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What CarMax Wants Investors to Know

By Demitri Kalogeropoulos – Jun 26, 2019 at 10:30AM

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The used-car retailer recently explained the key factors driving its latest growth rebound.

CarMax (KMX 4.29%) most recent earnings report showed a return to robust sales growth as shopping trends stabilized in the used-car industry. But with a double-digit sales increase, the automobile retailer did more than just maintain market share over the last few months.

CarMax reported net income for the quarter of $266.7 million, or $1.59 a share, up from $238.7 million, or $1.33 a share, in the year-earlier period. Sales rose to $5.4 billion from $4.8 billion. Analyst consensus was for EPS of $1.49 and sales of $5.2 billion.

Executives are optimistic that this positive momentum will carry through to the rest of the fiscal year and beyond. In a conference call with investors, CEO Bill Nash and his team explained why they're bullish about CarMax's growth initiatives -- especially the move toward multichannel retailing. Below are a few highlights from that presentation.

A smiling customer receiving the keys to his new car.

Image source: Getty Images.

Retailing update

This strength in retail is the result of a combination of many factors, including our solid execution, which was supported by enhancements to the customer experience, a robust lending environment and a delay of February tax refunds into our first quarter.

-- Nash

Comparable-store sales are off to a great start in fiscal 2019, jumping 10% compared to the flat result over the past 12 months. Nash credited delayed income tax refunds for some of the boost but said the bigger factor was CarMax's improved retailing execution. Traffic to its upgraded car-browsing website rose 15%, and customer traffic in stores held flat to mark a slight improvement over the declines from the past year.

CarMax made the most out of that customer traffic rebound by converting more browsers into buyers, culminating in a 13% bump in used-vehicle sales volumes.

Financial moves

We are committed to enhancing shareholder value through continued investment in our associates, our business and our capital structure.

-- CFO Tom Reedy 

CarMax made a number of financial moves in the period aimed at bettering long-term shareholder returns. The biggest priority was reinvestment in the business through the launch of 18 new stores over the past year. In addition, major cash outlays included higher compensation and increased spending on the digital sales channel.

Despite that spending, CarMax found room in the budget to repurchase over $200 million of stock while still allowing net profit to rise 12%.

Racing toward online retailing

As [we] look toward the future, we continue to believe the unique and powerful integration of our in-store and online capabilities provides us with a significant competitive advantage.

-- Nash

Because of the complicated, multistage buying process, CarMax believes most customers will prefer to shop using a mix of online and in-person experiences in the years to come. That judgment forms the basis for the retailer's multichannel sales strategy that pairs a fully online buying option with local customer service hubs.

CarMax only has demand data from one market to review so far, but Nash said early momentum is holding strong in the Atlanta area, where car-buying can occur totally online, including with a home delivery option. While cautioning that financial challenges will occur as they scale the service, management says the digital shopping segment could eventually be more efficient than their core retailing model.

For that reason, CarMax is plowing ahead with its multichannel selling strategy. It is planning to open 14 new lots and two stores dedicated to facilitating online purchasing on its way toward a national rollout over the next year or so. "We remain on track to provide our omnichannel experience to the majority of our customers by the end of fiscal year 2020," Nash said.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends CarMax. The Motley Fool has a disclosure policy.

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