Carmax Case Analysis

Carmax, the largest used-vehicle retailer in the U.S., will be reporting 4Q2016 earnings early tomorrow morning. Expectations for the firm 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%.

Though used car sales continue to contribute to a bulk of the revenue, a primary reason the company is struggling is because the younger demographic has not been buying cars. This lack of purchasing coupled with the fact that individuals and families are getting more life out of their automobiles is hurting the auto industry as a whole.

Despite headwinds, Carmax has been working on store expansions into new markets. During fiscal 2015, the auto superstore

opened 13 new stores, ten of the stores were in nine new markets. Additionally, during the first half of fiscal 2016, 7 stores were opened, three in new markets. Last quarter, two stores were opened and one was moved. The new store totals for 2016 are expected to reach 14 and 13-16 within the following two fiscal years.

However, Carmax is not in good financial shape. As of November 2015, cash and cash equivalents only totaled $33.35 million, down from $371.50 million in May 2015. This figure is in line with guidance projections for capex of roughly $360 million. But, declining revenue and weakness is new vehicle sales is cause for concern. The first nine months of fiscal 2016 highlighted the decrease in new vehicles revenues, a 16% dip. At that rate, new vehicle sales for this earnings report are not looking too good. Furthermore, Carmax’s debt has soared over the past year to $864 million per Nov. 2015 from $300 million per Nov. 2014.

Right now, it seems like Carmax needs some time to build up its cash and reduce its debt. The shares have been hurting over the past year and it seems that a positive earnings report may not help that much.