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Letter to the Editor

CarMax Reports Record Q2 Results

Total sales increased 23 percent to $1.63 billion from $1.32 billion in the second quarter of last year. Comparable store used unit sales rose 10 percent for the quarter. Total used unit sales grew 21 percent for the quarter. Net earnings increased 39 percent to $41.4 million, or 39 cents per share, compared with $29.9 million, or 28 cents per share, earned in the second quarter of fiscal 2005.

For the third quarter of fiscal 2006 ending November 30, 2005, CarMax expects comparable store used unit sales growth in the range of 2 percent to 8 percent, and earnings per share in the range of 19 cents to 25 cents.

"We are very pleased with our second quarter results," said Austin Ligon, president and chief executive officer, "especially considering the constantly changing environment in the auto retailing marketplace. Continuing excellent execution by our store teams took advantage of a strong increase in store traffic, which we believe was helped in part by the new car employee pricing programs..... Our no-haggle consumer offer makes price-comparing easy, giving us a unique advantage as consumers cross-shop.... We increased our radio advertising during the summer, focusing almost exclusively on our 'we buy cars' message. Even as prices on SUVs fell dramatically, we stayed active in the market, making a fair offer to purchase any consumer's vehicle. In addition, dealers lost some of their negotiating ability on trade-ins as prices of new cars were more transparent."

"We believe the new car pricing programs helped stimulate the robust increase in our appraisal traffic," Ligon added. "Consumers continue to learn that they can come to CarMax for a free appraisal of their cars. Doing so gives them an easy way to realize fair value for their cars if they choose to sell to us and a powerful negotiating tool if they choose to trade in at a new car dealer. The increase in appraisal traffic was the primary driver of the 25 percent increase in wholesale sales.

"New car margins rose nicely," said Ligon. "We actually were able to increase new car prices modestly because our pricing had been below the employee pricing programs. In wholesale, we continued to benefit from our sharp attention to appraisal offer adjustments during the summer's very dynamic market environment. The other sales and revenues margin grew as a result of growth in our service margin, reflecting the greater overhead expense absorption that higher volumes provide."

CarMax Auto Finance income increased 15 percent compared with the same quarter last year. CAF income benefited from the growth in total sales and a modest increase in penetration.

Ligon said, "We have again put a wide range on our quarterly expectations because market conditions continue to be uncertain and we are going into the ever- challenging model year changeover period. We continue to see SUV and light truck price declines. As these declines cause supplemental markdowns, we anticipate additional margin pressure. We expect the CAF gain on loans sold to be approximately 3.5 percent, the low end of our normalized range. Thus far in September, we've experienced a slight benefit from replacement purchases resulting from Hurricane Katrina. However, we have no way of knowing if and to what extent our sales might continue to benefit. Consequently, our current expectations do not include any future benefit from possible replacement purchases."

CarMax opened one superstore during the second quarter, bringing to five the number of superstores opened in the first half of the fiscal year. The company entered the Salt Lake City market with a standard superstore, which opened on August 31, the last day of the quarter. CarMax's plans call for opening four additional superstores during the second half of the year, including two satellite superstores that have opened in September, one in Miami and one in Nashville.

CarMax, a Fortune 500 company, and one of the Fortune 2005 "100 Best Companies to Work For," is the nation's largest retailer of used cars. Headquartered in Richmond, Va., CarMax currently operates 65 used car superstores in 29 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 August 31, 2005, the company sold 278,178 used cars, which is 93 percent of the total 299,138 vehicles the company retailed during that period.

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