CarMax KMX Analysis

KMX is mostly a used car dealer with attention to quality, no haggle pricing and low prices. It offers to remove the hassle in used car buying. I checked out the carmax.com website and the prices for the cars I saw were cheaper than the ones available with the dealer. KMX also has four new car selling facilities. Given the mix of new vs old cars ( 30-70 ) as well the expansion plans of KMX, it is likely that KMX will continue to see volumes of scale as it expands.

KMX was spun off from circuit city stores in 2002 as an independent entity, KMX was founded in 2002 in Virginia and currently has 81 stores in the country with most stores in Florida, Texas followed by California. Florida and California are hit heavily by the falling house prices and the general economy continues to cool off with impact on consumers. Let us see how this impacts KMX. The new car sales dipped in 2007 ( 11%) where as the used car sales went up (20+%). As the economy cools, it will be interesting to see how the mix changes in the first couple of quarters for KMX.

KMX has another revenue stream through auto financing operations. The company provides the following guidelines for 2008.

Fiscal 2008 Expectations
The fiscal 2008 expectations discussed below are based on historical and current trends in our business and should be read in conjunction with “Risk Factors,” in Part I, Item 1A of this Form 10-K.

Fiscal 2008 Sales. We currently anticipate comparable store used unit growth for fiscal 2008 in the range of 3% to 9%. We also expect wholesale unit sales growth to be consistent with our total used unit sales increase. Total revenues are expected to climb by between 14% and 20%, reflecting our expectations for comparable store used unit growth, new store openings, a modest increase in used vehicle average selling price, and a continued decline in our new vehicle sales.

Fiscal 2008 Earnings Per Share. We currently anticipate fiscal 2008 earnings per share in the range of $1.03 to $1.14, representing EPS growth in the range of 12% to 24%. We expect modest improvement in both used vehicle and wholesale gross profits per unit in fiscal 2008, as we continue to refine and improve our car-buying processes.

We expect CAF income to increase modestly, but at a pace slower than anticipated sales growth, primarily reflecting the challenging comparison created by the $13.0 million of favorable CAF items reported in fiscal 2007. The CAF gain percentage is anticipated to be slightly above the midpoint of our normalized 3.5% to 4.5% range in fiscal 2008, assuming no significant change in the interest rate environment.


The stock is not cheap but has potential for further growth in a vast market. The price to cash flow and P/E are somewhat high and the growth will be low this year. The ROA and ROE are not very high compared to other established businesses. While the concept clearly holds potential, the bet here is nation wide expansion of KMX over a period of time will increase efficiencies and EPS.

Valueline expects the company to post reduced margins over the next few quarters but do well over the long term as KMX is one of the finest companies in this category. Value line expects double digit bottom line growth for the next three-five years.