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CarMax Inc’s (KMX - Analyst Report) profit remained flat year over year at $111.6 million or 48 cents per share in the second quarter of fiscal 2013 ended on August 31, 2012. However, it missed the Zacks Consensus Estimate of 52 cents per share.

The profits included favorable impacts from increased retail sales, which were offset by higher selling, general and administrative (SG&A) costs associated with the company’s store expansion strategy.

The company’s net sales and operating revenues for the quarter increased 6.6% to $2.76 billion from $2.59 billion in the second quarter of fiscal 2012. Revenues also surpassed the Zacks Consensus Estimate of $2.74 billion.

Revenues from used vehicle sales improved 8.8% to $2.2 billion in the reported quarter. The increase in used vehicles revenues was attributable to higher unit sales. Unit sales went up 8.3% to 111,316 units and average selling price marginally increased to $19,494.

Revenues from new vehicle sales escalated 31% to $61.4 million, driven by a rise in sales volume. Unit sales surged 30.8% to 2,352 vehicles and average selling price scaled up marginally to $25,982.

Revenues from wholesale vehicles declined 4.5% to $437.1 million, mainly due to a fall in unit sales volume. Unit sales decreased 2.5% to 82,771 units and average selling price decreased 2% to $5,133 during the quarter.

Revenues from Others slipped 1% to $67.6 million. Revenues from extended service plan (ESP) increased 17.7% to $52.9 million, driven by improvement in retail vehicle sales and increase in higher ESP penetration.

Revenues from service department climbed 2.9% to $26.8 million. However, revenues from third-party finance fees fell significantly by $9.2 million during the quarter.

Gross profit increased 3.9% to $368.0 million from $354.3 million in the corresponding quarter last year. The growth in profit was attributable to higher profits from used vehicle, which was more than offset by reduction in profits from the new and wholesale business. Total gross profit per retail unit was $3,237, up 13.3% from $3,386 in the second quarter of fiscal 2012.

SG&A increased 11% to $254.7 million. The increase was attributable to the opening of eight new stores and increase in growth-related costs, including pre-opening, relocation expenses and other related costs. SG&A per used unit rose 2% to $2,241 in the quarter.

CarMax Auto Finance (CAF) income improved 19% to $75.7 million from $63.8 million in the second quarter of the prior year. The growth in CAF income was due to a 14% increase in average managed receivables to $5.25 billion.

Superstore Opening

CarMax plans to open 10 superstores in fiscal 2013. In the second quarter of fiscal 2013, the company has opened 3 used car superstores; 2 in Ft. Myers, Florida, and the other in Nashville, Tennessee.

Financial Position

CarMax had cash and cash equivalents of $458.6 million as of August 31, 2012, up significantly from $181.9 million as of August 31, 2011. Total debt (including financing and capital lease obligations, and non-recourse notes) rose to $5.3 billion as of August 31, 2012 from $4.5 billion as of August 31, 2011.

During the first half of fiscal 2013, CarMax had a cash outflow from operating activities of $285.9 million, up significantly from $75.9 million in the prior year. Capital expenditure amounted to $103.9 million compared to $80.2 million in the year-ago period.

Our Take

CarMax is one of the largest retailers of used vehicles. The company pioneered the used car superstore concept with the inauguration of its first store in 1993. It operated around 113 used car superstores in 56 markets as of August 31, 2012.

CarMax, which competes with AutoNation Inc. (AN - Analyst Report) Penske Automotive Group (PAG - Analyst Report), maintains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating. Currently, we have a long-term Neutral recommendation on its shares.

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