Investors reacted to CarMax's (NYSE:KMX) recent earnings report by sending shares 6% lower. The used car retailer announced plenty of good news, though, including a double-digit spike in unit sales as industry selling conditions improved. That success was paired with mixed financial results, as spiking expense spending reduced pre-tax earnings.
In a conference call with Wall Street analysts on Dec. 20, CEO Bill Nash and his team broke down the third-quarter numbers while discussing their outlook for the rest of the year. Below are a few highlights from that presentation.
Supporting faster growth
"We attribute our sales growth to a variety of factors including solid execution in operations, finance, customer progression, and marketing, in addition to an overall favorable used car sales environment," Nash said.
Investors finally got the growth acceleration they've been waiting for as comparable-store sales jumped 8%, thanks to an 11% increase in used vehicle volume. That comp boost was more than double the expansion rate from the previous quarter.
Management said growth was supported by better industry dynamics, including the pricing spread between used and new vehicles. CarMax benefited from a few successful initiatives, too, including the rollout of omnichannel shopping in more markets, a boost in the warranty period to 90 days from 30, and a national marketing campaign.
Spending more cash
Nash said: "Our teams have done an exceptional job in continuing to drive efficiencies, allowing us to maintain margins while offering competitive prices."
Executives warned investors back in September to expect higher expenses, and that prediction played out in the third quarter. While the consumer stock's gross profit per vehicle ticked up to $2,145, CarMax spent more on servicing expenses tied to the warranty period increase while also allocating far more on advertising. These changes combined with higher stock-based compensation spending to push pre-tax profit down to $228 million, or 4.8% of sales compared to $248 million, or 5.8% of sales a year ago.
Management stressed the bigger-picture financial position that shows a 4% boost in pre-tax income over the past three quarters. Expenses would be lower on a per-unit basis for the year, too, if not for the higher stock-based compensation spending that's being driven by CarMax's rising stock price.
Questions remain on e-commerce
Nash explained: "Approximately 40% of our customer base currently has access to our omnichannel experience, and we are on track to reach the majority of our customers by the end of this fiscal year in February. We plan to complete the rollout in the next fiscal year."
CarMax is still running full speed ahead with its online purchasing offering, and there are a few encouraging early data points on that initiative, including the fact that markets with the multi-channel experience are growing faster than their single-channel counterparts.
Yet executives noted that the attach rate for financing is lower on these online purchases, and CarMax is also seeing lots of inefficiencies as it staffs its shopping and pick-up centers for the first time.
Management says it is still confident that this new approach will drive faster sales growth while improving profitability as compared to the traditional selling model. Investors won't have to wait long to learn whether that prediction is playing out since the omnichannel shopping experience will reach the majority of its customer base by February and will be available through its entire network by the end of fiscal 2020.