CarMax Runs Into Tougher Competition From New Cars

Adjusted EPS excludes a $0.06 one-time benefit from the settlement of a class-action lawsuit. Reported EPS came in at $0.70.

The company did not offer guidance, but consensus third-quarter estimates call for EPS of $0.54 on revenues of $3.26 billion. For the full year, consensus estimates call for EPS of $2.57 on revenues of $14.11 billion.

The percentage of retail vehicles financed by subprime loans offered by third-parties and CarMax dropped from 18.5% a year ago to 13.8% this year.

The company’s CEO said:

The continued growth in our store base and improvements across our used, wholesale and [CarMax Auto Finance] operations, as well as our share repurchase program, all contributed to our record second quarter earnings per share.

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Same-store sales of used vehicles rose 0.2% year-over-year in the second quarter. The company attributed the small increase to a calendar shift. In the second quarter of 2013, the company reported a same-store sales increase over 2012 of 15.9%.

The company’s auto finance group posted a profit gain of about 9.7% year-over-year. CarMax is also continuing its tests of originating loans for subprime borrowers that the company would typically direct to third-party, subprime lenders for financing. As of the end of August, the company has $44.4 million outstanding in the program, about a third of which represents loans made in the second quarter.

According to data from the National Automobile Dealers Association (NADA), used car prices in the first three months of 2014 rose by a combined 6.1% and have fallen by a combined 12.1% since April. NADA suggests that part of the reason that used car prices have fallen is that automakers have boosted incentives for new cars. Incentives are up 32% year-over-year in the subcompact segment and up 21% in both the midsize and compact segments. Only three of 14 NADA segments have shown a drop in new car incentives. CarMax reports that average second-quarter used car prices were up 4.1%.

CarMax shares were down more than 7% in premarket trading Tuesday morning, at $49.01 in a 52-week range of $42.54 to $54.28. Thomson Reuters had a consensus analyst price target of around $56.50 before the results were announced.

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