When I posed the question on Monday: "Can CarMax Reignite?" this was not at all what I had in mind.
No sooner had CarMax
- Same-store sales rose 1% by unit, with sales from new stores tacking on another 9% worth of growth, for a total of 10%.
- Yet sales by revenue increased only 3%.
- And profits on these sales dropped 55% to $0.13 per share.
- Meanwhile, the company "continued to gain [an unspecified amount of] market share in the late-model used vehicle market."
Under the hood
So let's see if we can paint a picture of what's happening behind the numbers. Unit sales were up, but revenues lagged them by a wide margin, and profits deteriorated. What's that tell you?
Somebody got a deal?
Right on. Actually, a lot of somebodies seem to have spent a lot less money on the individual cars they bought. And for its part, CarMax made less profit on the sales. The key culprit in this dynamic appears to be gas-hogging pickups and SUVs. According to CEO Tom Folliard, "wholesale industry prices for SUVs and trucks declined nearly 25%, which is approximately four times the normal depreciation expected over this period ... [and] the most rapid depreciation of any vehicle segment that we have experienced in our 15 years."
Plummeting "truck" prices hurt the company in two ways. First, would-be sellers looking to trade in their trucks to CarMax suffered reverse sticker shock when they saw the appraised values -- and in droves, they refused to sell. Second, would-be buyers ... wouldn't buy trucks from CarMax even at the rapidly written-down prices CarMax was charging to unload them. The two trends added up to markedly weaker truck sales last quarter.
Get ready for the pileup
Bad news for CarMax? Clearly it was, but the bad news won't end there, folks. Just look at what happened to the stock prices of CarMax's competitors when the news broke:
(NASDAQ:CRMT)-- down 4%.
(NYSE:AN)-- down 5%.
- Penske Automotive -- down 5%.
- Lithia Motors -- down 8%.
And to the people who build the trucks that no one wants to buy anymore (but are afraid to sell -- presumably, because they owe more on the loans than the trucks are now worth):
(NYSE:GM)-- down 6%.
(NYSE:F)-- down 6%.
- (Meanwhile, the "Other Big 3" -- Toyota
(NYSE:TM), Honda (NYSE:HMC), and Nissan, all paced the market with just a 1% loss. And Chrysler is private, so it didn't lose anything. Lucky devil.)
Clearly, as bad as we all know things are looking in Detroit these days, no one expected it was this bad. It took CarMax's putting a number on the damage (25% depreciation in three months. Twenty-five per-CENT!) to shock investors into reality.
Boot up the GPS. Where to from here?
Excellent question. Unfortunately, even the guys at CarMax, who reportedly have the best database on car sales in the business, haven't got a clue. Said Folliard: "If the current trends persist, results for the full year could be significantly below the bottom of our original earnings guidance range. As a result of the combination of the uncertain economic conditions, rising fuel and food costs and weak consumer sentiment, exacerbated by the rapid depreciation in SUVs and trucks, we are temporarily suspending guidance on comparable store sales and earnings for fiscal 2009."
For the record, the "guidance range" that CarMax will now fall "significantly below" this year called for comps dropping as much as 2% year over year and no less than $0.78 per share in earnings. What's significantly below these numbers? Folliard "hopes" to update us on that "later in the year, when there is a more stable outlook for the economy and we have better visibility on trends."
Until then, all we can do is grip the wheel, bare our teeth, and pray things don't get worse. I'll be right there with you.
As will the car-lovin' Fools at Motley Fool Inside Value, where we've recommended the stock and -- believe it or not -- are still sitting on a 16% profit. Read how we picked the right price for CarMax when you sign up for a free trial.