CarMax's Used Car Business Revs Up
The auto industry's recovery from the financial crisis and the major bankruptcies of two of the three primary U.S. automakers has been impressive, and investors have seen its impact not just in automakers but also in related businesses like vehicle retail specialist CarMax (NYSE: KMX). The company specializes largely in used-car sales, and coming into its fiscal third-quarter report on Tuesday, CarMax investors were hoping that they would be able to share somewhat more in the strength that the overall industry has seen. Even as new-car sales start to plateau, CarMax said that it saw some strength in its unit sales that could point to better times ahead for the company. Let's look more closely at the latest from CarMax and what lies ahead for the car retailer going forward.
Image source: CarMax.
CarMax drives forward
CarMax's fiscal third-quarter results weren't entirely satisfying for investors, but they had some good aspects to them. Sales climbed 4.4% to $3.70 billion, which was slightly slower than the 6% growth rate that most of those following the stock were looking to see. However, net income climbed at a slightly higher 7% pace to $136.6 million, and that produced earnings of $0.72 per share, $0.02 higher than the consensus forecast among investors.
Looking more closely at the numbers, CarMax saw some important advances that could point to a brighter future. Comparable used-car sales growth climbed again, rising to 5.4% in unit terms, and that represents two straight quarters of advances from flat performance earlier in the fiscal year. Total used unit sales were up more than 9%, and CarMax reported that both increases in store traffic and stronger conversion figures contributed to the favorable sales performance in the used-car realm. Comparable sales growth was even stronger when you exclude customers who get financing through what CarMax calls its Tier 3 third-party finance providers, nearing the 10% mark.
CarMax's other businesses, however, once again lagged behind the used-car arena. Wholesale vehicle unit sales were down 2.2% from year-ago levels. Even though CarMax has grown its store network and boasted higher buy rates on appraisals, reduced appraisal traffic weighed on the segment's results. Other sales and revenues were up 1%, with strength in revenue from extended protection plans and third-party finance fees. But decreases in new vehicle sales stemmed from last year's sales of some of CarMax's new car franchises.
Operationally, CarMax also faces challenges. Gross profit per unit remained under pressure, with the figure for used cars remaining nearly unchanged at $2,155 per vehicle, but wholesale vehicles fell nearly $50 to $900 per unit. Average selling prices for both used and wholesale vehicles were down around 3%, sending the average used-car price down to $19,520 and wholesale prices to $5,103. Meanwhile, overhead expenses climbed by about 6% in absolute terms, reflecting the addition of 18 new store locations over the past year and the rise in used-car unit sales. CarMax did its best to control some of those costs, with advertising expenses falling 7%.
Can CarMax hit the gas?
CarMax continues to look at growth in its store network to foster overall gains in sales and profits. During the fiscal third quarter, CarMax opened six new locations. Two of those were in brand new markets for CarMax, including Boise, Idaho and Grand Rapids, Michigan. The four others expanded CarMax's existing presence in key markets, including Philadelphia, San Francisco, and the Florida community of Daytona. The company expects to open a dozen more stores within the next 12 months, including four during the current fiscal quarter.
Investors should also take some comfort in the knowledge that CarMax continues to believe that its stock represents good value. The company continued to take advantage of its share repurchase program during the fiscal third quarter, spending $198.7 million to buy back about 3.8 million shares of stock. That leaves $1.69 billion in authorized buybacks available for future use, which represents an impressive 15% or so of CarMax's current market capitalization.
CarMax shareholders weren't entirely comfortable with the report, sending the stock down less than 1% in pre-market trading following the announcement. Ideally, CarMax would like to see better performance not just in unit sales but also in pricing and margins in order to take maximum advantage of the opportunity it has to participate in the strength of the auto industry.
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