CarMax, Inc. (KMX) continues to face a difficult used-vehicle environment, largely due to aggressive incentives being offered by new vehicle manufacturers. However, CarMax is aggressively cutting prices on trucks and SUVs to reduce inventory and shifting its focus to passenger cars. The company's move into new markets and growth in existing markets are likely to strengthen volumes. Thus, we rate the stock a Hold at a six-month target price of $13.00.
Sales are improving across geographical regions and store formats, which is an encouraging indication. CarMax is gaining share in the used-car category as it grows at 6% compared to a decline of 3% in the industry. The company plans to expand its used-car superstores base each year by 15%. In total, the company opened 12 superstores during fiscal 2008.
However, consumers are increasingly opting for new cars by trading in their old cars, thereby increasing the used-cars inventory. Higher inventory resulted in increased working capital requirement, which in turn led to a 42% year over year decline in operating cash flows to $79.5 million in fiscal 2008.
Further, the company increased total debt by $148.9 million, primarily to fund increased inventory and capital expenditures in fiscal 2008. KMX's plans of increasing the store number to 200-300 would involve huge capital outlay, which will further pressure on cash flows.
Finally, on August 7, the law firm of Izard Nobel LLP filed a lawsuit against CarMax in the United States District Court for the Eastern District of Virginia on behalf of the purchaser of the common stock of CarMax. The complaint charges that CarMax and certain of its officers and directors have violated federal securities laws by issuing materially false statements.
Read the full analyst report on KMX
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