CarMax will report their fiscal (financial) second quarter earnings Wednesday morning.

Anyone trying to "play the stock" into the earnings really needs to think again, because I think most of the erratic movement with the quarterly reports out of CarMax have more to do with a "call" some brokerage firm was trying to make. Usually it comes from a new analyst in the space trying to make a name for him or herself.

The barrier to change is not too little caring; it is too much complexity.

To turn caring into action, we need to see a problem, see a solution, and see the impact. But complexity blocks all three steps.

Many board members award themselves (yes, that's how it's done) gold-plated pay packages even though they regularly play hooky in ways that would get the average worker canned in a heartbeat. More than 520 directors from Equilars database of about 4,000 companies missed 25% or more of their board meetings in the last two years. Most of those meetings last just two days.

Source: Michael Brush, MSN Money, December 16, 2005 "Pay soars in the board room"

In addition to reporting earnings Thursday, America's Car-Mart (CRMT) announced Hank Henderson [COO] will succeed Skip Falgout as CEO, demonstrating the company has a succession plan (they were one of the few companies that never responded back to my survey).

As far as the results go, America's Car-Mart continues to struggle. But it sounded like they were moving in the right direction. Management indicated on the call that they have lowered the average term of loans to about 25 months while at the same time increasing the down payment (so hopefully making more "quality" sales), which has been leading to lower delinquencies.

Below are the 2007 U.S. light vehicle sales and inventory levels by month (including my estimates for the rest of the year).

Source: BEA, Ward's Auto, Automotive News, efficient insights llc

I wanted to give you the earnings yields for the companies in the autoretailstocks.com index as of the closing price on Friday.

Source: Yahoo Finance, Zack's, efficient insights llc

50 years from now, when you look back at your life, don't you want to say you had the guts to get in the car?
Source: The movie Transformers, Shia LaBeouf (playing character Sam Witwicky)

L2 and Transformers: more than meets the eye

The Modigliani-Miller theorem (of Franco Modigliani, Merton Miller) forms the basis for modern thinking on capital structure. The basic theorem states that, in the absence of taxes, bankruptcy costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed. It does not matter if the firm's capital is raised by issuing stock or selling debt. It does not matter what the firm's dividend policy is. Therefore, the Modigliani-Miller theorem is also often called the capital structure irrelevance principle.

Merton Miller's analogy to illustrate the principle uses a pizza: cutting a pizza into more or less pieces does not change the underlying amount of pizza.

I agree with what Jeff Rachor said on the last quarterly conference call. It took a long time for Pep Boys to get off track and I appreciate him wanting to take the time to get it right this time around.

So this is one instance where investors really need to exercise patience. I wouldn't care if it took longer than November. Trying to hit an arbitrary deadline just to appease those of us (in the investment community) doesn't mean squat if he doesn't set the right course for the company.

"In the '70s', people invented hostile takeovers as a way to recapture the approximately 50 percent of the value of American corporations that was being destroyed by its managers with nonoptimal operating policies," asserts Harvard Business School professor Michael Jensen. Jensen, together with the late University of Rochester professor William Meckling, published extensive research purporting to show the positive effect that debt can have on company value. Jensen's main point: A company's operating and investment decisions, and therefore its cash flows, are not independent of its debt-equity ratio.

This year we will get about a quarter of our sales volume (GM globally) out of 11 emerging markets. Something that even as recently as 5 years ago was pretty hard to imagine that we would reach that degree of growth in volume and revenue in those markets.

We are pleased that we opened 6 new shops this year. But unfortunately 21 have closed in the U.S. and Canada during the same period. Our goal remains the same; stabilize shop count this year, and begin to see increases in 2008. To that end, year-to-date, we have signed 8 conversions all of which should open this year. In addition to the conversions, as I said, we have 6 new shops under construction.

click to enlarge

Where could conversion rates go over the next couple years?

About 85% of our vehicles are disposed of through auction. . . (But) We believe that the dealer direct has a lot of benefits both for us on the timing and reducing the pipeline (number of days idle). And in providing benefits to dealers in that they save transportation costs, in some cases flooring costs. And it can be a "win win." So I see this as being a third or more of our opportunity in 2008 and going forward.

We believe there are significant opportunities to reduce fleet cost inflation and improve fleet utilization and customer satisfaction over the next few years. Perhaps our most important cost initiative, which is part of our ongoing effort to streamline costs that I will be discussing in a minute, is a comprehensive review of all fleet processes. A cradle to grave re-engineering of how we buy, maintain, move and dispose of our rental vehicles.

We believe we can drive better fleet purchasing deals. We can also do a better job getting the cars we want when we need them. Once we take delivery, we can reduce the time before the first rental. The next opportunity is to eliminate the number of days a vehicle isn't generating revenue, whether due to maintenance, body shop, or other factors. At the end of the vehicles rental life, we can reduce the time between the last rental and getting the car off of our books. In addition we can better manage the holding period of our vehicles to maximize the residual value at the sale. As vehicles comprise almost 30% of our overall costs, even small system wide savings will be significant.

In an address to employees around the world, Chrysler Chairman and CEO Bob Nardelli and Chrysler Vice Chairman and President Tom LaSorda outlined the strong suits of The New Chrysler as a blend of longstanding traits and a willingness to embrace new processes to thrive in today's ultra-competitive marketplace. The new management team of Nardelli and LaSorda was announced earlier today.

Clearly the real opportunity going forward is to integrate and leverage our Ford assets around the world. And we've made a significant investment in all the PAG brands. And they are on a real positive profitable growth plans. And it just was clear to us that this is a good time to review our portfolio and decide the best thing for all of our brands going forward.

So for now, I just want to give you nine key metrics now that all of the franchised auto retailers have reported second quarter results.

Read AutoNation's Q2 2007 Earnings Call Transcript.

Throughout my career as an automotive retailer, I've appreciated a challenging market. Because it provides the opportunity for the best operators to rise to the top. More specifically, General Managers that focus on people and processes are able to deliver results in all economic environments.

Ford Motor Company (F):

Swung to a surprise profit of $0.13 in earnings per share when investors were looking for a loss of $0.38. South America, Europe, and even the Premiere Automotive Group all showed pretty sizeable improvements.