Earnings Preview for CarMax

CarMax (KMX - Analyst Report) will release its sales and earnings results for the second quarter of fiscal 2010 ended August 31, 2009 on September 22. The Richmond, VA-based used car retailer reported earnings of 11 cents per share, excluding special items, for the first quarter of the fiscal year. This was high above the Zacks Consensus Estimate of 4 cents per share.

For the second quarter, the Zacks Consensus Estimate for the company is 16 cents per share, an improvement of 45% compared to the recorded earnings in the previous quarter.
 
CarMax, the largest retailer of used vehicles in the U.S., conducts its operations through its wholly owned subsidiaries -- CarMax Auto Superstores Inc., Virginia; CarMax Auto Superstores West Coast Inc., California; CarMax Auto Superstores California LLC, California; CarMax Auto Superstores Services Inc., Virginia; CarMax Business Services LLC, Delaware; and Glen Allen Insurance Ltd., Bermuda. The company operates 6 new-car franchises, representing the Chevrolet, Chrysler, Nissan (NSANY - Analyst Report) and Toyota (TM - Analyst Report) brands, all of which are integrated with or co-located in its used-car superstores.

The company is among the strongest operators in its peer group, which includes AutoNation (AN - Analyst Report) and Penske Automotive Group (PAG - Analyst Report). The company has the leading liquidity and profitability ratios in its peer group, besides a low debt/equity ratio. By 2010, the company plans to achieve annual sales of $10 billion.
 
CarMax is consistent with the target for used-car superstore annual growth at around 15%. In fiscal 2009, the company opened 11 superstores, expanding the store base by 12%. In fiscal 2010, the company plans to open 5 to 10 superstores. Over the next 10 years, the company plans to increase the number of used-car stores from 89 to between 200 and 300, expanding outside its current market.
 
However, continuing slow sales in the new vehicle market, especially domestic cars, have forced original equipment manufacturers and dealers to offer incentives and attractive pricing. Therefore, in a defensive move, CarMax has begun lowering the prices of vehicles to reduce high used-car inventory, leading to shrinking margins.
 
Further, CarMax faces higher funding costs related to its finance arm, CarMax Auto Finance, which generates about 25% of the company’s total earnings. This negatively affects earnings. In the first quarter of fiscal 2010, the company’s earnings were reduced by 11 cents per share for increased funding costs and other adjustments related to CarMax Auto Finance loans originated in prior fiscal years.
 
Therefore, we recommend the shares of CarMax as Neutral.

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