CarMax (KMX 1.32%) recently announced second-quarter earnings results that kept it on pace to log accelerating sales growth after two consecutive years of slowing gains. The used car seller also achieved its second straight quarter of double-digit earnings growth thanks to restrained costs and rising selling prices.
CEO Bill Nash and his team are predicting that this profitability boost will reverse itself over the next six months, though, as the company spends most of its annual marketing budget. Executives discussed those plans, plus their wider e-commerce ambitions, in a conference call with Wall Street analysts. Below are a few highlights from that presentation.
Steady growth at stores
The retail performance was driven by strong conversion and continued growth in web traffic.
As expected, comparable-store sales growth slowed from last quarter's tax-return-fueled 10% spike. It stayed in solidly positive territory, though, with comps landing up 3% overall. That improvement was supported by 6% higher sales volumes for used cars and a 5% spike in the wholesale side of the business.
The results suggest that customer traffic was modestly lower across CarMax's network of over 200 stores. Yet that sluggishness was offset by a higher conversion rate of browsers into buyers, and by booming demand online. CarMax's website traffic jumped 16%, management said, to mark a modest increase over the prior quarter's gain.
Expect higher costs ahead
Similar to the first quarter, [selling-expense spending] was light due to timing of advertising expense, which we expect to step up in the back half of the year.
-- CFO Thomas Reedy
Profitability was steady at 6% of sales as lower selling expenses offset weakness in other cost areas. Yet investors should be prepared to see margins weaken over the next six months if growth doesn't stay elevated.
That's because CarMax has shifted most of its annual marketing spending to the back half of the fiscal year, and that timing coincides with ramped-up investments in the omnichannel shopping platform. Executives estimate that comps will need to land between 5% and 8% for profitability to improve for the full year, though, and so far growth has been right in that range over the past six months.
Online car buying is the future
Customers continue to tell us they value an omnichannel experience, empowering them to shop on their terms whenever and wherever is most convenient for them. The unique and powerful integration of our in-store and online capabilities provides us with a significant competitive advantage that no other used car retailer can offer at our size and scale.
Executives say they're as bullish as ever about their move to put the entire car-buying experience online. The initial uptake by shoppers has been encouraging, and CarMax's ability to pair e-commerce functionality with in-person help through its national store network has the potential to deliver defensible market share gains.
Unfortunately, it will be some time before investors get concrete numbers to review on this process since the consumer discretionary stock only recently added online buying to major markets like Florida and Texas. The company won't really know the full potential there until it starts marketing the new functionality over the coming months.
Meanwhile, there will be plenty of bumps along the way as CarMax learns from the online rollout. Yet management is still confident that the move will boost the broader business. "We continue to believe that this [omnichannel approach] will be a more efficient model than our current [one]," Nash said.