CarMax 2005 Annual Report Download - page 27

CARMAX 2005 25
including rising gasoline prices, increasing interest rates,
wholesale vehicle prices rising somewhat faster than seasonal
norms, and the potential for unpredictable new car
manufacturer incentive behavior.
Fiscal 2006 Earnings Per Share. We currently expect fiscal
2006 earnings per share in the range of $1.20 to $1.30. 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%.
Our earnings expectations also reflect the cost to roll out
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 the separation. As a consequence of these
higher costs, we would expect to see modest SG&A leverage
only if we achieve the upper end of our expected comparable
store used unit growth range. We currently expect our effective
tax rate in fiscal 2006 to be approximately 38.4%.
We plan to adopt SFAS 123R, “Share-Based Payment,”
which modifies SFAS 123, “Accounting for Stock-Based
Compensation,” in fiscal 2007, beginning March 1, 2006. This
revised accounting standard requires that all stock-based
compensation, including grants of employee stock options, be
accounted for using a fair-value-based method and recorded
as a charge to earnings. The company is in the process of
determining the effect of adopting SFAS 123R.
RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion of recent accounting pronouncements
applicable to the company, see Note 14 to the company’s
consolidated financial statements.
FINANCIAL CONDITION
Operating Activities
We generated net cash from operating activities of $44.7 million
in fiscal 2005, $148.5 million in fiscal 2004, and $72.0 million in
fiscal 2003. The fiscal 2005 decline primarily resulted from an
increase in inventory, due to the addition of nine used car
superstores during the year, three stores opened shortly after the
end of the fiscal year, and inventory to support expected
comparable store used unit growth. The fiscal 2004
improvement primarily resulted from the increase in net
earnings and a slight decrease in inventory, despite having added
nine used car superstores during the year. The decrease in
inventory in fiscal 2004 reflected the combined effects of a
higher-than-normal inventory balance at the end of fiscal 2003
resulting from weather-impeded sales in February 2003 and the
disposal of four new car franchises during the fiscal year.
Investing Activities
Net cash used in investing activities was $141.1 million in fiscal
2005, $73.8 million in fiscal 2004, and $80.4 million in fiscal
2003. Capital expenditures were $230.1 million in fiscal 2005,
$181.3 million in fiscal 2004, and $122.0 million in fiscal 2003.
The increase in capital expenditures reflects the increase in our
store base associated with our growth plan. Additionally, a
portion of the capital spending in fiscal 2005 and fiscal 2004
was associated with the construction of new corporate offices in
Richmond, Va.
Capital expenditures are funded through sale-leaseback
transactions, short- and long-term debt, and internally generated
funds. Net proceeds from sales of assets totaled $89.0 million in
fiscal 2005, $107.5 million in fiscal 2004, and $41.6 million in
fiscal 2003. The majority of the sale proceeds relate to sale-
leaseback transactions. In fiscal 2005, we entered into sale-
leaseback transactions involving seven superstore properties
valued at approximately $84.0 million. In fiscal 2004, we entered
into sale-leaseback transactions involving nine superstore
properties valued at a total of $107.0 million. In fiscal 2003, we
entered into one sale-leaseback transaction involving three
superstore properties valued at approximately $37.6 million.
These transactions were structured with initial lease terms of
either 15 or 20 years with four, five-year renewal options. At
February 28, 2005, we owned six superstores currently in
operation, as well as land and construction-in-progress related to
several planned superstores. In addition, we have five superstores
that have been accounted for as capital leases.
In fiscal 2006, we anticipate gross capital expenditures of
approximately $250 million. Planned expenditures primarily
relate to new store construction, including furniture, fixtures,
and equipment; land purchases associated with future year store
openings; new corporate offices; and leasehold improvements to
existing properties. We expect to open nine used car superstores
during fiscal 2006.
Financing Activities
Net cash provided by financing activities was $63.8 million in
fiscal 2005. In fiscal 2004, net cash used in financing activities
was $47.6 million, compared with net cash provided of $39.8
million in fiscal 2003. In fiscal 2005, we increased short-term
debt by $60.8 million primarily to fund increased inventory. In
fiscal 2004, we used cash generated from operations to reduce
total outstanding debt by $51.6 million. In fiscal 2003, we
increased total outstanding debt by $67.6 million and paid a
one-time dividend of $28.4 million to Circuit City in
conjunction with the separation transaction.
The aggregate principal amount of automobile loan
receivables funded through securitizations, which are discussed in
Notes 3 and 4 to the company’s consolidated financial statements,
totaled $2.43 billion at February 28, 2005, $2.20 billion at
February 29, 2004, and $1.86 billion at February 28, 2003.
During fiscal 2005, we completed two public automobile loan
securitizations totaling $1.15 billion. At February 28, 2005, the
warehouse facility limit was $825.0 million and unused
warehouse capacity totaled $162.5 million. The warehouse
facility matures in June 2005. Note 2(C) and Note 4 to the
company’s consolidated financial statements include a discussion
of the warehouse facility. We anticipate that we will be able to
renew, expand, or enter into new securitization arrangements to
meet the future needs of the automobile finance operation.