CarMax Posts Strong Q2 Results as Used-Car Sales Rise

The used-vehicle market presents many challenges to companies seeking to profit from it, and CarMax (NYSE: KMX) knows quite well what used-car sellers have to do to overcome some of the unique difficulties they face. In the past month, CarMax has had to deal with  unusual obstacles in the aftermath of Hurricanes Harvey and Irma, and some investors have been nervous about how much the natural disasters would drag on the results of the leader in no-hassle used-car pricing.

Coming into its fiscal second-quarter report on Friday, CarMax investors fully expected that the company would be able to sustain its strong momentum and produce solid growth. Its results were even better than most were hoping to see, and the negligible impact that it has suffered from Hurricane Harvey in particular reassured shareholders that the company's success story remains intact. Let's take a closer look at CarMax's latest results, and consider what's ahead for the car retailer.

CarMax stays on higher ground

CarMax's Q2 results continued the company's forward motion from earlier in the year. For the period, which ended on Aug. 31, revenue was up almost 10% year over year to $4.39 billion, dramatically topping the $4.25 billion consensus forecast among those following the stock. Net income of $181.4 million rose nearly 12%, and the resulting earnings of $0.98 per share were $0.03 better than analysts' estimates.

The company's emphasis on retail used car sales kept fueling it's overall gains. Total used vehicle unit sales were up 11%, extending its string of periods with double-digit percentage growth. Comparable-store sales growth of 5.3% was slightly lower than last quarter's pace, but CarMax said that the closure of six Houston-area stores during the last week of the quarter due to Hurricane Harvey had only a modest impact on comps.

CarMax's other business areas kept seeing slower growth. The wholesale vehicle business stayed above water with 0.4% unit sales gains, with the company saying that falling appraisal traffic held back gains from rising appraisal buy rates and the growth in the retailer's overall store network. Sales of extended-protection plans remained strong, growing by nearly 14%, but a decline in third-party financing fees limited the increase in revenue from CarMax's catch-all Other category to just 6%.

The best news for the company come on pricing: Average selling prices on the used-car side of the business rose almost 1% to $19,667, ending a streak of quarterly declines. Wholesale vehicle prices kept falling, posting a 3% drop to $4,957, but gross profit per unit from the wholesale business jumped by $80 per unit to $950. More modest profit gains of around 1% for used cars also fed CarMax's earnings gains.

What's next for CarMax?

CarMax continued to expand its store network at a relatively slow pace in its Q2, opening one new store in San Francisco, one in Hartford, Connecticut, and its first location in Maryland's Eastern Shore region. That pace is set to accelerate somewhat in the near future, with five new store openings expected in the current quarter, and 15 in total over the next 12 months. In particular, CarMax is focusing on smaller markets; the majority of those 15 planned openings are in metropolitan areas with populations of 600,000 or less.

Yet what long-term investors will want to know is how CarMax intends to respond to new competitive threats in the industry. The rise of disruptive new player Carvana (NYSE: CVNA) offers customers another alternative to the traditional car-buying experience, and its trademark vending-machine format display is earning it a lot of attention. Carvana will have to deal with the same general business challenges that CarMax does, and it will inevitably make some mistakes in climbing the learning curve. That should give CarMax time to formulate a strategy to respond.

At this point, however, CarMax shareholders seem pleased. The stock jumped 4% in pre-market trading following the earnings release. Things are looking up for the car retailer, and having survived hurricanes intact, it may be on the road to faster growth in the future.

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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.