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CarMax Inc. (KMX - Analyst Report) posted earnings per share of 62 cents in the second quarter of fiscal 2014 ended Aug 31, 2013, increasing 29.2% from 48 cents a year ago. Reported earnings also exceeded the Zacks Consensus Estimate by 5 cents. Net earnings increased 25.7% to $140.3 million from $111.6 million a year ago.

Net sales and operating revenues in the quarter rose 17.7% to $3.2 billion, topping the Zacks Consensus Estimate of $3.1 billion. The year-over-year improvement in revenues was mainly due to increases in used vehicle sales, wholesale vehicle sales and higher revenues from extended service plan.

Used vehicle revenues appreciated 20.4% to $2.6 billion in the quarter, driven by higher unit sales. Unit sales of used vehicles increased 21.2% to 134,854 vehicles, while their average selling price decreases marginally to $19,428 from $19,494. Comparable store used vehicle unit sales rose 16% in the quarter. The improvement was attributable to better execution in stores, favorable consumer credit environment and improved footfall in stores.

However, new vehicle revenues dipped 2.3% to $60 million due to lower unit sales. Unit sales of new vehicles decreased 7% to 2,187 vehicles while average selling price increased 5.1% to $27,313.

Wholesale vehicle revenues grew 8.7% to $474.9 million. Unit sales increased 10.2% to 91,243 vehicles due to improvement in store base and a stronger appraisal buy rate. Average selling price of wholesale vehicles decreased 1.7% year over year to $5,044. Other sales and revenues increased 5.2% to $71.1 million, driven by a 22.9% rise in revenues from extended service plan.

Gross profit increased 18.1% to $434.7 million from $368 million in the year-ago quarter. The improvement was driven by higher gross profit earned from the used vehicle business.

CarMax Auto Finance (CAF)

CAF reported an 11.5% increase in income to $84.4 million from $75.7 million in last year’s quarter. The improvement was primarily driven by a 24% increase in average managed receivables to $6.52 billion, partly offset by a decline in total interest margin rate.

Store Openings

During the second quarter of fiscal 2014, CarMax opened 2 stores, one in Katy, Texas, and the other one in Fairfield, Calif., The Texas store is the fifth store of the company in Houston market, while the California store is the third store in the Sacramento market. The company intends to open 10–15 superstores in each of the next two fiscal years.

Share Repurchase Program

During the second quarter of fiscal 2014, CarMax spent $48.7 million to repurchase 1 million shares under its existing share repurchase program. As of Aug 31, 2013, the company had remaining authorization of $414.8 million under the program.

Financial Position

CarMax had cash and cash equivalents of $750 million as of Aug 31, 2013, up from $458.6 million as of Aug 31, 2012. Total debt (including financing and capital lease obligations, and non-recourse notes payable) rose to $7.1 billion as of Aug 31, 2013 from $5.4 billion as of Aug 31, 2012.

In the first half of fiscal 2014, CarMax had a cash outflow of $263.6 million compared with $285.9 million in the prior year. Capital expenditures decreased to $136 million from $103.9 million in the same period in fiscal 2012. CarMax estimates capital expenditure in fiscal 2014 to be around $300 million.

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 #2 (Buy).

Stocks from the broader industry that warrants a look include Modine Manufacturing Company (MOD - Snapshot Report), American Axle & Manufacturing Holdings Inc. (AXL - Analyst Report) and Fuel Systems Solutions, Inc. (FSYS - Snapshot Report). All of them carry a Zacks Rank #1 (Strong Buy).
 

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