Back to top

Image: Bigstock

Will Rising SG&A Expenses Mar CarMax's (KMX) Q2 Earnings?

Read MoreHide Full Article

CarMax Inc. (KMX - Free Report) is set to release fiscal second-quarter 2019 results on Sep 24, before the opening bell. The current Zacks Consensus Estimate for the quarter to be reported is a profit of $1.33 on revenues of $5.03 billion.

The specialty retailer of used and new vehicles came up with better-than-expected results in the last reported quarter on the back of higher vehicle sales. Moreover, the bottom line increased 11.8% year over year.

As far as earnings surprises are concerned, CarMax — whose peers include Advance Auto Parts, Inc. (AAP - Free Report) , O'Reilly Automotive, Inc. (ORLY - Free Report) and AutoZone, Inc. (AZO - Free Report) among others — is on an excellent footing, having surpassed the Zacks Consensus Estimate in each of the last four quarters, with average of 6.23%. This is depicted in the graph below:

CarMax, Inc. Price and EPS Surprise

CarMax, Inc. Price and EPS Surprise

CarMax, Inc. price-eps-surprise | CarMax, Inc. Quote

Investors are keeping their fingers crossed and hoping that the company can continue winning ways by topping earnings estimates this time around too. However, our model indicates that CarMax might not beat on earnings in the to-be-reported quarter.

Which Way are Top and Bottom-Line Estimates Headed?

The Zacks Consensus Estimate for fiscal second-quarter earnings per share has been upwardly revised by a penny in the past 30 days to $1.33. This compares unfavorably with the year-ago reported earnings of $1.24 per share. The Zacks Consensus Estimate for revenues is pegged at $5,026 million, suggesting an improvement from $4,766 million reported in the prior-year quarter.

Factors at Play

While the company’s used vehicle retail revenues are likely to aid CarMax in the to-be-reported quarter, the firm is expected to feel the heat from lower wholesale revenues and rising expenses, which may in turn clip profit levels.

The Zacks Consensus Estimate for used-vehicles sales, which contribute to bulk of CarMax’s revenues, is pegged at $4,300 million. This indicates an increase from the year-ago level of $3,971 million. Further, the estimate for revenues from other segments is $171 million, implying an increase from $155 million recorded a year ago.

Used vehicle gross profit per unit is also expected to decline to $3,276 from $3,305 in the year-ago quarter. Moreover, the Zacks Consensus Estimate for net sales of wholesale vehicles is pegged at $634 million, pointing to a decline from $670 million generated in the year-ago quarter.

As it is, the company is bearing the brunt of increasing selling, general and administrative expenses over the last several quarters due to increased store openings. As the firm is carrying on aggressive store expansion initiatives, SG&A expenses are likely to soar in the to-be-reported quarter as well, thereby denting margins. Increased investments to develop technology and digital platforms, and rising compensation expenses are also expected to hurt its bottom line.

What Our Model Says

Our proven model does not conclusively predict that CarMax will beat the Zacks Consensus Estimate in the quarter to be reported. This is because it doesn’t have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is -0.68%. This is because the Zacks Consensus Estimate for earnings is pegged a penny higher than the Most Accurate Estimate.

Zacks Rank: CarMax currently has a Zacks Rank #4 (Sell). Note that we caution against stocks with a Zacks Ranks #4 or 5 (Strong Sell) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Just Released: Zacks’ 7 Best Stocks for Today

Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.6% per year.

These 7 were selected because of their superior potential for immediate breakout.

See these time-sensitive tickers now >>