Can CarMax Earnings Keep the Stock From Stalling Out?

Image: CarMax.

Car retailer CarMax (KMX +2.64%) has rewarded its shareholders over the years, with solid growth stemming from the long economic recovery and the gradual improvement in the financial situation that consumers face. So far in 2015, however, CarMax has given back some of its gains, and investors are looking anxiously at the company's coming fiscal second-quarter report on Tuesday for clues about whether the company can continue to grow at the pace they would like to see. Let's take an early look at what's been happening with CarMax over the past quarter and what it's likely to tell us in its report.

Stats on CarMax

Source: Yahoo! Finance.

Can CarMax navigate to higher ground?
Investors have generally been upbeat about CarMax's future prospects for its earnings, pushing their full year fiscal 2016 projections up by about 1% over the past few months. The market, though, has been far from positive about the car retailer's future, sending the stock down 13% since mid-June.

CarMax's fiscal first-quarter results showed both the success that the company has experienced recently and the high expectations that shareholders have. Both revenue and used-car sales volume slowed from a double-digit percentage pace in previous periods to high single-digit percentage growth, and CarMax's wholesale division saw growth rates fall below 5%. Average selling prices for used cars actually fell slightly from year-ago levels, signaling at least a short-term shift in the dynamics of the used-car market that could create future problems for CarMax. Rising expenses were also a concern, as CarMax spent more both on general administrative costs and on marketing and advertising spending.

In response, CarMax has continued to emphasize its growth efforts through store expansion efforts. The company announced earlier this month that it had become the official used car retailer of the New England Patriots, with Chief Marketing Officer Jim Lyski noting that "Boston is an important new market for CarMax, [and] our focus will be to use this partnership to better serve our customers and fans in the New England area." More broadly, CarMax hopes to open more than a dozen new locations this year, and it's already off to a strong start in that regard, offering service to customers in Denver and Tallahassee earlier this quarter.

Still, CarMax faces some uncertainty in the broader auto market. New-car sales throughout the industry in August were flat from a year ago, slowing the pace of growth in a year in which automakers are on track to hit roughly 17.7 million vehicle sales by the end of 2015. CarMax has to navigate the trends in the new-car market in order to ensure that used-car demand keeps up with or surpasses customers' appetite for new vehicles, yet even though some have expected a rising economy to make some people shift from used cars to new cars in their purchasing decisions, CarMax's long-term trends don't seem to support that conclusion.

CarMax also has to deal with strengthening competition. AutoNation (AN +2.96%) has made some strong strategic moves recently, acquiring 16 stores last month to boost its overall potential revenue by $600 million. AutoNation sees considerable promise in continuing to pursue acquisitions in a highly fragmented market among car dealers, and although it focuses on the new-car market, AutoNation has the potential to pose a much larger problem for CarMax in the long run depending on the direction it decides to go.

In the CarMax earnings report, investors will want to see signs that the used-car specialist is finding ways to spur growth despite early signs of economic challenges in the future. In particular, if the Federal Reserve decides to start raising interest rates, CarMax's auto-finance division could see an immediate impact that could pose a threat to a key part of the company's overall performance. If CarMax keeps seeing sales slow down from past growth rates, then investors could be in for a bumpy ride going forward.