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KMX earnings call for the period ending May 30, 2018.
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Investors have a few big questions heading into next week's earnings report.

CarMax, Inc. (CarMax) is the country's largest retailer of used cars by volume. CarMax competes in a highly fragmented, highly competitive market; there are approximately 20,000 automotive dealerships, 39,000 independent used vehicle dealers and an unknown number of individuals who sell used vehicles to the public.[1] CarMax has used its size to take advantage of economies of scale in its operations, notably through its rigorous computer-based tracking systems and no-haggle pricing strategy.

Two seemingly unrelated drivers of sales are airline travel and hurricanes. In addition, hurricanes tend to destroy cars, thus temporarily driving up the prices that CarMax can charge for its vehicles. As mentioned above, Carmax's stock rose 80% with speculation on the passing of the cash for clunker's program, which capitalizes on the impacts of weatherization.[2]

Business Financials

Carmax has 4 basic business segments: selling used vehicles, selling new vehicles, selling wholesale vehicles, and other (servicing, financing, and warranties). The company has a no-haggle policy with trade-ins, but really it recoups any trade-in losses through its servicing, warranty and financing arm.

CarMax has gross profitability of 13.6% for the last 5 years, with a pretax margin of only 3.3%. This is reflective of the amount of competition in the used car industry, and the fact that CarMax may not sell some of its inventory. Carmax is fiscally conservative, with a current ratio of 2.3, nearly double the industry average.

FY2011 Earnings Summary

  • Revenues up 20.5% to $8,710 million USD.
  • Net income 35.2% to $380.88 million USD.

Key Trends and Forces

Increased Travel & Hurricane Damage in the South Increase Prices for Carmax's Inventory

Increased travel and natural disasters like hurricanes can affect pricing for the company. When Americans travel more, rental companies like Hertz Global Holdings (HTZ) and Avis Budget Group (CAR) demand greater numbers of used-cars at CarMax's wholesale auctions, and bidding intensifies and prices rise. Similarly, hurricanes, such as those of the magnitude of Katrina and Rita, destroy large quantities of vehicles in the South, a key market for the company. When replacements are sought in mass, demand drives pricing to favorable levels.

Subprime Delinquencies on Auto Loans Negatively Impacts Business Performance

As many auto buyers finance their purchases with loans, there exists a risk of spillover from the subprime lending crisis into the auto-loan business. As homeowners/car buyers struggle to pay both their mortgages and auto-loans, the company may assume losses due to loan delinquencies as well as hampered demand for auto loans going forward.[3]

The Continuing Economic Downturn Incentivizes the Purchase of Used Vehicles

CarMax deals in 1-6 year old vehicles. This means that when the economy is strong, people can buy a car that is a little better/newer than during a down economy. So those who would normally buy a 1-2 year old used car can now buy a new car. But people normally in the market for a 7-10 year old car can now afford a 5-6 year old car. Conversely when the economy is very bad, car buyers move down a year or two on their purchase. CarMax has a sort of natural buffer because of the age range of cars it sells.

Rising Oil Prices Decreases the Use of Vehicles and Limits the Frequency of Used Car Purchases

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As oil prices increase, some think drivers limit their mileage and time on the road, therefore, accumulating less wear-and-tear and purchasing replacement vehicles less frequently. Analyst and KMX bulls argue that in the vehicle market, demand does not simply go away or vanish but becomes pent up. This pent up demand is later capitalized almost instantaneously when sentiment or a market rebounds. This places CarMax in a strong position as the largest retailer of used vehicle, during periods of procrastinated demand CarMax's heavily fragmented and less capable (at lest financially) shuts their doors or cuts inventories, employees, services, expansions, all to ensure survivability. Such drastic measures are needed because smaller dealers finance their inventories. Not so with CarMax, they own all their inventory, cash. This reverses the normal business para-dime, the smaller dealers are slower and less able to react quickly when markets turn around because they have to essentially rebuild their business.

CarMax's high turn rate and customer friendly large volume sales ensure the companies inventory levels are always lean. This in turn allows them to react very quickly to market fluctuations ( ie recent to gas prices propelling fuel sipping compacts values up and SUVs and truck plummeting down) Meanwhile its competition is stuck with older less profitable inventory for longer, On the other side during economic rebounds the pent of demand shoots demand up, small dealers are only able to realize a limited portion of that increase (due to size, space constraints, floor planning etc) One of CarMax's advantages is its now infamous website CARMAX.COM which helps it capture those increases in their entirety nationwide.

Competition and Used Car Market Share

The US auto-industry stopped growing long ago. The same is true of the used car industry. The used car industry is extremely competitive and price sensitive. Carmax does well because it has huge Economies of scale. It can buy cars in bulk, make standardized offers on nearly any car, and deploy technically advanced automated customer service systems to keep costs down. Carmax also uses its website, carmax.com to sell cars. Carmax.com has seen its traffic decline, perhaps due to the fact that Carmax now sells on cars.com as well.[4] Carmax thinks it has strong competitive advantage in its customer satisfaction due to fast turnaround, warranties, a no-haggle policy and a well-trained and friendly staff.

Despite its large size and because of just how fragmented the used car industry is, Carmax controls less than 2% of the total market for used cars (the largest of any single company) who size is estimated to be about 16 million cars per year. Its next largest competitor, AutoNation (AN) controls about 1%. There are about 39,000 used vehicle dealers and millions of private individuals directly competing with Carmax. [5] Indirect competition for used cars include new cars, motorcycles, and public transit. This is especially relevant to consider, because the advent of Hybrid and Alternative Energy Technology may make new cars temporarily more attractive.


  1. FY09 ARS Final Complete Report
  2. Mad Money Recap: Cash for Caulkers
  3. Associated Press article, "Subprime crisis could spread to auto loans," November 26, 2007
  4. profile of Carmax.com
  5. The Carmax 2008 Annual Report, p. 5
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