For many people, buying a car is a harrowing experience; fears of getting tricked by overzealous salespeople make many would-be shoppers try to avoid vehicle purchases entirely. A host of different business models have aimed to improve the car-buying process for consumers. CarMax (KMX +0.96%) has billed itself as a worthy alternative to higher-pressure sales tactics, and it's worked hard to find better ways to sell cars to bring more customers in its doors.
Coming into Tuesday's second-quarter financial report, CarMax investors had hoped that the auto dealer would build on the positive momentum that it had created earlier in the year. CarMax's numbers were indeed encouraging, and the company thinks it has the long-term vision to maximize its future success.
Rolling forward
CarMax's second-quarter results weren't quite as strong as they were in the first quarter, but they still showed a healthy industry environment. Revenue of $5.2 billion was higher by 9% from year-ago levels, and that was quite a bit better than the 6% growth that most following the stock were looking to see. Net income was higher by 6%, at $233.6 million, and earnings of $1.40 per share were better than the consensus forecast of $1.33 per share.
Image source: CarMax.
Solid fundamentals helped underpin CarMax's growth. Used-unit sales in comparable stores climbed 3.2%, helping to lift total used-unit sales higher by 6.2% from year-ago levels. That was a slower pace than in the first quarter, but those numbers three months ago got a boost from spending related to tax refunds. Growing web traffic helped keep sales climbing.
Other aspects of CarMax's business were also strong. Wholesale vehicle sales climbed 4.7% from year-ago levels, with CarMax buying a higher percentage of appraised vehicles even as the volume of appraisals eased lower. Meanwhile, gains in other sales and revenue accelerated to 8.5%, with a big bump higher in revenue from extended protection plans. Auto finance income was higher by 4% over the same period.
Average selling prices moved higher. On the used-vehicle front, average prices climbed 2.9% to $20,581. Wholesale prices were up a comparable 2.7%, to hit $5,090 per vehicle. Gross profit per used vehicle of $2,183 was stable compared to year-ago levels, but wholesale gross profit per unit climbed about 1% to $928.
CEO Bill Nash was pleased with the news. "Our double-digit increase in earnings per share reflected growth across our used, wholesale, and [finance] operations," Nash said, "along with ongoing share repurchases."
What's ahead for CarMax?
CarMax continues to see its omnichannel efforts driving future success. In a press release, Nash said, "We made significant progress on the roll-out of our omni-channel experience [during the quarter], and we remain confident that this is the future of car buying." The CEO pointed to the platform allowing "customers to move seamlessly between online channels and physical locations"; what's now available to about a third of CarMax's customer base should be rolled out to the majority of shoppers by the end of the fiscal year.
CarMax also kept opening new stores. Three locations opened in the second quarter -- in San Francisco, Phoenix, and Lubbock. The company foresees opening 13 more stores in the next 12 months.
Finally, repurchase activity continued at CarMax. The company spent $128.3 million to buy back 1.5 million shares, which was a somewhat slower pace than in the first quarter. CarMax still has another $1.78 billion left to finance future repurchases.
CarMax shareholders initially seemed to like the news, though after opening higher by about 4%, the stock gave back ground and traded lower around midday. Nevertheless, the auto industry seems fundamentally sound, and CarMax remains in good position to reap the rewards.
