Will CarMax Return to Growth in the First Quarter?

CarMax (NYSE: KMX) is making solid progress toward its broader goal of building scale in the huge, but fragmented, market for used cars sales. The country’s largest pre-owned automotive retailer has been busy expanding its physical sales base while also building out its digital shopping tools as people move more of their car shopping process online.

Yet, heading into CarMax’s fiscal first-quarter report, investors have a few key concerns about the strength of its business. After all, the company posted a rare sales decline at its existing locations in early April.

With that bigger picture in mind, let’s take a look at the prospects for an operating turnaround in this upcoming report.

Image source: Getty Images.

The good kind of traffic

CarMax sold 171,000 cars in the most recent quarter, which translated into a 3% decline from the prior year period. Sales volumes were even weaker after accounting for the boost provided by a growing store base, too. Comparable-store sales, or sales at existing locations, dove 8% in the fiscal fourth quarter.

That decline was unusual for CarMax, given that the retailer has posted significantly positive annual comps in each of the last six years. And, in fact, management said the dip had a lot to do with a temporary pricing imbalance driven by aggressive promotions from new car dealerships.

If that was the case, then investors should expect to see evidence of sales activity picking back up at CarMax’s lots as the pricing pressure lessens. At the same time, the retailer’s growth should stay solidly above that of the broader used car market to extend its long track record of market share gains.

Profits and expansion plans

The falling sales volumes put pressure on CarMax’s profits, mainly because fewer car sales means reduced demand at the retailer’s service centers. These challenges contributed to a worsening gross profit margin that slipped to 13.1% of sales from 13.9% a year ago.

On the other hand, CarMax achieved higher profits from its financing arm, which bodes well for future earnings gains. And its core profitability metric, the profit it generates per vehicle sold, held steady at $2,100. Investors are looking for both of these trends to improve over the long term as CarMax grows its sales base.

Image source: Getty Images.

And speaking of that growth, shareholders will get an important update this week on the retailer’s expansion plans. Those haven’t changed much even as customer traffic struggles pressured comps recently. CarMax’s initial targets call for adding 15 lots to its footprint in 2018 to match the prior year’s growth pace. However, that mix is tilting toward smaller markets, with 10 locations set to launch in these less-populated areas compared to five in 2017.

Finally, look for CEO Bill Nash and his team to highlight progress they’ve made at building out their digital sales infrastructure. CarMax has been piloting a new program, for example, that allows shoppers to complete nearly all elements of a purchase online so that the entire physical part of the process amounts to just a 15-minute trip to the store to collect the automobile.

Making this online experience a positive one for shoppers is a challenge, and it involves innovations in how CarMax displays its cars online, how it values trade-ins, and how it processes order details behind the scenes. But any progress the retailer makes here should help it stand out against the local competition, which lacks the resources provided by CarMax’s national sales footprint.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends CarMax. The Motley Fool has a disclosure policy.

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