Investors are gaining confidence in CarMax's (KMX +4.16%) business heading into its second-quarter earnings results set to post on Friday, Sept. 22. The used car retailer's operating trends looked healthy at its last report, but it wasn't clear just how much of that success had to do with the temporary lift caused by the arrival of delayed tax refund checks.
This week's results should answer that question, along with a few other important ones for investors.
Below, we'll look at a few key metrics to watch in CarMax's upcoming announcement.
Image source: Getty Images.
About those refund checks
Investors will be paying plenty of attention to comparable-store sales gains. That figure was a solid 8.2% to kick off the new fiscal year, which represented just a minor slowdown from the prior quarter's 8.7% jump.
CarMax has seen its customer traffic growth slow to a crawl recently, in part because credit providers are tightening their standards and pushing many lower-credit-tier shoppers out of the market. It has offset that headwind by boosting the percentage of browsing customers that it turns into car buyers.
You can expect the management team to highlight that conversion rate in this quarter's results. Meanwhile, CarMax credited delayed income tax refund checks for lifting its growth last quarter, so we'll get an important update on what a more normal sales cadence looks like for the retailer.
Pricing pressures
Management noted back in June that used car prices were declining across the industry, a trend that threatens to drag profitability lower. In fact, average selling prices slipped 2% last quarter despite the temporary lift from tax rebates.
The company has been through pricing swings like this in the past while always keeping its profits roughly steady. Gross profit per vehicle tends to move around a bit, but usually stays within a range of $2,100 to $2,200 per vehicle. If CarMax's profit per unit falls below $2,100, that's a sign of an unusually weak selling environment, especially in the context of slow sales volumes.
KMX Gross Profit Margin (TTM) data by YCharts.
While car prices could pressure profitability, look for declining costs, along with healthy growth on the financing side of the business, to lessen that negative impact.
The growth outlook
CarMax is still very much in growth mode, as management started the year off with plans to open as many as 15 new stores in fiscal 2018 and between 13 and 16 locations in fiscal 2019 (it added 15 stores during the prior fiscal year). After launching three new lots last quarter, the revenue base likely benefited from three more additions this quarter, including one in the brand-new market of Salisbury, Maryland.
Investors will be watching for any shift in those growth plans, either through changes in the number of stores that the company plans to open or to the size of the markets that it targets. CarMax has recently shifted its expansion strategy more toward smaller markets.
Another move in that direction might indicate a more conservative approach by the management team. Still, CarMax is likely to remain bullish on its long-term opportunities. After all, the company was responsible for less than 3% of the lightly used vehicles sold in the U.S. last year, so it is looking at a long growth runway ahead.
