It must be extremely frustrating to run a public company and continuously strive to satisfy Wall Street analysts. Slight frustration is likely what CarMax,'s (KMX +2.86%) executive team is feeling after the company reported record results last week for the first quarter, yet fell short of even higher analyst expectations.
Because the record quarter wasn't quite good enough, CarMax stock traded nearly 4% lower on Friday when the closing bell sounded. However, this seems like a knee jerk reaction fueled by short-term thinking. Investors would be wise to put context around CarMax's first-quarter – and that's just what we'll do.
By the numbers
CarMax reported its total used unit sales – which are vehicles sold at its retail stores and responsible for 57% of company profit in fiscal year 2015 – rose 9.3% over last year's first quarter. Not including its new store openings, CarMax's comparable store used unit sales increased nearly 5%.
Wholesale unit sales – which are typically older vehicles CarMax has purchased from consumers and sold at auctions, rather than at retail – moved 4.7% higher, compared to last year's first quarter. CarMax Auto Finance, or CAF, reported a healthy 15.3% increase in income to $109.1 million, driven by a 17.2% increase in managed receivables.
All in all, CarMax's revenue checked in with a 7.1% increase over last year's first quarter to just over $4 billion. This narrowly missed the average analyst estimate of $4.15 billion. Meanwhile, earnings per share topped the average analyst estimate (compiled by Bloomberg) of $0.85 by $0.01.
"We had another great quarter, setting all-time records for quarterly sales and earnings," said Tom Folliard, president and CEO, in a press release. "Continued strong performances in our used, wholesale and CAF operations, along with the growth of our store base and our ongoing share repurchase program, contributed to our solid results."
Despite CarMax posting a great quarter, the market remained unimpressed. Three reasons behind the market's lack of enthusiasm were declines in the average retail unit sale price and per unit profitability, and rising SG&A costs. Let's dig into those factors and see if the pessimism is warranted.
Sometimes a 10,000 foot view is best
Starting from the top, CarMax reported that its average selling price of used retail vehicles in the first quarter declined 1.6% year over year to $19,851. There are two things for investors to keep in mind here. First, despite the small decline, CarMax's average price tag of $19,851 is still a very strong figure historically.
Chart by author. Information from CarMax May 2015 Investor presentation.
The second thing for investors to keep in mind is that despite the small decline, CarMax is still generating a better average price per unit than the overall used vehicle market, according to figures from Edmunds.com.
Graphic source: Edmunds.com used car pricing report.
Next, let's take a look at figures closer to the bottom line. CarMax's first-quarter used vehicle gross profit per unit checked in at $2,200 per unit, a small decline from $2,220 per unit for last year's first quarter. Again, let's look at this from a historical perspective.
Chart by author. Information from CarMax May 2015 Investor presentation.
$2,200 in gross profit per unit is historically strong and the long-term trend is positive, but growth in this metric does appear to have slowed in recent years. Gross profit is an important factor for investors to watch while following CarMax, but its average gross profit margin per unit remained within historical norms of 11%-12%.
Investors should keep in mind, however, that because CarMax has been so consistent with its 11%-12% gross profit margin, a significant decline in the average selling price per unit will directly impact the bottom line. After all, 11% gross profit from a $20,000 sale is better than 11% from a $15,000 sale.
Lastly, there were some grumblings from investors about rising SG&A costs. It's true, SG&A costs have indeed risen over time, but that's not the full story.
Chart by author. Information from CarMax investor resources files.
As you can see, while SG&A costs have moved higher, SG&A has continued to decline as a percentage of total net sales and operating revenue. As long as that continues to be the trend, rising total SG&A costs are simply a byproduct of an expanding business and that should be fine with shareholders.
Furthermore, it's important to realize that the automotive industry is very cyclical and sales figures can be affected by factors such as differences in weather between the two periods. An abnormally harsh winter, for instance, can seriously slow demand and thus hurt profitability. That's why, despite the importance of quarterly year-over-year comparisons, it's sometimes best to look at the figures in annual averages and over a long period of time.
Sure, CarMax's average retail price and gross profit per unit may have fallen slightly in the first quarter, and total SG&A costs have increased. But historically the figures are still practically firing on all cylinders in terms of profitability for CarMax.
