Was CarMax's Sell-Off a Mistake?

Used-car dealer CarMax (NYS: KMX) reported double-digit net revenue growth in its second-quarter earnings. However, just after earnings were released, the shares sank 11%. Let's try to figure out what led to the sell-off.

A quick look at the quarter
CarMax reported operating revenue of $2.59 billion, good for more than 11% growth. A 23% surge in wholesale-unit sales was reflected in the gross profit, which increased by 2% to $354.3 million. Peers AutoNation (NYS: AN) and Penske Automotive (NYS: PAG) also performed well in their most recent quarters, with their top lines increasing by 8% and 6.3%, respectively.

However, softened consumer traffic caused by weak economic conditions hit the used-car dealer's comparable-store sales, which decreased by 2%.

Already running more than 105 stores, CarMax has opened one store in the second quarter and plans to open two more in fiscal 2012, and six in the first half of fiscal 2013. The continued rise in the number of stores should also contribute to sales growth.

The Foolish bottom line
Even in a depressed automotive market, CarMax has managed to show positive growth in both its top and bottom line. The decline in same-store sales is mainly due to low consumer confidence and softened consumer traffic. I believe that as consumer spending improves, revenues should strengthen further. It looks to me as if the sell-off was a bit of an overreaction.

  • Add CarMax to your Watchlist.

  • Add AutoNation to your Watchlist.

  • Add Penske Automotive to your Watchlist

At the time thisarticle was published Fool contributor Abantika Chatterjee owns no shares of any of the companies mentioned in this article. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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