Market Overview

CarMax Q4 Beats Estimates on Strong Subprime Financing


The used car retailer CarMax (NYSE: KMX)reported record results for its forth quarter and full fiscal year 2012 on Thursday.

The company beat consensus estimates with quarterly revenues of $2.48 billion versus $2.41 expected. Revenues also beat last year's comparable quarter of $2.25 billion. For the whole fiscal year, revenues increased 11 percent to $10 billion.

Comparable store unit sales increased 4 percent in the fourth quarter and 1 percent for full-year fiscal 2012. Unit sales clocked a 6 percent increase for the quarter and 3 percent for the whole year. Strong subprime-financed sales drove the increase, as did an extra day due to the leap year. Strong new car sales drove appraisal traffic, which according to the company resulted in solid buy percentages, as wholesale units sales increased 13 percent. Increase of 6 percent in traffic, CarMax CEO Tom Folliard noted during the earnings call, was a sequential improvement over two previous quarters that posted declines.

Growth in unit sales was enough to offset decreases in revenues from third party financing fees. Prevalence of cheaper subprime financing affected this, as well reduced third party fees due to a larger portion of third party financing retained by the company's financing arm. The latter helped the financing arm's revenues, however.

The company reported fourth quarter net earnings of $95 million, or $0.41 per diluted share, a 7 percent upside compared with $88.0 million or $0.39 EPS last year. Net income increase for the entire year was up 10 percent at $413.8 million or $1.79 per share. Comparable gross margin pressure in the fourth quarter came from increases in SG&A expenses, commission, as well as growth-related costs such as new store openings. The CEO pointed out that SG&A should increase in the next few quarters as the company ramps up store growth. The company expects to open 10 stores in 2012 and 10 to 15 stores in 2013.

A notable decrease in expenses was in advertising, primarily driven by the fact that the company chose not to advertise in the Superbowl this year. “That was a grossly overpriced event we decided not to participate in this year.” Folliard noted to analysts and investors in the call. He said that, despite expectations that this expense would go up as the company grows, the company saw advertising as something dependent on unit sales. If sales came at desired levels, the company would do more advertising.

CarMax reported that it has weathered the increase in gas prices well due to a nimble inventory that is able to react quickly in mix changes in vehicles sold. The company noted that SUV share declined by four points whereas small and mid-size unit sales picked up by the same amount. Folliard said consumer behavior change has been much more normalized compared to May 2008, as customers appear more at ease with gas prices in the high $3s.

Higher SAAR numbers have not affected CarMax inventory, CarMax CEO noted, as higher new car sales generally bring in more traffic in the company's stores, and thus increased sales. He noted inventory was flat to slightly up on new store openings.

The company briefly discussed inventory mix shifting more towards older cars, to reflect consumer preference. As these have a notably lowers gross margin per unit ($950 vs $2,150 for newer models), that may be a pressure on EPS along with rising SG&A. The company's wholesale business - older model sales - is where the company is particularly strong with regard to the competition, its auctions having the highest dealer participation rates.

KMX opened down 94 cents on yesterday's close but is picking up, currently trading at $34.21 as investors ponder the release.

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