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    Carmax Inc (KMX)

    New Share Buyback Program

    CarMax, Inc. is the largest retailer of used vehicles in the United States, operating through two main segments: CarMax Sales Operations and CarMax Auto Finance (CAF) . The company specializes in the retail and wholesale sales of used vehicles, along with related products and services such as extended protection plans and vehicle repair services . CarMax also offers financing options through its CAF segment, which provides competitive financing solely to customers purchasing retail vehicles from CarMax .

    1. CarMax Sales Operations - Encompasses all aspects of auto merchandising and service operations, including retail sales of used vehicles, wholesale vehicle sales, and related products and services such as extended protection plans, vehicle repair services, and advertising and subscription revenues.

      • Retail Sales of Used Vehicles - Offers a wide selection of used vehicles for purchase by consumers.
      • Wholesale Vehicle Sales - Facilitates the sale of vehicles to other dealers through auctions.
      • Extended Protection Plans (EPPs) - Provides additional coverage options for vehicle protection.
      • Vehicle Repair Services - Offers maintenance and repair services for vehicles.
      • Advertising and Subscription Revenues - Generates income through advertising and subscription-based services.
    2. CarMax Auto Finance (CAF) - Provides financing options exclusively to customers buying retail vehicles from CarMax, capturing additional profits and cash flows by offering competitive financing solutions.

    Initial Price$85.81August 30, 2024
    Final Price$83.97November 30, 2024
    Price Change$-1.84
    % Change-2.14%

    What went well

    • Accelerating sales momentum: CarMax is experiencing strong sales momentum, with comps improving sequentially each month, and December's month-to-date performance accelerating beyond the third quarter comps, indicating a strong growth trajectory into the fourth quarter, despite headwinds like losing a Saturday and Leap Day.
    • Significant SG&A leverage driving profitability: The company achieved SG&A leverage of 640 basis points, driven by growth in gross profit and continued expense efficiency actions, moving towards their goal of a mid-70% SG&A to gross profit ratio. CarMax is now pivoting from building capabilities to leveraging and enhancing them to drive growth and efficiencies.
    • Diversified vehicle sourcing strategy: CarMax's ability to source vehicles from both consumers and dealers allows them to secure hard-to-find inventory despite industry-wide supply shortages, supporting strong same-store sales comps and overall sales performance.

    What went wrong

    • Persistent weakness among lower-income consumers is impacting demand, with sales from customers making less than $3,000 per month still at half of their previous levels.
    • Flat web traffic indicates potential challenges in attracting new customers, suggesting growth is reliant on improved conversion rather than increased demand.
    • Future cost savings are being passed on to consumers rather than boosting margins, potentially limiting profitability upside.

    Q&A Summary

    1. Sales Momentum and Comps
      Q: What's a normalized used car unit comp for CarMax?
      A: It's hard to pinpoint a normalized comp, but we're pleased with the sales momentum. Throughout the quarter, comps improved sequentially each month. December's performance month-to-date has accelerated beyond the third quarter's comp. We believe the fourth quarter will be stronger from a comp performance than the third quarter, despite headwinds.

    2. Expense Leverage and SG&A
      Q: How should we think about expense leverage as comps improve?
      A: We're making progress toward our goal of hitting a mid-70% SG&A to gross profit ratio. With improved sales volumes and our cost management efforts, we're confident in our ability to leverage SG&A more effectively. We're past the heavy investment phase and are now focusing on enhancing capabilities to drive growth and efficiencies.

    3. Supply and Sourcing Strategy
      Q: Are you changing sourcing to lower-priced or older vehicles due to supply shortage?
      A: There's no significant change in our age mix; we've maintained a similar vehicle mix year-over-year. The notable difference is an increase in sales of vehicles under $20,000, which grew from 25% to 30% of sales year-over-year. Our diversified sourcing from consumers and dealers allows us to obtain hard-to-find vehicles, helping us navigate supply challenges.

    4. Cost Reduction Initiatives
      Q: Update on $200 per unit cost-out initiatives and use of savings?
      A: We've realized about half of the $200 per unit cost reduction, equally split between reconditioning and logistics, with the remainder expected in upcoming quarters. We're passing most of these savings to consumers while ensuring solid margins.

    5. Market Share Gains
      Q: Are you back to gaining market share as prices stabilize?
      A: While we prefer to measure market share annually, we feel great about our sales momentum and our ability to gain market share. We'll provide an update at the end of the year, barring any major price swings.

    6. CAF Allowance and Provisions
      Q: What led to the cut in the allowance for loan losses?
      A: Our provision reflects expected losses on new originations and any necessary true-up on existing receivables. This quarter's provision is at a more normalized level, with less true-up needed compared to last quarter. We originated $1.9 billion this quarter; tightening in Tier 1 is offset by testing in Tier 2 and Tier 3.

    7. Payment Extensions Impact
      Q: Provide more color on payment extensions and their P&L impact.
      A: We've adjusted our extension policies to help customers facing temporary hardships, allowing them to make partial payments to qualify for extensions. This helps customers stay in their cars and potentially lowers losses. We've reserved accordingly for any potential impact, which is reflected in our provision and reserve.

    8. Wholesale Business Growth
      Q: How sustainable are the gains in wholesale growth?
      A: We aim to increase wholesale volumes as much as possible. Our focus is on buying more cars, both retail and wholesale. Our partnership with Edmunds has helped sign up more dealers, and we see plenty of opportunity to expand. We offer dealers an additional avenue to sell unwanted cars, complementing traditional auctions.

    9. Omnichannel Experience Improvements
      Q: Has the omnichannel experience shift significantly benefited this quarter?
      A: Improvements in the omnichannel experience are a continuous build over recent quarters. We're seeing continued benefits from enhancing the customer experience, reducing friction, and improving conversion rates both online and in-store. Customers doing more remotely leads to better conversion, and our stores are leveraging tools for seamless customer interaction.

    10. Store Expansion Plans
      Q: Is there an opportunity to reach 300 stores, or leverage multichannel?
      A: We have 249 stores and believe we can go beyond 300 stores in the long term. We review our pipeline annually and see plenty of opportunities for expansion. While the omnichannel experience allows consumers to do more remotely, we believe a strategic physical footprint remains critical.

    11. Earnings Growth Expectations
      Q: Should low single-digit comps yield double-digit earnings growth?
      A: Our objective is robust top and bottom-line growth. With the investments we've made, we're positioned to leverage these as the operating environment improves. We've had two positive quarters of comps, with acceleration into the fourth quarter, and we're excited about our growth path moving forward.

    12. Inventory Build-Up and Tax Season
      Q: Is inventory build-up for tax season affecting cash flow?
      A: Inventory increased slightly as we're preparing for the upcoming tax season, which is a normal seasonal pattern. Our team has managed inventory well, improving turns year-over-year, and we're in good shape for tax time.

    13. Consumer Mindset and Demand
      Q: Has there been a change in consumer mindset driving demand?
      A: We haven't seen a significant change in consumer mindset. Improvements are largely due to our internal efforts to enhance the customer experience and reduce friction, as well as prices being down year-over-year. Some consumers are still financially pinched, particularly those with monthly household incomes below $3,000.

    14. Lending Partner Stance
      Q: Any noticeable changes from lending partners recently?
      A: Our lending partners remain steady, without significant adjustments. They love the CarMax business and are supportive in various conditions, but they're being prudent as any lender should be. We haven't observed major changes in their lending appetite.

    15. Impact of Consumers Shifting from New to Used
      Q: Are you gaining new customers shifting from new to used vehicles?
      A: Overall used car volumes have declined, especially in the 0- to 4-year-old segment, which is our sweet spot. Consumers are financially pinched, impacting the used car industry, particularly late-model sales. We believe consumers will return as economic pressures ease.

    16. EPP Penetration and Margins
      Q: Was EPP growth due to penetration or price increases?
      A: We raised prices on our Extended Protection Plans starting in the fourth quarter of last year, leading to higher margins. While penetration has decreased, we're overall making more money. We'll be lapping over that increase in the upcoming quarter.

    17. Used Car Pricing Trends
      Q: Are used car prices rising year-over-year?
      A: We feel good about our pricing due to actions taken and diversified sourcing. Off the top of my head, we're probably running a little lighter year-over-year in December, but we'll see how it pans out.

    NamePositionStart DateShort Bio
    William D. NashPresident and Chief Executive Officer1997William D. Nash joined CarMax in 1997 as an auction manager. He held various positions, including Vice President and Senior Vice President of Merchandising, and Senior Vice President, Human Resources and Administrative Services. He became President in February 2016 and has been CEO since September 2016 .
    Enrique N. Mayor-MoraExecutive Vice President and Chief Financial Officer2011Enrique N. Mayor-Mora joined CarMax in 2011 as Vice President of Finance. He was promoted to Vice President and Treasurer in 2016, then to Senior Vice President and Chief Financial Officer in 2019, and to Executive Vice President and Chief Financial Officer in 2022 .
    James LyskiExecutive Vice President and Chief Innovation and Strategy Officer2014James Lyski joined CarMax in August 2014 as Senior Vice President and Chief Marketing Officer. He was promoted to Executive Vice President in 2017 and transitioned to the role of Chief Innovation and Strategy Officer in 2023 .
    Charles Joseph WilsonExecutive Vice President and Chief Operating Officer1995Charles Joseph Wilson joined CarMax in 1995 as a buyer-in-training. He was promoted through various roles, including regional vice president of merchandising, and eventually to Executive Vice President and Chief Operating Officer in 2022 .
    Shamim MohammadExecutive Vice President and Chief Information and Technology Officer2012Shamim Mohammad joined CarMax in 2012 as Vice President of Application Development and IT Planning. He was promoted to Senior Vice President and Chief Information Officer in 2014, then to Senior Vice President and Chief Information and Technology Officer in 2018, and to Executive Vice President and Chief Information and Technology Officer in 2021 .
    1. Your credit penetration remains in the low 70% range, while an online peer has expanded theirs to the mid-80s; what specific constraints are preventing you from increasing your credit penetration to similar levels, and what strategies are you implementing to address this gap?
    2. With worsening trends in the broader auto loan market and Tier 3 penetration down to about 7%, how are you adjusting your underwriting standards and business planning to mitigate potential risks from a weakening credit environment, and what further cost efficiencies can you realize?
    3. Given the current headwinds in credit quality and increased loan loss provisions, does it make strategic sense to push forward with your full-spectrum lending initiative now, or should you reconsider its timing to avoid potential negative impacts?
    4. Can you provide more details on how you are rethinking or retooling your reconditioning operations to improve efficiencies and margins, and what specific actions are being taken to enhance profitability in this area?
    5. Regarding customers who are not procuring financing through CarMax and instead use third-party lenders or pay cash, what strategies do you have to better capture this higher-end, rate-sensitive customer segment and increase your overall financing penetration?
    Program DetailsProgram 1Program 2
    Approval DateOctober 23, 2018 April 2022
    End Date/DurationNo expiration date No expiration date
    Total additional amount$2 billion $2 billion
    Remaining authorization$2.15 billion as of 2024-12-21 $2.15 billion as of 2024-12-21
    DetailsPart of capital allocation strategy Part of capital allocation strategy

    Q2 2025 Earnings Call

    • Issued Period: Q2 2025
    • Guided Period: The documents do not specify a future period in the form of 'Q# ####' or 'FY ####'.
    • Guidance: The documents do not provide specific guidance metrics for CarMax from the Q2 2025 earnings call. The discussions focus on past performance and improvements in various areas but do not explicitly mention forward-looking guidance metrics.

    Q1 2025 Earnings Call

    • Issued Period: Q1 2025
    • Guided Period: The documents do not specify a future period in the form of 'Q# ####' or 'FY ####'.
    • Guidance:
      1. Advertising Spend: Approximately $200 per total unit for the entire year.
      2. SG&A Expenses: Focus on active cost management to leverage low single-digit gross profit growth.
      3. Cost of Goods Sold: Aim for a couple of hundred dollars per retail unit in savings over the next year or two.
      4. CarMax Auto Finance (CAF): No significant changes expected in the percentage of sales financed by CAF for the balance of the year.

    Q4 2024 Earnings Call

    • Issued Period: Q4 2024
    • Guided Period: FY 2025
    • Guidance:
      1. SG&A Leverage: Low single-digit gross profit growth required to leverage SG&A, aiming for mid-70% range over time.
      2. Marketing Spend: Approximately $200 per unit for the full year.
      3. Share Repurchases: Modest acceleration in the pace of share repurchases, with $2.36 billion of repurchase authorization remaining.
      4. Capital Expenditures: Between $500 million to $550 million.
      5. Store Openings: Five new store locations planned.
      6. Long-term Financial Targets: Goal to sell more than 2 million combined retail and wholesale units annually by fiscal 2026 to fiscal 2030.

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024 and FY 2024
    • Guidance:
      1. Share Repurchase Program: Resumed with $2.41 billion of repurchase authorization remaining.
      2. Store Openings: Four new stores planned in Q4.
      3. Retail and Wholesale Gross Profit Per Unit: Retail gross profit per used unit margin expected to be lower than last year's Q4 record margin.
      4. Marketing Spend: Full-year marketing spend per unit similar to last year, with Q4 spend exceeding last year's Q4.
      5. SG&A Efficiency: Target mid-70% SG&A as a percent of gross profit.
      6. Extended Protection Plan (EPP) Revenues: No profit-sharing revenues expected in Q4 due to inflationary pressures.

    Competitors mentioned in the company's latest 10K filing.

    • Franchised dealers: Sell both new and used vehicles and are part of the highly fragmented U.S. used car marketplace .
    • Online and mobile sales platforms: Facilitate increased competition in the used car marketplace .
    • Independent used car dealers: Compete in the U.S. used car marketplace .
    • Private parties: Compete in the U.S. used car marketplace .
    • Banks and credit unions: Provide direct financing to customers purchasing used cars, competing with CarMax Auto Finance .
    • New car dealers: Leverage franchise relationships to brand certain used cars as "certified pre-owned," providing a competitive advantage .
    • Companies with online focused business models: Compete in direct sales and consumer-to-consumer facilitation, impacting CarMax's business model .
    • E-commerce businesses: Enter the online new and used vehicle markets, potentially offering a greater inventory and superior online experience .
    • Automotive in-person and online auctions: Compete with CarMax's wholesale auctions .

    Recent developments and announcements about KMX.

    Financial Reporting

      Earnings Call

      ·
      Dec 19, 2024, 6:09 PM

      The recent earnings call for CarMax (KMX) highlighted several key points regarding the company's financial performance and strategic initiatives. CarMax reported a third-quarter net earnings per diluted share of $0.81, marking a 56% increase compared to the previous year. Total gross profit rose by 11% to $678 million, with used retail margins increasing by 7% due to higher volume and stable per unit margins. Wholesale vehicle margins also grew by 12% .

      Management expressed confidence in their sales momentum and market share gains, noting that the last two quarters have shown positive trends. They plan to update market share figures at the end of the fiscal year, assuming no significant price swings occur .

      Regarding forward guidance, CarMax is optimistic about the upcoming tax season, emphasizing the importance of inventory flexibility to adapt to market conditions. They are preparing for a potentially strong tax season by building up inventory, which is a typical seasonal strategy .

      In terms of strategic initiatives, CarMax is focusing on expanding its store footprint beyond the current 249 locations, with plans to reach 300 stores in the long term. They are also leveraging their omnichannel model to enhance efficiency and customer experience, which is expected to drive further growth .

      Analyst questions during the call touched on various topics, including the impact of market conditions on wholesale operations, inventory management strategies, and the company's approach to cost management and efficiency improvements. Management highlighted their efforts in improving conversion rates and reducing friction in the customer experience, which have contributed to their positive performance .

      Overall, CarMax's earnings call reflected a strong financial performance and a strategic focus on growth and efficiency, positioning the company well for future success.

      Earnings Report

      ·
      Dec 19, 2024, 12:23 PM

      CarMax, Inc. (NYSE:KMX) has released its third quarter fiscal year 2025 earnings results, reporting significant growth and positive trends in its financial performance. Net earnings per diluted share increased by 55.8% to $0.81, compared to $0.52 in the same quarter last year . The company achieved over 50% earnings growth, driven by gains across its business segments .

      Key Highlights:

      • Retail used unit sales increased by 5.4%, while comparable store used unit sales rose by 4.3%. Wholesale units saw a 6.3% increase .
      • Total gross profit reached $677.6 million, marking a 10.6% increase, supported by strong unit volumes and margin performance .
      • CarMax Auto Finance (CAF) income grew by 7.6% to $159.9 million, attributed to an increase in net interest margin percentage and average managed receivables .
      • The company repurchased $114.8 million in shares of common stock during the quarter .

      Trends and Strategic Insights:

      • The company noted a more stable environment for vehicle valuations, which contributed to robust earnings per share (EPS) growth .
      • CarMax continues to leverage its omni-channel platform, which is a key differentiator in driving growth and accessing a large market within the industry .

      Overall, CarMax's third quarter results reflect strong operational execution and strategic positioning in the used vehicle market, with significant improvements in sales, profitability, and financial management .

    Financial Actions

      New Share Buyback Program

      ·
      Dec 19, 2024, 12:21 PM

      CarMax has announced a new buyback program as part of its financial strategy. During the third quarter of fiscal year 2025, CarMax repurchased 1.5 million shares of common stock for $114.8 million. As of November 30, 2024, the company had $2.04 billion remaining available for repurchase under the outstanding authorization .