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CarMax Talks Used-Car Pricing, Store Expansion, and Growth Plans

By Demitri Kalogeropoulos – Apr 13, 2018 at 10:00AM

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Highlights from the used-car retailer's latest earnings call with Wall Street analysts.

CarMax (KMX -1.60%) recently posted quarterly earnings results that were marked by a slowdown in sales growth. The used-car retailer endured a painful drop in customer traffic, which led sales to inch higher by less than 1% despite an aggressive expansion in its store base.

Following the results, CEO Bill Nash and his team held a conference call with Wall Street analysts. Management used that time to explain the key factors behind the growth slump and what CarMax plans to do to get sales back on track.

Here are a few highlights from that discussion (all quotes are Nash's).

A smiling customer wearing sunglasses with his left hand outstretched to receive the key to his new car

Image source: Getty Images.

It's a pricing issue

The pricing spread between new and late-model used vehicles was pressured, which we think adversely affected our sales.

CarMax faced a tough comparison against a prior-year period that saw comparable-store sales spike higher by almost 9%. Yet management said they were still disappointed that comps fell 8% this quarter.

Pricing was apparently the main culprit, as new-car manufacturers ramped up their promotions to keep their inventory moving. That pricing issue should correct itself over time, executives said. Meanwhile, the company estimates that it gained market share for the full fiscal year and sees no evidence of a rising threat from used-car rivals. "We feel very comfortable on the competitive landscape at this point," Nash explained.

Wins during the quarter

Our website traffic grew in the fourth quarter by 16% as we continue to enhance our website and SEO capabilities. Gross profit per used unit once again remained consistent at $2,147, compared to $2,134 in the fourth quarter of last year.

In addition to market share gains, CarMax managed a few important wins in the period. These included healthy growth in the e-commerce sales channel, steady profit per vehicle, and a healthy uptick in average selling prices.

The retailer's financing arm turned in healthy results, too, as loan losses declined and average financing volume rose in conjunction with the higher sales prices.

Shifting expansion plans

During fiscal 2019, we once again plan to open 15 stores, 10 of which will be in what we define as small markets. We also plan to open between 13 and 16 stores in fiscal 2020.

CarMax's store expansion allowed used-car volumes to fall at just a 3% pace despite the traffic decline at existing locations. That success combined with rising selling prices to keep overall revenue in positive territory this quarter.

A salesman stands in front of a showroom car that's covered with a white dropcloth.

Image source: Getty Images.

Executives kept their aggressive store growth plans in place although they are now expecting to focus a bit more on smaller markets. CarMax is planning for about two-thirds of this year's new lot launches to occur in metropolitan areas of 600,000 people or less, compared to roughly half of last year's crop.

Growth initiatives

This coming year, we will continue to focus on meeting the customer on their terms whether it's in the store, online, or a combination of the two. Customers want flexibility and control in their shopping and buying experience.

CarMax has a few growth initiatives that might positively impact results in 2018. The company just finished rolling out a new customer relationship management (CRM) platform, for example, that it believes will create a more seamless and personalized buying experience. It's also testing an expedited pickup feature that allows customers to perform almost all elements of the purchase from home before a quick 15-minute trip to the store to collect their new car.

The digital shopping channel will see other important upgrades, too, including better interior photo capabilities and a mobile appraisal platform for customer trade-ins. Ideally, these moves will help keep sales moving in the right direction while CarMax waits for the spread between new- and used-car prices to return to its historical average, removing a major source of pressure on its business.

Demitrios Kalogeropoulos 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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