Thursday, auto retailer CarMax Inc. (KMX) reported a 72% surge in profit for the fourth quarter from a year ago, helped by an income at its auto finance division compared to a year-ago loss as well as lower expenses, which offset a 28% drop in sales. The company said it is unable to provide earnings or sales outlook for fiscal year 2010, citing the unprecedented declines in traffic and sales and the continuing volatility in the asset-backed securitization markets. However, the company forecast sharply lower capital spending and said it anticipates a double-digit decline in comparable store used unit sales for the year.

Fourth Quarter Results

For the fourth quarter, CarMax's net income rose to $37.52 million, or $0.17 per share, from $21.83 million, or $0.10 per share, in the prior-year quarter. On average, 12 analysts polled by Thomson Reuters estimated the company to report earnings of $0.02 per share for the quarter. Analysts' estimates typically exclude special items.

Net sales for the quarter dropped 28% to $1.47 billion from $2.04 billion in the year-ago quarter, and missed analysts' consensus revenue estimate of $1.62 billion.

The company attributed the lower sales for the quarter to a sharp decline in customer traffic compared with the prior year period, in addition to lean inventory levels and a decrease in the percentage of sales financed by its finance division.

The Richmond, Virginia-based company said total used vehicle sales, by far its biggest revenue generator, were down nearly 21%, while total wholesale vehicle sales declined 27% from the year-ago quarter. Total vehicle sales in dollar terms dropped 27% from the year-ago quarter.

The company noted that the decline in wholesale unit sales reflected both the reduction in customer traffic flow and a decrease in its appraisal buy rate. Comparable store used unit sales, which measures results at established locations, declined 26% for the quarter.

Tom Folliard, president and chief executive officer of CarMax said, Once again, the most significant factor affecting our sales was a sharp decline in customer traffic compared with the prior year. We estimate that traffic declined nearly as much as our 26% decrease in comparable store used unit sales, while our conversion rate slipped slightly.

Auto retailers are reeling from one of the worst sales slumps as customers keep away from showrooms or face difficulty in obtaining car loans amid the recession. Several auto retailers are threatened with losing their businesses amid falling sales and uncertainty over the future of Detroit's Big Three auto makers and their brands.

Peer Performance

CarMax's peer Florida-based AutoNation Inc. (AN) is yet to report its financial results for the first quarter. Analysts expect the company to report earnings of $0.16 per share for the quarter on revenues of $2.77 billion. In January, AutoNation reported a rise in profit for the fourth quarter from a year ago, helped by a positive tax adjustment and a gain from the buyback of senior notes, despite lower sales volume.

Other Metrics

CarMax's used vehicle sales for the fourth quarter dropped 26.8% from the prior-year quarter to $1.23 billion, while wholesale vehicle declined 38.7% to $137.2 million. New vehicle sales fell 41.6% from the year-ago quarter to $44.5 million, while other sales and revenues declined 7.6% to $60.1 million.

Gross profit for the quarter decreased 10% from the year-ago quarter to $230.3 million primarily due to the significant decline in used and wholesale unit sales. However, gross profit dollars per used unit increased substantially to $2,040 per unit from $1,715 per unit in the year-ago period.

Cost of sales declined to $1.24 billion from $1.79 billion a year ago. Selling, general and administrative expenses for the quarter were $196.74 million, down from $219.85 million in the same period last year.

The decline in expenses reflect decreases in variable selling expenses as well as the company's efforts to curb store and corporate overhead costs, including payroll and advertising. The lower expenses also reflect reductions in growth-related costs, including pre-opening and relocation costs, resulting from the company's suspension of store growth

CarMax's finance division, CarMax Auto Finance, or CAF, reported a net income for the fourth quarter of $27.97 million compared with net loss of $0.96 million in the same period last year. The company made no material adjustments resulting from changes in valuation assumptions during the latest quarter. In the year-ago quarter, CAF results were reduced by unfavorable adjustments and higher funding costs totaling $31.4 million, or $0.09 per share, primarily related to loans originated in previous fiscal periods.

As of February 28, 2009, the company had $308.5 million outstanding under the revolving credit facility and $140.6 million in cash and cash equivalents. This compares to $300.2 million outstanding under the revolving credit facility and $13.0 million of cash and cash equivalents at the end of the year-ago period.

In December, CarMax had said it will delay the opening of three new stores under construction, one in Georgia and two in Ohio, in an effort to trim costs and shore up cash. At that time, CarMax also said it was suspending its store growth plan until market conditions improved.

However, during the fourth quarter, CarMax expanded its presence in the Washington, D.C. market with a superstore in Potomac Mills, Virginia. The company noted that construction on the store was already underway in December when it announced its plan to temporarily suspend store growth.

Fiscal Year 2009

For fiscal year 2009, CarMax's net earnings declined to $59.21 million, or $0.27 per share, from $182.03 million, or $0.83 per share, in the prior year. Analysts expected the company to report earnings for the year of $0.12 per share.

Net sales for the year decreased 15% to $6.97 billion from $8.20 billion a year ago. Wall Street analysts had a consensus revenue estimate for the year of $7.14 billion.

The company's finance division, CAF reported a drop in full-year net income to $15.29 million from $85.9 million in the prior year.

Outlook

Looking forward, CarMax said it is unable to provide a meaningful projection for sales or earnings for fiscal year 2010 due to unprecedented declines in traffic and sales and the continuing volatility in the asset-backed securitization markets.

However, based on the assumption that sales trends do not improve from fourth-quarter levels and due to the economic uncertainty, the company said it anticipates a double-digit decline in comparable store used unit sales in fiscal 2010, particularly early in the year.

The company projects gross capital expenditures of approximately $20 million in fiscal 2010, down from $185.7 million in fiscal 2009.

CarMax noted that recent credit spreads in the public asset-backed securitization market were significantly higher than the spreads implicit in its warehouse facility. As a result, the company forecasts that CAF income for the year will be reduced by incremental funding costs of between $50 million and $85 million before taxes, or $0.14-$0.24 per share, upon the refinancing of the $1.215 billion that was in the warehouse facility at the end of fiscal 2009.

Stock Quotes

In Thursday's regular trading session, KMX is trading at $13.86, up $1.40 or 11.24% on a volume of 3.49 million shares. The stock has been trading in a range of $5.76-$21.99 in the past 52 weeks.

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