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As Drivers' Habits Shift, CarMax's Profit Slides

As drivers eschew gas-guzzling vehicles, CarMax's inventory of trucks and SUVs is growing and depreciating in value.
As drivers eschew gas-guzzling vehicles, CarMax's inventory of trucks and SUVs is growing and depreciating in value. (By Chris Rank -- Bloomberg News)
By Christopher Twarowski
Washington Post Staff Writer
Thursday, June 19, 2008

CarMax, the nation's largest used-car retailer, yesterday reported that its profit fell 55 percent in the first quarter, as higher fuel costs led many auto buyers to choose smaller cars over gas-guzzling larger vehicles. Consequently, the company is facing a growing inventory of trucks and sport-utility vehicles that are quickly depreciating in value and must be marked down.

The Richmond company's earnings plummeted to $29.6 million for the quarter ending May 31, from $65.4 million in the comparable period a year earlier.

"The weak economy, the dramatic increase in the price of gas, food and the resulting decrease in consumer sentiment have all combined to create a challenging marketplace which continues to negatively impact our financial results," Thomas J. Folliard, CarMax's president and chief executive, told analysts during a conference call yesterday.

Folliard attributes the drop in profit to "aggressive markdowns we took on SUVs and trucks in reaction to the unprecedented marketplace depreciation."

For instance, wholesale industry prices for SUVs and trucks declined nearly 25 percent in the quarter, which is about four times the normal depreciation expected over the period, the company said.

"In fact," Folliard said, "we've seen some dealers completely withdrawing from this segment and refusing to buy any of these vehicles."

The slowing economy has kept consumers away, as the company reported its first decline in customer traffic in two years.

Still, sales at CarMax grew 3 percent, to $2.21 billion from $2.15 billion in the comparable period a year earlier, propelled almost exclusively by used-car sales, which grew 6 percent. New-car sales fell 27 percent; wholesale sales dropped 7 percent.

The chain said it was helped by the fact that there was an extra Saturday in the quarter compared with last year.

CarMax's results added to a somber sales outlook among auto industry analysts.

Rod Lache, an analyst at Deutsche Bank, estimated in a report yesterday that annualized June auto sales in the United States were about 13 million, a significant decline from the 15.2 million and 14.2 million rate in April and May, respectively.

"In addition to weakening customer traffic, dealers report that they are now suffering from a mismatch between what consumers want to buy (small cars), and what they have in inventory (pickups and SUVs)," Lache wrote.

"The shift in mix to smaller vehicle from large SUVs to CUVs [Crossover Utility Vehicles] and cars, and from pickups to other segments remains a reality in the current turbulent market," Citibank analyst Itay Michaeli wrote in a June 3 report.

Contributing to CarMax's woes, profit in its auto financing unit fell to $9.8 million from $37.1 million, which it attributed in part to its higher borrowing costs and the difficulty of passing on those expenses to consumers.

CarMax said it would not offer predictions about how its business would do the rest of the year.

"Management's decision to suspend guidance speaks volumes about the volatility in the marketplace," wrote Richard M. Kwas, chief financial analyst at Wachovia Capital Markets.

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