The market's fears regarding peak auto sales, a growing concern about a possible automotive subprime loan bubble, and declining used-car prices have gripped investors and slashed value from just about every automotive stock throughout 2017. It's been less than ideal, to put it nicely, but despite these concerns, CarMax (KMX 0.05%) managed to top analysts' estimates on both the top and bottom lines during the first fiscal quarter of 2018 -- here are the highlights from Wednesday's report.
By the numbers
Starting from CarMax's top line, net sales and operating revenue increased 10.1% to $4.54 billion, which was ahead of consensus estimates calling for $4.45 billion, per Thomson Reuters. The increase was driven organically as well as by new store openings; used unit sales in comparable stores increased a healthy 8.2%, while total used unit sales rose 14.1%.
On the bottom line, net earnings jumped a strong 20.7% to $211.7 million, which pushed its net earnings per diluted share 25.6% higher to $1.13. That easily topped analysts' estimates calling for $0.98 earnings per share and helped drive CarMax shares up more than 3% after the markets digested the news.
Image source: Getty Images.
Bright spot
One major concern facing CarMax, as well as other automotive companies, has been the decline of used-car prices. That will pressure financing divisions of major automakers, and it also affects CarMax's top and bottom lines. That's why this quarter is such a relief to many investors, because CarMax was able to offset those mounting pressures and push gross profit per unit higher.
Data source: CarMax quarterly filings. Chart by author.
A couple of other important takeaways for investors involve the company's SG&A expenses and CarMax Auto Finance (CAF). Investors can expect the company's SG&A expenses to rise -- that's simply a fact of life for young and growing businesses. However, management has thus far done a pretty good job of offsetting the rising expenses. Compared to the first quarter of fiscal 2017, its SG&A expenses increased 6.1%, but that's far below the 11% increase of its store count over the same time frame (18 stores). For investors, SG&A is certainly a figure to keep an eye on quarter to quarter, because it cost the company $2,066 per used unit, and controlling that expense directly helps improve margins and the bottom line.
CAF also posted a solid quarter, as it increased its income by 8.5% to $109.4 million, with average managed receivables growing 11.1% to $10.83 billion. As the market becomes more competitive and prices potentially decline further, CAF represents an opportunity for CarMax to grow its top and bottom lines simply by increasing the number of customers financed, or improving the mix of type of loans in favor of a better interest spread -- if the potential reward is worth the risk.
The road ahead
Going forward, the company will be focused on three things: opening stores, improving its mobile presence, and improving margins. During the first quarter, CarMax opened three stores, and the plan is to open another 16 stores through the end of next May. In terms of its mobile presence, CarMax has decades of valuable vehicle selling data that helps it turn over inventory better than the competition -- if it can find a way to utilize this data better with its online presence, it could help improve conversion rates on sales -- and thus its top and bottom lines. If management continues to control SG&A during its store expansion, this quarter proves that the company can succeed even amid a peaking automotive industry, and that's welcome news for many investors.
