What Is Driving CarMax’s Earnings This Quarter?

CarMax, Inc. (KMX) Consumer Discretionary – Specialty Retail | Reports April 7, Before Market Opens

Key Takeaways:

The Estimize consensus is forecasting EPS of $0.71 and revenue of $3.68 billion, right in line with Wall Street’s estimates

CarMax focus on used-vehicles and location expansion could give them an upper hand on the competition

CarMax maintains a muddled balance sheet with long debt significant rising in the past 2 years

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CarMax, the largest used-vehicle retailer in the U.S., is scheduled to report fiscal fourth quarters earnings tomorrow, before the opening bell. Lately, expectations have been raised, but that does not necessarily mean a solid earnings report will help the stock. Over the past year, CarMax shares have plummeted 30%.

Even though used car sales constitute a majority of its sales, CarMax has struggled reach millennials. Young americans have been reluctant to purchase cars as they don’t need them or can’t afford them. Moreover, owners are now squeezing an extra few years out of their automobiles, thereby hurting the industry.

Moreover, CarMax is not in sound financial shape. As of November 2015, cash and cash equivalents totaled $33.35 million, down from $371.50 million in May 2015. This figure is in line with capex guidance of roughly $360 million, but declining revenue is cause for concern. The first nine months of fiscal 2016 saw a 16% decline in new vehicle sales. Furthermore, CarMax’s debt has soared over the past year from $300 million in 2014 to $864 in 2015.

Despite its woes, CarMax continues to expand into new markets. In fiscal 2015, the auto retailer opened 13 new stores, 10 of which were in new markets. CarMax plans to open 7 additional stores throughout the first half of fiscal 2016 and between 13 and 16 on the full year.

Moving forward, CarMax must build up cash to reconcile its mounting debt and appease investors. The stock has been hurting over the past year now and it seems that a positive earnings report may not help that much.