CarMax (KMX 58.78, +2.06, +3.63%) is trading nicely higher today after the
company reported Q3 (Nov) earnings results this morning. It was a good quarter
overall, although comps were a bit weak, but KMX was lapping a difficult comp
from last year.
CarMax is the nation's largest retailer of used vehicles. It currently operates 200 used car stores in 41 states.
CarMax operates a no-haggle pricing policy for its vehicles. This no-haggle pricing approach is attractive to buyers because it allows them to know that what they're paying is what anyone would pay, regardless of negotiation skill level. Another nice thing about CarMax is that they offer a very wide selection of cars from all manufacturers. Also, they will buy any car, and their purchase prices tend to be pretty fair. The experience generally compares favorably to, say, trying to sell a car on a site like Craigslist, which involves more uncertainties. They may not sell your car on their lots (CarMax has an age/condition cutoffs), but they will buy your car regardless of the condition and sell it to a wholesaler.
Turning to the NovQ earnings results, EPS rose 35% year/year to $1.09 while revenue rose 4.6% year/year to $4.30 bln. EPS was nicely above market expectations while revenue was basically in-line. KMX does not provide guidance. Total used vehicle unit sales increased 2.3%, while same store comps unit sales declined -1.2%. The comp performance primarily reflected lower store traffic, partially offset by improved conversion. Also, last year, KMX's six Houston-area stores drove comp growth in the wake of Hurricane Harvey. Total wholesale vehicle unit sales increased 10.0%.
In terms of new store openings, KMX opened four new stores in NovQ, and now the company has surpassed the milestone of 200 stores. All four new adds were in new television markets (Wilmington, NC; Lafayette, LA; Corpus Christi, TX; and Shreveport, LA).
KMX can be pretty volatile around earnings. The company does not guide, so analysts are a bit in the dark in terms of what to expect. However, investors seem pretty happy with this NovQ report. The comp number of -1.2% was a bit disappointing after a +2.1% comp in AugQ. In fairness, KMX was lapping an unusually strong result from last year’s quarter owing to Hurricane Harvey, so it seems the market is giving them a pass on that. There was very nice EPS upside this quarter, which tells us that margins were better than expected.
Looking ahead, rising interest rates could be a headwind for KMX as car financing rates are also rising; for used cars, these are a lot higher than for new cars. On the positive side, gas prices remain low and unemployment is at historically low levels. Should trade issues with China impact the U.S. economy, KMX could in turn be impacted.
So, there are a lot of moving parts right now from a macro standpoint. The stock has been weak lately alongside the overall market, falling from $80 in mid-September to around $58 now. Our sense is that the decline is more macro-related (stock market, economy jitters, rising rates, trade wars, etc.) than the result of something specific to KMX’s business, so it will probably take an improvement in macro sentiment to get the stock moving up again.
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