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CarMax Shifts Back to Growth

By Demitri Kalogeropoulos - Sep 26, 2018 at 5:35PM

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The used-car giant keeps finding ways to boost sales despite sluggish in-store traffic.

CarMax (KMX 1.14%) investors have been patiently waiting for concrete evidence that the retailer's sales growth trends would rebound as selling conditions improved in the industry. Executives have explained away recent declines as just temporary speedbumps, after all, driven by pricing conditions at new car dealerships.

On Wednesday, the used-car giant backed up that optimistic prediction with quarterly numbers that showed solid sales gains while earnings jumped thanks to lower taxes.

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

 Metric

Q2 2018

Q2 2017

Year-Over-Year Change

Revenue

$4.8 billion

$4.4 billion

9%

Net income

$221 million

$181 million

22%

Earnings per share

$1.24

$0.98

27%

Data source: CarMax's financial filings.

Highlights from the quarter

Sales trends improved for the second straight quarter thanks to the combination of a rising store base and higher sales at existing locations. CarMax's operating profitability slipped due to heavier spending in areas like advertising and new store launches. Yet a lower tax rate ensured that earnings expanded at a healthy clip anyway.

A customer shakes hands with a car salesman.

Image source: Getty Images.

Highlights of the quarter include:

  • Comparable-store sales rose 2% to mark the company's second straight improvement on this metric and its first positive growth result since the third quarter of 2017. CarMax reported another slight drop in store traffic, but the decline was offset by better conversion rates both online and in its physical lots.
  • Used-car sales volumes sped up to a 6% increase from 2% in the prior quarter. Wholesale volumes jumped, too, rising 15%.
  • Gross profit per vehicle held steady at about $2,200.
  • Expense growth outpaced revenue gains due to the timing of advertising spending and costs associated with CarMax's push into digital sales. As a result, before tax earnings amounted to $290 million, or 6.1% of sales. That's the same profit haul as a year ago, but CarMax was more profitable in that period as earnings accounted for 6.6% of sales.
  • The company added three stores to its base during the quarter to bring its growth to 18 locations over the past 12 months. Its footprint stands at 194 locations spread out across 41 states

What management had to say

Executives credited strong execution for helping deliver its return to comparable-store sales growth. "The performance primarily reflected improved conversion," they explained in a press release, referring to the rate at which browsers turn into buyers, "which we believe benefited from the solid performance of our store teams and contributions from our digital initiatives."

These gains were just partly offset by another decline in customer traffic, management said.

Looking ahead

CEO Bill Nash and his team still expect to open 15 stores during this fiscal year, with just over half of those locations coming in relatively small markets. The next two quarters will be especially busy on this score as four lots launch in the third quarter and five are on track for a fourth-quarter opening.

Meanwhile, investors are hoping that CarMax's positive volume trends extend deeper into the new fiscal year, which seems likely given the robust conversion and pricing gains the company just posted. Management would no doubt like to see their customer traffic levels stabilize after shrinking for several consecutive quarters. However, CarMax has demonstrated that it can sell more cars through its physical and online sales channels even during a period of sluggish shopper visits. That's good news for the business and for its shareholders.

 

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