Auto retailer CarMax (NYSE:KMX) reported second-quarter earnings growth of 25% today, thanks to improved gross margins and ongoing strength in its used-car business. It also tempered expectations for its third quarter, while raising its fourth-quarter outlook.
CarMax earned $39.6 million for the period ended August 31, vs. $31.7 million in the prior year's quarter. Per share, the company netted $0.37 compared to $0.30. Included in 2002's Q2 results was a charge of $1.3 million, or $0.02 a share, related to the company's separation from consumer electronics firm Circuit City (NYSE:CC).
Total revenues improved by 14% to $1.2 billion. Used-car sales, which make up the bulk of CarMax's business, shot up 20% to $939 million. Comparable store sales for used vehicles by unit grew by 6%, while new-car comps declined by 9%.
The company's net income growth translated solidly to its cash flow statement, with cash from operations rising 27%. Its capital expenditures more than doubled to $83 million from $40 million, reducing free cash flow to $35 million through the first six months of the year. In the same time frame last year, CarMax generated $53 million in free cash flow.
This isn't troubling, however, as CarMax is spending more to grow its business. The retailer's ambitious goal is to double its annual sales to $8 billion by fiscal year 2007. It plans to get there by leveraging overhead expenses, keeping comparable store sales growth strong, and adding as many as 44 new stores.
More immediate is the company's current (third) quarter. Because of below-plan sales in early September, and disruptions from Hurricane Isabel, CarMax now expects to earn $0.19-$0.21 a share, below analysts' expectations for $0.22. However, it expects to compensate for some of the lost sales from Isabel, and predicts earnings for Q4 of $1.11-$1.16, ahead of its previous outlook of $1.00-$1.10.
Investors responded to the lukewarm Q3 guidance by sending shares of CarMax down around 3% to $34 and change. Still, shares have climbed upward since a March 52-week low of $12.45, helping shareholders handily beat the S&P 500.
While investors expect near-perfection from CarMax at this point, they're still likely to get it as long as the company's full-year guidance holds, making their disappointment only temporary.
