- The Washington Times - Monday, September 22, 2003

Richmond used-car store chain CarMax Inc. reported higher-than-expected earnings yesterday, but lowered its third-quarter outlook because of Hurricane Isabel and soft sales this month.

The owner of 44 used-car superstores in 21 cities said profits jumped 25 percent for its fiscal second quarter ended Aug. 31 to $39.6 million (37 cents per diluted share) from $31.7 million (30 cents) a year earlier. Diluted earnings reflect the value of convertible warrants and stock options.

Sales, which are mostly from used-car stores, in the same quarter shot up 14 percent to $1.23 billion from $1.08 billion in the previous year’s second quarter. CarMax, a spinoff of Circuit City Stores Inc., also operates 15 new-car franchises.

CarMax stock closed yesterday at $35.25, up almost 1 percent from a week earlier at $34.95. The stock has more than doubled in six months as the company has expanded stores and services.

But the company lowered its same-store sales-growth forecast for the third quarter by 1 percent to between 4 percent to 6 percent, mainly because of Hurricane Isabel’s fury.

Hurricane Isabel, which knocked out power to 4.5 million people and caused an estimated $500 million in damages last week, “is an added effect that is likely to have some impact on us,” said Dandy Barrett, investor relations director.

CarMax has not calculated store and inventory damages and loss of business from the Category 2 hurricane, but the company is on track to meet its forecast of 5 percent to 9 percent growth for the fiscal year, which ends in February, Ms. Barrett said.

“We do expect a lower sales volume for the third quarter,” she said, noting the third quarter is traditionally a slower sales time for the car industry because dealers are changing inventory for newer car models.

Sharon Zackfia, a research analyst with William Blair & Co. LLC, said she expected the company to sustain minimal losses from the storm.

“Consumers buying used cars generally are not impulse-driven. I expect we’ll see a catchup in sales as people dig out” from the hurricane’s aftermath, she said, rating the company outperform.

While Ms. Zackfia does not own stock, William Blair & Co., a Chicago investment firm, has a banking relationship with CarMax.

Gerald Marks, an analyst with Raymond James, said he is watchful of CarMax’s growth.

“We maintain a cautious outlook for the auto retail sector, as we now view the downside potential as greater than the upside,” Mr. Marks said in his most recent report.

Mr. Marks, who advised investors to hold CarMax shares, said a rapid drop in consumer demand would raise dealer inventory levels during a critical time when dealers are phasing out older cars.

He cited the period from October to November 2002, when manufacturing orders slowed as the economy struggled to recover from the 2001 recession.

Mr. Marks does not own any company stock.

But CarMax’s chain model has positioned the company to dominate in a “fairly fragmented” market, said Scot Ciccarelli, managing director for equity research at Harris Nesbitt Gerard in New York.

“The real challenge is on the execution side. CarMax has created a proper business model and must follow through with a growth plan,” he said, rating the stock outperform.

Mr. Ciccarelli, who does not own CarMax stock, said the company could expand into a 250-store chain before saturating key markets.

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