What CarMax Wants You to Know

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Investors celebrated the recent fourth-quarter earnings report from CarMax (NYSE: KMX) that showed the used car retailer returned to growth at the end of fiscal 2018. Wall Street was especially pleased to see solid profit growth despite spending pressures from the move toward online auto sales. CarMax also faced what management called a "robust competitive environment" for used car sales.

In a conference call with analysts, CEO Bill Nash and his team added details on those market conditions as the company looked ahead to a new fiscal year. Below are a few highlights from that presentation.

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Ending the market share slide

CarMax's sales pace was muted this quarter, as it has been for most of the year. Customer traffic declined, and its 2.8% increase in comparable-store sales, while marking an improvement over the past quarter's 1% drop, wasn't enough to protect market share for the year.

Yet that market share slide appears to have ended, executives said, as CarMax started clawing back lost ground over the last few months. Revenue growth would have been stronger this quarter, too, except for delayed tax refunds compared with the prior year.

Holding the line on costs

CarMax managed a double-digit boost in adjusted pre-tax earnings despite having spent aggressively on improving its IT infrastructure and adding new stores to its retailing footprint. Part of that success can be attributed to healthy gross profit per vehicle, which ticked up to $2,166 from $2,147 a year earlier. Yet the broader contributing factor was expense discipline, as the company found ways to do more with less -- whether that was in respect to customer traffic or its level of employees. "This is a testament to the strength of our diversified business model and ongoing focus on operational efficiencies," Nash said.

Online selling looks promising

CarMax has been talking up the potentially transformative impact of digital sales for over a year, but this quarter was the first one to include some hard numbers for investors to review. The chain's fully online selling process -- available just in Atlanta right now -- drove double-digit sales growth, management said, and customers chose to finance through CarMax at about the same rate they did with in-store purchases.

Online shoppers were a bit less motivated to sign up for its service plans, but management believes it could improve that conversion over time. In fact, the online sales channel might even be "more efficient than our current model," according to Nash.

Management was cautious to remind investors that the early data on digital sales is limited to just a few months in only one test market. Yet CarMax is excited enough about the possibilities here that it plans to have the selling process available completely online across the country by early 2020. Until then, investors will see increased costs associated with preparing for this rollout, with most of the benefits not set to start lifting earnings results for at least another year.

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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.