CarMax Inc. (KMX) showed a profit of $107.9 million or 48 cents per share in the second quarter of its fiscal 2011, beating the Zacks Consensus Estimate of 40 cents per share. The profit was slightly higher than $103 million or 46 cents per share in the prior-year quarter. The improvement in profit was primarily driven by increases in Used vehicle sales and Wholesale vehicle sales.
Net sales and operating revenues in the quarter went up 13% to $2.34 billion, higher than the Zacks Consensus Estimate of $2.28 billion. Comparable-store used unit sales in the quarter rose 4%, driven by an improvement in sales conversion.
Used vehicle sales appreciated 10.7% to $1.89 billion. This can be attributable to a higher percentage of vehicles sourced directly from consumers through the company’s vehicle appraisal process and strong wholesale market valuations, which was higher than the prior-year levels.
However, new vehicle sales dipped 19.2% to $51.1 million, reflecting lower confidence in consumer spending. Wholesale vehicle sales scaled up 39.2% to $329.9 million, driven by increase in appraisal traffic as well as appraisal buy rate.
Other sales and revenues rose marginally by 2.1% to $71.3 million, mainly driven by increases in extended service plan revenues, partially offset by a decrease in third-party finance fees.
Cost of sales increased 13.1% to $1.99 billion. Gross profit was $349.1 million in the quarter, up 11% from $314.5 million driven by an increase in unit sales as well as an improvement in total gross profit dollars per retail unit.
Selling, general and administrative were $225.2 million in the quarter compared with $218.1 million in second quarter of fiscal 2010. The increased was attributable to increases in advertising expense and sales commissions, and other variable costs associated with the growth in unit sales.
CarMax Auto Finance (CAF)
CAF reported a decline in income to $52.6 million from $72.1 million in the second quarter of 2010. The lower income was attributable to low benchmark interest rates and an improvement in credit spreads in the term securitization market.
CarMax had cash and cash equivalent of $55.2 million as of August 31, 2010, lower than $122.3 million as of August 31, 2009. Long-term debt reduced significantly to $29.4 million as of August 31, 2010 from $377.6 million as of the same date of previous year.
In the first half of fiscal 2011, CarMax had a cash outflow of $9.5 million. This was much lower than the cash outflow of $51.3 million in the first half of previous fiscal year, due to an improvement in income. Capital expenditures increased marginally to $15.2 million from $14.3 million in the first half of fiscal 2010.
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. The company plans to open three superstores within 12 months from August 31, 2010 and five superstores in fiscal 2012.
However, increasing competition pose a threat to the company’s earnings. Further, CarMax’s utilization of CAF to keep funding retail sales in an unstable credit environment adds further uncertainty to the stream of earnings, which is still significant for its profitability.
As a result, CarMax retained its Zacks #3 Rank (Hold) for the short term (1–3 months) and we maintain our Neutral recommendation on the stock for long term (6+ months).