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CarMax Inc. (KMX - Analyst Report) posted a profit of $95.0 million or 41 cents per share in the fourth quarter of fiscal 2012 ended February 29, 2012, barely exceeding the Zacks Consensus Estimate by a penny. The profit increased 7% from $88.8 million or 39 cents per share in the prior-year quarter.

For the full fiscal year, the company’s profit grew 10% to $413.8 million or $1.79 per share from $377.5 million or $1.65 per share in fiscal 2011. The profit was in line with the Zacks Consensus Estimate.

Net sales and operating revenues in the quarter rose 10% to $2.48 billion, which was higher than the Zacks Consensus Estimate of $2.42 billion. For the fiscal year, net sales and operating revenues escalated 11% to $10.00 billion from the prior year, topping the Zacks Consensus Estimate of $9.94 billion.

Used vehicle revenues appreciated 9.7% to $1.97 billion in the quarter, mainly driven by both higher unit sales and average selling prices. Unit sales increased 5.8% to 105,769 vehicles while average selling price increased 3.5% to $18,495.

However, new vehicle revenues dipped 6.3% to $45.8 million due to lower unit sales. Unit sales decreased 11.6% to 1,727 vehicles while average selling price increased 6% to $26,409.

Wholesale vehicle revenues grew 18.1% to $395.7 million, primarily driven by higher unit sales. Unit sales increased 13.3% to 73,897 vehicles while average selling price increased by $204 to $5,208. Other sales and revenues slipped 11.7% to $60.6 million, driven by a $10.1 million fall in revenues from third-party finance fees (net).

Total gross profit rose 5% to $338.2 million from $320.7 million in the fourth quarter of fiscal 2011, due to higher contribution from retail and wholesale vehicles, partly offset by a reduction in other gross profit. Total gross profit per retail unit was flat at $3,146 compared with the corresponding quarter a year ago.

Selling, general and administrative expenses (SG&A) increased 7% to $243.5 million. The increase was attributable to expansion of the company’s store base, increases in sales commissions and other variable costs, and higher growth-related costs, partly offset by lower advertising expenses. SG&A per used unit increased slightly by $32 to $2,302 in the quarter.

CarMax Auto Finance (CAF)

CAF reported a 22% increase in income to $66.1 million from $54.1 million in last year’s quarter, primarily driven by an increase in interest margin on the back of increases in both average managed receivables and the spread between the interests charged to consumers and related funding costs. For the full fiscal year, CAF income was $262.2 million, up 19.2% from $220.0 million in the fiscal 2011.

Financial Position

CarMax had cash and cash equivalent of $442.7 million as of February 29, 2012, up significantly from $41.1 million as of February 28, 2011. Total debt (including financing and capital lease obligations, and non-recourse notes) rose to $5.05 billion as of February 29, 2012 from $4.39 billion as of February 28, 2011. However, debt to capitalization ratio was lower at 65.4% as of February 29, 2012compared with 66.2% a year ago.

In fiscal 2012, CarMax had a cash outflow of $62.1 million compared with $6.8 million in the prior year. The increase in cash outflow was mainly attributable to decline in auto loans receivables and unfavorable changes in Other liabilities. Meanwhile, capital expenditures increased significantly to $172.6 million from $76.6 million in 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, increasing competition pose a threat to the company’s earnings. Further, CarMax's utilization of CAF to keep funding retail sales in an unstable credit environment adds further uncertainty to the stream of earnings, which is still significant for its profitability.

As a result, the company retained its Zacks #3 Rank (Hold) for the short term (1 to 3 months) and we maintain our Neutral recommendation on the stock for long term (more than 6 months).

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