Investors have been understandably cautious about CarMax's (NYSE:KMX) business lately. After all, customer traffic declined through most of 2017 at the country's largest used-car retailer, leading to concerns that its sales growth momentum might hit a wall.
CarMax's third-quarter earnings announcement didn't ease that specific concern this week. In fact, sales growth slowed for the second consecutive quarter. On the other hand, profitability remained healthy and the retailer still plans to boost overall sales by aggressively adding to its store count in the coming year.
With that bigger picture in mind, let's take a closer look at the results.
Revenue increased 11% to $4.1 billion. Most of that gain came from a quickly expanding store base, though, as the company added five new locations during the quarter, compared to three in the previous quarter.
Comparable-store sales, in contrast, ticked higher by just 2.7% to mark another slowdown. Comps had started the year expanding at an 8% rate before slipping to 5% in the second quarter and falling to below 3% today. The good news is that CarMax managed to convert a higher percentage of shoppers into buyers. That success was offset by stubborn declines in customer traffic, though. Sales volumes remained healthy, with used-vehicle sales rising 8% and the wholesale segment logging a 9% increase.
CarMax's average selling prices ticked up 2.5% to surpass $20,000 in its core used-car segment. That increase helped profit per vehicle hold steady at $2,100, or roughly 11% of gross sales prices. The wholesale division benefited from an even stronger price boost, which management tied to rising appraisal rates.
Meanwhile, higher expenses led CarMax to post a drop in bottom-line profitability. Net earnings rose 9% to $148.8 million, or $0.81 per share, which translates into a 3.6% profit margin compared to 3.7% in the year-ago period.
What to watch
Looking ahead, investors will want to keep an eye on CarMax's operating expenses for signs that they'll begin falling back toward 9% of sales from the 10% they reached this quarter. Most of that increase came from temporary factors like a boost in executive incentive pay and the fact that new store openings sped up. However, the company reduced advertising spending during the quarter, and that benefit isn't likely to show up in future quarters, either. CarMax is also pouring resources into improving its digital sales channel, which threatens to elevate costs over the next few quarters.
In the meantime, CEO William Nash and his executive team intend to move ahead with their plans to add to CarMax's store footprint. There are 15 lots in the pipeline set to launch over the next 12 months, including in major new markets like Macon, Georgia, and Shreveport, Louisiana.
If customer traffic at existing locations weakens much more, perhaps to the point that comps fall into negative territory, then the company might look to pare back on that aggressive store growth pace. For now, though, sales are still rising even if the rate isn't as robust as it has been in prior quarters. And other important metrics, including vehicle pricing and financing demand, support the idea that CarMax has room to add to its relatively small market share in this huge, but fragmented, industry.