CarMax suffers financial fender bender

The nation's largest used-car retailer, CarMax, Inc. (NYSE: KMX) got hit with a huge increase in cost of funds this past quarter. The company's auto financing arm recorded a 49% decline in income for the quarter. Per unit gross profit margins declined by $146 per unit and are expected to continue to decline for the next quarter at least. This decline is typical for the model-year changeover period. On the up side, total used units sold increased by 9% and total sales revenue increased 7% to $1.89 billion. These increases, however, did not result in any increase in net earnings. On the contrary, net earnings for the quarter declined 34% to just under $30 million. Investors reacted predictably on the news, pushing the stock down 7% to close around the $20 mark.

CarMax continues to expand its market base, opening 5 new locations in the third quarter (3Q) alone. The company wants to expand its store base by 15-20% annually. This will be difficult with flat comparable store used unit sales and a 30% decline in new vehicle sales. CEO Tom Folliard issued revised guidance for FY 2008. Management now forecasts 2% sales growth and EPS in the $0.87-$0.93 range, down $0.05 per share from the previous forecast.