Friday, December 19, 2008

CarMax Not Reducing Costs Quickly

CarMax (KMX) reported terrible Q3 results. They lost money, have halted store openings and are trying to cut variable costs. Given the business they are in this should not be surprising. The investors that are currently disappointed and selling as a result of this press release have been asleep and deserve to lose their money.

But here is where I believe management is not coming up with the goods. They are not reducing fixed costs fast enough. They claim

“The increase in the SG&A ratio was mainly the result of the significant declines in comparable store used unit sales and average selling price. This increase was partially offset by reductions in variable costs. In the current market environment, we continue to reduce variable costs by reducing associate hours and allowing natural attrition to further reduce store staffing. In addition, we have implemented a hiring freeze at the home office and are carefully monitoring expenses at CAF.”

Hiring freeze is not going to cut it. You have to reduce all costs, especially fixed costs in absolute terms. This needs to be done now.