Auto superstore CarMax (NYSE:KMX) reports its fiscal Q1 2007 numbers Monday before market-open. Will investors drive away happy?

What analysts say:

  • Buy, sell, or waffle? Nine analysts follow CarMax. One seller has dropped coverage, leaving today two buys, six holds, and one sell.
  • Revenues. Analysts expect CarMax to report $1.8 billion in sales, up 15% from last year.
  • Earnings. Only a 3% rise in profits, to $0.38 per share, is expected.

What management says:
First off, CarMax has a new boss. On May 24, the company announced that Austin Ligon will be stepping down as CEO on June 21, to be replaced by current executive vice president for store operations, Thomas Folliard. Folliard brings with him 13 years of experience with the auto retailer. He became CarMax's first-ever car buyer in 1993, when the company was still part of CircuitCity (NYSE:CC), and has steadily worked his way up the management chain since then. It can be assumed that he knows his company backwards and forwards. Folliard hasn't exactly picked the ideal time to take over the retailer, however. Last quarter, CarMax's stock took a tumble on an uncertain earnings outlook (read fellow Fool Ryan Fuhrmann's description of the carnage right here.)

What management does:
CarMax is doing a good job of buying cars cheap in an oversaturated market and selling them not quite so cheap. Over the last 18 months, the firm's rolling margins are up across the board -- gross, operating, and net. Gross margins are doing the bulk of the work in dropping pennies to the bottom line. Over the last six months, for instance, operating costs grew in line with sales (17%), but cost of goods sold rose only 16%.

Margins %

11/04

2/05

5/05

8/05

11/05

2/06

Gross

13.7

13.7

13.7

13.8

14

14.1

Op.

3.4

3.5

3.5

3.6

3.7

3.8

Net

2.1

2.1

2.1

2.2

2.2

2.3

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

The Fool says:
Motley Fool Inside Value-meister Philip Durell suggests that Fools keep a close eye on CarMax's improving margins. A central tenet of his investing thesis in recommending the stock late last year was that he thinks CarMax can eventually produce 7% operating margins. The company looks to be on the right track toward that achievement so far, but it's still got quite a ways to go. Another issue: stock options. Philip pointed out that CarMax issued 2 million of them in both 2004 and 2005, significantly diluting outside shareholders.

So, there's two of the things we'll be looking for Monday: bigger margins and smaller dilution.

Competitors:

  • America 's Car-Mart (NASDAQ:CRMT)
  • AutoNation (NYSE:AN)
  • Group 1 Automotive (NYSE:GPI)
  • United Auto Group (NYSE:UAG)
  • Toyota (NYSE:TM) Financial Services
  • Wells Fargo (NYSE:WFC) Financial Acceptance

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Fool contributor Rich Smith has no interest, short or long, in any company named above.