CarMax (KMX -2.21%) is capitalizing on an unusually positive selling environment for used cars. The automotive retailer just reported strong sales gains, compared to both the comparable 2020 and 2019 period, as consumers eagerly upgraded their wheels.

CarMax also boosted its inventory through is popular trade-in program, leaving it in a great position to fill more demand over the next few quarters. Let's take a closer look.

A person handing a car key to a couple.

Image source: Getty Images.

Sales jumped

It's no surprise that sales improved compared to a year ago when many of CarMax's lots were operating at a fraction of their capacity due to pandemic restrictions. Yet the scale of the rebound was impressive.

Revenue jumped 65% year over year, to $8.5 billion. Sales are up 77% in the past two years, in fact. "Our top-line momentum continued," CEO Bill Nash said in a press release, "and we achieved record levels of third-quarter unit sales."

The retail segment saw a 17% spike in volume, with car sales rising to 227,000. CarMax's new online platform accounted for 9% of those transactions, up from 5% a year ago. The wholesale division expanded more quickly, thanks mainly to the tight supply of used cars on the market. Overall, CarMax delivered 415,000 automobiles, up 29%.

Rising prices

Prices soared, compared to a year earlier, when they were depressed by the pandemic. CarMax noted a 31% spike in retail-vehicle prices and a 58% boost on the wholesale side of the business. That increase allowed the company to recover all the ground it lost during the COVID-19 slump. Gross profit per vehicle is sitting at $2,200, or about the same level as before the pandemic struck.

Its financing arm is benefiting from the hot economy, but that segment pulled overall margins lower for the period. CarMax also spent aggressively in areas like staffing and the digital selling platform.

Management said these drags are temporary and don't reflect any mounting profitability challenge. Profit metrics back up that optimistic reading, as pre-tax earnings are up to 5.3% of sales over the last nine months, compared to 5.1% in the same period a year ago.

Looking ahead

Management said it is excited about the next few quarters and years. The combination of robust customer traffic, a growing online business, and high inventory mean CarMax can likely win more than its fair share of used-vehicle sales in the first half of 2022. But that's just the start of this growth story.

The retailer has been aiming to boost its market share to over 5% by 2025 from its current position of around 3.5%. These latest results suggest it can make progress toward that ambitious goal in 2022, with help from a planned 10 new-store launches.

The long-term goal is to raise annual sales at a double-digit percentage pace annually over the next five years while boosting profitability as revenue tilts more toward the digital platform. While it's unlikely that the current hot market trends will continue for that entire period, CarMax seems well-positioned to generate solid returns for investors over the long term.