CarMax swings to 3Q loss as sales fall

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The Richmond, Va.-based company says it lost 10 cents per share in the quarter that ended Nov. 30. The company reported earnings of $29.8 million, or 14 cents per share in the same quarter last year.

CarMax also said it suspended its fiscal 2009 outlook, citing unprecedented declines in traffic and sales and volatility in the credit market. It also imposed a hiring freeze at the home office, temporarily suspended store growth to conserve cash and said it will further reduce store staffing by natural attrition.

Total sales fell 23 percent to $1.46 billion in the quarter, down from $1.89 billion a year ago. CarMax said that same-store sales, or sales at stores open at least a year, tumbled 25 percent during the quarter.

The results were far short of Wall Street estimates. Analysts polled by Thomson Reuters expected earnings of 1 cent per share on revenue of $1.56 billion.

"We continue to face extremely challenging marketplace conditions," Chief Executive Tom Folliard said in a conference call with investors. "Although we believe the issues are externally driven, we plan to take effective action to preserve our profitability and capital."

Folliard said the company is focused on rapidly reducing costs to bring them in line with sales, while not hurting the customer experience or the company's ability to improve execution.

Overall, U.S. auto sales hit their lowest level in 26 years last month. Sales initially declined as high gas prices drove customers away. And while the cost to fill the tank has fallen in recent months, the credit crunch has made it difficult for both companies and customers to secure financing, and the recession has people worried about making big purchases.

Concerns about the fate of U.S. automakers also have impacted the bottom line, forcing some in the industry to ramp up cost-cutting measures.

The company's earnings were dragged down by its financing arm, which reported a pretax loss of $15.4 million compared with income of $16.3 million in the same period last year.

The results for CarMax Auto Finance were reduced by a $23.8 million write-down in the value of bonds the company holds, as well as $16 million for adjustments related to loans that originated in prior fiscal years, mainly projected losses on defaulted loans.

CarMax also said it saw a 58 percent decline in its third-party finance fees, partially affected by a reduction in unit sales, a shift in providers and arrangements with certain providers. The company also said third-party providers financed a larger percentage of sales in the quarter, allowing it to slow the use of its $1.4 billion warehouse credit facility.

Used vehicle sales dropped 22.8 percent, while new vehicles sales fell 25.3 percent, the company said. The average selling price of its used vehicles declined 7.4 percent due to industrywide decreases in used car price.

CarMax said it has reduced its used vehicle inventory by more than 18,500 units compared to levels at stores open as of Nov. 30, 2007, representing a reduction of more than $340 million. During the quarter, it reduced that inventory by about 8,300 units, or nearly $140 million.

RBC Capital Markets analyst Scot Ciccarelli and others questioned in the conference call whether CarMax, given price sensitivity of consumers, would be willing to sacrifice gross profit in order to increase sales and traffic.

"I'm very skeptical that the amount of dollars required to change consumer mind-set, they're just not there," Folliard said. "I don't believe we could substantially change demand and change our traffic by giving up a bunch of margin."

The company said its third-quarter results included about $7 million in severance costs associated with the lay off more than 600 employees, or about 4 percent of its total work force in October. The reductions were in its service operations departments at a majority of its production superstores, where it reconditions vehicles.

Shares of CarMax rose 4 cents to $8.24 in trading Friday. The stock has traded between $5.76 and $23 over the past 52 weeks.