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CarMax Surpasses Estimates - Analyst Blog


CarMax Inc.
(KMX) revealed a net income of 41 cents per share (before special items) for the first quarter of fiscal 2011, compared with 11 cents per share (before special items) in the same quarter of the previous fiscal year. With this, the company beat the Zacks Consensus Estimate of 33 cents per share.

CarMax's results were positively driven by a rebound in customer traffic and sales execution along with a favorable year-over-year comparison. This is also reflected in the improvement of comparable store sales by 9% for the quarter. Total gross profits escalated 21% to $333.5 million.

Net sales and operating revenues increased 23% to $2.26 billion in the quarter. Used vehicle sales grew 18.3% to $1.8 billion, while new vehicle sales rose 4.8% to $50.9 million.

Wholesale vehicle sales soared 84.5% to $316.5 million, driven primarily by significant increases in both its appraisal traffic and appraisal buy rate of used vehicles. The improvement in buy rate resulted from better appraisal offers by the company.

CarMax acquires its used-vehicle inventory directly from consumers via its in-store appraisal process through its car-buying centers. The company sells vehicles, purchased through the in-store appraisal process, that do not meet its retail standard through on-site wholesale auctions.

Other sales and revenues fell 4% to $62.5 million as a decline in net third-party finance fees has more than offset the 20% increase in extended service plan revenues. The increase in service plan revenues reflects both the growth in retail vehicle sales and the rollout of a guaranteed asset protection product in fiscal 2010.

CarMax Auto Finance ("CAF")

CAF, the company's finance arm, reported an income of $57.5 million, versus a loss of $21.6 million in the first quarter of fiscal 2010. The improvement in CAF income was due to low benchmark interest rates and better credit spreads in the term securitization market.

Store Openings

During the quarter, CarMax opened one used-car superstore, entering the Augusta, Georgia market. Subsequent to the end of the quarter, it also opened the two remaining new stores in Cincinnati and Dayton, Ohio, which had been planned for the current fiscal year.

Financial Position

CarMax had cash and cash equivalents of $13.7 million as of May 31, 2010, a decline from $133.6 million last year. This translated into a cash ratio of 2.4% for the period under study, significantly down from 20.9% in the same period last year. The decline in cash reserve was caused by the liquidation of a considerable amount of debt.

Long-term debt reduced significantly to $86.3 million from $416.4 million as of May 31, 2009. Consequently, the long-term debt-to-capitalization ratio decreased to 4.2% from 20.4% in the year-ago period.

In the quarter, CarMax's operating cash flow was $71.3 million, a sharp contrast to an outflow of $79.4 million in the prior-year quarter. This was primarily due to an improvement in net income during the quarter. Meanwhile, capital expenditures scaled up to $9.2 million during the quarter from $5.7 million a year ago.

Our Take

CarMax's heavy reliance on the used-car market helped improve results through a favorable appraisal buy rate. The automotive retailer's car-buying appraisal strategy helps provide an inventory of makes and models that reflect the tastes of each market.

The improved economic and sales environment in the U.S. helped CarMax to resume its strategy to open new used-car superstores every year. The company suspended the strategy at the end of fiscal 2009 due to deteriorated economic conditions. Before suspension, the company pursued a strategy to open used-car superstores at an annual rate of 15% of its used-car superstore base for several consecutive years.

However, slow sales in the new vehicle market, especially domestic cars, have forced manufacturers and dealers to offer incentives and attractive pricing for new cars. This has encouraged consumers to trade in their old cars for new, which has lowered used-car sales and increased the used-car inventory. This is forcing CarMax to lower the prices of vehicles in order to reduce high used-car inventory, thereby shrinking margins.

These factors have led us to continue with our Zacks #3 Rank for the stock (which translates to a short-term recommendation of "Hold") and our long-term recommendation of "Neutral".

Read the full analyst report on "KMX"
Zacks Investment Research

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.


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