What will CarMax say about used car prices on Tuesday?

CarMax (NYSE: KMX) investors expect a bumpy ride over the next few trading days. The used-car retailer will announce its latest results before the market opens on Tuesday, April 12, and there are some big questions in that report.

Shareholders hope CarMax continues to benefit from historically high used car prices and strong demand. However, difficulties in obtaining sufficient inventory could threaten these promising prospects. The retailer may also have seen a slowdown in customer traffic related to the latest wave of COVID-19 cases.

With that big picture in mind, let’s take a look at some trends to watch in CarMax’s Tuesday announcement.

Image source: Getty Images.

Sales and traffic

CarMax entered the fourth quarter of fiscal 2022 (which ended February 28) with fantastic momentum. Sales increased 9% in the third quarter (ended Nov. 30), management disclosed on Dec. 22, 2021. Customer traffic was strong and pricing trends were favorable thanks to higher prices on new vehicles.

Look for management this week to highlight the channel’s new e-commerce platform, which has moved the entire shopping process, including trades, to the online channel. This segment accounted for 9% of all sales in the third quarter and likely reached double-digit percentages in early 2022.

Costs and prices

Don’t expect CarMax to get a big windfall from skyrocketing used car prices. The company tends to maintain its gross profit per vehicle between $2,200 and $2,400 thanks to a wide range of sales environments, in part to be able to increase its market share in its fragmented industry.

Management hopes to cross 5% of the US used car market by 2025, after all, up from its current position of 3.5%. “We’ve chosen to pass the majority of our…savings on to customers through lower prices,” CEO Bill Nash said in late December.

Still, investors would like to hear good news on profitability, given that earnings have recently come under pressure from the finance division and the growing presence of CarMax’s physical and online stores. Ideally, the company can begin to recover some of its lost profitability by bringing its operating margin above 5% of sales.

KMX Operating Margin (TTM) Chart

KMX Operating Margin (TTM) Data by YCharts

Inventory and outlook

Investors will be watching two key trends for signs that CarMax is still driving growth. First, track inventory to prove that the company has no trouble filling its lots despite tight supplies in the automotive industry. Nash said in December that CarMax was struggling to get the right inventory ahead of the key tax filing season now unfolding. These issues have likely worsened over the next few months and could hamper growth through the end of 2022.

Second, look for executives to update their outlook for the fiscal year, which is currently forecasting solid sales and earnings growth as well as strong market share gains. It’s likely that CarMax will achieve each of these goals to some degree in 2022, but the magnitude of those gains could be limited by factors such as inventory and labor shortages.

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Demitri Kalogeropoulos has no position in the stocks mentioned. The Motley Fool recommends CarMax. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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