Following a weak start to the fiscal year, investors are starting to believe in CarMax's (KMX 0.83%) growth potential again. The used car giant had good news to report in its last earnings announcement, which showed its fastest expansion pace in over a year. That boost followed an encouraging improvement in shopper trends in late 2018 that have returned the company to modest customer traffic growth.
On Tuesday, CarMax has a chance to extend that positive momentum deeper into fiscal 2019 by showing strong operating results in its fiscal second quarter. While growth is likely to slow from the prior quarter, investors are hoping to see continued market share gains across its 200 stores around the country plus a spike in e-commerce sales.
Let's take a closer look.
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Traffic in stores
Comparable-store sales shot up 10% last quarter to mark a significant departure from the flat result shareholders saw through the full 2018 year. This encouraging start to the year included robust volume in both the used and wholesale segments of CarMax's business, but investors shouldn't expect double-digit growth to continue.
At least part of the increase last quarter came from the timing of federal tax return checks, management said. That factor helps explain why most investors following the consumer discretionary stock are expecting overall revenue gains to slow to around 6% this quarter from 12% last quarter. Looking deeper into that top-line result, keep an eye on whether customer traffic stays in positive territory. Another uptick would suggest gathering momentum, while a decline would show the business hasn't yet stabilized given that comps slowed in each of the last two fiscal years.
The online business
Management has been talking up the potential for e-commerce to boost sales and profits for over a year, and this report will be its first opportunity to put hard numbers behind those bullish predictions. CarMax launched fully online auto purchase functionality in several new markets over the last few months, including Florida, Virginia, and Texas. "We're delivering on an unmet customer need," CEO Bill Nash said after the Texas launch, "for a car buying experience that is flexible, convenient, and completely tailored to each customer."
Nash and his team believe this flexibility is a key competitive advantage since CarMax can use its national network of dealership lots to supplement its online offering to create an unmatched shopping experience. Investors will learn on Thursday whether customers are loving this approach, which is on pace to roll out nationally by the end of fiscal 2020.
Expense management
CarMax's gross profit margin tends to hold remarkably steady at about $2,200 per used vehicle. Thus, it's the changes to its expense burden that have the biggest potential to boost overall profitability. The company has made effective moves in this arena as growth has slowed lately by cutting back on staffing and keeping advertising expenses in check. More success here could deliver robust earnings growth in fiscal 2019 and beyond, but the bigger question going forward is how the move toward multichannel retailing will affect profitability.
Executives have suggested that the shift won't hurt margins and in fact might lift them over time. But investors will have to follow trends like gross profit per vehicle, tech costs, and service and financing attachment rates over the next few quarters to confirm that bullish outlook for themselves.
