CarMax Reports Second Quarter Results; Revises Fiscal 2008 Expectations

RICHMOND, Va., Sept. 19 /PRNewswire-FirstCall/ -- CarMax, Inc. today reported results for the second quarter ended August 31, 2007.

* Total sales increased 10% to $2.12 billion from $1.93 billion in the second quarter of last year. * Comparable store used unit sales rose 3% for the quarter. * Total used unit sales grew 11% in the second quarter. * Net earnings increased 20% to $65.0 million, or 29 cents per diluted share, compared with $54.3 million, or 25 cents per diluted share, earned in the second quarter of fiscal 2007. * For the fiscal year ending February 29, 2008, CarMax now expects comparable store used unit sales in the range of 1% to 3% and earnings per share in the range of $0.92 to $0.98. Second Quarter Business Performance Review

Sales. "Despite missing our sales targets for the first half of the year, we were relatively pleased with our sales performance, given the context of the current macro-economic conditions and the challenging automotive retail environment over the past few months," said Tom Folliard, president and chief executive officer of CarMax. "While our 3% increase in comparable store used unit sales represents a deceleration in our growth rate compared with recent quarters, we believe that we nevertheless continued to gain share in the late- model used vehicle market during the quarter."

Our sales growth was supported by increases in traffic, both in our stores and on our website, and the continued consistent availability of credit from CarMax Auto Finance (CAF) and our third-party finance providers. During the second quarter, we opened one used car superstore in Torrance, California, our seventh store in the Los Angeles market.

Wholesale unit sales increased 15% in the second quarter, somewhat greater than the 11% increase in total retail used unit sales, reflecting the easier relative comparison with the second quarter of last year. Other sales and revenues rose 10%, supported by a 14% increase in extended service plan revenues and an 11% net increase in third-party finance fees.

New vehicle unit sales declined by 15%, reflecting the combination of softer new car industry sales trends and the August divestiture of our Orlando Chrysler Jeep Dodge franchise. Following this divestiture, we now operate six new car franchises.

Gross Profit. Total gross profit per retail unit climbed to $2,869 in this year's second quarter compared with $2,755 in last year's quarter. The majority of the increase was attributable to an improvement in wholesale gross profit per unit to $796, up $97 compared with last year's second quarter. Wholesale profit was relatively consistent with the $800 per unit reported in this year's first quarter, however. The wholesale operation continued to benefit from our superior car-buying process, as well as continued strong dealer attendance at our auctions.

CarMax Auto Finance. CAF income decreased approximately 8% to $33.4 million compared with $36.5 million in last year's second quarter. In the prior year period, CAF income included approximately $6 million of favorable adjustments, primarily related to lowering loss rate assumptions on loans originated in 2003, 2004, and 2005. Excluding the effect of adjustments, CAF income increased 9%, reflecting our retail sales growth, a slight improvement in the gain on loans originated and sold from 3.9% last year to 4.0% in the current quarter, and an increase in total managed receivables.

SG&A. The SG&A ratio improved to 10.1% in this year's second quarter compared with 10.4% in the corresponding quarter of last year. Last year's second quarter SG&A ratio included the effect of approximately $5 million of share-based compensation expense related to the accelerated vesting of stock options held by our former chief executive officer upon his retirement. Excluding the effect of the accelerated vesting, last year's second quarter SG&A ratio would have been 10.1%.

Income Taxes. The effective tax rate increased to 39.5% in the current quarter compared with 38.2% in the second quarter of last year. The higher effective tax rate, which reduced earnings by approximately $0.01 per share, was primarily the result of the establishment of a valuation allowance against certain deferred tax assets.

Earnings and Earnings Per Share. "Although our comparable store used unit sales growth was slower than in recent quarters, the improvement in our gross profit per unit allowed us to increase earnings at a rate higher than our sales growth," said Folliard.

Supplemental Financial Information Sales Components Three Months Ended Six Months Ended (In millions) August 31 (1) August 31 (1) 2007 2006 Change 2007 2006 Change Used vehicle sales $1,687.1 $1,526.7 10.5 % $3,395.5 $2,987.9 13.6 % New vehicle sales 104.8 121.2 (13.6)% 217.4 239.6 (9.3)% Wholesale vehicle sales 265.3 222.3 19.3 % 526.4 469.6 12.1 % Other sales and revenues: Extended service plan revenues 33.2 29.2 13.7 % 67.1 58.0 15.7 % Service department sales 25.2 23.8 5.8 % 49.4 47.0 5.0 % Third-party finance fees, net 6.9 6.2 10.6 % 13.8 12.6 10.1 % Total other sales and revenues 65.3 59.3 10.2 % 130.3 117.6 10.8 % Net sales and operating revenues $2,122.5 $1,929.5 10.0 % $4,269.7 $3,814.7 11.9 % (1) Percent calculations and amounts shown are based on amounts presented on the attached consolidated statements of earnings and may not sum due to rounding. Retail Vehicle Sales Changes Three Months Ended Six Months Ended August 31 August 31 2007 2006 2007 2006 Comparable store vehicle sales: Used vehicle units 3 % 7 % 5 % 6 % New vehicle units (13)% (19)% (9)% (15)% Total units 2 % 5 % 4 % 5 % Used vehicle dollars 3 % 15 % 5 % 14 % New vehicle dollars (11)% (21)% (8)% (17)% Total dollars 2 % 11 % 4 % 11 % Total vehicle sales: Used vehicle units 11 % 15 % 13 % 14 % New vehicle units (15)% (19)% (10)% (15)% Total units 9 % 12 % 11 % 12 % Used vehicle dollars 11 % 23 % 14 % 22 % New vehicle dollars (14)% (20)% (9)% (16)% Total dollars 9 % 19 % 12 % 18 % Retail Vehicle Sales Mix Three Months Ended Six Months Ended August 31 August 31 2007 2006 2007 2006 Vehicle units: Used vehicles 96 % 94 % 96 % 94 % New vehicles 4 6 4 6 Total 100 % 100 % 100 % 100 % Vehicle dollars: Used vehicles 94 % 93 % 94 % 93 % New vehicles 6 7 6 7 Total 100 % 100 % 100 % 100 % Unit Sales Three Months Ended Six Months Ended August 31 August 31 2007 2006 2007 2006 Used vehicles 96,102 86,846 192,868 171,112 New vehicles 4,365 5,131 9,085 10,078 Wholesale vehicles 60,476 52,648 118,190 106,434 Average Selling Prices Three Months Ended Six Months Ended August 31 August 31 2007 2006 2007 2006 Used vehicles $17,388 $17,399 $17,434 $17,285 New vehicles $23,863 $23,476 $23,787 $23,626 Wholesale vehicles $4,278 $4,120 $4,344 $4,303 Selected Operating Ratios Three Months Ended (In millions) August 31 2007 % (1) 2006 % (1) Net sales and operating revenues $2,122.5 100.0 % $1,929.5 100.0 % Gross profit $288.2 13.6 % $253.4 13.1 % CarMax Auto Finance income $33.4 1.6 % $36.5 1.9 % Selling, general, and administrative expenses $214.2 10.1 % $200.0 10.4 % Operating profit (EBIT) (2) $108.2 5.1 % $89.8 4.7 % Net earnings $65.0 3.1 % $54.3 2.8 % Six Months Ended (In millions) August 31 2007 % (1) 2006 % (1) Net sales and operating revenues $4,269.7 100.0 % $3,814.7 100.0 % Gross profit $572.4 13.4 % $501.6 13.1 % CarMax Auto Finance income $70.5 1.7 % $68.9 1.8 % Selling, general, and administrative expenses $428.0 10.0 % $387.0 10.1 % Operating profit (EBIT) (2) $215.6 5.1 % $183.5 4.8 % Net earnings $130.4 3.1 % $111.0 2.9 % (1) Calculated as the ratio of the applicable amount to net sales and operating revenues. (2) Operating profit equals earnings before interest and income taxes. Gross Profit Three Months Ended August 31 2007 2006 $/unit (1) % (2) $/unit (1) % (2) Used vehicle gross profit $1,982 11.3 % $1,963 11.2 % New vehicle gross profit $1,072 4.5 % $1,176 5.0 % Wholesale vehicle gross profit $796 18.1 % $699 16.5 % Other gross profit $447 68.8 % $436 67.6 % Total gross profit $2,869 13.6 % $2,755 13.1 % Six Months Ended August 31 2007 2006 $/unit (1) % (2) $/unit (1) % (2) Used vehicle gross profit $1,958 11.1 % $1,944 11.1 % New vehicle gross profit $1,039 4.3 % $1,195 5.0 % Wholesale vehicle gross profit $798 17.9 % $711 16.1 % Other gross profit $451 69.9 % $449 69.1 % Total gross profit $2,834 13.4 % $2,768 13.1 % (1) Calculated as category gross profit divided by its respective units sold, except the other and total categories, which are divided by total retail units sold. (2) Calculated as a percentage of its respective sales or revenue. Earnings Highlights Three Months Ended Six Months Ended (In millions except per August 31 August 31 share data) 2007 2006 Change 2007 2006 Change Net earnings $65.0 $54.3 19.8 % $130.4 $111.0 17.4 % Diluted weighted average shares outstanding 220.6 215.3 2.5 % 220.4 214.7 2.6 % Net earnings per share $0.29 $0.25 16.0 % $0.59 $0.52 13.5 % Fiscal 2008 Expectations

"Our sales and profits for the first half of the fiscal year fell short of our original expectations," said Folliard. "We believe this is largely the result of the current market environment and the industry-wide slowdown in auto sales. While it is difficult to predict how long the current conditions may persist, we believe it is appropriate to revise our expectations for comparable store used unit sales growth and earnings per share for the current fiscal year. Our revisions assume that the current trends will continue for the remainder of the fiscal year."

We now expect annual comparable store used unit sales growth in the range of 1% to 3%, compared with the 9% increase achieved in fiscal 2007. Fiscal 2008 used unit comps were previously expected to be in the range of 3% to 9%.

We now expect fiscal 2008 earnings per share in the range of $0.92 to $0.98, compared with the $0.92 per share reported in fiscal 2007. Fiscal 2008 earnings per share were previously expected to be in the range of $1.03 to $1.14.

Our new fiscal 2008 expectations reflect: * Our missed sales and earnings targets for the first half of the fiscal year. * The slower anticipated pace of comparable store used unit sales growth and its effect on other related revenue and income streams. * Continued planned spending related to our strategic, operational, and Internet initiatives. * The recent credit market turmoil, which drove up the cost of funding in the public asset-backed market. While we were pleased with our ability to complete a $500 million transaction in early September despite this turmoil, the higher credit spreads associated with the 2007-3 transaction will cause a negative impact of approximately $4 million in funding costs in the third quarter.

"Although we are clearly disappointed with the revised outlook for fiscal 2008, we believe the downward revisions to our earnings outlook are largely related to external factors," said Folliard. "We believe we have a superior business model for automotive retailing, and we plan to continue investing to support our long-term growth initiatives. We plan to continue adding stores at our 15% to 20% stated annual growth rate and fully expect to gain market share regardless of the external environment."

Future Store Opening Plan

In the second half of fiscal 2008, we plan to open an additional nine used car superstores, one of which was opened in early September. This will bring the total fiscal 2008 store openings to 13, representing a 17% increase in our store base. In addition, we plan to expand our car-buying center test with the opening of our third and fourth centers, including one in Dallas and one in Tampa. At the car-buying centers, we conduct appraisals and purchase cars but do not sell vehicles. These test stores are part of our long-term program to increase both appraisal traffic and retail vehicle sourcing self- sufficiency.

In the first half of fiscal 2009, we currently plan to open eight used car superstores, as follows:

Production Non-Production Location Television Market Status Superstores Superstores Market (1) (2) San Antonio, Texas San Antonio Existing market -- 1 Phoenix, Arizona Phoenix New market 2 -- Colorado Springs, Colorado New market Colorado Springs 1 -- Charleston, South Charleston New market Carolina -- 1 Tulsa, Oklahoma Tulsa New market 1 -- Huntsville, Alabama Huntsville New market 1 -- Costa Mesa, Los Angeles Existing California market -- 1 5 3 (1) Previously referred to as standard superstores, these are stores at which vehicle reconditioning is performed. (2) Previously referred to as satellite superstores, these are stores that do not have vehicle reconditioning capabilities.

Normal construction, permitting, or other scheduling delays could shift the opening dates of any of these stores into a later period.

Third Quarter Fiscal 2008 Earnings Release and Conference Call Date

We currently plan to release third quarter sales and earnings results on Wednesday, December 19, 2007, before the opening of the New York Stock Exchange. The company will host a conference call for investors at 9:00 a.m. ET on that date. Information on this conference call will be available on our investor information home page at investor.carmax.com in early December.

Conference Call Information

We will host a conference call for investors at 9:00 a.m. ET today, September 19, 2007. Domestic investors may access the call at 1-888-298-3261 (international callers dial 1-706-679-7457). The conference I.D. for both domestic and international callers is 9751241. A live webcast of the call will be available on our investor information home page at investor.carmax.com and at http://www.streetevents.com/.

A webcast replay of the call will be available at investor.carmax.com beginning at approximately 1:00 p.m. ET on September 19, 2007, through October 19, 2007. A telephone replay also will be available through September 26, 2007, and may be accessed by dialing 1-800-642-1687 (international callers dial 1-706-645-9291). The conference I.D. for both domestic and international callers is 9751241.

About CarMax

CarMax, a Fortune 500 company, and one of the Fortune 2007 "100 Best Companies to Work For," is the nation's largest retailer of used cars. Headquartered in Richmond, Va., CarMax currently operates 82 used car superstores in 38 markets. The CarMax consumer offer is structured around four core equities: low, no-haggle prices; a broad selection; high quality vehicles; and customer-friendly service. During the twelve months ended February 28, 2007, we retailed 337,021 used cars and sold 208,959 wholesale vehicles at our in-store auctions. For more information, access the CarMax website at http://www.carmax.com/.

Forward-Looking Statements

We caution readers that the statements contained in this release about our future business plans, operations, opportunities, or prospects, including without limitation any statements or factors regarding expected sales, margins, or earnings, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based upon management's current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results to differ materially from anticipated results. Among the factors that could cause actual results and outcomes to differ materially from those contained in the forward-looking statements are the following: changes in the general U.S. or regional U.S. economy; intense competition within our industry; significant changes in retail prices for used and new vehicles; a reduction in the availability or our access to sources of inventory; our ability to acquire suitable real estate; the significant loss of key employees from our store, regional, or corporate management teams; the efficient operation of our information systems; changes in the availability or cost of capital and working capital financing; the occurrence of adverse weather events; seasonal fluctuations in our business; the geographic concentration of our superstores; the regulatory environment in which we operate; the effect of various litigation matters; the effect of new accounting requirements or changes to generally accepted accounting principles; and the occurrence of certain other material events. We disclaim any intent or obligation to update our forward-looking statements.

For more details on factors that could affect expectations, see our Annual Report on Form 10-K for the fiscal year ended February 28, 2007, and our quarterly or current reports as filed with or furnished to the Securities and Exchange Commission.

Contacts: Investors and Financial Media:

Katharine Kenny, Assistant Vice President, Investor Relations, (804) 935-4591

Celeste Gunter, Manager, Investor Relations, (804) 935-4597 General Media:

Lisa Van Riper, Assistant Vice President, Public Affairs, (804) 935-4594

Trina Lee, Public Relations Manager, (804) 747-0422, ext. 4197 CARMAX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (In thousands except per share data) Three Months Ended August 31 2007 % (1) 2006 % (1) Sales and operating revenues: Used vehicle sales $1,687,142 79.5 $1,526,738 79.1 New vehicle sales 104,779 4.9 121,231 6.3 Wholesale vehicle sales 265,282 12.5 222,299 11.5 Other sales and revenues 65,327 3.1 59,274 3.1 Net sales and operating revenues 2,122,530 100.0 1,929,542 100.0 Cost of sales 1,834,336 86.4 1,676,177 86.9 Gross profit 288,194 13.6 253,365 13.1 CarMax Auto Finance income 33,412 1.6 36,512 1.9 Selling, general, and administrative expenses 214,196 10.1 200,049 10.4 Gain on franchise disposition 740 -- -- -- Interest expense 950 -- 2,335 0.1 Interest income 245 -- 300 -- Earnings before income taxes 107,445 5.1 87,793 4.5 Provision for income taxes 42,450 2.0 33,529 1.7 Net earnings $64,995 3.1 $54,264 2.8 Weighted average common shares: Basic 215,891 211,831 Diluted 220,580 215,301 Net earnings per share: Basic $0.30 $0.26 Diluted $0.29 $0.25 Six Months Ended August 31 2007 % (1) 2006 % (1) Sales and operating revenues: Used vehicle sales $3,395,533 79.5 $2,987,858 78.3 New vehicle sales 217,394 5.1 239,639 6.3 Wholesale vehicle sales 526,434 12.3 469,595 12.3 Other sales and revenues 130,303 3.1 117,589 3.1 Net sales and operating revenues 4,269,664 100.0 3,814,681 100.0 Cost of sales 3,697,249 86.6 3,313,061 86.9 Gross profit 572,415 13.4 501,620 13.1 CarMax Auto Finance income 70,480 1.7 68,906 1.8 Selling, general, and administrative expenses 428,010 10.0 387,015 10.1 Gain on franchise disposition 740 -- -- -- Interest expense 2,966 0.1 4,282 0.1 Interest income 623 -- 567 -- Earnings before income taxes 213,282 5.0 179,796 4.7 Provision for income taxes 82,932 1.9 68,756 1.8 Net earnings $130,350 3.1 $111,040 2.9 Weighted average common shares: Basic 215,592 211,181 Diluted 220,355 214,706 Net earnings per share: Basic $0.60 $0.53 Diluted $0.59 $0.52 (1) Percents are calculated as a percentage of net sales and operating revenues and may not equal totals due to rounding. CARMAX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) August 31 August 31 February 28 2007 2006 2007 (Unaudited)(Unaudited) ASSETS Current assets: Cash and cash equivalents $7,589 $23,781 $19,455 Accounts receivable, net 56,165 66,690 71,413 Automobile loan receivables held for sale 4,464 4,019 6,162 Retained interest in securitized receivables 224,334 189,820 202,302 Inventory 820,171 734,364 836,116 Prepaid expenses and other current assets 19,993 12,071 15,068 Total current assets 1,132,716 1,030,745 1,150,516 Property and equipment, net 755,276 533,335 651,850 Deferred income taxes 42,467 28,782 40,174 Other assets 47,331 43,856 43,033 TOTAL ASSETS $1,977,790 $1,636,718 $1,885,573 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $248,762 $190,168 $254,895 Accrued expenses and other current liabilities 63,028 71,275 68,885 Accrued income taxes 8,207 37,701 23,377 Deferred income taxes 14,680 8,831 13,132 Short-term debt 2,672 1,915 3,290 Current portion of long-term debt 86,265 103,402 148,443 Total current liabilities 423,614 413,292 512,022 Long-term debt, excluding current portion 27,361 34,276 33,744 Deferred revenue and other liabilities 115,982 57,449 92,432 TOTAL LIABILITIES 566,957 505,017 638,198 SHAREHOLDERS' EQUITY 1,410,833 1,131,701 1,247,375 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,977,790 $1,636,718 $1,885,573 CARMAX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (In thousands) Six Months Ended August 31 2007 2006 Operating Activities: Net earnings $130,350 $111,040 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 22,026 16,727 Stock-based compensation expense 17,744 19,636 (Gain) loss on disposition of assets (28) 86 Deferred income tax benefit (1,324) (18,937) Net decrease (increase) in: Accounts receivable, net 15,248 9,931 Automobile loan receivables held for sale, net 1,698 120 Retained interest in securitized receivables (22,032) (31,512) Inventory 15,945 (64,664) Prepaid expenses and other current assets (4,925) (860) Other assets (4,298) 144 Net increase (decrease) in: Accounts payable, accrued expenses and other current liabilities, and accrued income taxes (26,695) 37,442 Deferred revenue and other liabilities 24,316 7,598 Net cash provided by operating activities 168,025 86,751 Investing Activities: Capital expenditures (132,092) (54,317) Proceeds from sales of assets 1,272 3,467 Net cash used in investing activities (130,820) (50,850) Financing Activities: (Decrease) increase in short-term debt, net (618) 1,452 Payments on long-term debt (62,007) (56,871) Equity issuances, net 9,947 13,928 Excess tax benefits from stock-based payment arrangements 3,607 7,612 Net cash used in financing activities (49,071) (33,879) (Decrease) increase in cash and cash equivalents (11,866) 2,022 Cash and cash equivalents at beginning of year 19,455 21,759 Cash and cash equivalents at end of period $7,589 $23,781 (Logo: http://www.newscom.com/cgi-bin/prnh/20011214/CARMAXLOGO )