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CarMax Earnings: 3 Things to Watch

Demitrios Kalogeropoulos, The Motley Fool

Investors have modest expectations heading into the fourth-quarter earnings report from CarMax (NYSE: KMX). The used car retailer has struggled to end a customer traffic slide at its existing locations in recent quarters, which means sales growth could be muted. Its earnings outlook is weak, too, as CarMax pours resources into taking the entire car-buying process online.

These challenges will put key metrics like same-store sales, gross profit margin, and operating earnings in the spotlight when the company announces its results on March 29. Below, we'll look at exactly what investors should watch for in that report.

A customer shakes hands with a car salesman.

Image source: Getty Images.

1. Sales mix

CarMax's sales have been pressured lately by two key negative trends. The bigger and more stubborn one has been a pricing imbalance between new and used vehicles that management says should resolve itself with time. That issue has made the chain's almost-new vehicles less attractive for shoppers, which helps explain why CarMax's customer traffic has declined through each of the first three quarters of fiscal 2018.

The retailer's second big challenge was going up against a prior-year period that was heavily impacted by surging demand after hurricane flooding in and around its major Texas markets. Executives said that this matchup played a big role in pushing comparable-store sales into negative territory last quarter.

Investors can look for progress in CarMax's rebound initiatives by following whether comps growth returns to positive territory. Management will likely update shareholders on industry pricing trends, too, and improvements there should also show up in rising demand for vehicles four years old or newer.

2. Online updates

It would be an understatement to say that CarMax executives are optimistic about the online selling channel. They've highlighted notable metrics to show just how much potential they see for growth here. While customer traffic has declined in stores in the past year, for example, CarMax's digital segment is handling 20 million visitors each month versus 19 million last year.

That's why it's been a huge priority for the business to take the entire selling process online in an initiative that involves logistics, legal, and shopper-experience challenges. Look for CarMax to spend time this week discussing the progress it has made in solving each of those problems. Management should also update investors on its plans to introduce the fully online shopping experience beyond just the current test markets.

3. Finances

CarMax warned investors to expect a boost in spending as the chain works out the kinks in its online selling platform in 2019, and executives should have more details to share this week about the specific impact on expected earnings. A temporary cost spike wouldn't be a problem as long as the initiative helps CarMax stay in the industry leadership position. However, it's likely to be several quarters before investors have a clear view of the ultimate effects of the move toward multichannel retailing.

That means the stock's movement over the short term might depend more on strength in concrete operating metrics like comps, gross profit per vehicle, and operating margin. For the time being, the digital sales channel is an attractive but unproven growth avenue. 

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends CarMax. The Motley Fool has a disclosure policy.