CarMax Inc (KMX)

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CarMax Inc. (KMX)

F1Q11 (Qtr End 05/31/2010) Earnings Call

June 23, 2010 9:00 AM ET

Executives

Katharine Kenny – Vice President, IR

Tom Folliard – President and CEO

Keith Browning – EVP and Chief Financial Officer

Analysts

Simeon Gutman – Credit Suisse

Sharon Zackfia – William Blair

Jaison Blair – Rochdale Research

Himanshu Patel – J. P. Morgan

John Murphy – Banc of America/Merrill Lynch

Craig Kennison – Robert W. Baird

Matt Fassler – Goldman Sachs

Dan Gallatin – Deutsche Bank

Brian Nagle – Oppenheimer

Scot Ciccarelli – RBC Capital Markets

William Truelove – UBS

Bill Armstrong – CL King & Associates

Tricia Gill – Wells Fargo Securities

Scott Stember – Sidoti & Company

Presentation

Operator

Good morning. My name is Tanya, and I will be your conference operator today. At this time, I would like to welcome everyone to the Quarter One Fiscal Year 2011 Quarterly Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I will now turn the call over to Ms. Katharine Kenny. Ma’am, you begin your conference.

Katharine Kenny

Good morning. 104 in Richmond today. I’m Katharine Kenny, Vice President of Investor Relations at CarMax. I know you all want an update on the weather here. I’m also pleased to announce that CarMax was added to the S&P 500 as I’m sure you’re all aware.

Thank you for joining our fiscal 2011 first quarter earnings conference call. On the call with me today as usual are Tom Folliard, our President and Chief Executive Officer; and Keith Browning, our Executive Vice President and Chief Financial Officer.

Before we begin, let me remind you that our statements today regarding the company’s future business plans, prospects and financial performance are forward-looking statements that we make pursuant to 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 that involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. 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, 2009 filed with the SEC.

One last comment, I think you will notice today that we have shortened Tom and Keith’s prepared remarks. Our reasoning was to reduce the redundancy of information readily available in the press release and focus more on questions from our conference call participants.

Again, thanks for joining. I’ll turn the call over to Tom.

Tom Folliard

Thank you, Katharine. Good morning everyone. Well, we’re pleased to report a 9% used unit comp, used unit comp growth in the first quarter of fiscal 2011. This was driven primarily by an increase in our customer traffic. On a two-year basis our comp store unit sales trend improved sequentially from a negative 14% in the fourth quarter of fiscal 2010 to a negative 8% in the first quarter.

Now, let me highlight some of our key achievements for the quarter. Year-over-year we improved used vehicle margins by over $200. We delivered both strong sales execution and strong inventory turns.

Our wholesale unit sales grew by 52% and our buy ratio, which is percentage of cars that we appraise, how many of those we buy was over 30% for the quarter, and we also increased wholesale gross profit per vehicle. In addition, CarMax Auto Finance had better than expected quarter which Keith will provide a little more detail in a moment.

Our notable increase in used vehicle gross profit per unit was due to a variety of factors, including greater self-sufficiency, which is the amount of inventory that we retail that is sourced through our store appraisal lane.

Also as you know, the dramatic wholesale price appreciation we saw last year represented a substantial tailwind for our gross profit per used vehicle and it continued to support our gross profit during the first quarter, although to a lesser extent. Other factors supporting the increase in gross profit were our reduction in reconditioning costs, which we have talked about previously and once again strong inventory turns.

Now, I’ll ask Keith to comment on CarMax Auto Finance results. Keith?

Keith Browning

Thanks, Tom. Good morning. As you are aware, this quarter was our first quarter after adopting the new accounting rules for CAF, which require us to account for term securitizations as secured borrowings as opposed to accounting for these transactions using gain on sale accounting.

As expected, our quarter was strong due to the historically high spreads between rates charged to consumers and our funding costs, but it was also positively impacted by better than expected trends in net charge-offs.

Lower charge-offs along with record high recovery rate of nearly 56% caused actual losses to be approximately 30% below our projections and significantly below the trends we’ve been seeing over the last 12 to 18 months.

All of the reasons for these loss trends can’t be known but we don’t believe they were unique to CarMax. We believe other companies are seeing improved loss performance as well as better recovery rates due to the high wholesale vehicle prices.

This strong performance led us to lower our loss reserves for future periods. The combination of better loss performance and lower reserves positively impacted net earnings by approximately $0.03 per share this quarter versus our expectations.

As you know, we provided one-time CAF guidance at the beginning of the fiscal year to assist investor with the transition in the securitization accounting rules. However, we will neither be providing nor updating that guidance on a going forward basis, as is consistent with our current earnings guidance practices.

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