CarMax beats estimates, used car market remains stable

CarMax Inc. (KMX) reported its fiscal first-quarter financial results this morning. The auto retailer's profit fell 2.7 percent on a 17 percent sales drop, but it still beat Wall Street expectations, sending shares soaring over 12 percent shortly after the open.

CarMax, which operates 100 used car superstores in 46 metropolitan markets and sold nearly 346,000 used vehicles in its most recent fiscal year, earned $28.7 million, or 13 cents per share, in the three months ended May 31, down from $29.6 million, or 13 cents per share, a year ago. On an adjusted basis, earnings came in at 22 cents a share, well above the 4 cents a share that analysts expected.
Not surprising in this economic environment, sales fell 17 percent to $1.83 billion from $2.21 billion a year ago but still beat analysts' estimates of $1.72 billion. Same-store sales fell 18 percent during the quarter.
"We are pleased to report earnings similar to the prior year level, despite being in the midst of the most challenging economic and credit environments in our history," Chief Executive Tom Folliard said in a statement. And he's right, although CarMax results shouldn't be all that surprising. Only 2 percent of the company's sales are new vehicles, which protect it to a degree from the slump in the new car market at least, if not from the slump in the economy. Like most defensive products, the used-vehicle market has been historically more stable than the new one.

The company's own results reflect that well. At comparable stores, used vehicle sales dropped only 17 percent, while new vehicle sales fell 42 percent.

Not only that, but despite a decline in the average selling price of its used vehicles, CarMax's total gross profit per unit actually increased to 12 percent (from 10.2 percent) for used vehicles and to 15.1 percent overall (from 12.8 percent), which explains why profit fell only 2.7 percent with a revenue drop of 17 percent.

When reporting the previous quarter, CarMax said it was temporarily suspending its store growth as a result of the weak economic and sales environment. It further estimated gross capital expenditures of approximately $20 million in fiscal 2010, down from $185.7 million in fiscal 2009 -- quite the cut. So all things considered, the company can indeed be proud of reading the environment right and reacting appropriately.

The economic downturn didn't affect only sales, of course, but CarMax's financing arm as well, which reported a loss of $21.6 million, compared with a profit of $9.8 million a year-ago. Volume of loans dropped 27 percent from the year-ago period, not just because of the sales decline, but also because of what seems to be a healthy decision to decrease the amount of in-house lending, despite its contribution to the decline in sales.

As for the future, Folliard said that "While our customer traffic trend continued to be weak, we did see improvement in the first quarter compared with the fourth quarter of fiscal 2009." Such statements provide a relief for investors and for the market at large.
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