A Carmax location's facade.

A Carmax location's facade. Credit: Handout

CarMax Inc., the used car dealership chain, reported a 4 percent decline in its first-quarter profit on lackluster sales and profit margins.

The results missed Wall Street expectations and its shares tumbled almost 7 percent in afternoon trading Thursday.

Used car sales have typically been strong during the recession as buyers looked to cut costs out of job security fears.

CarMax has seen its performance improve as a result of sales increases, cost-cutting efforts and gains from its financing division. But low consumer confidence, tighter lending standards and high unemployment have hindered the industry's recovery.

The Richmond, Va.-based company runs more than 110 stores in 56 markets that mainly sell used cars and trucks.

It posted net income of $120.7 million, or 52 cents per share, for the period ended May 31, compared with $125.5 million, or 54 cents per share, a year ago.

Analysts polled by FactSet expected earnings of 53 cents per share.

Revenue grew 3.5 percent to $2.77 billion, but that was below Wall Street expectations of $2.82 billion.

Sales at stores open at least one year were flat for the quarter after rising 6 percent and 9 percent in the same quarter the last two fiscal years. This is a closely-watched indicator of a retailer's financial performance as it strips away the impact of recently opened or closed stores.

Used vehicle unit sales grew 3 percent as the company's average selling price rose 2 percent to $19,285. Wholesale vehicle unit sales declined 2 percent during the quarter. New vehicle unit sales, which make up a smaller part of CarMax's business, fell 13 percent. Other revenue, which includes fees it receives from third-party lenders its customers use fell 9 percent.

"We need to see the economy pick up, we need to see unemployment move down, and we need to see more movement in the SAAR (the figure that reflects how many cars would be sold if the current sales pace persisted the entire year, adjusted for seasonality)," CEO Tom Folliard said in a conference call with investors. "It's going to take some time."

Its total gross profit — its profit after reconditioning and other costs — fell less than 1 percent during the quarter. Gross profit per used vehicle sold was essentially flat at $2,221, while wholesale gross profit per vehicle fell about 3 percent.

Income from CarMax's auto financing arm rose 8 percent to $75.2 million in the quarter compared with $69.7 million a year ago.

Expenses rose 5 percent to $253.6 million as the company spent more to support its store growth.

CarMax has been focused on lowering expenses, and improving traffic, execution and gross margins to position it for future growth. For example, the company has improved its sale and appraisal rates and lowered the costs for reconditioning vehicles.

CarMax also said it plans to open 10 stores in both new and existing markets during the fiscal year ending Feb. 28, 2013, and three stores in the first quarter of fiscal 2014.

Its shares fell $1.92, or 6.9 percent, to $25.98 in afternoon trading. Its shares are down 26 percent since hitting a 52-week high of $35.17 in late March. They traded as low as $22.77 in September 2011.

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