankly, I'm not sure they know what they're going to do.

So that remains to be seen.

I'll turn it over to Tom to make some comments on the leverage that we got on SG&A and any comments Keith wants to make as well.

Thanks, Austin.

Matt, there's a little bit of timing in there, but almost all of it is from the fixed leverage that we get from -- that 6% comps delivers, just as we said in the press release.

So no incremental efficiencies, process changes, etc., that would make the difference?

There are modest changes we've made as we continually describe to take expenses out, but we're very careful about doing those and making sure that we don't affect the customer experience when they come in.

So while we try to get better on expenses it's really leverage from the comps.

And when would the -- to the extent that timing was an issue, when would the delayed expenses flow through the P&L?

It's has to do with a variety of items.

Quite honestly, there's no one expense, it's just things that we added up to a couple million dollars that we thoroughly expect to happen in the second and third quarters, but it wasn't any one significant thing.

So a couple million is about the magnitude?

Yes.

Thank you.

Matthew Nemer, Thomas Weisel Partners.

Good morning.

First question is on the sales channels.

I'm wondering if you're seeing increased sales through the auto trader agreement that you signed?

I seem to recall that you put all your inventory up on auto trader and I'm wondering if you've been able to track how that's working for you?

Yes, in terms of sales through that channel, Auto Trader is really an advertising source, and all it really does is refer people either to us or to CarMax.com.

And I think the early read is we think it's worth the money that we're spending on it, but it's too early to say anything beyond that.

I don't think we'd -- we certainly wouldn't attribute the performance of this quarter to our shift to Auto Trader.

But I think on balance we feel like the money is better spent there than on some of the newspaper expenditures we were doing before and we think we are getting our money's worth.

Okay.

And then the second question is any early read on the buying center in Atlanta and with that's doing for the store that's close to that center?

The only comment we'd make is that it's open and we're happy with it so far, but it's way too early to draw any conclusion.

We're happy so far, but we need to get several months under our belt before we would even begin to draw a conclusion on it.

So, so far so good.

And then lastly, on the wholesale gross profit per vehicle, that continues to be strong even though you've seen a moderation in wholesale prices.

And so I'm wondering if this is sort of the new bar.

Or do we ever see that go back to 400 or $500 or have the structural improvements in your offer sort of changed that indefinitely?

This is Keith.

The answer is I think for this time of the year we think that this is probably an appropriate bar, but when we get into the second half, especially the third quarter when we expect wholesale prices to significantly decline, that we wouldn't expect to achieve this level at that time of the year.

And this is Tom.

One of the things we've said in the past is that our wholesale business is such an integrated piece of the total consumer offer that there's always a balance between wholesale and retail and what we monitor very closely is our buy rate.

And if we have to move our offers up in order to help drive retail sales, that's a trade-off we have to evaluate all the time.

Okay, that's helpful.

Thank you.

Sharon Zackfia, William Blair.

Good morning.

I don't think anyone asked this already so I'll ask.

Can you talk about trends in the quarter, both on the retail and wholesale side?

And then maybe separately, the gross margin dollars per retail car, I understand there are a lot of puts and pulls with that, but is there any reason why we shouldn't see some nice increases in that year-over-year going forward if wholesale trends remain where they are?

When you say trends in the quarter, do you mean during the first quarter?

Yes.

Any observation you want to make on that, Keith?

They were very steady.

Compared to what we've seen previously, it was basically a pretty steady quarter.

So all three months -- there were little pluses and minuses, but all three months were pretty much in line with expectations and not at all like the prior two years.

And the second part of your question again?

The gross margin dollars per retail car?

I mean, obviously up nicely year-over-year.

It didn't look like you got a lot of pushback from customers on taking a little bit more profit per retail car with wholesale prices down?

And (multiple speakers).

This is Tom.

Part of what drives our margins is our fluctuation in inventory and the way we manage our inventory through our pricing model.

And as Austin just mentioned, we had a party steady quarter which really can help us get a little bit of extra margin out of it because we don't have some of the fluctuations we've had in the past with total inventory level.

So a real steady quarter sometimes can help and this one sure did.

And if you'll remember, historically, up until the last two years, the first quarter is one of our two strongest quarters.

So it's hopefully a low bit more returns of what we would normally expect in the first quarter.

Great.

Austin, have fun in Buton.

Thanks.

Scot Ciccarelli, RBC Capital Markets.

Can you help us understand a little bit what else might be going on kind of industry wide in terms of used car pricing?

I heard obviously the comments you made regarding what the new car guys are doing, but I guess some of the third-party data and what some of the auction houses are talking about is pricing starting to soften a little bit, unless I'm mistaken on that.

And yet, obviously that's not what you saw.

Can you help us understand a little bit the dynamic there?

I think the first thing to understand is when they talk about prices softening, you had unusually strong prices through the winter and it's normal that prices will soften -- in the spring and in the summer you start to expect price declines.

And having had a stronger than expected winter, particularly at the low end of product, I don't think it's unusual that you would see that or outside of our expectation.

The other comment I'd make is in general what we've said is you can't figure out a lot about where the used car business is going just because wholesale prices are increasing or decreasing, particularly the overall index.

Because the overall index isn't -- you don't buy any index, you buy individual cars.

And last year we saw a fairly stable index which hid absolute chaos below with huge collapse of SUVs and skyrocketing prices on midsize and compact cars.

So we don't draw a lot of conclusions from those overall indices.

I'll let Tom make any other comments on the overall wholesale market though.

That pretty much sums it up right there.

I have nothing to add really.

I guess I understand that.

I know you guys have never been one to really track that index.

But it seems to me as you become larger, I would think at least theoretically, you'd start to track the index a little bit more just because of where you are in your gross (multiple speakers).

Is that an erroneous assumption?

I'm not sure that we don't track it.

What I'm saying is that the index is not a key determinant of what we see going on in the market in terms of retail sales.

It certainly relates to what we see going on in the auction market in average of all cars.

But you don't buy the average of all cars, you go out and buy specific cars.

And what really matters is the very specific indices of the individual cars and how those relate to their counterparts in the new car market.

And that we track in excruciating detail with every piece of information that's available publicly or to us on a proprietary basis.

Okay, fair enough.

And then just one more clarifying comment if you could, Austin.

Can you give us any more detail regarding your expectations for the wholesale business during the course of the year?

Obviously that was a major driver for you guys last year.

You had another very good quarter with it this year so far.

Can you give us any other indication or detail regarding your expectations for that segment going forward?

I think as Keith said, in general we'd expect it to be fairly normal in the summer, we would expect it to -- certainly margins to go down in the fall when prices go down.

It would be surprising if it were as strong next winter as it was this winter because we had an unusual benefit, particularly on the very low value cars from Hurricane Katrina and very strong demand for those cars.

So we'd expect to have a tough comparison in the fourth quarter.

Does that help?

Yes, it does.

Thank you.

Bill Armstrong, CL King & Associates.

Good morning.

The lower vehicle acquisition cost, is that mostly at the wholesale level or the appraisal offers or is it a combination of the two?

It's a combination of the two.

And your wholesale gross margin per vehicle was up 15% year-over-year, a moderation from the rate late last year, but still a pretty good increase despite the pricing moderation.

And I would say that that tended to come earlier in the quarter because we still had some of the benefit from the winter.

Okay, okay.

And finally, your average -- and I know you tend not to track this or put a lot of importance on this, but your average retail selling price was up about $1000.

Anything new to draw from that?

Was that just coming from mix or are there any pricing trends that might have impacted that?

That's almost exclusively mix related.

SUVs are a little stronger this year than they were last year.

Last year they were in all-out collapse, this year they were in something less than all-out collapse.

Oh, and actually, despite the gas prices in the first quarter we have a higher mix of SUVs this quarter than we did last first quarter because we had the collapse last year so we got out of some of that inventory.

So if you compare year-over-year we have some more sport utilities this quarter than we did last year's first quarter.

Okay, that's helpful.

Because I was wondering how you were selling more SUVs with gas prices where they are.

It's really the comparison.

And it's -- look, used SUV prices got beaten down so low by last winter that even with current gas prices there are some pretty good deals out there.

And we've talked about that before, that's why it's nice to work in a fairly efficient wholesale market is it will adjust for whatever has to happen to clear the market.

And even a lower-priced SUV is still more expensive than a compact.

Right, right.

Okay, thanks.

Rod Lache, Deutsche Bank.

Good morning, everybody.

Congratulations.

First, I've got kind of more of a macro question.

We're seeing higher rates in gas prices having some effect on the new retail market.

And I'm just wondering whether you feel that your segment of the market would continue to be countercyclical if the consumer continued to slow?

Typically -- and I can only speak to history -- typically what rates and gas prices do is affect the mix of what people buy, not how much they buy by and large.

Because once again, the wholesale market will adjust those prices and the challenge for us when it occurs is does it occur in a study enough fashion that the wholesale market is pretty efficient or does it occur so sharply that it takes a while for the wholesale market to catch up and therefore our inventory is a little out of line with what the ideal inventory might be.

So far this year it's been a much steadier process.

You'd have to have lived in a cave to be surprised that gas prices went up this spring.

And interest rates have been going up steadily and I think the consumer has adjusted to that.

So in the used car market it's really a need driven market.

The higher the interest rate you get less car, but you still have to go meet that need.

If you need a minivan you still need a minivan.

So at least based on history those are going to have typically a much bigger impact on the new car business than on the used.

Obviously there are other factors aside from these that are pressuring consumers.

So if you were to see -- the new car business used to be much more cyclical than it's been recently.

But if you were to think back to other periods when there were big dips or bigger dips in the used car market, obviously your business model was less mature than it is now, but would you expect the volumes to be fairly resilient and used even under that kind of scenario?

Once again, you can only look at history.

But the history was that when the new car business was much more cyclical the used car business was relatively a cyclical.

And history is what it is.

It has happened, conditions always change and you never know how the new set of conditions are going to affect you.

But based on what we've seen historically this has been a less cyclical business than new cars.

And clearly this quarter with rising gas prices the consumer response was nowhere near as dramatic as it was last year in the summer.

As Austin mentioned, nobody was surprised, they were a little bit more conditioned, and having gone through it a couple of times now we've learned and applied the lessons we've learned with inventory management to this quarter, so we're a little better prepared to handle it as well.

Great.

And secondly, could you just give us a little bit more color on when you'd expect the CAF margins to revert back to normal?

When Keith is put in charge of the Federal Reserve probably.

I think as Keith said before, as long as interest rates keep going up we expect there to be some continuing pressure.

And the latest thing we've all heard, as you have, from the Fed is a somewhat more aggressive rather than -- attitude toward interest rates that suggest that they may continue to go up for longer than people thought and maybe even go up more than people thought, so that will continue to put pressure on until they level out would be our best guess.

Great, thank you.

And Keith has not gotten an appointment letter yet.

Or even a phone call.

He can use this as a reference if he'd like.

Thanks.

Hardy Bowen, Arnhold & Bleichroeder.

That's a great quarter.

It must be very satisfying.

Yes, it was.

How much did the mix of business influence the gross margin dollars per vehicle in this quarter?

As I mentioned earlier, Hardy, it's mostly the smoothness of the inventory and the consistency of sales we saw through the first quarter less mix.

So it's not mix to a great degree?

It's primarily turns.

Okay.

And the price per vehicle, do we expect that to be equally as high in the second quarter I would presume the trends that we're seeing?

I don't think anybody actually believes us when we say this, but we have no expectation on that and our general view is it doesn't matter.

That we sell what the market demands and if the mix shifts it toward a higher average retail price point we'll sell that, and if it shifts toward a lower average retail price point we'll sell that.

Our experience is that is not the key driver.

The key driver of this quarter was not the fact that our average retails were up but was the fact that our sales were strong and our inventory turn was strong.

And I think, Hardy, one of the things we've gotten more and more comfortable with is our ability to move with whatever is going on in the marketplace, whatever the consumer demand tells us to do.

So we could tell you something now and if we saw something happen in the second quarter like we did last year with Katrina, our ability to move our inventory along with demand is going to have an influence on the average selling price and I think we're getting better and better at that.

And I'm pursuing that we're seeing strong volume in Texas because of hurricanes.

Is that fair to say?

We have been, but that's I think well behind us.

Okay.

And California, it seems like these units are doing very well.

What are your thoughts on California?

As we've said before, we're quite happy with L.A.

We're very happy with the advertising strategy we undertook there and we're going to continue to add more stores in L.A.

We've always been happy with Sacramento and we'll continue to add more stores in the other California markets.

It is 37 to 38 million people and the biggest car market on earth.

And we're still not even remotely fully penetrated there.

So we're happy with the way California is going and we'll continue to add stores there.

Okay.

Sounds good.

And Austin, have a wonderful retirement if you call it that.

Okay, thanks a lot.

I'll give you a call from Buton.

Okay.

Having no more questions I think we'll bid you adieux.

Thanks a lot for joining us.

Bye.

Thank you for participating in today's conference.

You may now disconnect.