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Is CarMax Back in the Driver's Seat?

By Dan Caplinger – Sep 15, 2016 at 10:04AM

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The stock has bounced back in recent months, but will business conditions improve?

Image source: CarMax.

One of the biggest purchases that many Americans make is buying a car, and CarMax (KMX 0.23%) has sought to offer an alternative to the much-hated process of haggling and trickery that many dealers force upon their customers. For years, the CarMax model was also good to shareholders, but since last year, CarMax stock has stalled out and struggled to hold its ground. Coming into Wednesday's fiscal second-quarter report, CarMax investors hope that the dealer will be able to reverse some troubling trends and find ways to produce sustainable growth. Let's take an early look at CarMax to see what its report is likely to say.

Stats on CarMax

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Source: Yahoo! Finance.

What's coming down the road for CarMax earnings?

Investors have remained cautious about CarMax earnings in recent months. They've kept their views on the fiscal second quarter stable, but they've reduced their calls for the 2017 and 2018 fiscal years by 1% to 2%. The stock has regained some of its lost ground, though, climbing 15% since mid-June.

The quarter got off to a rocky start after CarMax announced its fiscal first-quarter results in late June. Revenue for the dealer climbed less than 3%, and net income sank slightly from year-ago levels. Comparable used-car sales rose by just 0.2%, making CarMax almost entirely reliant on its ongoing network expansion efforts to drive overall growth. Adverse trends on the car pricing front also held CarMax back, with used cars remaining flat and wholesale prices falling slightly.

Yet one thing that investors will be happy to see is that CarMax has completed its executive succession plan. Bill Nash took over the reins as chief executive officer as of Sept. 1, succeeding exiting CEO Tom Folliard, who will remain on CarMax's board of directors. Nash has been with CarMax since 1997, serving in a number of positions in its auction services, merchandising, and human resources divisions. Folliard assured investors earlier this year that the succession plan will "ensure a seamless management transition and the continuity of the company's culture," and Nash remains excited about CarMax's growth prospects.

Over the past few months, some analysts following the company have also grown more optimistic about its business prospects. In late August, analysts at Susquehanna noted their belief that comparable-store sales should start to climb more aggressively. Not only are macroeconomic factors in the industry supporting a wider gap between new and used car prices, which should spur used car demand, but also CarMax has worked hard to make it easier for customers to use its website and other e-commerce methods to bring in sales. Meanwhile, analysts at Baird pointed not only to stronger used-car sales but also to CarMax's efforts to cut its debt financing costs as potentially supporting higher profits.

In the CarMax earnings report, investors will want to focus on the role that Bill Nash plays as the new CEO. Despite the company's emphasis on ensuring a smooth transition, the change in leadership at the top also gives CarMax an opportunity to make subtle shifts in its strategic direction, and seeing how Nash puts his own spin on the used car industry and CarMax's approach to capturing more of the used car market will be informative. Given how important it is for CarMax to make the most of the opportunities in selling used cars as the cornerstone of its business, the company needs to show its investors that it has the tools in place both to deal with challenges and to take full advantage of every chance to boost sales and profits going forward.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends CarMax. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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