CarMax: A Bumpy Road Ahead

 | Apr 09, 2013 | 10:30 AM EDT
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CarMax (KMX) reports on its fourth quarter Wednesday and it could give investors a peek into consumer sentiment as we head into the summer. In recent years, consumers have held off buying a car. But sales -- both new and used -- are rising now.

As the second largest car retailer in America, CarMax has been cashing in. But I am increasingly concerned that CarMax faces tough comparisons and whatever the company reports could be seen as a disappointment. I think the stock is an accident waiting to happen.

CarMax reports fourth quarter fiscal year 2013 on Wednesday and investors are expecting another strong quarter. The consensus estimate is $0.46 on $2.7 billion in revenue. Analysts believe revenue will grow 10.2% year-over-year, which is up from last year's 9.9%. For the year, the Street is looking for $10.8 billion in revenue, up 8.5% over last year.

Revenue growth has been slowing since the huge rebound in fiscal 2011. That year, revenue rose 20% as car sales bounced back from the depths of the recession. Going into the first quarter, the Wall Street consensus is for 10.7% revenue growth. But last year, CarMax was only able to produce 3.5% revenue growth in the May quarter. In fact, sales growth in the first quarter has been slowing. In fiscal 2011, CarMax grew first quarter revenue 23.3%. In 2012, revenue was up 18.4% and the first quarter was up just 3.5% in 2013.

Investors are expecting fiscal 2014 sales to increase almost 10%, but business has to pick up not only in Q1, but in Q2 as well. Second quarter sales need to jump to 10.7% from 6.5%. Or put another way, the first half of fiscal 2014 will have to be blow out for the company to even have a chance of making the Street consensus estimate. Sales either have to beat the Street or estimates have to come down.

The company realizes growth is slowing and announced a $300 million stock buyback in October 2012 to smooth over concerns. Remember, fiscal 2013 had one extra week, because it was a leap year. Comparisons will definitely be tougher this year.

Since I'm short CarMax, I may be talking my book. But I believe the stock is an accident waiting to happen.

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