Why CarMax Shares Dipped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of CarMax (NYSE: KMX  ) were getting taken to the shop today, falling as much as 10% on a disappointing earnings report.

So what: Sales were actually strong for the used-car dealership chain as overall revenues increased 13%, to $2.94 billion, topping estimates of $2.87 billion, as same-store sales improved by a brisk 10%. Perhaps the strong sales growth is not such a surprise in a year that has seen domestic auto sales jump across the board. Despite the revenue gains, earnings per share missed estimates by $0.01, coming in at $0.47, as CarMax lost out in the lucrative auto-financing market. The market seemed to be especially disappointed that the jump in sales did lead to a stronger bottom-line performance.

Now what: The customers' shift to outside financing is certainly a curious development in this business, and will continue to threaten CarMax if it proves to be structural. CarMax also said third-party lenders were becoming stricter about handing out debt. As a result, the company is planning to test its own subprime lending originations, which could reverse the misfortune. With a well-known brand, and an auto market that's continuing to recover, CarMax does seem like it's poised for long-term success. I wouldn't count them out after one bad report.

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  • Report this Comment On December 20, 2013, at 5:13 PM, jstolzman wrote:

    All the more reason to buy more KMX and stay in for the long haul. I see KMX having plenty of growth.

  • Report this Comment On December 20, 2013, at 7:53 PM, Cooldude0007 wrote:

    I find it hard to believe that KMX is missing out on the financing. There must be a problem with the approach. The last 3 cars I bought were late models. I was preapproved by my credit union at a very competitive rate. They simpply asked, if we could save you another half of a percent would you be interested? Heck yes, that's part of my plan to come in with a tuff rate knowing they will, in most cases, beat it. The reall money for KMX is in the extended warranty. Big profit indeed. The last one started out about a grand. I kept saying no and started to get up to leave. We went thru that routine 5 times wherein I bought it for about $450. At that he was cring of course that I was getting it at cost, ya right. But look at the profit that they would have had with a less informed buyer. My brother just paid 2 thousand for "the best one they had". If CMX has folks walking on the credit and are missing out on the big warranty profit I am very very concerned. Hell if I can figure these guys out, whats the big problem here? Too greedy to be competitive. Too many "suits" walking around? They should have their act together, afterall look at their size. Management best make changes and very soon. Long term, hell I will buy GM first. Maybe even take a shot at Chrysler as their ads are really driving in buyers and sales are way up.

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