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CarMax Earnings Preview: What to Watch for on Friday

By Demitri Kalogeropoulos - Jun 22, 2021 at 7:30AM

Key Points

  • CarMax is benefiting from rising demand and higher new car prices.
  • Market share should begin climbing again after falling through the pandemic.
  • Look for management to discuss their aggressive push into online retailing.

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The used-car retailer should have mostly good news for investors this week.

CarMax (KMX -0.17%) share prices have had a wild ride since the start of the pandemic. While the stock initially slumped as demand for cars plunged early last year, returns have beaten the broader market so far in 2021. Investors are excited about the prospect of stronger sales, lower credit write-offs, and rising prices ahead for the leading pre-owned vehicle retailer.

With that big picture in mind, let's look at what investors can expect to hear from the company in its earnings report slated for release on Friday, June 25.

A couple shopping for a car as a salesperson shows them a car's interior.

Image source: Getty Images.

What's driving the rebound?

All the ingredients are in place for a sharp growth rebound. In fact, Wall Street analysts are expecting revenue to jump 129% year over year to $6.23 billion.

Sure, most of that spike is due to the unusually weak year-ago period that included aggressive COVID-19 containment measures. But CarMax said in its last earnings report that sales accelerated into the start of fiscal Q1.

Federal stimulus payments, declining COVID-19 cases, and warmer weather all combined to set a new March sales record, CarMax executives said in early April. Look for more records to be set in this upcoming report, as compared to 2019's sales levels.

Market share is another growth metric worth following to cut through pandemic-related volatility. That number took a hit during the pandemic, falling to 4.3% from 4.7%. Management said in April that the figure was growing again, and investors will be looking for confirmation of that optimistic reading on Friday.

Profitability wins

CarMax has dealt with a wide variety of selling conditions in recent years as demand for new cars rose and fell. Pricing and availability for these premium products play a big role in setting terms in the used-vehicle segment.

But through those swings, CarMax routinely earns between $2,000 and $2,400 in gross profit per vehicle sold. Investors might see unusually strong profits this week, thanks to supportive industry trends like high demand and rising new car prices.

CEO Bill Nash and his team aim to balance that earnings growth with investments aimed at keeping market share rising. "Our goal," he told investors, "[is] to maximize both unit sales and long-term profitability."

Looking ahead

Management will make some general comments about the strength of the business heading into the new fiscal year, including around inventory, pricing, and demand. These predictions might grab most investors' attention immediately following the report on Friday. Currently, most investors expect CarMax's sales to rise by about 20% in this new fiscal year.

Looking further out, the company has a good shot at achieving a materially higher market share, now that the industry is growing again and customers are once again shopping in its lots. CarMax has one of the biggest, most comprehensive online-vehicle selling platforms in place today.

While spending on that channel might pressure earnings in the coming quarters, the platform gives the retailer a chance to connect with new buyers and target a much bigger piece of the massive used car industry. That helps explain why management is hoping to breach the 5% market-share mark by 2025 while boosting sales at a 10% compound annual rate over the next few years.

Demitri 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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