CarMax (KMX -1.70%) recently raised its long-term growth outlook after the company gained market share in the expanding used car industry last year. Yet the stock price fell immediately following the fourth-quarter earnings announcement and remains far below the market's return so far in 2022.

That gap can be explained by the company's decision to prioritize market-share growth over short-term profits. Rather than boosting profitability by capitalizing on historically high used-car prices, CarMax is instead seeking to gain market share by keeping its prices low when compared to rivals.

Let's take a closer look at why that approach might pay off for shareholders.

A person holding a new car key.

Image source: Getty Images.

The fourth-quarter earnings report

Retail sales trends were soft for the Q4 selling period, which ended in late February. CarMax saw a 5% drop in sales volumes and a 6.5% decline in overall comparable-store sales. This was mainly due to macroeconomic factors such as the rise of the omicron variant. That decline was more than offset, though, by booming sales in CarMax's wholesale segment.

Executives highlighted the company's success in gaining market share in the fragmented used-car industry. CarMax now accounts for 4% of all pre-owned sales, up from 3.5% a year ago.

The online business was a key factor in that growth, as digital sales now represent over 11% of revenue, compared to 5% a year ago. "We are extremely proud of our accomplishments in fiscal 2022," CEO Bill Nash said in a press release.

The bad news was focused on gross profit

If one number explains why some investors were disappointed with the earnings release, it was likely $2,195, or CarMax's gross profit per vehicle. That metric improved compared to a year ago, but used-car prices have been soaring. Wall Street was hoping that the historically strong selling environment would drive margins higher, as it has for vehicle manufacturers.

Instead, CarMax decided to build goodwill and market share by keeping its prices low. "We chose to pass along some of our ... cost savings to consumers via lower prices," Nash told investors in the Q4 earnings call.

Profits took another hit from rising spending in areas like IT and advertising. Overall, pre-tax earnings fell to $200 million, or 2.6% of sales, from $262 million, or 5.1% of sales a year ago.

A brighter future

It's only been about a year since CarMax issued its long-term growth outlook, but that forecast was due for a revision, thanks to the strong sales performance this past year. Executives believe sales volumes might reach as high as 2.4 million by fiscal 2026 (in four years), up from the prior target of 2 million. Annual revenue will land between $33 billion and $45 billion by then, compared to the initial outlook calling for about $33 billion.

The bad news is that fiscal 2023 will show another period of relatively weak earnings as CarMax invests more in its infrastructure and prepares to move into new metropolitan markets like New York. But shareholders should still be happy to see this growth stock winning market share in this crowded industry. That's CarMax's surest path toward boosting annual sales toward $45 billion in a few years, compared to the past year's $32 billion haul.