Investors have some high hopes heading into the upcoming earnings report by CarMax (NYSE:KMX). The used car retailer is in the middle of a historically strong selling environment, with prices and demand for its products soaring.
We’ll find out on Thursday whether CarMax was able to fully capitalize on those conditions through the summer months. Management should give investors a clearer picture of its main growth initiatives, too, including the push toward all-online automobile selling.
Let’s take a closer look.
Sales trends suggest upside for CarMax
Revenue trends beat expectations three months ago, with sales rising over 130% to reach a first-quarter record. CarMax doubled the volume of retail sales and nearly tripled its wholesale metrics. Growth was solid despite store closures a year ago. On a two-year basis, sales were up 16% in Q1.
Management credited the favorable selling environment for most of those gains, but also said the growth wouldn’t have happened without assets like its national selling footprint and omnichannel approach.
Those factors should support another strong sales report, with most investors predicting revenue will land at $6.7 billion compared to $5.4 billion a year ago. The good news is that CarMax entered the period with plenty of inventory, which suggests it capitalized on the booming demand for used cars.
Higher car prices could mean wider profit margins
Prices are surging, too, in part because new car prices are jumping. Those increases always give CarMax room to increase its own list prices while still giving shoppers a discount over new car purchases.
The chain last quarter booked roughly $2,200 of profit per vehicle sale, which is near the top of management’s long-term target. Look for that happy trend to continue in Q2, helping push pre-tax earnings up closer to 10% of sales. “We remain confident in our ability to meet our … targets of revenue growth, total unit growth, and market share,” CEO Bill Nash said back in late June.
Looking ahead to the fiscal second half
CarMax on Thursday will comment on the strength of the industry going into the second half of its fiscal year. Investors should get clarity around important issues like the supply chain, pricing, and customer traffic trends through the first few weeks of Q3.
Looking further out, expect management to talk up its bigger growth initiatives, including a more aggressive store expansion program and more enhancements to the online selling platform. CarMax is aiming to push its market share to over 5% of the fragmented used car industry after sitting below that mark for years preceding the pandemic.
Its goal of roughly 10% annual sales gains should deliver on that promise, and 2021 is shaping up to easily pass that level. The extent of the slowdown in 2022 will depend on how far these great selling conditions extend past the summer months.
But in any case, CarMax is building some enduring strengths into its business, including a robust e-commerce network and a bigger national selling footprint. Those factors should support shareholder returns, no matter what the selling environment becomes over the next few quarters.
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