For a long time, used-car specialist CarMax (NYSE:KMX) has enjoyed strong growth, as the U.S. economy's gradual recovery has encouraged Americans to extend the lives of their cars and to purchase used cars rather than ponying up for new vehicles. Coming into Friday morning's fiscal-first-quarter financial report, CarMax investors wanted to see the company continue its impressive streak of strong growth in sales and earnings. CarMax only delivered on half of that slate, with earnings topping expectations but revenue growth showing signs of sluggishness. Let's look more closely at how CarMax did and why some investors are nervous about the company's future.
CarMax earnings keep climbing as sales growth hits the skids
To be clear, CarMax's results were far from problematic under normal standards. Net revenue climbed 7.1% to another new record of $4.01 billion. On the bottom line, net earnings climbed a similar 7.3% to $182 million, producing earnings of $0.86 per share, which matched expectations. The problem, though, is that investors had wanted revenue growth in the 10% to 11% range, and a comparable used-car sales volume gain of just 4.9% was 2 percentage points lower than last quarter.
Despite its record results, most of the underlying numbers from CarMax's business units showed signs of slowing. Used-car sales rose 9.3% for the quarter in terms of unit volume, which was lower than the double-digit percentage level from the previous quarter, while the corresponding growth in CarMax's wholesale division was just 4.7%. Average selling prices for the key used-car segment fell 1.6%, and that produced growth in comparable-store used-car revenue that was just half what the company produced in the year-ago quarter. Extended protection plan growth also slowed, effectively neutralizing what had been a much more substantial portion of CarMax's overall sales growth.
CarMax's auto finance segment endured some of the same trends it has faced recently. Income climbed more than 15% to $109.1 million, with solid underwriting practices leading to fewer loan losses than it expected. Yet interest margins have continued to fall, and that counterbalanced the impact of growth in receivables to hold back the division from its full potential.
CEO Tom Folliard didn't say much about CarMax's report, contenting himself to celebrate the vehicle retailer's record performance and overall strength across the board. In particular, Folliard pointed to CarMax's ongoing stock buybacks as helping to boost earnings-per-share growth, with the company spending nearly $120 million to repurchase 1.8 million shares during the quarter.
Will CarMax keep slowing?
Store growth remains an important element of CarMax's overall sales gains, and the company anticipates further retail openings throughout the new fiscal year. After opening three locations in the first quarter, CarMax expects to bring four more online during the current quarter -- two in the Denver area, one in Tallahassee, Fla., and one near Providence, R.I. That should keep CarMax on track to meet its goal of opening 13 to 16 stores per year.
Yet one of the most important things CarMax must do is to figure out how to keep a lid on its expenses. Compensation and benefits costs rose nearly 13% from the year-ago quarter, and gains in store occupancy costs and advertising expenses were also sizable in comparison to CarMax's sales growth. To prevent contracting margins from pressuring the bottom line further, CarMax will have to find solutions to save money and ensure greater profit going forward.
In what might seem like a dramatic overreaction, CarMax shareholders expressed their extreme dissatisfaction with the quarterly results, as the stock fell 4.5% in the first hour of pre-market trading following the announcement. With the shares carrying a fairly hefty valuation, CarMax investors have grown accustomed to better results. If current trends continue, it will be hard for CarMax to sustain the growth that shareholders take for granted from the used-car retailer.
Dan Caplinger owns shares of Apple. The Motley Fool recommends Apple and CarMax. The Motley Fool owns shares of Apple and CarMax. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.