CarMax Does a U-Turn

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"Despite the current weak economic conditions, we remain committed to executing our store growth plan for the long-term benefit of customers and shareholders, and we intend to open an additional eight used car superstores during the remainder of fiscal 2009."
-- CarMax (NYSE: KMX) CEO Tom Folliard, June 18, 2008

"As a result of the current environment and in order to enhance profitability, we have decided to temporarily slow our store growth."
-- CarMax CEO Tom Folliard, Aug. 6, 2008

Now, I know what you're thinking. "Folliard … why, that's such a common name! It could easily be two different guys saying these two diametrically opposed things less than two months apart." Ah, but here's the clue that tells you we're talking about the same guy -- he's the CEO of CarMax in each instance.

The conclusion, then, is inescapable: CarMax has "done a 180." Fortunately, at the speed CarMax is moving, this wasn't as dangerous a maneuver as it sounds. Along with the expansion-deceleration announcement, the nation's largest used-car lot issued its long-awaited update on just how bad this year is supposed to get:

• Comparable same-store sales were down 17% in June and July -- a dramatic fall from the positive 1% comps we were looking at up until mid-May. And fewer sales inevitably translate to fewer profits.
• Profits, which: "Historically ... have funded a significant portion of our store growth," no longer seem adequate to the task. As a result, CarMax is pushing four of its anticipated fiscal 2009 store openings off into fiscal 2010.
• Further pressuring profits, CarMax has reduced its inventory by some 9,500 vehicles, or about $150 million in value. Based on inventory levels stated as of May 31, that works out to a 16% reduction. Such a dramatic reduction -- nearly four times the previous quarter's reduction in inventories -- can have come only at deep discounts to what CarMax probably thought the cars would sell for when it bought them. So look for margins to fall steeply in the next report.

The backstory to CarMax's crisis is well-known. Major automakers like Ford (NYSE: F) and GM (NYSE: GM) are in full-scale panic mode, with GM reinitiating its "employee discount for everyone" deal. Even the traditionally tight-pursed Japanese manufacturers are getting in the incentives game, with both Toyota (NYSE: TM) and Nissan (Nasdaq: NSANY) offering generous cash-back deals. (The skinflints at Honda (NYSE: HMC) are by and large the exception.)

Between production cutbacks on the one hand, and inventory clearances on the other, the long-term view here seems clear: Eventually, a dearth of new cars will perk up the used-car sales environment, and CarMax will enjoy the revival. In the meantime, though, better buckle up. The stretch of road immediately ahead looks to be rough.

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