CarMax Q4 earnings preview: Store expansion will offset impact of demand slump

CarMax (KMX) is slated to unveil its fourth-quarter financial results Friday before the opening bell. If the used-car retailer maintains the recent trend, earnings of the February-quarter will surpass the $1.06-per share estimate, which represents a 38% increase from last year. In all of the trailing three quarters, the bottom-line beat the Street view.

The consensus sales estimate is $4.43 billion, up 8.4% from the fourth quarter of 2018. The positive outlook reflects the management’s aggressive drive to expand the store network, which gathered momentum in the preceding quarter.

As per the current plan, around 15 stores will be opened this year, of which six will be in tier-II markets. The initiative assumes significance considering the decline in customer traffic in the existing stores even as the company struggles to tackle the pricing issues.

As per the current plan, around 15 stores will be opened this year, of which six will be in secondary markets

Expenses associated with store expansion, combined with the heavy investment that goes into the development of technology and the digital platform, is estimated to have restricted the bottom-line growth to some extent in the most recent quarter.

For the third quarter, the Richmond, Virginia-based company reported a 4.6% growth in revenues to $4.30 billion, despite a decline in comparable store sales. Higher sales drove up adjusted net earnings by 35% to $1.09 per share, exceeding the market estimates.

Also see: CarMax Inc. Q3 2018 Earnings Conference Call Transcript

Analysts’ consensus rating on CarMax’s stock is buy, with an average price target of $68. While the strong fundamentals and relatively low price make the stock a suitable option for long-term investors, the company’s high levels of debt call for caution.

Among CarMax’s peers, AutoNation (AN) last month reported weaker than expected earnings and revenues for the fourth quarter. Earnings dropped to $1.02 per share, hurt by a 5% decline in revenues to $5.41 billion.

Overall, CarMax shares had an unimpressive run in 2018, despite making strong gains in the first half of the year and hitting a record high. The stock remained broadly stable so far this year but continued to underperform the sector.