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CarMax Inc. (KMX - Analyst Report) posted a 23.1% increase in earnings per share to 64 cents in the first quarter of fiscal 2014 ended May 31, 2013, from 52 cents a year ago. Reported earnings also exceeded the Zacks Consensus Estimate by 7 cents. Profits increased 21.5% to $146.7 million from $120.7 million a year ago.

Net sales and operating revenues in the quarter rose 19.3% to $3.3 billion, topping the Zacks Consensus Estimate of $3.1 billion. The year-over-year improvement in revenues was due to increases in used vehicle sales and wholesale vehicle sale.

Used vehicle revenues appreciated 23.4% to $2.7 billion in the quarter, driven by both higher unit sales and average selling prices. Unit sales increased 22.1% to 137,154 vehicles, while average selling price increased 1.3% to $19,540. Comparable store used vehicle unit sales rose 17% in the quarter, while it was flat a year ago. The improvement was attributable to better execution in stores and an attractive consumer credit environment.

However, new vehicle revenues dipped 5.5% to $52.4 million due to lower unit sales. Unit sales decreased 7.5% to 1,949 vehicles and average selling price decreased 2.3% to $26,788.

Wholesale vehicle revenues grew 4.9% to $490.7 million. Unit sales increased 5.8% to 88,356 vehicles due to improvement in store base and a stronger appraisal buy rate. Average selling price decreased by 1.1% to $5,388. Other sales and revenues increased 6.4% to $66.2 million, driven by a 26% rise in revenues from extended service plan.

Gross profit increased 17.3% to $448.1 million from $381.9 million in the year-ago quarter. The improvement was driven by higher gross profit earned from the used vehicle businesses.

CarMax Auto Finance (CAF)

CAF reported a 15.7% increase in income to $87.0 million from $75.2 million in last year’s quarter. The improvement was primarily driven by a 21% increase in average managed receivables to $6.15 billion.

Store Openings

During the first quarter of fiscal 2014, CarMax opened 3 stores, penetrating the Harrisonburg, Va. market and the Savannah and Columbus markets in Ga.

At the end of the quarter, CarMax opened the fifth store in the Houston, Texas. The company intends to open between 10 and 15 superstores in each of the next two fiscal years.

Share Repurchase Program

During the first quarter of fiscal 2014, CarMax repurchased 2.9 million shares of its common stock for $124.6 million under its existing share repurchase program. As of May 31, 2013, the company had $463.5 million shares remaining for repurchase under the program.

Financial Position

CarMax had cash and cash equivalents of $725.3 million as of May 31, 2013, up from $456.4 million as of May 31, 2012. Total debt (including financing and capital lease obligations, and non-recourse notes) rose to $6.7 billion as of May 31, 2013 from $5.2 billion as of May 31, 2012.

In the first three months of fiscal 2014, CarMax had a cash outflow of $77.6 million compared with $115.5 million in the prior year. Capital expenditures decreased to $42.1 million from $47.6 million in the same period in fiscal 2012. CarMax estimated capital expenditures of $300 million for fiscal 2014.

Our Take

We appreciate CarMax’s focus on the used-car market, which helps it to outperform the industry. However, increasing competition poses a threat to the company’s earnings. The company currently retains a Zacks Rank #3 (Hold).

While we remain on the sidelines about CarMax, stocks from the broader industry that warrant a look include Visteon Corp. (VC - Snapshot Report), STRATTEC Security Corporation (STRT - Snapshot Report) and Magna International Inc. (MGA - Analyst Report). All of them carry a Zacks Rank #1 (Strong Buy).

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