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CarMax Looks Toward E-Commerce for Growth

By Dan Caplinger – Dec 21, 2018 at 12:58PM

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The auto dealer is giving customers every opportunity to make purchases.

The e-commerce revolution has changed the way people shop, putting a high value on quick delivery and broad product lines. Many once thought that the auto industry would be immune to the pressures of online shopping because of the desire to test-drive vehicles before purchasing them. Yet the convenience of using the internet is undeniable in an industry known for high-pressure sales tactics, and CarMax (KMX 2.64%) is looking to make maximum use of technology to give its customers as many different ways to buy cars and trucks as possible.

Coming into Friday's fiscal third-quarter report, CarMax investors had high expectations for growth in sales and profits. CarMax was able to deliver the goods on much of what investors had wanted to see, and moves in the e-commerce front promise new avenues for future growth along with an awareness of what it takes to attract a new generation of car-buyers to its dealerships.

Two-story building with CarMax triangular carport on columns in front, with several vehicles nearby.

Image source: CarMax.

How CarMax drove forward

CarMax's fiscal third-quarter results were generally solid. Revenue climbed 4.6% to $4.30 billion, which was just shy of the 5% growth rate that most of those following the stock had wanted to see. Net income of $190.3 million climbed 28% from year-earlier figures, and the resulting earnings of $1.09 per share came in well above the consensus forecast among investors for just $1 per share.

Yet to a large extent, CarMax relied on the growth in its dealer network to boost its financial performance. Comparable-store used vehicle sales were down 1.2%, losing the momentum CarMax had generated in the previous quarter when it saw a nice increase in comps. Used vehicle unit sales were up 2.3%, but lower store traffic played a key role in holding the numbers down. In addition, the year-earlier period was especially strong in the aftermath of Hurricane Harvey, when those in the Houston area who lost their vehicles in the flooding had a huge positive impact to CarMax's six stores there. The company estimates that this had a negative impact of 3.5 percentage points on comps. Gross profit per used car also fell slightly, declining $15 to $2,133.

CarMax's other businesses helped the company stay stronger. Vehicle unit sales on the wholesale side were up 10%, and that sent gross profit higher by nearly 12%. Gross profit per unit climbed $16 to $949 per vehicle, and higher appraisal buy rates helped to keep the segment healthy. In the other sales and revenues division, strength in extended protection plan sales helped lift segment revenue by 12%.

Vehicle pricing was mixed. Used car prices climbed more than 1% to $20.273 per vehicle, but wholesale prices eased lower by 1% to $5,214.

CEO Bill Nash was happy about the way CarMax held up. "We are pleased to report solid growth," Nash said, "despite having soft comparable store used unit sales this quarter." The CEO went on to explain how the company's diversified business model helps it stay resilient, even under challenging conditions.

Can CarMax make a big splash?

Yet CarMax also has a strategy to promote growth. Nash set out CarMax's strategy for incorporating e-commerce to an even larger extent than it has traditionally:

We are also excited to introduce our omni-channel experience in Atlanta, where consumers can now customize their car buying experience, whether they want to buy a car completely from home, in-store, or most importantly, through a seamlessly integrated combination of online and in-store experiences.

The company hopes it'll be able to boost its overall business by incorporating these improvements.

CarMax also kept repurchasing its shares. Buybacks amounted to 3.7 million shares for $254 million. With the company having added another $2 billion in authorized purchases during the quarter, there's no clear end in sight to CarMax's buyback activity.

CarMax shareholders celebrated the news, and the stock was higher by nearly 5% at midday following the announcement. Some are growing nervous about a potential economic slowdown that could hit discretionary spending on vehicles in the future, but for now, investors are happy that CarMax is firing on all cylinders.

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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