CarMax Sees Earnings, Sales And Revenue Crash

By Eric Fox | September 23, 2008 AAA

Retail is a tough enough business right now, but just imagine trying to run a retail business that relies on third party or in house financing to make a sale. Used car dealer CarMax (NYSE:KMX) is just such a business, and not surprisingly it reported weak earnings in its second fiscal quarter as the consumer slowdown and tight credit conditions continued to stifle business.

CarMax reported revenue of $1.84 billion, down 13% from $2.12 billion in the second quarter of 2007. Net earnings declined to $14.0 million, or earnings per diluted share of 6 cents, compared with $65.0 million, or 29 cents per diluted share, reported in the second quarter of fiscal 2008. The company missed analyst expectations of 8 cents per diluted share for earnings, and revenue of $1.9 billion.

Sales Plunge
Other measures of operations were also weak. Comparable store used unit sales declined 17% for the quarter, and total used unit sales decreased 7% in the second quarter. "The slowdown in the economy and reductions in consumer spending power resulting from higher gasoline and food costs continued to create a difficult environment for our business," said Tom Folliard, president and CEO of CarMax in the earnings release. (For related reading, check out Using Consumer Spending As A Market Indicator.)

CarMax also was hurt by activities in its CarMax Auto Finance unit, which makes loans to customers to purchase vehicles. The company saw earnings reduced by $28.2 million, or 8 cents per share, in the quarter, causing a pre-tax loss of $7.1 million. This company earned net income of $33.4 million in the second quarter of 2007 in this unit. The three items that hurt earnings in the finance unit were:

  • $15.7 million related to increases in loss rate assumptions for loans originated in prior fiscal years - mostly 2006, 2007 and 2008.
  • $7.7 million due to a mark-to-market reduction in the carrying value of subordinated bonds that the company owns in securitizations it completed in 2008
  • $4.1 million from increasing the discount rate used to value its retained interest in securitized receivables.

CarMax said if current conditions persist, the last two items would result in positive contributions to company earnings in future periods.

Comparable store vehicle sales for both new and used vehicles have turned sharply negative in the last year, as the consumer spending slowdown accelerated. In the second quarter of 2007, used vehicle units sales increased 3%, while new vehicle unit sales decreased 13%; compared to a 17% and 20% drop this quarter for used and new, respectively.

Measured in dollars, the drop was even worse, with a decline of 22% in used vehicle dollar sales, and a 21% decline in new vehicle dollar sales this quarter.

All Auto Dealers Suffering
Other auto retailers are reporting similar problems. Sonic Automotive (NYSE:SAH) lowered guidance in July to be in a range of $1.65-1.85 per share, down from a previous range of $2.35-2.50. The company blamed a tough economic environment. AutoNation (NYSE:AN) reported in late July that net income fell 33% to $51.8 million, or 29 cents per share, from $77.3 million, or 37 cents per share in the same quarter last year. The company announced a $100 million cost reduction plan in response to "the ongoing macroeconomic and industry challenges".

Penske Automotive Group (NYSE:PAG) reported that second quarter income from continuing operations increased 1.2% to $40.5 million, when it reported in late August, but the company called the quarter "very challenging at the retail level".

Bottom Line
Retailers that rely on consumer demand will continue to suffer as the consumer retrenches on spending. However, the companies that rely on financing to help those consumers buy their products are being hurt further as financing dries up and loss rates on loans inch higher.

To discover the inner workings of this industry, read The Industry Handbook: Automobiles.

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