On Dec 29, 2015, we issued an updated research report on CarMax Inc. KMX. Going forward, this auto retailer of used and new vehicles will continue to benefit from its aggressive store expansion and share repurchase strategies. However, rising competition and a weak financial position remain headwinds.
CarMax’s earnings per share increased 5% year over year to 63 cents in the third quarter of fiscal 2016 (ended Nov 30, 2015). The improvement in the bottom line was driven by lower shares outstanding. However, earnings fell short of the Zacks Consensus Estimate of 68 cents.
CarMax’s net sales and operating revenues in the reported quarter increased 4.1% year over year to $3.54 billion, mainly driven by higher sales of used and wholesale vehicles. Revenues, however, missed the Zacks Consensus Estimate of $3.62 billion. The year-over-year rise was mainly driven by higher sales of used and wholesale vehicles.
CarMax follows an aggressive store growth policy. During the third quarter of fiscal 2016, CarMax opened 2 stores and relocated 1 store. Subsequent to quarter end, the company entered the Boston market with two stores in Norwood and Danvers, MA. In fiscal 2016, the company plans to open 14 stores, including its third store in Westborough, and relocate 1 store whose lease is about to expire. The company also intends to open 13–16 superstores in each of the next two fiscal years. As of Nov 30, 2015, CarMax had 155 used-car stores across 77 markets.
In addition, CarMax consistently enhances shareholder value through buybacks. During third-quarter fiscal 2016, CarMax spent $445.7 million to repurchase 7.7 million shares. As of Nov 30, 2015, the company had $1.55 billion of authorization remaining under its share repurchase program.
However, CarMax has a weak financial position. Moreover, the company is witnessing declining new vehicle sales. In the first nine months of fiscal 2016, new vehicle revenues decreased 16.2% to $162.8 million owing to a 16% fall in unit sales to 6,039 vehicles. Also, the average selling price of new vehicles dropped 0.3% to $26,851.
This Zacks Rank #3 (Hold) stock also witnessed downward estimate revisions over the last 30 days. The Zacks Consensus Estimate declined roughly 0.7% to $2.02 per share and 1.1% to $3.46 per share for fiscal 2016 and fiscal 2017, respectively.
Stocks that Warrant a Look
Better-ranked automobile stocks include U.S. Auto Parts Network, Inc. PRTS, Fox Factory Holding Corp FOXF and O'Reilly Automotive Inc. ORLY. All these stocks carry a Zacks Rank #2 (Buy).
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