Will CarMax Stay in Gear This Earnings Season?

By Earnings Fool.com


Image: CarMax.

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For decades, many buyers of cars and trucks have made their purchases through local dealers that have a limited geographical reach. But more recently, dealer networks like CarMax and AutoNation have built up coverage that extends across the nation, and CarMax in particular has tried to cater to those looking for a superior used-car purchase experience. The stock took a dip early in the year, but coming into its fiscal fourth-quarter report on Thursday, CarMax investors are hoping for continued steady growth in earnings and sales. Let's take an early look at what CarMax is likely to say about its most recent quarter and what could lie ahead for the company.

Stats on CarMax

Analyst EPS Estimate

$0.71

Change From Year-Ago EPS

6%

Revenue Estimate

$3.68 billion

Change From Year-Ago Revenue

4.7%

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

What's down the road for CarMax earnings?
In recent months, investors have scaled back on their views about CarMax's future earnings, reducing their fourth-quarter projections by a penny per share and their fiscal 2017 estimates by about 2%. The stock has been on a roller coaster ride and is still down 6% since late December.

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CarMax's fiscal third-quarter results raised concerns from investors about how much growth the car retailer would be able to generate. Revenue was up just 4%, and net income actually dropped by 1% from the year-earlier quarter. A rise in unit sales was more than outweighed by weaker pricing, and that sent comparable-store used-car sales down almost 1%. Rising overhead expenses cost CarMax dearly on the bottom line, and a new marketing campaign also added to the drag on net income. CEO Tom Folliard commented on how difficult the quarter was from a sales perspective, even though he believes that continued expansion will help lead CarMax forward.

Yet CarMax took an even bigger hit when AutoNation commented on the state of the automotive sales market. CEO Mike Jackson said that AutoNation's gross profit for new and used cars would be about $250 to $300 lower per vehicle, and the reason he gave was that unusually large incentives and discounting activity among manufacturers were forcing AutoNation to cut prices in order to compete effectively. CarMax has prided itself on its ability to use pricing power to its advantage, but if the market gets more competitive, CarMax could have trouble avoiding the forces that AutoNation has cited.

Even worse, some new-car manufacturers are looking at ways to get their piece of the used-car market pie as well. By setting up online websites that allow customers to look at particular makes of used vehicles and get information on availability at traditional local dealers, automakers are adding value to their own dealer networks. That will make the competitive advantage that CarMax and AutoNation have less valuable, and that in turn could lead to further deterioration in profitability going forward.

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Still, CarMax has ambitious growth plans. The company is recruiting for more than 1,600 new positions at locations across the country, and most of those positions are in the sales department. Some service detailers and technicians will be hired, but the general idea is that CarMax wants to staff its new dealerships with trained personnel who understand the company's goals and will work to achieve them.

In the CarMax earnings report, be sure to watch how the company's management responds to what's happening elsewhere in the industry. Given so much competitive pressure, CarMax needs to establish its own strategic thinking in a way that will give customers and investors alike the confidence they need in the company's future prospects. Otherwise, recent pressure could continue for CarMax shareholders.

The article Will CarMax Stay in Gear This Earnings Season? originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends CarMax. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.