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CarMax Sees Slowing Growth in Used-Car Sales

By Dan Caplinger - Dec 21, 2017 at 11:42AM

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Find out the latest challenges facing the auto retailer.

CarMax (KMX -3.30%) has done a good job of profiting from the rise in demand for used cars in recent years, and its approach to the market gives its customers an ability to choose from a wide selection of vehicles across a nationwide network of dealers. The company has even been able to overcome hurricane-related challenges to keep its fundamentals strong, and solid conditions in the U.S. economy point toward continued favorable tailwinds for the auto market generally.

Coming into Thursday's fiscal third-quarter report, CarMax investors weren't sure what to expect from the auto retailer, with some company-specific concerns seeping into a generally favorable outlook for the industry. Results showed ongoing growth but at a slightly slower space than many shareholders had hoped to see during the period. Let's look more closely at CarMax to see what it said and what's ahead in 2018.

CarMax dealership location with large entryway cover and several cars parked in front of the building.

Image source: CarMax.

CarMax drives onward

From an investor's perspective, CarMax's fiscal third-quarter results were mixed. Sales were up 11% to $4.11 billion, which was considerably stronger than the 7% gain on the top line that many of those following the stock had expected to see. Net income, however, grew at a slower pace of 9% to $148.8 million. The resulting earnings of $0.81 per share fell just a bit short of the consensus forecast among investors.

Moderation in the pace of growth in used-car sales was a key part of the report. Total used vehicle unit sales were up 8% from the year-earlier quarter, slowing from 11% growth three months ago. Comparable-store used-unit sales were up just 2.7%. CarMax said that lower store traffic was again a concern, offsetting some of the increases in sales conversion that the retailer achieved. Moves to get more vehicles to hurricane-affected areas helped bolster CarMax's results as well.

On the wholesale side, CarMax saw things pick up dramatically. Total wholesale unit sales were up 9%, and the company credited sizable boosts in its appraisal buy rate for the gains. Revenue from other sources was up 5%, boosted by a 10% jump in extended protection plan sales.

Pricing returned to more favorable trends. Average sales prices on used vehicles climbed 2.5% to just above the $20,000 mark, while wholesale vehicle prices rose by more than 3% to $5,268. However, gross profit per unit was down overall by about 1%, as declines in margin for used cars offset better profits from wholesale vehicles.

Can CarMax hit the gas?

Store openings remain a key aspect of CarMax's growth plans, and expansion accelerated during the quarter. Five new stores opened, with additional locations in the Philadelphia, Las Vegas, San Francisco, and Seattle markets as well as a store in a new market for CarMax in Tyler, Texas. That met the company's expectations for the quarter, and the entry into Tyler marks just one of many new locations planned in relatively small population centers over the next 12 months.

One big boost could come from the recently passed tax reform bill. CarMax did report a substantial drop in its income tax rate during the period, but at 34%, it still has a fairly high tax burden. With new corporate tax rates of 21% set to take effect in 2018, the impact on CarMax could be dramatic heading into the coming year.

Nevertheless, shareholders weren't happy about signs of potentially slowing growth, and the stock fell 3% in mid-morning trade following the announcement. In order for CarMax to make the most of its opportunities for growth, it will have to keep expanding its network while focusing on measures that will keep it ahead of rising competition in the years to come.

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