Slowing Economy Drives Used Car Market

Car, buying, leasing, sale, hands with keys over graphic of cars
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Used car dealership chain CarMax Inc. said Wednesday its profit rose nearly 5 percent in its fiscal second quarter as a shaky economy continued to push consumers toward previously owned cars and trucks.

CarMax, which operates more than 100 stores, said its overall revenue climbed 13 percent while revenue at stores open at least a year rose 4 percent even though last year's sales were boosted by the government's Cash for Clunkers rebate program.

While used cars didn't qualify under the federal program that gave rebates for junking older cars and buying more fuel-efficient vehicles, the Richmond, Va.-based company has said the program resulted in a spike in traffic.

Its net income rose to $107.9 million, or 48 cents per share, in the three months ended Aug. 31, compared with $103 million, or 46 cents per share, a year ago.

Its revenue rose to $2.34 billion from $2.08 billion a year ago, as the industry slowly recovers from the worst U.S. auto sales market in decades.

The results beat Wall Street estimates. Thomson Reuters says analysts it surveyed expected earnings of 40 cents per share on revenue of $2.27 billion.

Its shares rose $1.60 cents, or nearly 7 percent, to $25.72 in early trading Wednesday.

CEO Tom Folliard told analysts in a conference call that CarMax dealerships had about the same amount of customer traffic as last year's second quarter despite Cash for Clunkers, but the sales force was able to convince more of those people to buy.

"We are especially pleased with the strength of our comparable store used unit sales where, despite our toughest comparison in recent quarters, we still delivered positive comps," Folliard said.

Used vehicle sales rose about 11 percent as the company's average selling price rose about 5 percent. CarMax said its gross profit per used vehicle sold increased 4 percent to $2,205 and total gross profit increased 11 percent primarily because it sold more cars.

The company said the improvement came because it obtained more of its vehicles directly from consumers, more efficient reconditioning operations and wholesale used car prices that were above last year's numbers.

Whether sales and higher selling prices are sustainable remains uncertain, Folliard said.

"So much depends on what happens with the economy and unemployment," he told investors.

CarMax's auto financing arm reported income of $52.6 million compared with $72.1 million a year ago. In the year-ago period, it saw favorable adjustments from an increase in the value of bonds the company holds.

Expenses for the second quarter rose 3 percent to $225.2 million as the company increased sales commissions and advertising, as well as costs related to selling more cars.

CarMax has been focused on lowering expenses, and improving traffic, execution and gross margins to weather the weak automotive market and better position it for future growth. For example, the company has improved its sale and appraisal rates and lowered the costs for reconditioning vehicles.