Investors in the nation's used-car retailers got a pleasant surprise from America's Car-Mart (NASDAQ:CRMT) earlier this month. But what's under the bows and wrapping paper at bigger-box rival CarMax (NYSE:KMX)? We'll soon find out. CarMax reports its fiscal Q3 2008 numbers Wednesday morning.

What analysts say:

  • Buy, sell, or waffle? Fourteen analysts now follow CarMax, up two from last quarter. Four of them rate it a buy, nine more a hold, and one says sell. The Motley Fool CAPS community rates the stock a four out of five stars.
  • Revenue. On average, analysts expect to see sales rise 6.7% to $1.9 billion.
  • Earnings. Profits, in contrast, are predicted to fall 19% to $0.17 per share.

What management says:
After basically promising investors in September that he intended to trade margins for market share, CarMax CEO Tom Folliard surprised us with a Q2 earnings report that revealed quite the opposite. Sales were slowing down -- but margins were on the rise!  An explanation for the disconnect may be simple. The investor presentation at which CarMax outlined its margins-for-market share plan preceded Q2 earnings by just a few days -- not enough time for the quarter's results to reflect CarMax's future strategy. Three months later, I'm wondering whether we'll see these two trends reverse course come Wednesday. If CarMax can jumpstart its growth, the company should inspire investor confidence, even if we begin to notice a margin leak somewhere along on the chassis. 

What management does:
In the meantime, here's the current state of CarMax: Gross margin is still on the rise, pulling operating and net margins up in its wake. Since this is still a low-margin, volume-driven business, though, management's success will hinge on its ability to grow sales. Margin improvement -- which CarMax claims to eschew in any case -- should be a secondary concern this week. (Especially since CarMax already leads rivals AutoNation (NYSE:AN), Penske Automotive (NYSE:PAG), and Lithia Motors (NYSE:LAD) on operating margins.)

Margins

5/06

8/06

11/06

2/07

5/07

8/07

Gross

14.2%

14.4%

14.5%

14.5%

14.5%

14.6%

Operating

3.8%

4.0%

4.6%

4.4%

4.4%

4.5%

Net

2.3%

2.4%

2.8%

2.6%

2.6%

2.7%

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.

One Fool says:
Reviewing CarMax's performance last quarter had Motley Fool Inside Value analyst Michael Olsen waxing disappointed: "[E]conomic weakness coupled with recent profit warnings from Target (NYSE:TGT) suggest that the consumer's long-lived strength may finally be waning. An additional consideration is that housing troubles are also affecting consumers' perception of economic health."

Both factors will likely crimp consumer spending, and both could be blamed for CarMax missing its own sales targets last quarter, and warning of flat profits growth for the year. That said, Michael remains optimistic about the firm, calling it a "compelling value" -- and I agree.

Yes, consumer wallets are pinched these days. But people need transportation, and in the United States, "transportation" means cars. I see little risk that CarMax's sales will suffer any long-term decline, as long as the company offers "compelling value" to its own customers. In that regard, a cash-poor consumer is more likely to buy used than new. And if CarMax follows through on Folliard's promise to funnel cost savings into lower prices, I expect CarMax will do just fine in a bad economic environment, and continue stealing used-car market share from its rivals.

How confident? Confident enough that, just like Warren Buffett, I bought my first shares of CarMax after last quarter's report.

Who else is worth a good tire-kicking in the used-car space? I submit that Car-Mart is looking interesting. Find out why in:

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CarMax is a Motley Fool Inside Value recommendation. Discover Fool value guru Philip Durell's full list of tantalizing bargain stocks with a free 30-day trial subscription.

Fool contributor Rich Smith owns shares of CarMax. The Motley Fool has a disclosure policy.