CarMax Surpasses Zacks Estimates - Analyst Blog

CarMax Inc. (KMX) posted a profit of $82.4 million or 36 cents per share in the third quarter of its fiscal 2011, barely surpassing the Zacks Consensus Estimate of 34 cents per share. The profit was higher than $74.6 million or 33 cents per share in the prior-year quarter.

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 by 16% improvement in comparable store sales for the quarter. Net sales and operating revenues in the quarter went up 23% to $2.12 billion, higher than the Zacks Consensus Estimate of $1.97 billion.

Used vehicle sales escalated 20% to $1.69 billion. This can be attributable to continued rebound in customer traffic and an improvement in sales conversion, reflecting better availability of consumer credit.

However, new vehicle sales rose 24.9% to $47.7 million. Wholesale vehicle sales appreciated 41.1% to $320.1 million, driven by increase in appraisal traffic as well as appraisal buy rate.

Other sales and revenues increased by 16.8% to $62.9 million, driven mainly by increases in extended service plan (ESP) revenues.The 31% increase in ESP revenues reflected both the growth in used unit sales and better penetration of ESP.

Gross profit was $297.9 million in the quarter, up 23% from $242.9 million driven by increases in used and wholesale unit sales as well as an improvement in ESP revenues.

Selling, general and administrative were $219.7 million in the quarter compared with $192.1 million in second quarter of fiscal 2010. The 14% increased was attributable to increases in sales commissions and other variable costs associated with the growth in unit sales and higher advertising expense.

CarMax Auto Finance (CAF)

CAF reported a decline in income to $55.7 million from $65.8 million in the quarter. The lower income was attributable to adjustments of $31.6 million related to loans that originated in the third quarter of previous fiscal year.

Financial Position

CarMax had cash and cash equivalent of $74.4 million as of November 30, 2010, which was significantly higher than $15.2 million in the same period a year ago. Long-term debt reduced significantly to $29.3 million as of the above date from $149.7 million as of November 30, 2009.

In the first nine months of fiscal 2011, CarMax had a cash outflow of $22.5 million compared with an inflow of $56.5 million in the same period of prior year. The decline in cash flow was mainly attributable to increases in inventory and auto loans receivables. Meanwhile, capital expenditures increased to $38.5 million from $18.4 million in the first nine months of fiscal 2010.

Our Take

We appreciate CarMax's focus on the used-car market, which helps it to outperform the industry. The automotive retailer is among the strongest operators in its peer group, which includes AutoNation Inc. (AN) and Penske Automotive Group (PAG).

In the first quarter of fiscal 2011, CarMax resumed its strategy to open new used-car superstores, driven by improved economic and sales environment in the U.S. Under the strategy, the company plans to open used car superstores at an annual rate of 15%–20%. The company plans to open five stores in 2012; and five to ten stores in 2013.

These, along with the improved results, have led the company to retain Zacks #2 Rank on its stock, which translated to a short-term (1–3 months) recommendation of Buy.