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Earnings Preview: CarMax

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CarMax Inc. (KMX - Free Report) is expected to release its third quarter fiscal 2013 results before the market opens on December 20. The company posted a loss of 48 cents per share in the second quarter of the fiscal year, ended on August 31; well below the Zacks Consensus Estimate of 52 cents. In the upcoming quarter, the Zacks Consensus Estimate for the company is a profit of 39 cents per share, reflecting an annualized estimated growth of 7.26%.

With respect to earnings surprise, the company has missed the Zacks Consensus Estimate in two of the trailing four quarters, outperformed in one of the quarter and was in line in the other. With this, the company has delivered an average earnings surprise of -3.48%, implying that it has missed the Zacks Consensus Estimate by the same magnitude.

The Zacks Consensus Estimates for full-year fiscal 2013 is $1.83, implying an estimated year-over-year growth of 2.11%. The upside potential for the third quarter and full year estimates, essentially a proxy for future earnings surprises, is about 7.69% and 10.19%, respectively.

Second Quarter Review

CarMax’s profit remained flat year over year at $111.60 million in the second quarter of fiscal 2013 as favorable impacts from increased retail sales 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 in the quarter, surpassing the Zacks Consensus Estimate of $2.74 billion.

Revenues from used vehicle sales improved 8.8% to $2.19 billion on higher unit sales. Revenues from new vehicle sales escalated 31% to $61.40 million, owing to the same reason.

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. It plans to open 10 superstores in fiscal 2013

Estimate Revisions Trend

The Zacks Consensus Estimate for the third quarter increased marginally by a penny over the past 30 days. Let us discuss the agreement and magnitude of estimate revisions.

Agreement of Estimate Revisions

Over the last 30 days, 5 out of 13 analysts covering the stock have revised the estimates for the third quarter upward while none moved it downward. In the same period, 4 out of 13 analysts covering the stock have revised the estimates upward for fiscal 2013 while one moved it downward. The upward pressure in estimates can be attributable to better sales trend.

Magnitude of Estimate Revisions

The Zacks Consensus Estimate for both the third quarter and fiscal 2013 increased by a penny to 39 cents and $1.83, respectively, in the last month. Both the quarterly and annual estimates reflect a year-over-year growth of 7.3% and 2.1%, respectively.

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 116 used car superstores in 58 markets as of December 6, 2012.

CarMax benefits from its focus in the used-vehicle market, which will help it outgrow peers. Moreover, the inventories of the company 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 - Free Report) and Penske Automotive Group (PAG - Free Report) , maintains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating. Currently, we have a long-term (more than 6 months) Neutral recommendation on its shares.

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