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Tickers in this Article: KMX, AN, CRMT, WMT
Following the dramatic slump in sales during the final quarter of its fiscal 2009 (which ended on February 28), investors in used car dealer CarMax (NYSE:KMX) weren't holding out much hope that the numbers of the first quarter of the current fiscal year would show anything in the way of a meaningful improvement. However, drastic cuts in operating costs and better sales execution combined to produce earnings per share for the quarter of 13 cents, flat with the same period a year earlier, but well ahead of the 4 cents analysts had been expecting.

The news prompted a one-day gain in share value of nearly 18% and a quick analyst upgrade to "Outperform". Since the beginning of the year, CarMax shares have gained an impressive 78%.

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Used Outperforming New
While year over year comps for same store sales continue to show double-digit unit sales declines of about 17% for the period, this was better than the 26% decline in the previous quarter giving rise to hopes that used car sales may now be stabilizing.

Just released results by another used car dealer, America's Car-Mart (Nasdaq:CRMT) reported a unit sales gain of 5.5% would appear to confirm this trend is now taking shape.

Traditionally, the used car sales have been less volatile than the new car market. When it reported its first-quarter results earlier this year, rival new car dealer Autonation (NYSE:AN) disclosed that its new vehicle unit sales slumped by 43%. For the U.S. market overall, sales continue to remain weak, slumping nearly 39% on a year over year basis to the end of May.

The New Normal
If used car sales are now leveling off, this could be another example of a fairly permanent downshift in consumer buying behavior that has been showing up in the performance of big-box retailers like Wal-Mart (NYSE:WMT). The discount retailer has been gaining market share by attracting cost-conscious consumers with lower prices. If unemployment remains high, this bargain-hunting behavior is likely to continue and turn into the "new normal".

However, one potential speed bump to realizing the "new normal" of above-trend sales for used car dealers could the impact of the "Cash For Clunkers" program just passed by the Senate. The new law gives consumers with cars that get less than 18 miles per gallon the ability to turn them in for a $3,500 or $4,500 cash voucher toward the purchase of new cars only.

The Bottom Line
While CarMax has managed to shift into overdrive in spite of tough recessionary conditions, potential buyers may wish to avoid chasing the stock at current levels. Even with fresh upwardly revised EPS estimates in the 45 to 50 cent range for fiscal 2010, the shares trade a lofty forward multiple of more than 28x - a number more suitably assigned to a high-growth tech stock. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)

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