The news couldn't have been better tailored to pair with my Foolish Forecast title if I had written it myself. Wednesday, before earnings came out at CarMax
Yesterday, after it did just that, its shares, well, jumped. Up 10% for the day, in fact. What set the joint to jumping? You may be surprised at the answer: The auto retailer simply met its targets. Sales came in at $2.15 billion, as expected. Earnings, too, at $0.30 per share. Finally, CEO Tom Folliard reiterated guidance for this fiscal year: Same-store sales should grow 3% to 9%. Profits per share should come in at $1.03 to $1.14. Yesterday's big news, it seems, is that there was no news -- or at least, nothing bad.
So does the mere absence of bad news, and the meeting of expectations, justify a 10% jump in the stock's price (which is, by the way, continuing to climb today)? I'll leave answering that question to wiser heads than mine. Instead, today I want to focus on an interesting quirk of the company, which explains why, despite earning hefty profits under GAAP, it generates only meager free cash flow -- and why free cash flow may not be the best measure for evaluating this company.
Comparing fiscal Q1 2008 numbers to those from one year ago, CarMax grew net earnings 15% to $65.4 million. Meanwhile, its free cash flow came in at just $14.5 million in Q1. Why the difference? After generating massive operating cash flow -- $75.4 million in Q1, up 57% from last year -- CarMax is pouring these cash profits back into building its business at an accelerating rate. Compared with last year, the firm boosted capital spending more than 140% (building book value in the process).
In fact, the more I look at this company, the more I think it's a story akin to the one I outlined when recommending Wimm-Bill-Dann