It's Time for CarMax, Inc. to Throttle Up on Growth

Source: CarMax.

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Car retail specialist CarMax (KMX -0.67%) has enjoyed a solid year to date, with shares climbing to new all-time highs as the company continues to take advantage of the rising tide of U.S. auto demand. After a strong performance in the first quarter of its fiscal year, CarMax hopes to follow up with more gains in earnings and revenue when it announces its second-quarter results on Tuesday. What investors want to see from CarMax is earnings growth that can outpace the rise in sales that it has seen lately.

Many car-buyers have found the process of purchasing a vehicle to be arduous, with the need to haggle with aggressive salespeople while fighting a culture that seems stacked against the shopper from the start. But as Fool co-founder David Gardner noted in his original recommendation of CarMax early last year, CarMax has aimed to make the buying process less painful, boasting the top sales of used vehicles of any network in America. Let's take an early look at what's been happening with CarMax over the past quarter and what we're likely to see in its report.

Stats on CarMax

Source: Yahoo! Finance.

Can CarMax keep speeding ahead?
Investors have gained a lot of confidence in CarMax's prospects over the past few months, boosting their earnings estimates not just for the August quarter but also for the current and next fiscal years by 2% to 3%. The stock has responded well, with gains of nearly 20% since mid-June.

Recent optimism for CarMax came largely from its fiscal first-quarter report back in June . Net sales jumped more than 13%, producing an almost 16% rise in net income and an even larger 19% gain in earnings per share. CEO Tom Folliard noted the company's record success, citing strong contributions from CarMax's retail and wholesale operations as well as its auto-finance unit. Comparable-store unit sales climbed by 3.4%, reflecting the strength in the auto market generally. In addition, the opening of new store locations across the country shows CarMax's commitment to filling out its national network of dealers.

Source: CarMax.

From a longer-term perspective, though, CarMax has shown improvement in key areas for sustaining its growth. The company has worked hard to cement its reputation for fair dealing, giving its salespeople fixed commissions rather than paying them more to sell higher-margin vehicles than others. Moreover, from a competitive standpoint, CarMax has worked hard to fend off Internet-based rivals, taking advantage of the fact that especially for used vehicles, buying sight-unseen and then having to deal with the hassles of transporting a vehicle from often far-away locations gives CarMax and its dealer network a huge edge.

One problem for CarMax, though, is consistency. As Stock Advisor analyst Sara Hov noted after the first-quarter report, CarMax's results can be lumpy, and the company's management team said that it didn't change its core strategies in producing record results last quarter. Investors therefore have to be prepared for short-term misses.

Nevertheless, investors should look beyond the headline numbers in CarMax's coming earnings report for signs that its long-term growth story remains intact. With so much potential to attract car-buyers tired of the traditional sales tactics most dealers use, CarMax needs to keep working to build up its brand while giving customers the buying experience they want.