CarMax, Inc. (KMX 0.82%) is driving toward a strong end of the calendar year, after the stock spent much of 2016 recovering from "peak auto" doom and gloom that sent just about any kind of auto stock lower late in 2015. CarMax released its results early on December 20th, and despite missing top-line estimates and trading lower immediately after the release, it quickly rebounded to a 5% gain as investors came to their senses and realized the used-auto retailer had another consistent and solid quarter. Let's take a look at the details and key takeaways for investors.
By the numbers
Starting with CarMax's top line, revenue rose 4.4% to $3.7 billion, which was about $50 million below consensus estimates. Net earnings increased 6.6% to $136.6 million and earnings per share rose 14.3% to $0.72, two pennies ahead of consensus estimates. Again, despite the company's coming up a little short on the top line, a quick glance at a 10-year graph will show how consistently CarMax has grown its revenue.
Comparable sales are healthier than they appear
Other metrics checked in as solid as well, with total used-vehicle unit sales up 9.1% and comparable-store used-unit sales up 5.4% compared to the prior year's third quarter. But investors also need to consider that CarMax has reduced sales to its tier 3 customers, which are considered riskier consumers and are financed by a third party. And remember that CarMax actually pays a fee to third parties to finance these customers. Excluding the decline in tier 3 customers, CarMax's comparable-store used-unit sales jumped a stronger 9.8%.
The takeaway here isn't for investors to focus on the comparable-sales figure excluding tier 3 consumers, because that's part of the business. Rather, understand that CarMax's healthier sales are still posting comparable-sales gains at an accelerated pace.
As good as it gets
Despite CarMax's average used-unit selling prices remaining near historical highs, it's becoming more apparent that the current level might be as good as it gets during this cycle:
Data source: CarMax investor resources. Chart by author.
The next takeaway is a little more complicated, and might depend on whether you're a glass-half-full or glass-half-empty kind of person. As you can see below, gross profits have stayed relatively flat, but margins have moved steadily lower.
Data source: CarMax investor resources. Chart by author.
Part of the reason, in my opinion, is that the decline isn't showing weakness in CarMax's operations or an explosion in costs. Rather, margins are moving back to more normal levels, after being artificially inflated during the aftermath of the "Cash for Clunkers" stimulus program that sent a huge chunk of trade-ins to the grinder after the program ran through its $3 billion rebate allowance in only 29 summer days in 2009. That in turn took a huge chunk out of used-car supply, and artificially sent used-car prices up over the next two years, giving CarMax more negotiating leverage that juiced its bottom line. So instead of weakness in the company's margins, part of what we're seeing is simply reversion to a more historical level of about 11%.
Ultimately, CarMax's third quarter was another solid performance. The company appears poised to continue on its growth story, as it opens more stores and invests in improving comparable-store sales through smartphone apps and more interactive and efficient store footprints, among other things. That said, CarMax investors will want to keep an eye on used-car prices, as more leased vehicles flood the market and pressure prices downward.
