CarMax, Inc. Earnings Call Nuggets: Tone of Customers, Advertising

On Thursday, CarMax, Inc. (NYSE:KMX) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Tone of Customers

Brian Nagel – Oppenheimer: So, first question Tom, more of a qualitative one, we’re looking at the sales trend, the used unit comps and clearly that metric continued to improve here in the fourth quarter with 4%. I assume the numbers got better through the quarter, but the questionnaire for you is, we talked a lot about this in prior calls in other conversations, but how would you characterize your overall tone of your customer – the overall tone of your customers? Now, you’ve seen large number of customer, better traffic, better conversion, how is that basically playing out?

Tom Folliard – President and CEO: In the quarter our traffic was up, and I think we talked about this some on the last call that because of our really high volume of appraisals recently, particularly appraisal only customers, over the last couple of years, we have kind of gone back and looked at our conversion and tried to segment out customers who are really and specifically just coming to buy a car from us; and when we do that, we are really comfortable and confident that our conversion continues to increase, and that it did once again in the quarter, and it also went up some for the year. Our traffic was up about 6% in the quarter, but that includes – that’s total traffic, which also includes appraisal traffic. So I think the customer flow that we are getting is solid, good quality customer flow that wants to buy cars, and we are converting them at a pretty good clip. We still would like to see a higher flow of customers overall, but we are pretty pleased with how the quarter came out.

Brian Nagel – Oppenheimer: So I guess just to follow-up on that then, if we look at how the customer tracked through the fourth quarter, I mean, were there significant differences between let’s say Q4 and then Q3, Q2 for you guys? How should we think about the changing dynamics of the customer?

Tom Folliard – President and CEO: Well, we don’t talk about any movement during the quarter. The last two quarters were a little disappointing from a sales and customer flow standpoint, with a – I think we were a negative 2, and negative 3 on comps in the second and third quarter, so clearly, this was a better quarter with a plus 4, and I would say that’s the biggest difference. We were down the last two quarters, we are up this one.

Brian Nagel – Oppenheimer: Fair enough. The second question I have, on SG&A spend, we talked what you guys are clearly ramping up growth again. We saw higher SG&A spend in the fourth quarter related to that growth. How should we think about SG&A spend as we look into 2012 related to your more aggressive unit expansion?

Tom Folliard – President and CEO: Well, we are going to have some more expenses around store growth, because we are either opening or preparing to open more stores in this year than we did last year, and we talked about coming out of the recession having kind of a controlled build of store growth. We opened up three stores two years ago, five stores last year. We said we’re going to open 10 this year and 10 to 15 the next. So there is some spend that goes along with that on preopening expense, on staffing up to be prepared to open up those stores, relocation all those kinds of things. So we expect SG&A to go up, and hopefully we can get some comp sales to offset it.

Brian Nagel – Oppenheimer: Do you want to give any parameters of how much higher SG&A spending should be in 2012?

Tom Folliard – President and CEO: We are not going to give any guidance on that. We are providing a table for SG&A. It will be in the K and we break it down a little better in there. So that will be no.

Advertising

Austin Paul – RBC Capital Markets: This is actually (Austin) for Scott today. Question just to follow-up on the previous question on SG&A. I understand that the expenses will be ramping up as you ramp up store growth, but I did notice in the press release you talked about lower advertising expense, which I guess seems a little bit counterintuitive, but I would think that you would ramp that up as you grow stores and grow into new markets. So could you maybe talk about advertising and how you expect that to trend in the coming year?

Tom Folliard – President and CEO: Yeah, I think that for the quarter that was just we did not – we didn’t do Super Bowl this year and we did last year. That’s a pretty overpriced thing to do.

Austin Paul – RBC Capital Markets: So that was just for this quarter, but I guess in the coming year, should we expect advertising to ramp up of along with the other expenses related to new store growth?

Tom Folliard – President and CEO: Yeah. We try to think about advertising on a per unit sold basis. If we get the sales we expect, we would expect to spend more money on advertising and then we’re going to have some pre-opening advertising that will be larger than it was last year because we’ll open more stores.

Austin Paul – RBC Capital Markets: Understood; and then, just one last question on a different topic. Obviously, we’ve all seen gas prices rising in recent months. I’m curious, is that impacting your mix at all? Are people looking for small and more fuel-efficient cars? I guess I’m kind of speaking about that in the context of ASPs which were still up reflecting 4% year-over-year. So, just curious how the mix is trending and how that will impact ASPs going forward?

Tom Folliard – President and CEO: Yeah, we talked about – I mentioned that in my opening remarks. Our SUV mix was down 4 points sequentially year-over-year, but it’s not – it’s in the sub – I mean, I’m sorry, mid-size and small cars were up about the same to offset that. So, we have seen it, but just from – how does it feel? It doesn’t feel anything like it did back in May of ’08 when gas hit $4 and we saw a dramatic shift in consumer behavior. I’d say this has been a little bit more gradual and people seem a little more settled into the high 3s on gas prices, but I think one of the best things about the CarMax consumer offer is we’re pretty nimble and we can adjust our inventory to whatever the consumer is looking to buy and it doesn’t make any difference to us. We’re happy to sell smaller cars, we’re happy to sell SUVs, and as we’ve talked about before, our margin is more on a per unit basis and is not really driven off of ASP. The only place where ASP really has an impact is on average amount financing in CAF. And I also think that ASPs over the last couple of years have been driven far more by the changes in the wholesale market than they have been by anything to do with our mix.

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