Please ensure Javascript is enabled for purposes of website accessibility

CarMax Races Back to Growth

By Demitri Kalogeropoulos – Updated Jun 24, 2019 at 4:58PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors finally saw the revenue rebound they've been seeking for more than a year.

Investors had been pushing the stock of CarMax (KMX -1.43%) higher this year on expectations that the used-car retailer might be on the cusp of an operating rebound. The company didn't disappoint in its first quarterly report of fiscal 2019: It said on Friday that sales growth had accelerated sharply over the last few months.

Other factors contributing to its strong results included favorable lending trends and restrained cost growth. The company's aggressive shift toward online selling, meanwhile, continued to show promise. Let's look at CarMax's latest earnings trends.

A customer receiving the keys to his new car from a salesman.

Image source: Getty Images.

Customer traffic returns

The company endured falling customer traffic in 2018, which contributed to a second straight year of slowing sales growth. Comps were flat last year after rising by 2% in 2017 and by more than 4% in 2016.

The good news is that CEO Bill Nash and his team said trends began improving in late 2018, and this latest report gave investors evidence of the rebound strengthening. Revenue growth shot up to 10%, in fact, to mark CarMax's fastest expansion rate in more than a year. Part of this boost came from a shift in the timing of tax refunds, but the increase also points to firming market-share trends. The retailer returned to customer traffic growth this quarter while also doing a better job at turning more of those browsers into used-car buyers.

More efficiency

The earnings report contained several encouraging signs that management is on the right track with improving its finances. Gross profit per automobile held steady on both the used and wholesale sides of the enterprise. Selling expenses dipped slightly on that basis, too, thanks to restrained growth in wages and advertising.

These gains combined to help net profit rise 12%, and that boost was amplified by stock-repurchase spending so that earnings per share jumped nearly 20%. "CarMax had an outstanding first quarter," Nash said in a press release to investors, citing "strong growth in sales, gross profit, and earnings."

Looking ahead

The improving customer traffic trends bode well for the more than 200 stores in the comps base in 2019. These locations aren't likely to maintain that double-digit growth for the full year but appear set to materially improve on last year's flat result.

Revenue will also be supported by an expected 14 new lot launches over the next 12 months, 9 of which are planned in major metropolitan markets.

And management continues to see multichannel selling as the key to its long-term growth. To that end, it added a fully online car-buying process to most of its Florida markets this past quarter following continued strong demand in its initial test market, Atlanta.

Executives believe the combination of their national store network with a robust online shopping capability will be hard for any used-car rival to match. "No other company is in a better position to deliver this omnichannel experience efficiently and profitably," Nash said. If that prediction plays out, CarMax has a shot at significantly boosting its market share in the used-car industry, which currently sits at just above 4%.

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.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.