CarMax Gains Speed as Expansion Continues

By Dan Caplinger Markets Fool.com

The car-shopping experience is a much-hated process for many shoppers, and auto seller CarMax (NYSE: KMX) has aimed to change that for the better through a combination of broad vehicle selection and no-hassle sales methods. That approach has given many people positive views of the company, and coming into its fiscal fourth-quarter report on Thursday, CarMax investors had hoped that the approach would pay off in higher sales and profits. CarMax saw particular strength in its used-car market during the quarter, and that helped produce positive momentum that it hopes will persist into the coming fiscal year.

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Let's take a closer look at CarMax to see how it did and what's coming down the road for the car seller.

Image source: CarMax.

CarMax punches it

CarMax's fiscal fourth-quarter results finished the year on a strong note. Revenue was up 9.3% to $4.05 billion, easily topping the consensus forecast for sales of $3.93 billion. Net income climbed 8% to $152.6 million, and that produced earnings of $0.81 per share, which was $0.02 per share better than most investors had expected from the vehicle retailer.

Taking a closer look at the results, CarMax continued to see some disparities within its business. On one hand, the used-car market was extremely strong, and CarMax saw used unit sales in comparable stores climb almost 9% for the quarter. Total sales of used cars were up more than 13% for the quarter, and modest increases in store traffic combined with a sharp boost in sales conversions to lead to the good results. In addition, sales of extended protection plans climbed by nearly a fifth, boosting the contribution from CarMax's other sales line item.

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Yet other aspects of CarMax's business kept showing some challenges. Wholesale vehicle unit sales were down 1.2% compared to last year's fiscal fourth quarter, as appraisal traffic fell and limited CarMax's ability to boost sales despite growth in its store-base network. Even within the retail segment, the Tier 3 segment, which represents customers who get financing by third-party providers, remained under pressure. Tier 3 customers represented less than 10% of total sales, down from nearly 15% in the year-ago period. CarMax blamed delays in federal income tax refunds for a large part of the decline for the fiscal quarter that ended Feb. 28.

CarMax experienced mixed performance from an operational standpoint. Gross profit per unit was mixed, with used car figures climbing $25 to $2,134 per unit but wholesale gross profit falling more than $65 to $938 per unit. Average selling prices fell, with a nearly 2% drop for used vehicles to $19,435 and a more extensive 7% decline to $4,910 for wholesale vehicles. A 15% jump in overhead expenses reflected greater spending on advertising and an expanding base of stores, which now includes 173 locations.

What's coming for CarMax?

CarMax kept expanding to foster growth, although the quarter was relatively slow. The company added Mobile, Alabama, and Albany, New York, to its network, and it opened two new stores in the Los Angeles area. That brought the total number of new stores to 15 for the fiscal year, and the company hopes to match that pace of growth in fiscal 2018 and 2019.

However, some might see the slowing pace of CarMax's stock repurchase activity as a potential negative sign. The company said that it spent just over $100 million on buybacks during the quarter, repurchasing about 1.5 million shares of stock. Nevertheless, that brought its total purchases for the fiscal year to more than 10 million shares and $557 million, and the company still has almost $1.6 billion available for future buys if it chooses to do so.

CarMax shareholders were pleased by the report, and the stock climbed almost 3% in pre-market trading following the announcement. With signs that the auto retailer is taking advantage of opportunities to boost its exposure and get more customer traffic, CarMax hopes that it can ride its momentum into the coming fiscal year and beyond.

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