Shares of auto superstore Carmax (KMX: Charts, News) slid at the end of last week, after the company posted disappointing first quarter earnings below analysts’ forecasts. The Richmond, Virginia- based company posted earnings of 52 cents per share, or $120.7 million, on revenue of $2.77 billion. Earnings decreased 4%, but revenue increased 4% from the prior year quarter. However, both top and bottom lines missed analysts’ expectations of 53 cents per share on revenue of $2.81 billion.
Although total unit sales rose 3%, due to higher average selling prices, a 2.1% drop in wholesale unit sales and flat same-store sales offset those gains. Profit in its wholesale unit segment also dropped by 5%. New vehicle sales, a smaller business segment, plunged 10.4%, but used vehicle sales, its core business, rose 5.7%. The company makes an average profit of $2,177 per used car sold, as opposed to $847 for new cars. Other revenue, which includes third-party lender fees, dropped 9%.
The lackluster earnings disappointed many investors, after Carmax posted two consecutive years of strong first quarter growth. Carmax’s unit sales increased 52% in the first quarter of fiscal 2012, and 32% in 2011. Despite a weak macroeconomic environment which has punished the auto industry over the past year, Carmax intends to open ten new superstores in fiscal 2013 – twice the amount of stores opened in fiscal 2012. The company has already opened new stores in Pennsylvania, California and Tennessee as part of the expansion plan. New stores in Florida, Iowa and Colorado are scheduled to follow.
The company’s operating margin of 36.43% and profit margin of 4.14% are both far above the industry average. Expenses increased by 5% to $253.6 million due to more aggressive store expansion. The company stated that it has been focused on decreasing expenses, improving traffic, execution and gross margins. During the first quarter, Carmax improved its sale and appraisal rates, while lowering the costs of reconditioning used vehicles for resale.
While the used car market is currently out of favor, analysts consider Carmax the strongest in its industry. Shares of Carmax have slid 22% over the past twelve months, while shares of its smaller competitor Autonation (AN: Charts, News) have risen 3%. Stephens Inc. analyst Rick Nelson noted, “They’ve been challenged with the supply of 1-to-3 year-old cars, which is their core business.” Nelson also noted that discretionary spending was waning, which impacted customers’ ability to buy higher-priced used cars.
Carmax, which was established in 1993 after being spun off of parent company Circuit City, is considered the pioneer of the “car superstore” business model, in which the Wal-Mart (WMT: Charts, News) superstore business model is combined with the traditional auto dealership. As of June, the company operates 111 car superstores across 55 markets, with an average of 250-500 stores per lot. The average cost of a Carmax vehicle is $19,000. Used vehicles are usually less than six years old with less than 60,000 miles driven.
Shares of Carmax trade at 12.4 times forward earnings with a 5-year PEG ratio of 1.08, which suggest that they are undervalued. However, macro headwinds will keep the stock under pressure in the short term. The stock has traded in a wide 52-week range between $22.77 and $35.17. The company does not pay a dividend.
Other News About KMX
CarMax 1Q profit down 4 pct on lack luster sales
Carmax slides after missing analyst estimates.
CarMax shares down as wholesale unit disappoints
Weak used car sales in the United States dents the company’s bottom line.
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