CarMax (KMX 0.94%) investors are in for a bumpy ride over the next few trading days. The used-car retailer will announce its latest earnings results before the market opens on Tuesday, April 12, and there are a few big questions heading into that report.
Shareholders are hoping CarMax is still benefiting from historically high prices for used cars and strong demand. Challenges in obtaining enough inventory might threaten that bright outlook, though. The retailer might have seen a customer traffic slowdown connected to the last surge in COVID-19 cases, too.
With that big picture in mind, let's look at a few trends to watch in CarMax's Tuesday announcement.
Sales and traffic
CarMax entered the fourth quarter of fiscal 2022 (which ended Feb. 28) with fantastic momentum. Sales were up 9% in the third quarter (ended Nov. 30), management revealed on Dec. 22, 2021. Customer traffic was strong, and pricing trends were favorable thanks to higher prices on new vehicles.
Look for management this week to highlight the chain's new e-commerce platform, which moved the entire purchase process, including trade-ins, to the online channel. That segment accounted for 9% of all sales in Q3 and likely broke into double-digit percentages in early 2022.
Costs and prices
Don't expect CarMax to reap a big windfall from those soaring used car prices, though. The company tends to keep its gross profit per vehicle steady at between $2,200 and $2,400 through a wide range of selling environments, in part so that it can boost market share in its fragmented industry.
Management is hoping to cross 5% of the U.S. used car market by 2025, after all, up from its current 3.5% position. "We chose to pass along the majority of our ... savings to customers via lower prices," CEO Bill Nash said in late December.
Still, investors would love to hear some good news on profitability, given that earnings have been pressured recently by the financing division and by CarMax's expanding physical and online store presence. Ideally, the company can start recovering some of its lost profitability by pushing operating margin back above 5% of sales.
Inventory and outlook
Investors will be watching two key trends for signs that CarMax is still in the driver's seat on growth. First, follow inventory for evidence that the company is having no trouble filling its lots despite tight supplies in the auto industry. Nash said back in December that CarMax struggled to secure the right inventory ahead of the key tax return season that's occurring right now. Those issues likely worsened over the next few months and could hamper growth into late 2022.
Second, look for executives to update their fiscal-year outlook, which currently calls for solid sales and earnings growth along with significant market share gains. It is likely that CarMax will achieve each of these targets to some degree in 2022, but the scale of those wins could be limited by factors like inventory and labor shortages.