CarMax Takes A Hit, Let's Take Another Look At The Numbers

Implications: Along with CarMax's report of a 55% drop in fiscal first-quarter profit, stocks of U.S. auto makers fell across the board, as high fuel prices and general economic weakness weigh on consumer sentiment.

Analysis:

No one expected CarMax's fiscal first-quarter earnings report to be pretty, just not quite as ugly as they turned out. CarMax, the country's largest used car retailer posted a 55 percent drop in Q1 profits. 

Other auto stocks followed the announcement by CarMax, GM fell to record lows. Ford shares fell 6%. Public dealer groups followed suit, with Lithia, Sonic, and Group 1 all posting losses.

Consumers trading down to late model used cars from new usually provide a cushion for CarMax and other secondary market dealers, but rapid price declines of over 15% in some gas guzzlers, coupled with much tougher credit, limited home equity and a weaker economy have made the consumer upside on loans and unwilling or unable to trade into another vehicle. CarMax has had to reduce margins and write down inventory in a significant fashion.

Plus, new car dealers are offering large incentives which slows down traffic at CarMax lots.

Recent statistics have shown the widest divergence ever between retail and wholesale trends covering two years. And consumers seem to be less willing to sell their vehicles outright to CarMax, a revenue source the company desperately needs.

Between gas prices, home equity scarcity, sharply lower auto purchasing and a glut of gas guzzlers on their lots, CarMax (and the industry at large) is suffering with no end in sight.

CarMax may have to do some "tweaking" to their "nonnegotiable" selling  model to get through the next several months.