Why CarMax Stock Popped 14%

What happened

CarMax (NYSE: KMX) stock is trading near its highs of the day, up 14.2% as of 2:45 p.m. EDT, after the used car specialist reported fiscal Q1 2018 earnings results this morning.

CarMax earned $1.33 per share in Q1 on sales of $4.79 billion, beating analyst expectations for both sales and earnings.

CarMax sells a whole lot of cars — a lot of them wholesale. Image source: Getty Images.

So what

CarMax grew its sales 5.5% year over year in dollar terms, and grew its earnings per share 17.7%.

In terms of units (cars) sold, same-store sales of used cars declined 2.3%. However, overall units sold increased 1.6% thanks to the opening of new locations. CarMax’s biggest growth in units sold came from wholesale sales to other dealers — up 9.6%. Gross profits from wholesale sales also grew 9.6%.

Thus, the surprising conclusion to this quarter’s results appears to be that CarMax benefited most from an expanding role as car buyer of first resort. More and more often, people are bringing their old cars to CarMax to appraise and buy; then CarMax turns around and resells them wholesale to other dealers, taking its cut in the process. More than one in three cars CarMax sold last quarter were sold in this way.

Now what

I wouldn’t be surprised to see this trend develop in the future. Advising investors on what to expect over the course of the next year, CarMax let on that it plans to open 15 new car superstores through May 31, 2019, nine of them in cities with “populations of 600,000 or less, which we define as small markets.” As the new big fish in these small ponds, I’d expect CarMax to attract an outsize share of car trade-ins there as well, further beefing up the company’s powerful wholesale vehicle purchase-and-resale business.

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Rich Smith 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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