Despite strong selling conditions in the used car industry, CarMax (KMX -0.91%) has failed to impress investors lately. The used car retailer's stock is underperforming the market so far in 2022 and is down over 43% from highs set in November 2021.
Part of the problem is that the used car giant is prioritizing market share gains over earnings right now. Wall Street had been hoping that CarMax instead would capitalize on soaring industry prices to raise its profitability.
The chain's upcoming earnings report will help show whether that strategy has been the right approach to maximize CarMax's long-term returns. With that in mind, let's preview the earnings report due out on Friday, June 24.
Sales trends
Investors don't have high expectations around growth. CarMax's sales volumes fell last quarter, the company said in mid-April, due to difficult year-over-year comparisons. Revenue soared a year earlier when financial stimulus income boosted consumer spending.
CarMax's business through late February was "adversely affected by macro factors," CEO Bill Nash said at the time, including slowing economic growth and rising vehicle prices.
Most investors expect sales to land at $9.2 billion this quarter, compared to $7.7 billion a year earlier. Keep an eye on CarMax's comparable-store sales for signs that the business is stabilizing following last quarter's decline.
The company's market share trends are key to follow, too. That metric rose to 4% of the massive, fragmented used car market in fiscal 2021. CarMax is hoping to crack 5% over time.
Gross profit margin
Management said back in April that it was aiming to keep its prices low in hopes of boosting that market share figure. Investors want to see evidence of that approach working through improving growth metrics like comparable-store sales and customer traffic.
KMX Gross Profit Margin data by YCharts
The worry is that CarMax is giving up too much in that trade-off, especially considering that economic growth trends appear to be slowing. Gross profit per vehicle didn't budge last quarter even though prices have jumped in the industry.
Sure, CarMax is gaining share and keeping its dealerships busy. But shareholders are right to wonder when this growth will translate into higher profitability. Instead, they've seen gross profit margin fall recently as management prioritizes market share and invests heavily in the e-commerce selling channel.
Looking down the road
The stock price this week will be sensitive to any projections that CarMax makes about the rest of 2022. Executives might again cite weakening economic conditions for pressuring results into the summer months. Inventory challenges might show up, too, although the chain has been doing a good job so far at securing enough vehicles to keep its lots full. Soaring gas prices could be yet another factor weighing down its results.
On the positive side, CarMax still sees room to consolidate its grip on the massive used car market with help from its unique multichannel selling model. With an extensive national network of dealerships, plus a robust online shopping experience, the chain is positioned well to benefit from growth in the industry.
Right now, investors are worried that this growth will stall, potentially pushing profitability even lower in 2022. But CarMax should emerge from any slowdown as a stronger business, just as it has through previous downturns.
