One of the things I find most interesting (and challenging) about investing is trying to identify companies that may be affected by not-so-obvious factors. In the case of used-car retailer CarMax
First, it turns out that employee pricing plans, instituted by General Motors
In its fiscal second quarter, ended Aug. 31, CarMax reported that earnings were up 39% to $41.4 million, or $0.39 per share, beating even its recently raised expectations. Total sales jumped 23% to $1.63 billion. Although comparable-store vehicle sales looked strong, increasing 10%, last year's 5% drop in comps makes the performance a bit less impressive. Still, that's an extremely strong quarter for the company overall.
According to CarMax, the Big Three's employee-discount plans made their car prices more "transparent," letting customers make easier comparisons with CarMax's no-haggle prices. As a result, CarMax's vehicle sales increased; it turned out that the company had been pricing its vehicles below the Big Three's employee pricing. To me (and obviously, to other consumers), that suggests those pricing programs weren't quite the bargain they were made out to be. It also implies that perhaps CarMax should have been a bit more aggressive in how it set its vehicle prices. Whatever the case, CarMax took advantage of Detroit's price floor to increase its own car prices.
CarMax's appraisal business, in which the company gives potential customers a free appraisal of their old cars and offers to buy them, also benefited from the Big Three sales boom. More car buyers were seeking appraisal of their used cars for trade-in purposes, encouraging comparison-shopping and driving more business to CarMax -- which evidently purchased these trade-in vehicles at bargain prices. The law of unintended consequences strikes again.
Hurricane Katrina hit the U.S. mainland on Aug. 29. Although too late to impact CarMax's fiscal second quarter, it apparently has spurred CarMax's car sales during the first half of September. I know it sounds unusual to say a car retailer was positively impacted by a hurricane, particularly since the company had no stores in the affected areas. Nevertheless, company management said it received a "slight benefit from replacement purchases" resulting from the hurricane. It declined to more specifically quantify the impact Katrina is having on its bottom line, and I doubt it could even if it wanted to. However, as reported earlier, Katrina is estimated to have destroyed 400,000 vehicles in Louisiana and Mississippi. Apparently, some evacuees from these devastated areas are finding their way to CarMax stores in their new locales to buy replacements.
Looking ahead, CarMax projects earnings in its seasonally weaker fiscal third quarter to be between $0.19 and $0.25 per share (vs. $0.17 a year earlier). Same-store sales of used vehicles, which comprise 89% of sales, are expected to increase between 2% and 8%. The company is hesitant to offer a narrower range because of uncertain market conditions and the automobile industry's model-year changeover, which occurs during its fiscal third quarter.
I expect CarMax to come in toward the upper end of its guidance and continue to be a strong performer overall. Because of the inherent uncertainty involved, the company is not factoring hurricane-related replacement purchases into its estimates. However, there is no doubt that Katrina has increased CarMax sales and, with Hurricane Rita ready to hit Texas any day now, there will be many more people looking for a new ride. Add that to the company's already strong growth, and CarMax looks revved up for serious performance.
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Fool contributor Mike Cianciolo welcomes feedback and doesn't own shares of any of the companies in this article.
