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CarMax Overcomes Historic Challenges to Stay Profitable in Q1

By Demitri Kalogeropoulos – Jun 19, 2020 at 4:29PM

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These earnings headwinds are likely to linger through the rest of the fiscal year, though.

Investors were not expecting to hear much good news from CarMax's (KMX -0.35%) fiscal 2021 first-quarter earnings report. That period covers March, April, and May -- three months capturing the most intense impact to date from the COVID-19 pandemic that kept most of its automotive lots shuttered.

It wasn't a surprise, then, to see sales and profitability collapse in Q1. But the leading used car retailer revealed some encouraging metrics in this report, too. Let's take a look.

Limited sales outlets

With over 80% of the selling days in the quarter impacted by social distancing mandates, CarMax's business was stressed, to say the least. Used car volumes dove 40% as customer traffic slumped and most of the company's lots either closed or switched to limited capacity. The chain also saw its wholesale business shrink by 48%. That division endured a similar traffic decline, but that factor was amplified by huge swings in the appraisal value of used cars.

A salesman shows a couple the interior of a car.

Image source: Getty Images.

Several positive trends showed up in this report. CarMax held the line on pricing overall, and it even managed a 1.5% increase in used-vehicle pricing. This win helped support its gross profit per vehicle, which fell to only $1,900, or 9.4% of the sales value, compared with $2,200, or 10.9%, in recent quarters.

The company also made some aggressive cost-cutting moves that together sent expenses down 24%. Management highlighted that success and CarMax's progress in moving more of its business online as key wins in the period. Executives were also happy with their ability to reduce inventory levels in conjunction with reduced demand. "We accomplished a lot this quarter," CEO Bill Nash said in a press release, "despite the challenges the pandemic posed."

Looking forward

The forward-looking metrics suggest a bumpy ride for investors over the next few quarters. Sure, CarMax succeeded in reducing inventory, moving more of the wholesale and consumer businesses to its digital sales channels, and slashing costs. The chain also noted accelerating demand trends for several weeks now, stretching back to late May. "Sales have progressively improved since hitting a trough in early April," according to executives.

But comps are still down by double digits in early June, management said. CarMax has also had to ramp up its loan-loss provisions as economic pain produces more uncollectible auto debt. Its finance division booked an $84 million writedown this quarter, and that figure might increase if the recession deepens or stretches on.

Nash said that CarMax's business model is both flexible and stronger than many of its competitors' and that much is clear from the fact that the chain could generate a profit under historically awful selling conditions. Net income landed at $5 million this quarter, down from $267 million a year ago.

Shareholders will still have to be patient while they wait for the automotive business to return to its past earnings potential. The pressures on CarMax's lot traffic and financing divisions, for example, are likely to stick around at least through the rest of fiscal 2020.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends CarMax. The Motley Fool has a disclosure policy.

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