Shares of CarMax Inc. (KMX) declined 9.4% to $48.08 on Dec 20, 2013 post the announcement of the results for the third quarter of fiscal 2014 (ended Nov 30, 2013). The company posted earnings per share of 47 cents in the third quarter of fiscal 2014 ended Nov 30, 2013, increasing 14.6% from 41 cents a year ago.
Reported earnings missed the Zacks Consensus Estimate by a penny. Net earnings increased 12.4% to $106.5 million from $94.7 million a year ago.
Net sales and operating revenues in the quarter rose 13% to $2.9 billion, missing the Zacks Consensus Estimate of $3.1 billion. The year-over-year improvement in revenues was mainly due to increases in used vehicle sales and new vehicle sales.
Used vehicle revenues appreciated 15.9% to $2.4 billion in the quarter, driven by higher unit sales. Unit sales of used vehicles increased 15.4% to 122,065 vehicles and their average selling price increased to $19,469 from $19,344. Comparable store used vehicle unit sales rose 10% in the quarter. The improvement was attributable to better execution in stores, favorable consumer credit environment and improved store traffic.
New vehicle revenues rose 9.6% to $50.1 million due to higher unit sales. Unit sales of new vehicles increased 6.6% to 1,818 vehicles, while average selling price increased to $27,428 from $26,681.
Wholesale vehicle revenues grew 2.2% to $437.3 million. Unit sales increased 3.8% to vehicles due to increase in store base. Average selling price of wholesale vehicles decreased 1.7% year over year to $5,123. Other sales and revenues decreased 5.2% to $57.2 million.
Gross profit increased 10.6% to $381.7 million from $345.2 million in the year-ago quarter. The improvement was driven by higher gross profit earned from the used vehicle and new vehicle business.
CarMax Auto Finance (CAF)
CAF reported a 15.7% increase in income to $83.9 million from $72.5 million in last year’s quarter. The improvement was primarily driven by a 24% increase in average managed receivables to $6.81 billion, partly offset by a decline in total interest margin.
During the third quarter of fiscal 2014, CarMax opened three stores, one in Jackson, Tennessee, one in Brandywine, Maryland, and the last one in St. Louis, Missouri. The Maryland store is the company’s eighth store in the Baltimore/Washington, D.C. market.
Subsequent to the end of the quarter, the company opened a second store in St. Louis and opened two stores in Philadelphia, Pennsylvania. The company intends to open 10–15 superstores in each of the next two fiscal years.
Share Repurchase Program
During the third quarter of fiscal 2014, CarMax spent $14.8 million to repurchase 0.3 million shares under its existing share repurchase program. As of Nov 30, 2013, the company had $400 million remaining under the program.
CarMax had cash and cash equivalents of $664.8 million as of Nov 30, 2013, up from $445.1 million as of Nov 30, 2012. Short-term debt rose to $1.3 billion as of Nov 30, 2013 from $706 million as of Nov 30, 2012.
In the first nine months of fiscal 2014, CarMax had a cash outflow of $493.1 million compared with $499.2 million in the prior year. Capital expenditures increased to $212.9 million from $184.9 million in the same period in fiscal 2012. CarMax estimates capital expenditure in fiscal 2014 to be around $300 million.
We appreciate CarMax’s focus on the used-car market and its aggressive store expansion strategy, which helps it to outperform the industry. However, increasing competition poses a threat to the company’s earnings. The company operates in the automotive retail industry with the likes of AutoNation Inc. (AN), Penske Automotive Group, Inc. (PAG) and Lithia Motors Inc. (LAD). Currently, CarMax carries a Zacks Rank #3 (Hold) on its stock.