U.S. Markets open in 9 hrs 1 min

CarMax Hits the Gas

Dan Caplinger, The Motley Fool

The auto industry is going through a lot of changes, with the rise of autonomous vehicle technology, ridesharing, and electric-powered cars and trucks having a big influence on how consumers in the U.S. and around the world decide when and how to buy. CarMax (NYSE: KMX) initially aimed simply to offer a friendlier alternative to the traditional used car lot, but as auto buyers have started moving online, the dealer hasn't hesitated to follow them there by adding an e-commerce element to its business.

Coming into Friday's fiscal fourth-quarter report, CarMax investors wanted more information about exactly how the company would move forward with its innovation efforts, and they also looked for good gains in sales and earnings. CarMax's top-line growth wasn't as strong as many had wanted, but good performance on the bottom line showed that the company is positioned well for 2019 and beyond.

CarMax sign and location with sevearl cars parked outside.

Image source: CarMax.

CarMax races over the finish line in 2018

The company's fiscal fourth-quarter results were mixed in many people's eyes. Revenue was up 5.7% to $4.32 billion, and that fell more than $100 million short of the 8% growth that those following the stock had wanted to see. Net income climbed an impressive 58% to $192.6 million, however, and that resulted in earnings of $1.13 per share. That topped the consensus forecast for $1.06 in EPS by a considerable margin.

Fundamentally, CarMax got a nice bounce in some of its key business metrics. Comparable-store used vehicle sales picked up 2.8% during the quarter, making up for a down period three months ago. Unit sales overall climbed 5.6%, and CarMax said that those figures would've been even better had it not been for delays in tax refunds stemming from the government shutdown and new tax laws. Sales conversion levels improved, offsetting some weakness in store traffic. Gross profit per used vehicle was higher by $19 to $2,166.

In the wholesale area, CarMax also saw success. Vehicle unit sales growth there was up just 3.7%, but gross profit per unit was up $31 to $977. Elsewhere, sales from extended protection plans and third-party financial fees were both higher, lifting CarMax's catchall "other sales and revenues" segment by almost 15% versus year-ago levels.

On the pricing front, CarMax saw little change. Used car prices were up just 0.3% to $19,978, and wholesale prices were slightly lower to $5,024, down about 1%.

CEO Bill Nash highlighted a technological advance that could pay dividends across the network in the near future. "We're also pleased with the response to our omnichannel rollout in Atlanta," Nash said, "where consumers can now buy a car completely from home, in-store, or through a seamlessly integrated combination of online and in-store experiences." Nash believes this should be available to most of the company's customers by the end of the coming fiscal year.

What's next for CarMax?

CarMax also continues to have high hopes for expanding its network. The company opened five new locations in the fourth quarter, including three in the new markets of Buffalo, New Orleans, and the Alabama capital of Montgomery. That brought CarMax's store count to 203, and the company sees itself opening 13 stores in the coming year and roughly the same number next year.

Stock buyback activity also accelerated during the quarter. CarMax bought back 4.4 million shares, spending $270.1 million and taking advantage of the market swoon to pick up stock more cheaply. That still leaves more than $2.1 billion in authorized funds available for future repurchases.

CarMax shareholders were happy with that report, and the stock jumped 9% in morning trading following the announcement. With its ability to reach customers however they want to buy a vehicle, CarMax is showing that it can adapt to changing conditions and make the most of opportunities wherever they present themselves.

More From The Motley Fool

Dan Caplinger 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.