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CarMax Idea Proposal (KMX)

CarMax Idea Proposal (KMX)
 

Can CarMax sustain its growth trend as it continues to add stores and expand its omnichannel sales platform?

Report Available: August 21, 2019

 

Blueshift’s initial research found KMX, the nation’s largest used car dealer, building on its FYQ4 2019 sales uptick with a solid FYQ1 2020 performance. CEO Bill Nash cited “strong growth in sales, gross profit, and earnings” as the key to the outstanding quarter. The company also continued to execute on its multichannel selling initiative with expansion beyond Atlanta to markets in Florida and Virginia. Challenging the growth trend is intense competition that is also disrupting how used cars are bought and sold, and an economy that is slowing, though the Fed’s July 31 rate cut may help spur used car sales and financing.

Observations

  1. KMX’s Q1 2020 results beat the Street’s estimates and posted a string of positive numbers. Sales revenue, net income, and gross profit all rose 12%, and EPS increased 20%. Used car sales rose 13% to 224,268 units at an ASP of $20,050. Wholesale car sales increased 7% with an ASP of $5,213. Store traffic was flat in Q1, but web traffic increased 15% YY.
  2. KMX continued to execute on its new store expansion and omnichannel sales initiatives in FYQ1 with new store openings, the expansion of online sales to Florida and Virginia, and the announcement of a second Customer Experience Center opening in Olathe, KS that will hire 300 customer experience consultants, assistants, and managers.
  3. Challenging KMX’s continued growth is intense competition and a shift in consumers’ method for buying used cars. CVNA is the fastest growing used car dealer and it has disrupted how used cars are sold with its online shopping and buying process, car vending machine, and home delivery business model. AN is another competitor that appears well positioned to compete with KMX.
  4. The slowing U.S. economy is another headwind KMX must navigate as it tries to extend its growth trend. U.S. growth slowed to an annual rate of 2.1% in Q2 compared to the annual growth rate of 3.1% in Q1. Trade disputes and a global slowdown were cited as the cause. The decline was less than expected because consumer spending remained strong and there are signs that it will remain strong, though at a slower pace. The Cox Automotive July 2019 Industry Update reported a 3% YY decline in used car sales and a 2% YY decline in new car sales in June. However, the Fed approved on July 31 its first rate cut since 2008 which should bode well for auto sales and financing.
  5. Blueshift’s May 1 report found that KMX’s omnichannel/online and store expansion initiatives would drive sales and loan originations in 2019, thanks to a robust used car market and the company’s stellar reputation, good management and brand loyalty. Its unique low-pressure sales model is trusted by consumers, its scale and financial strength are advantages, and it is successful and aggressive at car acquisition. KMX’s omnichannel/online program is late to market, but it is expected to quickly catch up. The most frequently discussed competitor was CVNA which has disrupted used car sales with its online selling model, its car vending machine, and delivery service. Some sources are impressed with CVNA, but said it is not making any money.

 

Can KMX build on its strong Q1 comp sales results? Can it sustain growth? What effect is KMX’s omnichannel offering having on sales? Is KMX’s aggressive investment in additional physical store locations a winner or loser in light of increased online buying? How will KMX’s auto finance segment perform with the shift to omnichannel sales?  What is the trend with the cost of funding? How is this affecting KMX’s auto financing segment? What effect will the Fed’s rate cut have on used car sales in the coming months? To answer these and other questions, Blueshift will gather data and issue a market research report from independent sources in the following areas: Used Car Dealers, Banks and Used Car Lenders, Online Competitors, and Industry Specialists.  

 

Companies: AutoNation (AN), CarGurus Inc. (CARG), CarMax Inc. (KMX), Carvana (CVNA), TrueCar Inc. (TRUE), Bank of America (BAC), Credit Acceptance Corp (CACC), Capital One Financial (COF), Discover Financial Services (DFS), Santander (SC), U.S. Bancorp (USB), Wells Fargo (WFS)

 

Research Begins: August 5, 2019

To see other ideas Blueshift Research is currently working on, please click here.

 

Blueshift Research’s sister company, Intro-act, is launching its Intro-act Scorecard, the C-suite’s standard, ongoing measure of corporate investor engagement.

 

The Scorecard optimizes the ROI on corporate access by measuring: Concentration, Directionality, Breadth, Impact, Depth, and Duration