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CarMax Still Stalled

By Rich Smith - Updated Apr 5, 2017 at 7:56PM

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At least it's popped the hood to do some tinkering.

CarMax (NYSE:KMX) reported unforgivably lousy numbers this morning, no two ways about it.

Expected to earn a penny a share for its fiscal Q3 2009, the used car superstore operator lost a dime instead. Expected to report a 15% decline in sales, the Motley Fool Inside Value recommendation said sales fell "23%," with comps down 24%.

Is there a light at the end of the tunnel? Nope. CarMax pulled its guidance entirely, leaving us in the dark. So why is the stock holding up even as well as it is?

Because it's all about tomorrow
As I mentioned in our pre-earnings Foolish Forecast, "the fewer cars [CarMax] sells today, the greater the pent-up demand for cars in future years." The key to determining how CarMax fares between now and then, though, depends on how efficiently management responds to the crisis. So consider a few of the belt-tightening measures that CarMax outlined:

  • Staff reductions: CarMax laid off 4% of its workforce in October, primarily in the department where the firm reconditions used vehicles for sale. Also, HQ is undergoing a hiring freeze.
  • Cutting capex: With store traffic anemic, management shelved plans for building new stores to service nonexistent customers.
  • Carrying less inventory: Over the past year, CarMax has slashed inventory by 18,500 vehicles, or more than $340 million in value.

To my Foolish eye, these steps seem well-calculated to work hand in hand. Not selling as much stuff? You don't need as much inventory. Don't need as much inventory? You don't need as many people prepping it for sale, either.

From defense to offense
With these defensive steps in place, CarMax is now ready to go on the offense. We learned from the conference call that CarMax has no intention of racing AutoNation (NYSE:AN), Lithia Motors (NYSE:LAD), and America's Car-Mart (NASDAQ:CRMT) to the bottom on price, thus sacrificing profits in hopes of wooing consumers unwilling to buy. As CEO Tom Folliard told one analyst: "I don't believe we could substantially change demand and change our traffic by giving up a bunch of margin."

Instead, CarMax grew its gross margin 80 basis points to 13.7% (13.4% year to date), even as it "modestly gained market share" from its rivals.

Foolish takeaway
CarMax is going through tough times, no doubt, and the near future looks bleak. But management recognizes the problems, is taking steps to ensure it will ride out the storm, and seems to be enjoying some (small) success with this. As a shareholder myself, I cannot say I'm thrilled with today's news. Instead, just like management, I'm hunkering down for a long, hard slog.

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Stocks Mentioned

CarMax Inc. Stock Quote
CarMax Inc.
$98.84 (0.49%) $0.48
AutoNation, Inc. Stock Quote
AutoNation, Inc.
$117.50 (1.01%) $1.17
Lithia Motors, Inc. Stock Quote
Lithia Motors, Inc.
$292.60 (0.93%) $2.69
America's Car-Mart Stock Quote
America's Car-Mart
$105.62 (-1.59%) $-1.71

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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