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Letter to the Editor

CarMax Reports Q4 and Fiscal Year 2005 Results

For the quarter, net earnings increased 32 percent to $29.7 million, or 28 cents per share, compared with $22.5 million, or 21 cents per share, reported in the fourth quarter of fiscal 2004. For the year, net earnings were $112.9 million, or $1.07 per share, a 3 percent decrease compared with $116.5 million, or $1.10 per share, earned in fiscal 2004.

"We were very encouraged by the way our business rebounded in the fourth quarter," said Austin Ligon, president and chief executive officer. "The strong fourth quarter sales growth was reflected in our fourth quarter earnings, with earnings up 32 percent on a 25 percent increase in revenues, even though store bonus payouts were higher than planned. Our superstores just kept beating their bonus targets, even as we continued to raise the targets in response to the improving sales trends. The rebound in sales and earnings growth also reinforced our belief that the softness we experienced in the first half of the fiscal year was due to external market factors, not to store execution issues. When traffic levels increased in the latter half of the year, so did our sales. Based on our confidence in our business model, we continued our planned store growth, opening nine superstores during the year, an 18 percent increase to our superstore base. Both our established and our newer stores in all our regions have shown renewed sales strength.

"Our used vehicle gross profit dollars per unit were within our range of expectations for the quarter," Ligon said. "For the year, we were able to reach our gross profit dollar targets for used vehicles despite disappointing first-half sales. In the fourth quarter, wholesale margins increased significantly, as is typical in the fourth quarter. Fourth quarter margins in other sales and revenues declined reflecting primarily the approximately 5 percent incremental increase in sales financed by DRIVE, our new subprime finance provider."

DRIVE purchases subprime retail installment contracts at a discount. This discount is reflected in the CarMax income statement as an offset to the fees received from third-party providers of prime and nonprime auto financing.

"CAF income was up modestly in the fourth quarter, as the benefit of the growth in our originations and managed receivables more than offset the decrease in the gain spread," said Ligon. "The gain spread, which represents the difference between average interest rates charged customers and our cost of funds, declined to 3.7 percent in this year's fourth quarter from 4.5 percent in last year's fourth quarter. For the year, CAF income was 3 percent below last year's level, reflecting the decline in the gain spread to 3.8 percent in fiscal 2005 from 4.7 percent in fiscal 2004. Throughout fiscal 2005, CAF income comparisons were challenged by an environment where our funding costs rose more rapidly than consumer finance rates."

"Our strong sales generated modest expense leverage in the quarter, with the SG&A ratio declining to 10.3 percent compared with 10.5 percent in last year's fourth quarter," said Ligon. "We generated positive leverage despite both the higher-than-expected store unit bonuses and the growing proportion of our store base that is comprised of stores not yet at base maturity. For the year, the expense ratio was 10.4 percent this year versus 10.2 percent last year."

"Assuming continuing healthy sales performance, we currently anticipate comp store used unit growth for fiscal 2006 in the range of 5 to 9 percent," said Ligon. "Comp growth should be stronger in the first half of the year simply because of the easier first half comparisons with last year. We are mindful that some of the factors that may have played a role in the weakness experienced last spring and summer are at play in the marketplace today: gas prices are rising once again; interest rates continue to increase; wholesale prices are again rising in the spring more than historical norms would indicate; and domestic auto manufacturers are struggling, which makes their incentive behavior difficult to anticipate. We are hopeful that these factors will not cause undue disruption in our market environment."

"We currently expect fiscal 2006 earnings per share in the range of $1.20 to $1.30," Ligon said. "We expect CAF income to increase only slightly from the fiscal 2005 level, as projected continuing interest rate increases will likely cause our cost of funds to once again rise more rapidly than consumer rates. Consequently, we expect CAF's gain spread for fiscal 2006 to be slightly below the normalized range of 3.5 to 4.5 percent. Our earnings expectations also reflect the rollout of marketwide advertising in Los Angeles for the first time as we open our fifth L.A. store. Finally, we expect between $2 million and $3 million in incremental costs related to separating our data center operation from Circuit City -- the last cost expected to be added as a result of our separation from Circuit City. As a consequence of these higher costs, we would expect to see modest SG&A leverage if we are at the upper end of our expected comp unit growth range. We currently expect our tax rate in fiscal 2006 to be approximately 38.4 percent."

CarMax, a Fortune 500 company and one of the Fortune 2005 "100 Best Companies to Work For," is a leading specialty retailer of used cars. Headquartered in Richmond, Va., CarMax currently operates 59 used car superstores in 27 markets. CarMax also operates seven new car franchises, all of which are integrated or co-located with its used car superstores. During the twelve month period ended February 28, 2005, the company retailed 253,168 used cars, which is 92 percent of the total 273,804 vehicles the company retailed during that period.

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