CarMax Raises Outlook Amid Strong Used-Car Sales

Auto dealer group CarMax Inc. (KMX) raised its second-quarter earnings forecast on Tuesday, citing better-than-expected sales and showroom traffic, sending its shares up 12 percent.

"Contrary to our expectation that the summer's huge volumes of new car sales industrywide would take share from late-model used cars, consumers increased their purchases of used cars as well, which accrued to KMX's benefit," analyst William Armstrong of CL King & Associates, said in a research note.

CarMax, the largest U.S. retailer of used cars, said it now expected quarterly earnings of about 37 cents a share, up from its previous forecast for a profit of 29 cents to 34 cents.

Wall Street analysts, on average, expect the company to earn 34 cents a share in the second quarter and $1.22 a share in 2005.

The increase in CarMax's profit outlook was driven, at least in part, by a surge in showroom traffic after Detroit's Big Three automakers recently began selling vehicles to the general public at the same low prices their employees pay, CarMax said.

"We believe this effect could be short-term in nature, though declining wholesale prices may help prop sales in (the second half of the year)," Scott Nesson, an analyst with Lehman Brothers, said in a note to clients.

Nesson raised his estimates for 2005 and 2006 by 6 cents to $1.26 per share and $1.48 per share, respectively.

Carmax said stronger-than-expected quarterly earnings were also due to a rise in car loan applications from prime-rated customers and wholesale auction prices for vehicles, other than large trucks and SUVs, that were above historical norms.

Sales of fuel-thirsty trucks and sport utility vehicles have fallen this year on the back of the run-up in U.S. gasoline prices.

"Although new car dealers took in massive numbers of trade-ins, KMX also saw an increase in appraisal traffic," Armstrong said.

CarMax said it will report on Sept. 21 results for the second quarter ending on Aug. 31.

Further adding to its improved outlook, CarMax said its same-store used sales will likely increase 10 percent in the second quarter, up from a previous estimate for growth in the range of 3 percent to 9 percent.

CarMax shares jumped $3.46 to $32.13 on the New York Stock Exchange (search).