CarMax Inc (NYSE: KMX)
Last Price: US$69.04| Fair Value: US$141.00
Business Strategy & Outlook:
CarMax’s revenue has increased at a compound annual rate of about 13% since fiscal 2000 because of the success of customer-friendly sales practices and use of information technology. The firm targets a 12%-19% annual growth rate for fiscal 2021-26. Competing dealerships have tried no-haggle pricing and failed because their salesforces are trained to focus on selling vehicles that earn the highest possible gross profit rather than vehicles that customers actually want or need. A traditional dealership relies on profits from service to offset the typically lower margins it gets on new-vehicle sales. CarMax does not hire salespeople from the auto industry, and salespeople receive the same commission regardless of the vehicle sold. They do not even know the profit on the vehicle sold. The CarMax customer stays with the same salesperson throughout the transaction rather than being passed off to a finance department, receiving a buying experience that is hard to match at a dealership. This focus on customer satisfaction, combined with scale advantages that allow for a wide inventory selection and extensive pricing data, creates a narrow economic moat. Management has said repeatedly that it will give any further improvements in operating expenses back to the customer as a price decrease instead of seeking higher gross margins. This strategy is admired by professionals; CarMax’s scale allows it to price below smaller dealerships, and lowering prices should increase comparable-store sales while keeping competitors away, though some large dealers are copying CarMax’s shopping experience. The company can often make up any lost margin via its highly profitable finance arm, CarMax Auto Finance. CAF finances about 41% of unit sales. The company’s omnichannel program, which finished rolling out in the second quarter of fiscal 2021, enables consumers to shop in any combination of digital and in store that they like and should allow for fewer store openings over time. These factors should keep the company growing for many years, despite more competition from franchised dealers and online-only startups. Omnichannel is just over half of retail volume.
Risk and Uncertainty:
CarMax operates in the cyclical auto industry, and any downturn brings uncertainty as to the timing and extent of a recovery in demand for used vehicles. Also, nothing stops a competitor from trying to emulate CarMax; Lithia Motors’ and Asbury’s now-defunct L2 and Q Auto used-car stores are proof of that, as are AutoNation USA, Sonic’s EchoPark, and Penske’s CarShop stores. In 2013, franchise vehicle dealer Sonic announced plans to open its EchoPark standalone used-vehicle stores, which it did in 2014. Sonic wants to have a lot of stores over time and made it clear how much it admires CarMax. The industry is so fragmented that all these firms may find success, though it is thought competitors will need at least a decade to rival CarMax in size and expertise. When used-vehicle prices rise, management will likely keep the same target for gross profit dollars, which can hurt margin and cash flow as in fiscal 2022. It is thought highly of CarMax’s management and business model, so it is considered macroeconomic variables as the highest risk for the firm rather than company specific risk factors. Any major environmental, social, and governance concerns for CarMax are not viewed, provided that autonomous vehicles do not someday eliminate demand for used vehicles. It is believed that is highly unlikely, due to vehicle affordability for all Americans, and even if it occurred, it’s likely a very long way off. The company does get sued from time to time for accusations of unpaid wages or unfair labor practices, but any of these matters ever receiving a judgment that would reduce fair value estimate reduction is not seen. CarMax will need to ensure that its data security measures are ironclad as it moves into the omnichannel space with its customers sharing more personal information. Governance improvements in the past are that the board allowed the shareholder rights plan to expire in 2012 and removed the staggered board of director terms in 2013
Bulls Say:
Company Description:
CarMax sells, finances, and services used and new cars through a chain of over 230 used retail stores. It was formed in 1993 as a unit of Circuit City and spun off into an independent company in late 2002. Used-vehicle sales typically account for about 83% of revenue and wholesale about 13%, with the remaining portion composed of extended service plans and repair. In fiscal 2022, the company retail and wholesale 924,338 and 706,212 used vehicles, respectively. CarMax is the largest used-vehicle retailer in the U.S. but still estimates that it has only about 4% U.S. market share of vehicles 0-10 years old in 2021. It seeks over 5% share by the end of calendar 2025 and revenue of $33 billion-$45 billion by fiscal 2026. CarMax is based in Richmond, Virginia.
(Source: Morningstar)
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