Wednesday, June 23, 2010

CarMax Caution Flag on Gross Profit %

CarMax (KMX) reported much improved Q1 earnings primarily due to improved results from its financing arm. They also improved revenues and feel they are making more money on each used car they sell. Here is the item to worry about:

Net sales and operating income are up some 23% but Gross Profit as a percentage of revenues has dropped almost half of one percent. This is a very telling sign. While the business cranked up marginally there was less value. Management did not address the issue in their earnings release. Investors need to watch this metric.

You cannot make it up on volume with declining margins.

Disclosure: No position in any stocks mentioned in this post.