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CarMax Inc. (KMX - Analyst Report) reported a 13.9% growth in earnings per share to 41 cents in the third quarter of fiscal 2013 (ended on November 30, 2012) from 36 cents per share in the year-ago quarter. The results surpassed the Zacks Consensus Estimate of 39 cents. Profits escalated 15.3% to $94.7 million from $82.1 million in the year-ago quarter.

The company’s net sales and operating revenues for the quarter climbed 15.1% to $2.6 billion from $2.3 billion in the third quarter of fiscal 2012. Revenues also beat the Zacks Consensus Estimate of $2.46 billion.

Revenues from used vehicle sales improved 17.1% to $2.1 billion in the reported quarter. The growth was attributable to higher unit sales. Unit sales went up 16.3% to 105,815 units and average selling price marginally increased to $19,344.

Revenues from new vehicle sales declined 0.7% to $45.7 million, due to a 0.8% fall in sales volume to 1,705 vehicles. Average selling price inched up to $ 26,681.

Revenues from wholesale vehicles jumped 9.6% to $427.7 million, mainly due to an increase in unit sales volume. Unit sales increased 9.5% to 79,747 units and average selling price decreased marginally to $5,214 in the quarter.

Revenues from Others went up 4.9% to $60.4 million. Revenues from extended service plan (ESP) increased 22.2% to $48.6 million, driven by improvement in used vehicle sales and higher ESP penetration.

Revenues from service department climbed 5.9% to $24.8 million. Revenues from third-party finance fees increased significantly by $7.5 million during the quarter.

Gross profit increased 13.9% to $345.2 million from $303.2 million in the corresponding quarter last year. The growth was attributable to higher profits from used and wholesale vehicle, which was partly offset by reduction in profits from the new vehicle business. Total gross profit per retail unit was $3,211, down from $3,271 in the third quarter of fiscal 2012.

SG&A increased 13.9% to $257.3 million from $225.8 million in the corresponding quarter of prior year. The increase was attributable to the opening of ten new stores since the third quarter of last year and higher variable selling costs due to a 12% increase in used vehicle unit sales. SG&A per used unit declined 1.8% to $2,393 in the quarter as growth in unit sales was partly offset by higher costs related with the growing store base.

CarMax Auto Finance (CAF) income improved 15.8% to $72.5 million from $62.6 million in the third quarter of the prior year. The growth was due to a 15% increase in average managed receivables to $5.48 billion.

Superstore Opening

CarMax plans to open 10 superstores in fiscal 2013. In the third quarter of fiscal 2013, the company opened 3 used car superstores in Des Moines, Denver markets and in the Los Angeles market.

Financial Position

CarMax had cash and cash equivalents of $445.1 million as of November 30, 2012, up from $383.4 million as of November 30, 2011. Total debt (including financing and capital lease obligations, and non-recourse notes) rose to $5.7 billion as of November 30, 2012, from $4.8 billion as of November 30, 2011.

During the first nine months of fiscal 2013, CarMax had a cash outflow from operating activities of $499.2 million, compared with an inflow of $6.3 million in the same period a year ago. Capital expenditure amounted to $184.9 million compared with $106 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 117 used car superstores in 58 markets as of December 20, 2012.

CarMax benefits from its focus in the used-vehicle market, which will help it outgrow peers. Moreover, the company’s inventories are closely aligned with sales trends, which optimize gross profit per vehicle sold while offering great value to customers.

However, we are concerned about used vehicle margins that are under pressure as manufacturers and dealers resort to aggressive incentives in order to attract customers for trading old cars for new ones.

CarMax, which competes with AutoNation Inc. (AN - Analyst Report) and Penske Automotive Group (PAG - Analyst Report), maintains a Zacks #2 Rank, which translates into a short-term (1 to 3 months) Buy rating.

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