CarMax Leaves Investors Uncertain About Its Future

By Markets Fool.com


Image source: CarMax.

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Investors in the auto industry have had to deal with an apparent disconnect between the state of the business and share-price movements. Although 2015 was a record year for automakers, their stocks have been under pressure as investors fear that the best of times might be behind them. Coming into its fiscal fourth-quarter report on Friday, used-car specialist CarMax was feeling some of the same pressure, and concerns raised by fellow national auto-retail chain AutoNation had fed fears that both companies might not see the investment performance shareholders wanted. CarMax's results were solid, but the stock fell anyway, and that points to an ongoing lack of confidence among investors about its future.

CarMax gets in gear
CarMax's fiscal fourth-quarter results met or exceeded what most investors were looking to see from the company. Revenue was up 5.5% to $3.71 billion, and that was better than the $3.68 billion consensus forecast among investors. Net income fell 1.5% to $141 million, but a decrease in share count led to growth in earnings of $0.71 per share. After adjusting for a $5.2 million impairment-related charge, adjusted earnings came in $0.03 per share better than investors had expected.

Taking a closer look at CarMax's financials, you can see signs of sluggishness despite the fact that the company largely beat expectations. Comparable used-car sales rose 0.7% in unit terms, leading to an overall rise in used-car volume of 4%. Growth in wholesale-division sales slowed to 2.3%, and CarMax's decision to divest itself of new-car franchises led the company's other sales and revenues category to fall 8.5%. Fees from third-party financing arrangements and extended protection plan sales helped support overall growth.

Some of the other metrics CarMax tracks were mixed. Average selling prices for used vehicles rose 2.4%, but wholesale vehicle average prices were close to flat. The rise in sales led comparable-store sales for used cars to rise 3% in terms of revenue, but that was still a far cry from the 7.6% comps growth CarMax posted in the year-ago quarter. Margins slipped despite CarMax's successful efforts to rein in overhead costs, especially in the compensation area. Costs of new stores still grew, due in part to five new locations opened during the quarter.

CEO Tom Folliard put a realistic spin on CarMax's results. "While we faced a somewhat more challenging sales environment in the second half of the year," Folliard said, "we delivered solid revenue and EPS growth." The CEO also pointed to record store openings and massive share buybacks in improving CarMax's overall prospects.

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What's coming down the road for CarMax?
CarMax will look to a similarly aggressive schedule of new stores to help foster growth in fiscal 2017. It currently expects 15 stores to open, with eight coming in brand-new markets for the company, including the areas of San Francisco, El Paso, and Portland, Maine. Overall, the company expects $450 million in capital expenditures for fiscal 2017, much of which will match up with land acquisition and construction activity related to future new stores.

CarMax's buyback activity also continued during the quarter. The 3 million shares it bought for roughly $156 million was less than it repurchased during the fiscal third quarter, but it brought CarMax's total spend on stock to more than $970 million for the full fiscal year. CarMax still has $1.4 billion in authorized money available for future buybacks.

Left largely unanswered, though, is whether the concerns that AutoNation expressed in its quarterly report earlier this year will affect CarMax. AutoNation pointed to contraction in profit margins for its car sales in both the new- and used-car realms, blaming increased discounting activity from traditional dealers and rising competition. If CarMax sees similar trends with its heavy used-car focus, then the improvements it has made to bolster profitability could come under pressure.

Perhaps because of those concerns, CarMax shareholders reacted negatively to the report despite its solid results, sending shares down more than 4% at midday following the announcement. Until the future path of the economy becomes clearer, CarMax shares could remain subdued.

The article CarMax Leaves Investors Uncertain About Its Future 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.