CarMax Slashes Inventory as Profits Tank

CarMax Inc. sustained one of the largest revenue and net income declines in its 15-year history during the second quarter of its fiscal year, prompting the Richmond, VA-based used-car superstore network to slash its pre-owned inventory by more than 13,300 units.

CarMax Chairman and CEO Tom Folliard attributed the downswing to the weak U.S. economy and spiking gasoline prices. The inventory cutback, he says, was brought about to increase gross profits per unit above those of its first fiscal quarter.

The average selling price of used vehicles at CarMax stores fell 6% in the quarter ended Aug. 31, as total revenues dropped 13% from $2.12 million a year ago to $1.84 million, and net profits fell 78% from $65 million to $14 million. CarMax's finance operations reported a pretax loss of $7.1 million in the quarter, compared with net income a year earlier of $33.4 million.

CarMax's new-vehicle sales, in line with those of other new-vehicle franchised dealers, also declined in the quarter. The network's six new-car dealerships reported a 25.7% drop from $104.8 million a year earlier to $77.8 million. CarMax has a total of 98 preowned retail outlets and six franchised new-car stores.

Folliard says CarMax is looking for opportunities to reduce costs, including cutting labor hours and imposing a hiring freeze at its Richmond home office.

The sales mix at CarMax held steady at 70% cars and 30% trucks and SUVs, Folliard says.

“What's all over our network is our challenge to make profits on declining sales,” he adds.

CarMax earnings were negatively affected by a 51% reduction in third-party finance fees. Chief Financial Officer Keith Browning says. This accompanied a tightening in subprime credit availability and a weakening of credit profiles among average customers, he explains.

CarMax, whose stock is traded on the New York Stock Exchange, continued to withhold any guidance to investors or media on future earnings in its 2009 fiscal year. The company's CEO and CFO indicates in an analyst conference call that they were uncertain as to when the downward spiral in traffic and sales would turn around.