CarMax Reports Second Quarter Results

September 26, 2018

RICHMOND, Va.--(BUSINESS WIRE)--Sep 26, 2018--CarMax, Inc. (NYSE:KMX) today reported results for the second quarter ended August 31, 2018. Year-over-year highlights include:

Net sales and operating revenues increased 8.6% to $4.77 billion. Used unit sales in comparable stores increased 2.1%. Total used unit sales rose 5.8%. Total wholesale unit sales increased 14.6%. CarMax Auto Finance (CAF) income increased 1.6% to $109.7 million. Net earnings increased 21.8% to $220.9 million and net earnings per diluted share increased 26.5% to $1.24.

Second Quarter Business Performance Review

Sales. Total used vehicle unit sales increased 5.8%, while comparable store used unit sales rose 2.1% versus the prior year’s second quarter. The comparable store sales performance primarily reflected improved conversion, which we believe benefited from the solid performance of our store teams and contributions from our digital initiatives, partially offset by lower store traffic.

Total wholesale vehicle unit sales increased 14.6% compared with the second quarter of fiscal 2018, driven by an increase in appraisal traffic, the growth in our store base and a higher appraisal buy rate.

Other sales and revenues increased 12.4% compared with the second quarter of fiscal 2018. Extended protection plan (EPP) net revenues rose 15.2%, reflecting the increase in our retail unit volume and cost decreases from plan providers, as well as a $4.4 million benefit associated with the accelerated recognition of revenue related to extended service plans. The accelerated recognition results from our adoption of the new revenue recognition accounting standard in the first quarter of fiscal 2019. Net third-party finance fees improved $1.9 million, reflecting shifts in our sales mix by finance channel, including an increase in our Tier 2 and a decrease in our Tier 3 sales.

Gross Profit. Total gross profit increased 7.7% versus last year’s second quarter, to $650.6 million. Used vehicle gross profit rose 5.9%, reflecting the 5.8% increase in total used unit sales. Used vehicle gross profit per unit remained stable at $2,179 compared with $2,178 in the prior year period. Wholesale vehicle gross profit increased 10.8% versus the prior year’s quarter, driven by the 14.6% increase in wholesale unit sales, partially offset by a decrease in wholesale vehicle gross profit per unit to $919 from $950 in last year’s second quarter. Other gross profit increased 12.2%, reflecting the improvements in EPP revenues and net third-party finance fees, partially offset by a decrease in service profits, which were affected by reduced leverage of service department overhead costs.

SG&A. Compared with the second quarter of fiscal 2018, SG&A expenses increased 12.0% to $453.6 million. Factors contributing to the increase included the 10% increase in our store base since the beginning of last year’s second quarter (representing the addition of 18 stores), and a $6.5 million increase in stock-based compensation expense. Advertising expense rose 17.9% largely reflecting timing shifts compared with the prior year. We also continued to update our technology platforms and support our core strategic initiatives as part of our focus on improving the omnichannel customer experience. SG&A per used unit was $2,304 in the current quarter, up $126 year-over-year. The increase in stock-based compensation expense increased SG&A per unit by $28.

CarMax Auto Finance. (1) Compared with last year’s second quarter, CAF income increased 1.6% to $109.7 million. The increase reflected the net effects of an 8.6% increase in average managed receivables, an increase in the provision for loan losses and a slightly lower total interest margin percentage. The total interest margin percentage, which reflects the spread between interest and fees charged to consumers and our funding costs, was 5.7% of average managed receivables compared with 5.8% in last year’s second quarter. The provision for loan losses increased to $40.0 million from $32.9 million in the prior year quarter. The allowance for loan losses as a percentage of ending managed receivables remained stable at 1.13% as of August 31, 2018, compared with 1.15% as of August 31, 2017, and 1.13% as of May 31, 2018.

Interest Expense. Interest expense rose to $18.0 million from $16.8 million in the prior year’s second quarter, primarily reflecting higher interest rates in fiscal 2019.

Income Taxes. The effective tax rate fell to 23.7% in the second quarter of fiscal 2019 from 37.5% in the prior year’s second quarter, primarily due to the reduction in the federal statutory tax rate following the enactment of the 2017 Tax Act. The current quarter’s effective tax rate was also reduced by share-based awards that settled during the quarter.

Store Openings. During the second quarter of fiscal 2019, we opened three stores. We added two stores in existing television markets (Albuquerque, New Mexico, and Oklahoma City, Oklahoma), and we entered the Macon, Georgia, television market.

Share Repurchase Activity. During the second quarter of fiscal 2019, we repurchased 2.3 million shares of common stock for $171.2 million pursuant to our share repurchase program. As of August 31, 2018, we had $638.3 million remaining available for repurchase under the current authorization.

Supplemental Financial Information

Amounts and percentage calculations may not total due to rounding.

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