CarMax (KMX) to Bank on Expansion Plans Amid Cost Woes

CarMax (NYSE:KMX)’s KMX shares have gained 11.5% in the past year, underperforming the industry’s rise of 29.2%. Headquartered in Richmond, VA, CarMax is one of the largest retailers of used vehicles in the United States. The range of vehicles includes both cars and light trucks. CarMax also provides customers with a comprehensive range of related services, including financing of vehicle purchases and sale of extended warranties, accessories and vehicle repair services through CarMax Auto Finance.

However, this Zacks Rank #3 (Hold) firm is currently bogged down by certain headwinds that are keeping investors on the sidelines. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Let’s delve deeper into the tailwinds and headwinds faced by the company.

CarMax’s store-expansion initiatives, fast delivery and high-quality products are boosting its market share. The auto retailer follows an aggressive store expansion initiative in existing as well as new markets. During the last reported quarter, the company opened one new location, with plans to open 10 new stores during fiscal 2022. In fact, the company’s goal of selling 2 million units annually combined through its retail and wholesale channels by 2026 offers ample visibility for growth.

The company’s customer-centric omni-channel capabilities provide a personalized multichannel experience with a mix of digital and physical interactions to meet their needs. This has enhanced the shopping experience for buyers. It is a critical component of the company’s long-term strategy and is likely to boost its revenues in the future.

CarMax reported record revenues in the third quarter of fiscal 2022, jumping almost 65% year over year. This was mainly because of increased consumer demand for buying their vehicles online, ramped up inventory and staffing levels, and the continued success of vehicle sourcing from customers. The company sold 415,054 vehicles in the last reported quarter, including 227,424 used cars, up 16.9%. CarMax’s wholesale unit sales were up 48.5% to 187,630, setting a third-quarter record for the company. Comparable store used unit sales were also up 15.8%.

The acquisition of Edmunds has solidified CarMax’s position in the used auto ecosystem. Edmunds’ content and technology expertise along with CarMax’s unparalleled national scale and infrastructure will provide exceptional value to clients and bolster the company’s profitability.

While the company is riding on such positives, it faces certain hurdles.

CarMax has been bearing the brunt of high selling, general and administrative (SG&A) costs, hurting the firm’s margins. SG&A costs flared up 33.7% from the prior-year period to $575.9 million in the last reported quarter. This surge was driven by enhanced total compensation and benefits, increased advertisement and other overhead expenses. CarMax expects SG&A costs to rise further.

Further, increased investments to develop technology platforms and ramp up digital initiatives also increase capital expenses for the company. The company projects capital spending to shoot up to roughly $350 million in fiscal 2022, up from the $164.5 million recorded in fiscal 2021 and the $331.9 million in fiscal 2020. This expected upswing reflects the firm’s continued spending on technology and the opening of new locations.

Moreover, the company’s high leverage, as represented by a total debt-to-capital ratio of 0.77, way higher than the sector’s 0.31, reduces its financial flexibility to tap opportunities.

3 Key Picks

Some better-ranked stocks in the auto space include Fox Factory Holdings FOXF, General Motors GM and LKQ (NASDAQ:LKQ) Corporation LKQ, all carrying a Zacks Rank of 2 (Buy) currently.

Fox Factory has an expected earnings growth rate of 16.67% for the fourth quarter of 2021. The Zacks Consensus Estimate for its fourth-quarter 2021 earnings has been revised 2cents upward in the past 90 days.

Fox Factory’s earnings beat the Zacks Consensus Estimate in the last four quarters, delivering an earnings surprise of 27.9%, on average. FOXF has surged 29.3% in the past year.

General Motors has an expected earnings growth rate of 1.12% for 2022. The Zacks Consensus Estimate for its 2022 earnings has been revised 11 cents upward in the past 30 days.

General Motors’ earnings beat the Zacks Consensus Estimate in the last four quarters, delivering an earnings surprise of 46.51%, on average. GM has surged 35.7% in the past year.

LKQ Corp has an expected earnings growth rate of 11.59% for fourth-quarter 2021. The Zacks Consensus Estimate for its fourth-quarter 2021 earnings has been revised a penny upward in the past 90 days.

LKQ Corp’s earnings beat the Zacks Consensus Estimate in the last four quarters, delivering an earnings surprise of 34.37%, on average. LKQ has rallied 52% in the past year.

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