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CarMax Keeps Dealing With Auto Industry Headwinds

By Dan Caplinger – Apr 4, 2018 at 3:06PM

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Sales growth slowed almost to a standstill.

The automotive market has seen a lot of volatility lately, with a mix of economic factors hitting the sector from all sides. CarMax (KMX -0.14%) has done its best to navigate a difficult environment, and it's successfully found ways to deal with unforeseen events like summer hurricanes in key markets. Yet trends toward slowing sales have made some people nervous about CarMax's future.

Coming into Wednesday's fiscal fourth-quarter report, CarMax investors wanted to see evidence that the car seller could return to a more stable growth trajectory. Unfortunately, the company wasn't able to do that, and with declines in earnings on flat sales, fears about CarMax appear to be justified. Let's take a closer look at CarMax and what its latest results say about its future.

Front of CarMax dealership, with large sign and a few vehicles.

Image source: CarMax.

CarMax hits the skids

CarMax's fiscal fourth-quarter results didn't get the job done in many respects. Sales inched higher by just 0.8% to $4.08 billion, and that was well short of the 3% growth rate that most investors had wanted to see. Net income dropped 20% to $122.1 million, and even after accounting for various one-time items, adjusted earnings of $0.74 per share couldn't match the $0.87-per-share consensus forecast among those following the stock.

Tax reform played a role in holding CarMax back. The company said that revaluation of deferred tax assets cost the company $32.7 million in tax charges during the quarter. That was only partially offset by $20.8 million in gains due to the lower tax rate that was in effect for much of the fiscal quarter.

Yet fundamental trends in the key retail used car business remained weak, and that was a source of concern. Total used car unit sales dropped more than 3% in the quarter, with comparable-store used unit sales plunging 8%. Lower store traffic was the biggest factor, and CarMax could only achieve flat conversion rates.

Elsewhere, CarMax's performance was mixed. Wholesale vehicle unit sales jumped nearly 9%, with the growth in CarMax's store network and an increase in the company's appraisal buy rates both contributing to better performance. However, other revenue was down 4.5% from last year's fiscal fourth quarter, as extended protection plan sales fell more than 2% and third-party finance fees were also down from year-ago levels.

CarMax did get some help from average selling prices. Figures for used vehicles were up 2.5% from year-ago levels to just under $20,000, while wholesale vehicle prices were higher by more than 3% to just above $5,075. Gross profit per unit was higher by double-digit percentages on both the used and wholesale channels.

What's down the road for CarMax?

CEO Bill Nash wasn't entirely pleased with the company's performance. "We're disappointed in our fourth quarter comparable store unit sales performance," Nash said, "which we believe was partly affected by macro pricing factors resulting in a softer sales environment."

Yet CarMax will keep relying on new store expansion to help it boost its top line. The company announced plans to open 15 stores in fiscal 2019 and 13 to 16 stores in fiscal 2020, with two-thirds of the openings over the next year coming in smaller markets of 600,000 people or less. All but two of the planned new locations for the coming year are in the south, including three in Louisiana and two each in North Carolina, Florida, and Texas.

Investors can also take heart from the fact that CarMax has continued to buy back its stock. The company spent $127.8 million to repurchase 1.9 million shares during the fiscal fourth quarter, and that leaves more than $1 billion remaining in its authorized repurchase plan for future buys.

CarMax shareholders seemed content despite the less-than-stellar results, and the stock climbed 4% in regular trading following the Wednesday morning announcement. Yet for gains to continue, CarMax will need to start seeing sales move in the right direction again. Otherwise, what's been a good story could come to a screeching halt in short order.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends CarMax. The Motley Fool has a disclosure policy.

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