Will Tax Refunds Boost CarMax's Earnings This Week?

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Used-car giant CarMax (NYSE: KMX) is set to close the books on its fiscal 2018 in the next few days. And with the economy growing and income tax refunds hitting consumers' pockets, there are good reasons to expect positive results from the auto retailer on Wednesday, April 4.

Sales growth has been under pressure recently as new-car dealerships cut prices to keep their inventory moving. CarMax has managed that challenge well, though, and as a result has allowed its used-car volumes, pricing, and profits all to rise at a healthy pace.

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With those broader trends in mind, let's look at the metrics that will determine whether that positive momentum continues into the new fiscal year.

Healthy sales growth

CarMax posted a 10% revenue spike last quarter, but that increase came mainly from additions to its store base rather than from higher sales at existing locations. Comparable-store sales growth, in fact, slowed to 2.7% to mark a second straight deceleration. Comps started the year at an 8% rate before dropping to 5% in the second quarter and declining again to 2.7%.

Executives pinned the slowdown on increased promotions among new-car dealerships. By closing the gap with the type of late-model used cars that it sells, these price cuts led to reduced customer traffic that CarMax offset, in part, with higher conversion rates. A shift toward more expensive cars also helped by pushing average selling prices up.

But car sales tend to jump during income tax refund season in February and March, and so there's a decent chance that CarMax's comps will end the year on a high note after rising by 5.5% over the past nine months.

Spreading out

The retailer is committed to rolling out its no-haggle car shopping concept across the U.S. and, as of late November, it operated stores in 89 major markets that covered about 72% of the country. CarMax was on track to add four more locations to its footprint during the fourth quarter to bring its full-year expansion to 15. That boost would match the prior year's growth and includes a few large, brand-new markets such as Seattle, Washington.

The rising store base should help sales volumes increase to well above last year's 671,000 mark, but CarMax still has a long runway ahead. It accounted for less than 3% of lightly used vehicle sales in the most recent complete fiscal year, after all.

Looking to fiscal 2019

That large market opportunity should support an aggressive fiscal 2019 outlook that calls for opening as many as 16 new locations. CarMax will likely explain on Wednesday whether those new lots will soak up much more capital, depending on land and construction costs and the range of large and small market locations in the mix. Its latest customer traffic results will figure into that plan, as persistent challenges there might force a more modest approach to its physical expansion.

Finally, look for an update on its digital spending initiatives as more elements of the car-shopping experience move online. CarMax can't afford to lose these browsers to e-commerce specialists, and so it might choose to direct an increasing proportion of its profits toward digital advertising and bulking up its online-selling tools.

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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.