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CarMax Outlook Weakened by Slowing Used-Car Sales

By Reuters
Published | Updated

DETROIT – Auto retailer CarMax Inc. (KMX) posted flat earnings Thursday and said second-quarter earnings could be weaker than analysts expected due to disappointing used-car sales.

Richmond, Va.-based CarMax said earnings for the first quarter ended May 31 totaled $35.3 million, or 33 cents per share, compared with $35.3 million, or 34 cents per share, in the year-earlier quarter.

CarMax cited slower-than-expected used-car sales, rising interest rates and high gas prices when it cut its earnings forecast in May to a range of 30 cents to 32 cents per share, down from 33 cents to 35 cents previously. Analysts also forecast the same range, according to Reuters Estimates.

Used car sales "have been pretty volatile for the last two or three months, driven at least in part by very aggressive incentives for new cars," William Armstrong, an analyst with CL King & Associates, told Reuters. High incentives on new cars make them more attractive to buyers than used cars, he said.

CarMax was "quite disappointed" with used-car sales, President and Chief Executive Austin Ligon said in a statement. "We continue to see considerable volatility in our used car sales and take a very cautious outlook toward the second quarter," he added.

Used-car sales are considered particularly sensitive to rising gas prices because they are often bought by consumers on a budget. Rising interest rates have also slowed the number of consumers refinancing their home mortgages, which in the past has freed up cash to buy big-ticket items such as cars.

CarMax expects second-quarter earnings in the range of 30 cents to 35 cents per share, the company said Thursday. Wall Street analysts forecast a range of 34 cents to 40 cents with an average estimate of 37 cents, according to Reuters Estimates (search).

CarMax said it gave a wide range for its second quarter forecast due to volatile used-car sales, and the company chose not to provide an outlook for the second half of the year until the market is more consistent.

CarMax shares initially fell more than 5 percent following the earnings release, but bounced back and were up 44 cents, or about 2 percent, at $22.04 on the New York Stock Exchange (search), despite the weak outlook.

"Maybe you've got people thinking the stock has finally bottomed out," Armstrong said. "Most of the bad news has already been factored into the stock price."

CarMax shares have gradually bounced back from a 52-week low of $20.65 hit in mid-May, but remain far below the 52-week high of $39.30 reached last September.