CarMax (KMX +2.28%) isn't immune to the effects of the COVID-19 pandemic swamping the U.S. economy. The auto retailer specializes in used, mass-market brands, so its sales aren't likely to be as pressured by an economic downturn as sales at luxury retailers like Penske Automotive. Still, lower customer traffic plus a drop in incomes signals revenue declines ahead.
Investors will hear key details about those threatened growth and profitability trends when CarMax posts its fiscal fourth-quarter earnings results on Thursday, April 2. They'll also get a much-anticipated update on the retailer's push into e-commerce, which might drive most of its sales volumes during the temporary social-distancing mandates in parts of the country today.
Let's take a closer look.
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Good fiscal 2020 trends
CarMax's backward-looking metrics should be strong. After all, this fiscal fourth quarter runs through late February, a period that doesn't include the ramp-up of social distancing in states like New York and California.
Its last earnings report contained plenty of signs of positive momentum, too, with sales increasing 8%, double the pace of the prior quarter. Management said back in December that a few factors contributed to that growth spike, including more-favorable industry pricing dynamics and the rollout of digital shopping to more metro markets .
Keep an eye on profitability to judge whether that growth is coming at a price. CarMax's gross profit per vehicle has held steady at about $2,400 for several quarters, and a similar result this week would be good news for the business since it would show strength in the industry heading into the COVID-19 slowdown.
The online future
CarMax executives have been encouraged by the early results of their digital sales initiatives, even to the point of predicting that this channel should support faster growth without hurting key metrics like profitability and the attach rate of servicing, warranty, and financing packages. The company recently expanded the e-commerce service to just over half of its sales base, and so management can now infer some important details about how the service might affect the business over time.
That multichannel selling posture will come in handy now that many major metropolitan governments are asking residents to stay at home in a bid to limit the spread of COVID-19. CarMax can help many of these shoppers complete the entire purchase experience online, from trade-in valuation to financing, before the car is delivered to their home or workplace.
Looking further out, the consumer discretionary business would certainly be affected by any recessionary period that follows, so look for CEO Bill Nash and his team to discuss their plans for cutting costs and protecting market share in the coming months. These executives won't have any special insight into the duration of any potential downturn, but they will have a good reading on how CarMax's financial assets can serve the business through what promises to be a difficult start to fiscal 2021.
