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CarMax Earnings: 3 Things to Watch

By Demitri Kalogeropoulos - Dec 20, 2018 at 9:20AM

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The metrics that investors will be following in Friday's earnings report.

Can CarMax (KMX 1.83%) make it three-for-three? The used-car retailer is in the middle of a shaky growth rebound, having gone from substantial year-over-year sales declines last year to just barely get back to positive sales growth. It's aiming for a third-straight acceleration in revenue gains in its upcoming financial report, but will have to overcome some challenges to accomplish that.

Let's look at those issues and the key metrics to watch in the announcement set for Friday, Dec. 21.

A customer shakes hands with a car salesman.

Image source: Getty Images.

Selling more cars

Sales growth returned last quarter, improving to a 2.1% gain from a 2% drop in the prior quarter and an 8% decline at the end of fiscal 2017. Investors will look for another positive result on this metric on Friday to demonstrate that CarMax's sales have stabilized.

Looking beyond the top line, we can expect an update on two trends that have hurt the retailer's business lately. First, customer traffic has been declining for almost a year, making it much harder to keep growth on track. CarMax has counteracted that by boosting its conversion rates both online and in its lots. But those efficiency gains can only go so far. The chain will need to return to at least modest traffic growth to support rising revenue targets.

Then there are the pricing challenges that have been pushing costs higher. CEO Bill Nash and his team aren't sure what's driving the volatility in CarMax's acquisition costs, but they said back in September that tariffs could be hurting the industry by spurring unusually high demand for new vehicles, relative to used ones. Executives should explain on Friday how these challenges played out in the third-quarter results, especially with respect to earnings. If CarMax can maintain its profitability, with gross profit per vehicle holding steady at around $2,200, then the pricing problems haven't posed a significant threat to its profit power.

Other growth avenues

Expanding its store base is a pillar of CarMax's growth plan, so any update on this topic will be worth investors' attention. It was a busy quarter on that score, with car lots opened in new metropolitan markets in North Carolina, Texas, and Louisiana. The retailer is aiming to tack on about 15 locations this year, and investors should get an update on Friday about the strength of that expansion, including whether CarMax plans to maintain that pace heading into 2019.

Finally, expect management to spend plenty of time talking about its digital sales strategies. That's because, in contrast to the weakening traffic volume at a typical store, its website is handling many more visitors lately. The demand has been strong enough to convince CarMax to put serious resources behind moving as much of the car shopping process online as possible. In fact, it recently launched a trial program that allows a shopper to conclude the entire purchase without having to set foot on a lot.

The program is only available in one of CarMax's metro markets today. But if it works as well as management hopes, then investors can expect to see the program rolled out nationally in 2019.

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