CarMax Falters on Weak Comps; Lowers Guidance

Shares of CarMax (KMX) fell 7% Wednesday after the used-car retailer's earnings missed Street targets and it warned of flat comparable sales and a challenging economic environment. Net earnings declined 34% to $29.8 million ($0.14/share), vs. $45.4 million ($0.21/share) in FQ3 2007. Total sales increased 7% to $1.89 billion from $1.77 billion. Analysts polled by Reuters expected EPS of $0.17 and revenue of $1.87 billion.

"Current economic conditions clearly affected our performance this quarter," said CEO Tom Folliard. Flat comps reflected a decline in consumer confidence, the company said. Income at the firm's CarMax Auto Finance [CAF] unit fell 49% to $16.3 million from $32 million. "Continuing turmoil in the asset-backed credit markets drove funding costs higher in CAF's warehouse facility as the spread between asset-backed commercial paper rates and benchmark rates widened significantly during the quarter," it said. A recent front-page piece in the Wall Street Journal (Auto Loan Delinquencies Surge) discussed the spillover of credit-market concerns into the auto loan market.

Looking ahead, the company now estimates comparable-store sales growth of 2% and full-year EPS of $0.87-$0.93. Prior expectations were $0.92-$0.98, while analysts were looking for $0.95. The company said the weaker guidance is largely the result of higher funding costs at CAF. In a recent note, RBC Capital Markets explained the correlation between KMX's flat comps and its lending woes: "Just as easing lending standards helped accelerate comp growth (more people qualified for financing), tightening lending standards will likely slow comp growth further (fewer people now qualify)." On Dec. 17, Wachovia maintained an Underperform rating on CarMax, and said it believes the overall environment has worsened since September and expects declines over the next two quarters. Shares are down 4.7% to $20.60 in pre-market trading.

Sources: Press release
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