The auto industry has been extremely healthy lately, and that has boded well not just for automakers but for sellers of used cars as well. CarMax (NYSE:KMX) does most of its business in the used-car segment, and the dealer's unique approach to no-hassle pricing and low-pressure sales approach appear to be resonating with its customer base.
Coming into its fiscal first-quarter report on Wednesday, CarMax investors wanted to see the car retailer's momentum continue to build. The company delivered what its shareholders wanted to see, including even better growth figures than expected and plans for continued expansion. Let's look more closely at CarMax and what its results say about its future.
CarMax is driving higher
CarMax's fiscal first-quarter results were extremely encouraging. Sales jumped more than 10% to $4.54 billion, and that was even faster than the 8% growth on the top line that most of those following the stock had expected to see. Net income of $211.7 million was up an even stronger 21% from year-ago levels, and that translated to earnings of $1.13 per share, well above the $0.98 per share consensus forecast among investors.
Looking more closely at CarMax's numbers, the same trends that we've seen in recent quarters continued into the new fiscal year. The used-car market has continued to provide almost all of the upward momentum for CarMax, with total used vehicle unit sales growing more than 14%. On a comparable-store basis, growth of 8.2% extended a streak of solid performance from the car retailer. CarMax did say that the delay of federal tax refunds might have had a slight positive impact in shifting some sales that traditionally would have taken place in the previous quarter, but with new rules in effect, that impact is likely to recur in coming years. Also, extended purchase plan sales kept up their strong pace, with revenue from the products jumping by more than a fifth and leading CarMax's catch-all other sales category up 12%.
Meanwhile, wholesale vehicle unit sales remained a drag on CarMax's growth. Unit sales in the wholesale sector were flat from year-ago levels, as reduced appraisal traffic offset the increase in the number of CarMax store locations in its network. The auto retailer called out cars between seven and nine years old as being in particularly short supply. In addition, CarMax noted that on the retail side, third-party Tier 3 sales declined to 10% of total used unit sales.
Operationally, CarMax kept seeing average selling prices fall. Used vehicles were down 2% to $19,478, while wholesale vehicle prices were off 3% to $5,113. From a gross profit perspective, though, CarMax was able to squeeze a bit more from its sales, making an average of $2,212 per vehicle on used cars and $1,012 on wholesale vehicles. Those figures were up $10 and $17 respectively from year-ago levels. CarMax also did a good job of containing costs, limiting its growth in overhead expenses to 6% and reducing its per-unit expenses by $157 to $2,066 per unit.
Can CarMax keep up its pace?
CarMax's expansion plans continued apace during the quarter, although the seasonal lull kept new store additions down somewhat. The retailer opened two stores in Seattle and one in Pensacola. Seattle in particular represents a new market for the company, which now has 177 locations in 39 different states. However, CarMax has a fairly ambitious slate of 12 new stores expected to open during the remainder of this fiscal year, including San Jose, Las Vegas, and stores in the greater Philadelphia and Denver areas.
Looking down the road, though, there were warning signs for investors to keep an eye on. The company's auto finance division saw income rise by almost 9%, with average receivables climbing double-digit percentages. However, interest margin fell slightly, while loan loss provisions were up a bit as a percentage of managed receivable assets. The slight rise isn't enough to raise immediate concerns, but in a rising rate environment, shareholders will want to be diligent in seeing whether CarMax customers overall show some credit-quality deterioration in future quarters.
Nevertheless, CarMax shareholders were happy with the result, and the stock jumped 7% in pre-market trading following the announcement. As long as the overall industry remains healthy, CarMax looks like it's doing what it needs to do to tap into the success of the auto retail business with its attractive business model.