Credit crunch hits used car market; CarMax profits drop 48%

The tightening of access to credit and higher costs associated with financing hit used car seller CarMax Inc. (NYSE: KMX) right in the wallet. The company suffered a huge 48% drop in 4th quarter (4Q) net earnings, the vast majority of which stemmed from growing losses and increasing credit expenses in its auto finance unit. Thus unit posted a $1 million loss in 4Q2008, as compared to a $31.7 million profit in 4Q 2007. CarMax CEO Tom Folliard states the company is willing to tolerate such a loss in order to maintain in-house financing capabilities as a way to help boost sales and grow market share. But for how long? Fiscal Year (FY) 2008 earnings declined 8% as a result of the 4Q plunge.

CarMax is doing a whole lot of things right. 4Q sales increased 9% to just over $2 billion and FY 2008 sales increased 10% to $8.2 billion for used cars, to help counter a 20% decline in new car sales. Comparable store sales increased 3% and market share grew a bit. But in order to hit these numbers, CarMax dropped its gross profit per unit by $120. Average profit per unit sales was just over $2500.

"You can't sell what you can't finance" remains as true in the used car market as in real estate. Despite increasing costs for credit and financing, CarMax plans to continue its expansion plans, opening 14 used car superstores in 2009. Revenue is projected to grow in the 7-14% range based on modest growth in sales per unit volume. FY 2009 EPS is forecast at $0.78-$0.84. Used car retailers will remain in a much stronger financial position than new car retailers, at least for the foreseeable future.