CarMax (NYSE:KMX) is the nation's largest auto retailer, and that scale gives it major advantages over local and regional competitors. But the company is still subject to the same pricing pressures that pinch the industry when new car manufacturers ramp up their promotions.

That issue affected CarMax's fiscal first-quarter results. Yet, as management predicted back in March, the challenge appears to be lessening with each passing quarter.

Here's a look at how the latest results stacked up against the prior-year period: 

 Metric

Q1 2018

Q1 2017

Year-Over-Year Change

Revenue

$4.79 billion

$4.54 billion

3%

Net income

$239 million

$212 million

13%

Earnings per share

$1.34

$1.14

18%

Data source: CarMax's financial filings. 

What happened this quarter?

Revenue inched higher thanks to a growing store base as CarMax's sales at existing locations dipped for the second straight quarter due to reduced shopper traffic. Profitability held steady, though, and sales trends improved when compared to the prior quarter.

A customer receives the key to his new car purchase.

Image source: Getty Images.

Highlights of the quarter include:

  • Comparable-store sales dropped 2.3%. Yet that result was a big improvement from the prior quarter, which included an 8% comps slump. Management blamed falling shopper traffic that was only partially offset by CarMax's success in turning more browsers into buyers during the quarter.
  • Gross profit held steady at $2,200 per used vehicle. However, the reduced sales pressured the service side of the business, so gross profitability dipped to $661 million, or 13.8% of sales from $649 million, or 14.3% of sales, a year ago.
  • Expenses ticked up as CarMax spent more on stock-based compensation and on improving its customer shopping experience both in stores and online. As a result, earnings before taxes fell to 6.7% of sales from 7.4%. That decline was wiped out by a falling tax rate that left bottom-line profitability at 5% of sales compared to 4.7% of sales in the year-ago period.
  • The retailer opened three new stores, two of which were in existing markets, and one, in Greenville, North Carolina, representing a new market entry.
  • CarMax spent over $200 million repurchasing shares, and the falling share count allowed per-share earnings to expand by 18% even as net income rose by a more modest 13%.

What management had to say

Executives said the slight sales decline was a result of a few challenges, mainly reduced store traffic and a difficult comparison to a prior-year period that included 8.2% higher comps. Management cited unusually low new-car prices as a key reason for last quarter's struggles, and that situation only got a bit better in the most recent quarter.

"While our comparable store unit sales performance improved significantly from the February 2018 quarter," CEO Bill Nash said in a press release, "we believe macro pricing factors still had some effect on our first quarter sales."

Looking forward

While Nash and his team wait for the pricing challenges to naturally lessen over time, they're focused on extending their scale advantage by adding stores to the sales base. CarMax is targeting 15 new locations this fiscal year to roughly match the robust expansion pace from 2017. Perhaps reflecting the softer selling conditions, the retailer is shifting its growth plans a bit so that they favor smaller markets over the larger, more competitive metropolitan areas.

That growth strategy is the best way CarMax can press its advantage in the fragmented used car industry. Not only does it make advertising spending more efficient, but the bigger sales base also gives the retailer a leg up on local rivals in the digital sales channel, which smaller companies aren't able to target nearly as aggressively.

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.