"From virtually every standpoint, the first nine months of this year have proven exceptional and reflect the increasing success of our long-term business strategy."
Those were strong words that CarMax (NYSE:KMX) CEO Tom Folliard used to sum up his company's fiscal third quarter of 2007 -- and they were entirely justified. In striking contrast to the car crash of a quarter that rival America's Car-Mart (NASDAQ:CRMT) reported a couple of weeks back, CarMax's success seems to have surprised its own leadership.
Management felt compelled to raise its annual guidance for the second time in three months, based on a quarterly sales increase of 24% year over year, net profits that nearly doubled to $0.42 per share, and comparable-store used-unit sales (translation: the number of used cars sold by established stores, as opposed to the value of such sales) that rose 13%. The company now expects to see comps rise 8% or 9% this fiscal year (up from 6% to 8%, when Folliard last spoke on the subject), and to earn $1.75 to $1.85 per diluted share (up from previous expectations of $1.55 to $1.65).
Lots of cars; lots and cars
But enough about CarMax, per se. I've always found the wealth of detail this company provides its investors more interesting for what it tells us about trends in the broader automotive industry than for what it tells us about CarMax proper. To coin a phrase, I like to survey the car lot and not get too distracted by the individual cars.
Note in particular that CarMax experienced a "rebound in sales of SUVs and trucks, which were adversely affected last year by consumer reaction to higher gas prices. Sales of luxury vehicles also continued to comprise a larger percentage of our sales." Along similar lines, the company's finance unit posted a 14% rise in income, owing to "an increase in the average amount financed." This suggests that American car buyers are reopening their wallets to pricey gas guzzlers, now that gasoline prices have moderated a bit and interest rates have stopped rising.
To me, it also suggests good things for truck-dependent U.S. automakers Ford (NYSE:F), GM (NYSE:GM), and DaimlerChrysler (NYSE:DCX). Conversely, it may bode ill for companies whose very existence depends on Americans fearing high-priced gasoline: fuel-cell pioneer Ballard Power (NASDAQ:BLDP), for example, or ethanol maker Verasun (NYSE:VSE). CarMax's report may mark the beginning of a reversal , which had only just begun, of this shift to smaller cars.
What did we expect from CarMax last quarter, and what did we find when we popped the trunk? Find out in:
Businesses that can create operating leverage can be attractive opportunities. That's one reason why CarMax is an Inside Value recommendation. To see what other bargains Philip Durell is finding, take a free trial.
Foolanthropy is celebrating its 10th year! To learn more about our five Foolish charities or to make a donation, visit www.foolanthropy.com.
Fool contributor Rich Smith has no interest, short or long, in any company named above.
