CarMax Is Booming: Should You Buy?

Source: CarMax.

CarMax (NYSE: KMX  ) was rising by an explosive 16.5% on Friday after reporting remarkably strong financial performance for the quarter ended on May 31. The business is truly firing on all cylinders, and the company's differentiated business model has allowed it to outperform competitors such as AutoNation (NYSE: AN  ) and Penske (NYSE: PAG  ) in the long term. Should you buy CarMax?

Running at full speed
Total sales and operating revenues during the first quarter of fiscal 2014 increased 13.3% to $3.75 billion; this came in materially above analyst's forecasts of $3.58 billion for the quarter.

Performance was strong across the board: Total used-vehicle unit sales grew 9.8% during the period, while comparable-store used unit sales increased by 3.4%. Wholesale vehicle unit sales grew 9.9% versus the first quarter of fiscal 2013, and income from CarMax Auto Finance -- CAF -- increased by 8.7% during the quarter.

Total gross profit increased 12% to $501.7 million. Used-vehicle gross profit rose 9.9% on the back of growing unit sales, while gross profit per unit remained in line with the first quarter in 2013. Wholesale vehicle gross profit increased 17.5%, driven by a 9.9% increase in wholesale unit sales and an improvement of 6.8% in wholesale vehicle gross profit per unit. 

Earnings per share increased 18.8% year over year to $0.76 per share, considerably above estimations of $0.67 per share from Wall Street analysts.

The company opened four new stores during the quarter, three in new markets for CarMax: Rochester, New York; Dothan, Alabama; and Spokane, Washington; and one new store in an existing market: Harrisburg/Lancaster, Pennsylvania. In addition, CarMax opened a new store in Madison, Wisconsin, after the quarter ended.

In addition to increased traffic at the company's stores as a major growth driver during the quarter, management highlighted the fact that online performance was remarkably sound. Average monthly Web visits grew to over 14 million, up 25% compared to the same period last year. Approximately 30% of total visits were to the company's mobile site.

Competitive strengths
CarMax is quite a unique player in the auto dealership industry. The company applies a customer-friendly commercial policy that resonates remarkably well among clients. CarMax has a no-haggle pricing policy, which makes the negotiation process much simpler and more comfortable. Besides, the process is also more transparent than at competing companies; the price of the car the customer is buying does not change depending on factors like vehicle trade-ins.

Sales employees at CarMax work on a fixed commission, meaning their commission does not change depending on which vehicle the customer buys. This means they can focus on finding the best vehicle according to a customer's needs, as opposed to pushing the cars that generate higher sales commissions.

This is generating strong performance on the competitive front, as CarMax has materially outgrown competitors such as AutoNation and Penske over the last several years. 

KMX Revenue (TTM) Chart

KMX Revenue (TTM) data by YCharts.

Importantly, both AutoNation and Penske are delivering solid financial performance lately, which is indicating that industry demand remains encouragingly solid. 

AutoNation delivered healthy numbers for the first quarter of 2014, as total sales increased 6.5% to $4.36 billion. New vehicle units sales grew 6.1% to 71,223 units during the quarter, while used vehicle units sales increased by 3.2% to 52,136.

May sales data from AutoNation was even more encouraging: The company announced retail sales of 30,275 new vehicles during the month, an increase of 15% compared to the same month of 2013. On a same-store basis, reported retail new vehicle unit sales in May were 29,471, an increase of 12%.

In comparison to CarMax or AutoNation, Penske tends to be more volatile in its financial performance, but the company delivered impressive growth rates for the first quarter of 2014. Penske announced a big increase of 20.9% in total revenues to $4 billion during the quarter, driven by a 13.1% increase in total retail unit sales, including a 9.9% increase on a same-store basis.

Reports from AutoNation and Penske show that demand is remarkably strong in the industry, and this is a big positive factor for CarMax and other companies in the business, since performance at the company-specific level is usually quite tied to industry conditions.

Foolish takeaway
CarMax delivered remarkable financial performance during the last quarter, and reports from competitors such as AutoNation and Penske confirm that demand is healthy across the industry. CarMax has proven its ability to outperform competitors in the long term thanks to its differentiated business strategy, so this unique car dealership looks well positioned to continue delivering solid gains in the years ahead.

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