CarMax Inc. (KMX) reported its earnings for the third quarter of its fiscal year 2011, ended November 30, 2010, on December 21, 2010, barely surpassing the Zacks Consensus Estimate by 2 cents per share. However, the market reacted negatively, with share prices falling subsequent to the earnings release due to the weak performance of CarMax Auto Finance and absence of the company's outlook.

Analysts were indifferent as well, without upgrading or downgrading the stock since the earnings announcement. Below we will cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for both short-term and the long-term.

Third Quarter Highlights

CarMax has beaten the Zacks Consensus Estimate with the help of a rebound in customer traffic and sales execution along with a favorable year-over-year comparison. This was reflected in the improvement of comparable store sales by 16% for the quarter.

Net sales and operating revenues in the quarter went up 23% to $2.12 billion, higher than the Zacks Consensus Estimate of $1.97 billion. Used vehicle sales escalated 20% to $1.69 billion while new vehicle sales rose 24.9% to $47.7 million.

Gross profit was $297.9 million in the quarter, up 23% from $242.9 million driven by increases in used and wholesale unit sales as well as an improvement in ESP revenues.

CAF reported a decline in income to $55.7 million from $65.8 million in the quarter. The lower income was attributable to adjustments of $31.6 million related to loans originated in the third quarter of previous fiscal year.

In the first nine months of fiscal 2011, CarMax had a cash outflow of $22.5 million compared with an inflow of $56.5 million in the same period of the prior year. The decline in cash flow was mainly attributable to increases in inventory and auto loans receivables.

(Read our full coverage on this earnings report:  CarMax Surpasses Zacks Estimates)

Earnings Estimate Revisions – Overview

Estimates have remained the same over the last 7 days, reflecting analysts' indifference about the stock, driven by the lackluster results of the company and absence of any earnings outlook. Let us delve into the earnings estimate details.

Agreement of Estimate Revisions

The table below shows a strong agreement among analysts regarding the outlook of CarMax's earnings. Over the last 7 days, none of the analysts covering the stock have revised the estimate for both fiscal 2011 and 2012.

However, over the last 30 days, 6 out of 14 analysts covering the stock have revised the estimate upward for fiscal 2011 while 2 analysts moved in a downward direction. For fiscal 2012, 9 out of 14 analysts have revised the estimate upward while only one moved it downward.

Magnitude of Estimate Revisions

Earnings estimate for fiscal 2011 has remained the same at $1.64 since the earnings announcement. It has been revised upward 30 days ago from $1.61. The trend is same for fiscal 2012. Analysts have revised upward the estimate 30 days ago by 6 cents to $1.77. However, no revisions were made over the last 7 days.

CarMax in Neutral Lane

CarMax's strong exposure to the used-car market has helped it improve the results through a favorable appraisal buy rate. The automotive retailer's car-buying appraisal strategy helps provide an inventory of makes and models that reflects the tastes of each market.

The improved economic and sales environment in the U.S. has helped CarMax to resume its strategy to open new used-car superstores every year. Under the strategy (suspended at the end of fiscal year 2009) the company plans to open used-car superstores at an annual rate of 15%–20% of its used-car superstore base every year.

During the first half of fiscal 2011, the company opened one used-car superstore, entering the Augusta, Georgia market. Subsequent to the end of the quarter, it has also opened the two remaining new stores in Cincinnati and Dayton, Ohio. It now plans to open five stores in 2012; and five to ten in 2013. However, the decline in cash flow may hamper the company's aggressive store expansion strategy.

However, slow sales in the new vehicle market, especially domestic cars, have forced manufacturers and dealers to offer incentives and attractive pricing for new cars. These have encouraged consumers to trade in their old cars for new, which has lowered used-car sales and increased the used-car inventory. This is forcing CarMax to lower the prices of vehicles in order to reduce a high used-car inventory, thereby shrinking margins.

Due to the above factors, CarMax retains a Zacks #3 Rank (Hold) on its stock for the short term (1–3 months) and we have reiterated our long-term recommendation of Neutral for the long term (more than 6 months).

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