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Why CarMax Stock Jumped 12% in March

John Ballard, The Motley Fool

What happened

Shares of CarMax (NYSE: KMX) gained 12.4% in value last month, according to data from S&P Global Market Intelligence.

The used-car seller delivered a better-than-expected earnings report toward the end of March that sent the shares soaring.

A CarMax store parking lot.

IMAGE SOURCE: CARMAX.

So what

CarMax has struggled with store traffic and soft sales growth of used cars lately, with used unit comparable store sales declining by 1.2% in the previous quarter. But the fiscal fourth-quarter earnings report showed a significant improvement, as used unit comp sales increased by 2.8%.

Overall, net sales rose by 5.7% year over year to $4.32 billion in the fiscal fourth quarter. For the full year, net sales climbed 6.1% to $18.17 billion.

The company reported earnings per share of $1.13 for the quarter, representing growth of 68% year over year, which beat the consensus analyst estimate by $0.09. Full-year earnings increased 33.1% to $4.79 per share, mostly driven by a lower tax rate and share repurchases.   

CarMax lost market share in the first half of the year, but it regained share in the second half of the year, specifically in the zero- to 10-year-old vehicle category. 

Now what

CarMax continues to work on enhancing its omnichannel capabilities to allow customers to buy a car online and pick it up at a store. The company is also slowly rolling out home delivery to serve customers who can't get to a store. 

Over the next year, management plans to step up its investment in technology, which is crucial to CarMax's competitive position, as dealerships around the country continue to step up their digital game. Early in April, one analyst upgraded CarMax stock, citing the tailwind the company has with the digital offering. 

Currently, Wall Street analysts expect the used-car chain to grow earnings by 7% in fiscal 2020 (which ends in February), led by net sales growth of 6.2%. 

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John Ballard 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.