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What CarMax Wants You to Know

Demitrios Kalogeropoulos, The Motley Fool

CarMax (NYSE: KMX) can't seem to keep its recovery rolling. After returning to sales growth in the second quarter, the used-automobile retailer announced that revenue just slipped back into negative territory.

In a conference call with investors, CEO Bill Nash and his team explained how demand trends were better than they might appear at a glance. CarMax's management also issued an update on their push into e-commerce sales, which they're hoping will help return the company to its long-term growth targets over time.

Below are a few highlights from that discussion.

A male customer shakes hands with a car salesman.

Image source: Getty Images.

Houston is to blame

While we are disappointed to report negative comps in the quarter, they were materially affected by the dynamics and the six Houston area stores following Hurricane Harvey.
-- Nash

CarMax's sales gains slipped into negative territory for the third time out of the retailer's last four quarterly outings, with comparable-store sales falling 1.2%. That recent track record is weak enough that it could call into question the company's broader growth targets.

Management said an unusual regional sales spike in the prior-year period, tied to disruptions from hurricanes that struck the southeastern U.S., hurt results this time around. After accounting for that event, comps would have risen 2.3% in the third quarter, or at roughly the same pace as in the prior quarter.

Executives said the results were also held back by continued pricing challenges that are making some used cars less attractive when stacked up against new vehicles. CarMax's percentage of sales tied to vehicles between zero and four years old fell to 77%, management said, from 81% a year ago. This shift contributed to falling customer traffic across its store base, which was only partially offset by an improved conversion rate.

E-commerce wins

Customers are looking for an experience that gives them more control and independence in buying and selling a car. However, they also want advice and guidance at any point in the journey. That is why we've developed the omnichannel experience that delivers upon this unmet customer need.
-- Nash

CarMax has been active in developing its e-commerce selling infrastructure, having just opened a fully online selling process in Atlanta, its oldest market. While cautioning that it's too early to make sweeping judgments, management said they're happy with the feedback they're getting from customers. Their confidence in this maturing into a significant growth avenue is bolstered by the fact that CarMax's website traffic is still rising at a double-digit pace even though shopper visits to its lots are trending lower. Nash and his team believe the company, because of its national store footprint, is uniquely positioned to deliver a full spectrum of shopping options to customers, including a mix of in-store interactions and online processing.

Costs are rising

In terms of cost implications, we will continue to invest but still expect to leverage SG&A at the upper end of a mid-single-digit comp range. While there are incremental costs and inefficiencies in the near-term, we've also identified potential cost savings through process changes and other improvements that can help offset these expenses over time.
-- Nash

CarMax implied that the new e-commerce capabilities, which the company hopes to roll out to its national base by early 2020, will require elevated spending and pressure profits in the short term. It's also unclear at this point whether that sales channel will ultimately deliver profitability that's on par with what the retailer achieves through its physical sales.

But the good news is that online shopping is making car buying a simpler experience, which syncs up well with CarMax's overall value proposition. Thus, it's an ideal avenue for the chain to use to increase its market share and return to a steadier sales growth pace in the coming quarters.

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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.