CarMax’s e-commerce bet is already paying off
It has been less than a year since CarMax (NYSE: KMX) has brought its digital shopping platform fully online, but shareholders are already seeing the benefits of the move. The used car retailer on Thursday announced record sales through the end of August, including in the e-commerce channel.
However, not all CarMax results were positive, as increased costs reduced profitability. But the chain is still finding plenty of resources to fund the launch of its new stores as it strives to strengthen its market share in this fragmented industry.
Let’s take a closer look at summer operating trends as reported in the company’s second quarter results, released on Thursday.
CarMax reported sales gains, especially in e-commerce
Sales volumes reached 420,000, up 20% from a year ago. This period of the previous year was depressed thanks to the pandemic, but CarMax also set a second quarter record in its retail segment and an all-time quarterly record in wholesale sales. Both increases also came from higher average selling prices, which contributed to an overall sales increase of 49% in the quarter. Most investors who follow the stock expected more modest income growth.
The digital sales platform had a particularly strong quarter. Car buyers have adopted CarMax’s online valuation product for their trade-ins, and online transactions have jumped to 28% of total activity, from 18% a year ago. This figure may increase over time, as CarMax makes the online shopping process more convenient.
CarMax has had some successes and failures
CarMax benefited from an exceptionally high pricing environment thanks to high demand, tight supply and rising prices for new cars. However, the gross margin per vehicle fell slightly thanks to the increase in expenses. Gross margin reached $ 815 million, or 10% of sales, from $ 752 million, or 14% of sales a year ago.
This change was the main reason that overall profit margins fell, with net profit reaching 3.6% of sales from 5.5% last year. This is a step back from the record profitability CarMax achieved last quarter.
Management has said their priority is to improve the shopping experience, even if this results in lower profits in the short term. “We continue to invest in growth and innovation for the benefit of our customers,” CEO Bill Nash said in a press release.
CarMax’s finance arm has benefited from the booming economy, which should help support the company in the second half of its fiscal year. The chain also enters this period with a strong stock position.
The stock fell immediately after the report, likely because Wall Street was hoping to see more robust earnings growth thanks to soaring used car prices. Yet CarMax takes a long-term approach to maximize profits by limiting price increases and aggressively investing in its online platform.
These measures, along with the addition of 10 new stores, are expected to help it grow its market share to above 5% of the fragmented used car industry in the United States this year. But CarMax has much higher ambitions over time. These growth targets are based on the burgeoning digital sales platform, which is rushing to represent a third of the business at large about a year after its launch. Shareholders should see strong returns by focusing on this positive long-term picture of volatile earnings trends at the end of 2021.
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