CarMax Misses, Profits Flat

CarMax Inc. (KMX - Analyst Report) suffered a profit of $111.9 million or 49 million per share in the second quarter of its fiscal year ended August 31, 2011, which was flat compared with $107.9 million or 48 cents per share earned in the second quarter of prior fiscal year. With this, the used-car retailer missed the Zacks Consensus Estimate by 2 cents per share.

The flat profit was primarily attributable to economic slowdown and lower consumer confidence as reflected in a 2% decline in comparable store used unit sales.

Net sales and operating revenues in the quarter rose 10.5% to $2.59 billion, which was lower than the Zacks Consensus Estimate of $2.63 billion. Total gross profit increased marginally by 1.5% to $354.3 million from $349.1 million in the second quarter of fiscal 2011, mainly reflecting the strong results of wholesale auctions.

Used vehicle sales inched up 66% to $2.02 billion. The rise in sales was mainly attributable to increase in average selling price to $19,408 from $18,084 a year ago as used unit sales fell 2% to 102,825 units.

However, new vehicle sales dipped 8.2% to $46.9 million, reflecting lower confidence in consumer spending. Wholesale vehicle sales surged 38.8% to $457.9 million, driven by continued increase in appraisal traffic as well as appraisal buy rate. Other sales and revenues rose marginally by 4.5% to $68.1 million, mainly driven by decline in third-party finance fees.

Selling, general and administrative were $236.4 million, up 5% from $225.2 in the comparable quarter a year ago. The increased was attributable to higher advertising and targeted spending to support future store growth. The SG&A ratio improved to 9.1% from 9.6% in the prior-year quarter on the back of higher average selling prices.

CarMax Auto Finance (CAF)

CAF reported a 21% increase in income to $63.8 million from $52.6 million in the second quarter of fiscal 2011. The increase in income was attributable to higher interest margin. CAF net loans originated rose 27% from the year-ago quarter.

Store Opening and Credit facilities

During the quarter of fiscal 2012, CarMax expanded its presence in the San Diegomarket, by opening a store in Escondido, California. The company expects to open 8 superstores within 12 months from August 31, 2011.

During the same period, the company also entered into a new 5-year unsecured revolving credit facility of $700 million that replaced the existing secured facility, scheduled to expire in December this year. It also renewed $800 million warehouse facility that was scheduled to expire last month.

Financial Update     

CarMax had cash and cash equivalent of $181.9 million as of August 31, 2011, which was significantly higher than $55.2 million as of August 31, 2010. Long-term debt reduced marginally to $27.9 million as of August 31, 2011from $29.4 million in the corresponding period of previous year.

In the first half of fiscal 2012, CarMax had cash outflow of $81.6 million that worsened from $9.5 million in the same period of 2010. The increase in cash outflow was attributable to increase in Auto loans receivable and decrease in Accounts payable, accrued expenses and other current liabilities, and accrued income taxes. Capital expenditures increased significantly to $80.2 million from $15.2 million in the first half of fiscal 2011.

Our Take

We appreciate CarMax’s focus on the used-car market, which helps it to outperform the industry. The automotive retailer is among the strongest operators in its peer group, which includes AutoNation Inc. (AN - Analyst Report) and Penske Automotive Group (PAG - Analyst Report).

However, the tendency of manufacturers and dealers to lure customers into trading old cars for new ones through incentives puts pressure on the company’s used vehicle margins. This led the company to retain Zacks #3 Rank on its stock, which translated to a short-term (1–3 months) recommendation of “Hold”.

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