CarMax Inc. (NYSE: KMX) is getting squeezed by its own rising cost of borrowing money to finance consumer vehicle purchases, weakening consumer demand spreading across the board, declining customer traffic into sales locations, lower gross profit margins per vehicle, and rapidly accelerating declines in the resale prices of trucks, SUVs and other gas hogs already parked on its lots. All these factors mean that CarMax 1Q FY2009 EPS dropped to $0.13, down 55% from 1Q FY2008.

Don't look for improvement in any external factors in the near future. Nevertheless, CarMax senior management has decided to continue with its aggressive expansion program in order to gain market share across the country. Thus far, CarMax has opened six new used car superstores in 2008 with plans to open eight more. The company is also testing a program to centralize its appraisal and car buying programs into five car-buying centers spread throughout the country. CarMax hopes to obtain more of its used vehicles for resale directly from consumers rather than wholesale auto auctions. The profit margin is higher for CarMax on vehicles obtained directly from consumers.

CEO Tom Folliard has suspended guidance for the rest of FY2009 given so many broad-based economic uncertainties, including continued uncertainty in the subprime lending sector. CarMax's income from financing declined $27 million to $9.8 million in 1Q FY2009. The company is facing higher funding costs and higher loss assumptions. Presently the stock is trading right around $16, but will face an uphill battle just to stay in that price range.

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.

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.