The used car market is booming and CarMax (NYSE:KMX) is cashing in on the growth. The used vehicle retailer said last week that it more than doubled its sales volumes in early 2021 as compared to a year ago.
There were other encouraging metrics in the report that all paint a positive picture of CarMax’s earnings potential in fiscal 2022 and beyond.
1. Setting more records
Sales jumped 138% to $7.7 billion, which easily outpaced Wall Street’s expectations. CarMax had described accelerating growth through March as weather warmed up and COVID-19 cases started falling in the U.S. Those trends continued, and the company was able to more than double its unit sales through late May.
Management credited strong demand, including from its recently launched e-commerce platform, for supporting the win. CarMax also managed to keep inventory well stocked through supply chain challenges. “We delivered exceptional results in a high demand environment,” CEO Bill Nash said.
2. Revving up the profit engine
Several positive factors combined to make CarMax’s business more profitable. Its financing arm endured fewer loan write-offs thanks to healthy consumer income levels in today’s economy. Selling prices spiked 11% due to rising demand and tight supply, too. Finally, CarMax’s gross profit per vehicle came in near the top of its typical range, landing at $2,200 compared to $1,900 a year ago.
These wins helped push pre-tax earnings up to $567 million, or 7.4% of sales, compared to $262 million, or 5.1% of sales, last quarter. Nash said that profitability figure set a record for the business and was helped along by CarMax’s growing connection with car shoppers and a revenue model that covers consumer cars, wholesale vehicles, and financing. “We remain confident in our ability to meet our long-term targets of revenue growth, total unit growth, and market share gains,” Nash said.
3. Looking ahead
That long-term forecast calls for CarMax to increase sales at a 10% annual rate over the next few years while at the same time pushing its market share to over 5% of the huge but fragmented used car industry. That metric had been 4.7% before the pandemic pushed it closer to 4% last year.
CarMax will get help reaching this goal from new lot openings, including 10 launches expected in the current fiscal year. But it has an even bigger treasure to target in the online sales channel, which has quickly grown to 8% of total sales volumes in just the last year or so. The company was likely the biggest single buyer of used vehicles this past quarter, executives believe, after it executed 163,000 purchases through its new online appraisal tool.
The latest growth and financial metrics were lifted by factors that aren’t likely to persist for long, including pent-up demand from the pandemic, financial stimulus payments, and rising prices on used and new vehicles.
Yet CarMax’s report also contained signs of a fundamentally stronger business that is delivering more value to car shoppers through its omni-channel platform. That success should lead to better returns for investors even after sales trends slow from their current historic growth rates.
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