CarMax Drives Higher Despite Sluggish Used-Car Sales Growth

Millions of Americans buy cars each year, and many of them look for good used vehicles that are less expensive than new cars but can still offer reliable transportation for years. CarMax (NYSE: KMX) has sought to tap into that market with its national network of dealerships concentrating on used cars. That’s a massive undertaking that comes with a variety of logistical challenges, but CarMax has done a good job of producing long-term success even as it’s had to navigate occasional tough conditions along the way.

Coming into Friday’s fiscal first-quarter report, CarMax investors were anxious to see whether the car dealer could produce sustained and profitable sales growth. CarMax’s results were generally strong, and even though some of its traffic figures were somewhat weak, the company appears to have found ways to bolster its profitability and take advantage of the opportunities in the market with the best potential payoff.

Image source: CarMax.

How CarMax steered forward

CarMax’s fiscal first-quarter results were solid. Revenue rose by 5.5% to $4.79 billion, far exceeding the 1% growth rate most investors were looking for from the car dealer. Net income jumped 13% to $238.7 million, and that produced earnings of $1.33 per share, exceeding the consensus forecast among those following the stock by $0.09 per share.

Those numbers hid some disparities across CarMax’s different business lines. In the key used vehicle unit, sales were up only 1.6%, with comparable-store used unit sales falling 2.3% compared to the prior-year period. Conversion levels improved somewhat, but lower store traffic remained a concern for the company. Gross profit per used car was about unchanged at $2,215.

What really helped CarMax was its strength in other areas. Wholesale vehicle unit sales were up close to 10% compared to last year’s fiscal first quarter, with store-network growth and rising appraisal buy rates combining to lift CarMax’s numbers in that area. Gross profit in the wholesale area was flat at $1,012 per vehicle. The car retailer also got a nice bounce from sales of extended protection plans, where revenue rose nearly 9%. A slight decline in third-party finance fees weighed against the gains elsewhere, but CarMax was still able to do fairly well, given the declines in used car unit sales.

On the pricing front, CarMax saw some favorable trends continue. Used car prices climbed 3% to $20,067, while wholesale vehicle sales prices were higher by just under 2%, to $5,205. Those gains were a major component of the rise in overall revenue that CarMax saw for the period.

Can CarMax kick into high gear?

CEO Bill Nash still believes CarMax could make more progress. “While our comparable store unit sales performance improved significantly from the February 2018 quarter,” Nash said, “we believe macro pricing factors still had some effect on our first quarter sales.”

Expansion will keep playing a role in further growth. CarMax opened three stores, including locations in Dallas, Miami, and Greenville in North Carolina during the quarter, and a subsequent opening in Santa Fe after the official end of the fiscal quarter kept the company on track to meet its goal of opening 15 stores in fiscal 2019.

CarMax also hit the accelerator on its share repurchase activity. The company bought back 3.3 million shares during the quarter, spending more than $207 million in the process. Even after that spending, that still left CarMax with more than $800 million in authorized repurchase capacity for future buybacks if the company so chooses.

CarMax shareholders were happy with the report, and the stock climbed 4% in premarket trading following the announcement. With signs pointing toward a brighter future, CarMax hopes it can put some tough times behind it once and for all and take advantage of new opportunities for the rest of the year and beyond.

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Dan Caplinger 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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