3 Things to Watch When CarMax Posts Earnings

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CarMax (NYSE: KMX) shareholders can expect extra volatility in the coming days, with the used-car giant scheduled to post earnings results before the market opens on Wednesday, Sept. 26.

Shares have outperformed the S&P 500 by a wide margin since its last report in late June, and that spike means the pressure is on the retailer to follow through on some of the positive sales and profit momentum that it showed in its fiscal first-quarter report.

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Improving sales trends

Comparable-store sales is the key metric that investors will be watching to judge the health of this business over the summer months. CarMax's comps have declined for two consecutive quarters as customer traffic slipped. However, last quarter's results marked a significant improvement in the trend as comps fell 2% compared to an 8% drop in the prior quarter.

CEO Bill Nash and his executive team have predicted that this positive trend will continue as the pressure eases from aggressive pricing promotions on the new car side of the industry. That's a key reason why most investors are expecting sales growth to come in at about 6% this quarter, up from 3% in the prior quarter. Most of those gains will come from a growing store base since CarMax added a few more lots to its footprint, including in new markets like Warner Robins, Georgia. But a further improvement in the retailer's comps would show that management has a good grasp on the industry's broader pricing dynamics.

Healthy earnings

CarMax's 18% spike in per-share profit last quarter had a lot to do with the fact that its tax rate plummeted to 25% from 37%. Yet the company's operating margins looked solid, too. Gross profit per vehicle was steady at $2,200, and investors will want to see that figure stand pat, or even edge higher.

Other expenses are rising as the company shells out more on wages and on bulking up its e-commerce infrastructure. Still, look for pre-tax earnings to hold steady at about 7% of sales. Investors who follow the company are expecting earnings to improve to $1.21 per share from $0.98 per share a year ago, mostly thanks to those lower tax payments.

Growth plans

CarMax's core growth initiative involves fully covering the country with stores so it can press its advantage as the nation's largest used-car retailer. We'll likely get an update on that plan on Wednesday that keeps the retailer opening roughly 15 stores per year to add to its current base of 192 locations.

In the meantime, executives are growing more optimistic about the e-commerce sales channel given the fact that consumers are flocking in that direction these days. And CarMax, with its large national distribution network, is ideally positioned to capitalize on that demand in ways that many regional dealerships can't.

The CarMax website handled an average of 19 million visitors per month last year, and the retailer's challenge is to convert a higher proportion of those browsers into buyers over the next few years. Online car appraisals, machine-learning based recommendations, and home delivery are a few of the initiatives CarMax is currently rolling out to aid in that process, and investors should find out on Wednesday whether or not these shopping improvements are helping lift sales and conversion rates both online and in stores.

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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.