FOOL PLATE SPECIAL
Though CarMax can't boast the glitzy profits Circuit City's core electronics division can during a booming economy, the no-haggle used-car business has become more valuable with consumer spending and confidence slowing down. That trend should continue this year.
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Brian Lund still gets emails from Circuit City (NYSE: CC) stockholders setting him straight -- to put it politely -- about a column he wrote in April calling its majority-owned CarMax (NYSE: KMX) no-haggle auto sales division an "affliction." He got a few more of those yesterday following the news that the consumer electronics retailer believes CarMax will be one of the keys to this year's results. Circuit City, in a Tuesday press release, said it expects CarMax to deliver $0.03 and $0.16 of the company's fiscal fourth-quarter and full-year (ended Feb. 28) operating earnings per share, respectively. That's a fraction of the $0.47 and $0.70 the company, as a whole, expects, but it highlights the earnings power CarMax has delivered in recent months. "The strength of our used-car business as the economy has slowed and consumer confidence has fallen," said CarMax President W. Austin Ligon, "reflects our view that the CarMax used-car concept will continue to offer the consumer strong value and generate steady sales growth during an economic down cycle." For fiscal 2002, says Chairman and CEO W. Alan McCullough, CarMax is expected to deliver between $0.19 and $0.21 of the $0.79 to $0.91 of EPS the company expects. That's an increasing slice of the Circuit City net income pie, and it continues a trend that has, apparently not coincidentally, detailed a shift in the company's spending habits over the last two years, with CarMax-related net income making up an increasingly large proportion of the company's net income as the economy has slowed. (Over the first three quarters of this fiscal year, CarMax accounted for about $38 million in net income and Circuit City Stores $160 million; last year the numbers were $9 million and $165 million, respectively.) CarMax has come under fire because its business isn't as attractive as the personal electronics segment Circuit City and industry leader Best Buy (Nasdaq: BBY) operates in. Growth has been slower and margins lower, while the operation has required significant debt to finance despite poorer cash flows. Getting through Circuit City's financial statements can be confusing and CarMax has traditionally reported meager net margins and profits at best. It's easy to see why Lund might have called the operation a drag. But CarMax shoppers have come out of the woodwork lately, even as Circuit City's electronics operations -- as well as those of Best Buy and others -- are reporting difficult times. CarMax is selling more used cars (it also sells new ones), propping up margins as gross profits at the company's core business have slowed. And improved inventory management, especially during the most-recent model-year changeover, has helped keep the choicest cars in front of customers. (For more on operating in the retail business, check out our InDepth page on the subject.) But Circuit City has also aggressively targeted its electronics operations, ditching the unsuccessful Divx, getting out of appliances, and remodeling stores to provide a better, brighter, shopping experience. More items will be available for snagging right off the shelves, rather than through associates as was traditionally the case at Circuit City stores. All told, these changes won't be done for a few years and will cost the company significantly in terms of both near-term results and actual expenses, but they were long overdue and should bode well for the company's position in consumer electronics down the road. In the meanwhile, however, CarMax seems to be pulling its weight admirably.
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