CarMax has not reached its limit

Chip shortages have proven to be a continuing gift for the used car business. But it’s not free yet.

Used Car Seller CarMax KMX -9.83%

On Thursday, it said sales for the quarter ending August 31 were up 48.7% year-on-year, surpassing analysts’ expectations and reaching a record of $ 8 billion. High prices for used cars, driven by continued delays in new car manufacturing due to a global chip shortage, continue to push the company’s top line. Average retail prices increased 30.8% year-on-year.

However, not all of them are profitable. Earnings per share actually fell compared to a year ago, 12.4% below analysts’ expectations. It seems to have been a huge disappointment for investors after the company has significantly exceeded EPS estimates for the fourth straight quarter. CarMax’s share price fell by more than 11% after the earnings announcement on Thursday morning, after reaching a record high on Wednesday.

However, CarMax’s share price probably needed to be revised. Inventories are still up 39 percent year-to-date, surpassing even the fast-growing online used car dealer Carvana by about 12 percentage points.

Part of the decline in profitability was due to CarMax having to spend more on staffing and advertising to sell more. The unit price to retail customers has decreased compared to the previous quarter, and the company plans to keep the unit price at the normal level so that it can be sold at a competitive price.

The good news is that finding a car for sale by CarMax isn’t too much of a problem. The company sold 6.7% more units to retail customers compared to the previous year. According to Evercore, this is far superior to the mid-single-digit decline that Cox Automotive saw in the industry over the same period.

CarMax, a used car dealer on Thursday, said sales for the quarter ending August 31 were up 48.7% year-on-year.


tannen maury / Shutterstock

This heralds CarMax’s sales growth in the coming quarter. Compared to July and August, when used car prices were somewhat calm, this month’s selling prices actually rose. As of mid-September, used car wholesale prices were 3.5% higher than the previous month and 25% higher than the previous year, according to Mannheim.

Even in hot markets, CarMax has little choice but to invest to stay competitive. According to a recent report from Oppenheimer, the used car market is still a very fragmented space, with CarMax and its three online competitors 3.5% of used cars planning to replace used cars in the United States. Only occupy. But as long as used car demand and prices continue to rise, there should be many businesses to avoid.

In addition, the used car boom can last longer than the chip shortage itself. Some automakers say they plan to permanently reduce inventory to dealers after making high profits during an inventory-constrained pandemic.Ford,

NS -0.84%

For example, he said he plans to cut dealer inventory levels by a third in the long run. This should help drive demand for used cars compared to pre-pandemic levels.

CarMax’s share price is generally a favorable period for the industry as a whole, but it can hit more speed bumps as it invests in navigating tricky periods. It should not be distracted from that open path ahead.

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CarMax has not reached its limit

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