CarMax (KMX) recently announced quarterly earnings results that depicted a brutal selling environment over the spring months. Social-distancing efforts fueled collapsing sales volumes and used-car prices also dove during the shutdowns tied to COVID-19.
In a conference call with investors, CEO Bill Nash and his team discussed how CarMax navigated through that crisis while achieving wins in areas like inventory management, gross profit per vehicle, and digital selling capabilities. Executives expressed confidence in rebounding growth rates over the short term and said their experience during the pandemic has them ready to double-down on their plan to make CarMax the leading omnichannel used-car retailer.
Let's look at a few highlights from that presentation.
The depth of the drop
At the peak in early April, sales were down more than 75%. During this time, 95% of the country was under shelter-in-place orders, and approximately half of our stores were closed or under limited operations due to the mandates of public health officials and government agencies.
The auto retailer followed recommended shutdown orders and quickly moved most of its lots to limited capacity and by-appointment-only shopping. But the pandemic still forced sales lower by 75% on the most aggressive shelter-in-place days.
Management noted the swiftest decline in pricing on both the retail and wholesale sides of the business, too. While these metrics help explain the financial stress the company went through in Q1, they don't reflect any fundamental weakness in the business. "We believe our first-quarter results are not indicative of future trends," Nash said.
Bright spots on gross profit
Our strong [gross profit] management is a testament to the strength of our professional buyers; our proprietary algorithms for buying, selling, and appraising cars; and our experience in managing through challenging times.
-- CFO Tom Reedy
CarMax couldn't sustain its long streak of earning between $2,200 and $2,400 of gross profit per vehicle, but managing to post $1,900 per car constituted a win considering the collapsing sales volumes. Executives credited their nimble inventory and pricing systems for protecting profitability despite slumping sales volumes.
Success here combined with aggressive cost cuts to keep the company in the black through the quarter, with net income falling to $5 million compared to $267 million a year ago.
A flexible cash position
We ended the first quarter in a stronger liquidity position than we started.
CarMax made several aggressive financial moves that together left the retailer in a flexible cash position heading into the next phase of the pandemic. Cash holdings are up, inventory is down, and the chain's debt level is holding just below its long-term target range.
Despite those improvements, management isn't confident enough to plow ahead with its prior capital spending plans and has paused initiatives like store launches and stock repurchases. Yet executives believe they have more support for their strategy of building the country's biggest multichannel car-purchasing platform in the wake of a pandemic that has put a premium on at-home shopping. There's no telling what kind of economic pressures will impact car sales over the next few months, or how the latest outbreaks might impact reopening plans.
But CarMax seems ready to take advantage of several potential growth scenarios thanks to its lean financial position and its expanding digital offering. "All of this positions us favorably," Nash said, "to profitably grow market share as the economy and consumer rebounds."