CarMax Inc. (NYSE:KMX) reported its earnings for the first quarter of its fiscal year 2011 (ended May 31, 2010) on June 23, 2010, beating the Zacks Consensus Estimate by of 11 cents per share. However, the market reacted negatively, with share prices falling subsequent to the earnings release due to the company’s lack of an earnings outlook.
Analysts were highly optimistic given the company’s impressive results, as almost every one covering the stock had revised estimates upward. Below we will cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for both short-term and the long-term outlook for the stock.
First Quarter Highlights
CarMax topped the Zacks Consensus Estimate with the help of a rebound in customer traffic and sales execution along with a favorable year-over-year comparison. This was reflected in the improvement of comparable store sales by 9% for the quarter.
Net sales and operating revenues increased 23% to $2.26 billion in the quarter. CarMax Auto Finance (“CAF”), the company’s finance arm, reported an income of $57.5 million versus a loss of $21.6 million in the prior-year quarter. This was attributable to low benchmark interest rates and better credit spreads in the term securitization market.
CarMax resumed its store expansion strategy during the quarter driven by improved economic and sales environment in the U.S. During the quarter, the automotive retailer has opened one used-car superstore in the Augusta, Georgia market. Subsequent to the end of the quarter, it has also opened the two remaining new stores in Cincinnati and Dayton, Ohio, which had been planned for the current fiscal year.
Earnings Estimate Revisions – Overview
Estimates have improved over the last 7 days, reflecting analysts’ optimism about the stock, driven by the company’s improved results and strong business strategy. Let us delve into the earnings estimate details.
Agreement of Estimate Revisions
The table below shows a strong agreement among analysts regarding the outlook of CarMax’s earnings. Over the last 7 days, all the analysts covering the stock have revised upward the estimate for fiscal year 2011, ended February 28, 2011, with no downward revisions. For fiscal year 2012 ended February 28, 2012, the revisions continue to be strong. As many as 12 out of 14 analysts covering the stock have revised the estimate upward while none moved in a downward direction. This commendable trend in estimate revisions predicts a consistent stream of earnings.
Magnitude of Estimate Revisions
Earnings estimates for fiscal year 2010 have been raised by 18 cents from $1.26 to $1.44 since the earnings announcement. Analysts are confident about the next fiscal year as well. They have raised estimates by 14 cents from $1.39 to $1.53 for the fiscal year. This is noteworthy as analysts continue to value the stock at a premium.
CarMax’s strong exposure to the used-car market has helped it improve the results through a favorable appraisal buy rate. The automotive retailer’s car-buying appraisal strategy helps provide an inventory of makes and models that reflects the tastes of each market.
The improved economic and sales environment in the U.S. has helped CarMax to resume its strategy to open new used-car superstores every year. Under the strategy (suspended at the end of fiscal year 2009) the company plans to open used-car superstores at an annual rate of 15%–20% of its used-car superstore base every year. CarMax plans to open three new stores in 2011, three to five in 2012, and five to 10 in 2013.
However, slow sales in the new vehicle market, especially domestic cars, have forced manufacturers and dealers to offer incentives and attractive pricing for new cars. These have encouraged consumers to trade in their old cars for new, which has lowered used-car sales and increased the used-car inventory. This is forcing CarMax to lower the prices of vehicles in order to reduce a high used-car inventory, thereby shrinking margins.
Due to the strong agreement among the analysts on the back of improved results, we have upgraded the short-term recommendation on the stock to Strong Buy (Zacks #1 Rank). However, the slow recovery in the market will undermine the company’s results in the long run. As a result, we have maintained our long-term recommendation of Neutral on the stock.