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WIKI ANALYSIS
CarMax, Inc. (CarMax) is the country's largest retailer of used cars by volume, during the fiscal year ending on February 28th, 2009. CarMax sold over 345,465 used vehicles through 100 superstores during FY 2009, raising $6.9 billion in net sales.[1] CarMax competes in a highly fragmented, highly competitive market; there are approximately 20,000 automotive dealerships, 39,000 independent used vehicle dealers and an unknown number of individuals who sell used vehicles to the public.[2] CarMax has used its size to take advantage of economies of scale in its operations, notably through its rigorous computer-based tracking systems and no-haggle pricing strategy.
CarMax's financial performance has been affected by the worsening economic conditions and tight credit markets brought on by the subprime lending crisis. Revenues have decreased from $8.2 billion in FY 2008 to $7.0 billion in FY 2009; additionally net income has decreased from $182 million in FY 2008 to $59 million in FY 2009.[1] Carmax's second quarter of 2009 however saw a 13% increase in sales, indicating that the company's downtrend may reverse. Company executives caution that excess performance was largely driven by the government's cash for clunker's program which spurred aggregate auto demand. [3] Moreover, this growth has pushed Carmax's stock closer to its value, in turn increasing the risk of holding the stock.[4]
Two seemingly unrelated drivers of sales are airline travel and hurricanes. CarMax sold over 200,000 wholesale vehicles to rental car companies such as Hertz Global Holdings (HTZ) and Avis Budget Group (CAR), which thrive on increased airline travel. In addition, hurricanes tend to destroy cars, thus temporarily driving up the prices that CarMax can charge for its vehicles. As mentioned above, Carmax's stock rose 80% with speculation on the passing of the cash for clunker's program, which capitalizes on the impacts of weatherization.[5]
Business Financials
Falling demand for both new and used automobiles caused Carmax's Q1 09 revenues to fall approximately 17%, to $1.83 billion.[6] However, the falling cost of purchasing vehicles also lowered the company's expenses by about 19%, causing first quarter net income to fall just $810,000 to $28.7.[6]
Carmax has 4 basic business segments: selling used vehicles, selling new vehicles, selling wholesale vehicles, and other (servicing, financing, and warranties).
The company has a no-haggle policy with trade-ins, but really it recoups any trade-in losses through its servicing, warranty and financing arm.
The following graph shows how profits are divided between the business segments. You might notice that Carmax's New Car profits declined 40% between 2008 and 2009, whereas its wholesale and used car profits declined only 8-9%.[7] This shows how Carmax's main business line is somewhat insulated from U.S. Economic Cycles
The next graph shows Carmax's operating margins, which have been relatively stable across years. It is very profitable to provide extra services to old cars, and less profitable to sell them.
Financial Ratios
CarMax has gross profitability of 13.6% for the last 5 years, with a pretax margin of only 3.3%. This is reflective of the amount of competition in the used car industry, and the fact that CarMax may not sell some of its inventory. Carmax is fiscally conservative, with a current ratio of 2.3, nearly double the industry average. Carmax has taken a beating since 2007. It once traded at 81.4 times earnings, whereas now it only trades at 30.8 times earnings, meaning that investors are much less optimistic about the company's growth potential.[8]
It is notable that investment genius Warren Buffett has invested in Carmax. He bought the stock in the $9-$12 range and cashed out 25% of his holdings in Summer 2009.[9]
Quarterly and Annual Earnings
Q3 FY 2009 Earnings
CarMax posted revenues of $1.73 billion, up 19% from 1.46 billion in the same quarter the previous year.[10] Comparable store used unit sales and total used unit sales rose by 8% and 9% respectively for the quarter, marking the second consecutive quarter of comparable store used sales growth.[10] CarMax posted a net income of $74.6 million this quarter, and increase from a net loss of $21.9 million in the same quarter the previous year.[10] Gross profit increased to $242.9 million from $199.2 million in year-to-quarter comparisons, an increase of 22%.[10] These gains were driven by an increase in unit sales as well as an increase in profit margins.[10]
CarMax experienced gains despite the anticipated impact of the government's "cash for clunkers" program and tightening lending standards.[10] CarMax pointed to its streamlined inventory and management systems and processes as having provided the fundamentals for growth.[10] Despite these gains in traditional, used vehicle sales, Carmax saw a 31% drop in new vehicle sales and a 1.1% drop in wholesale vehicle sales.[10]
Q2 FY 2009 Earnings
CarMax posted net sales and revenues of $2.08 billion, an increase of 13% from $1.84 billion to same quarter of last year[11] Driving these gains were increases across the board on comparable store used unit sales, total used unit sales, and net income.[11] Comparable store used unit sales grew by 8% in the second quarter coupled with a 10% increase in total used unit sales as well.[11] Buttressing these gains CarMax's net income of $103.0 million, a 735% increase from the $14.0 million in net income posted in the second quarter of FY 2009.[11]
Both used vehicle sales and wholesale vehicle sales increased in the second quarter, by 15.6% and 6.1% respectively.[11] Used vehicle sales finished at $1.7 billion and wholesale vehicle sales finished at $237 million;[11] new vehicle sales, on the other hand, decreased by 18.8% to $63.2 million from $77.8 million the previous year.[11]
FY 2009 Annual Summary
CarMax posted revenues of $6.9 billion for FY 2009, a 15% decrease from the previous year.[12] Both net earnings and diluted earnings per share dropped by 67% for the year, with net earnings ending at $59.2 million.[12] Driving these losses were decreased in used vehicles sold and return on invested capital. Used vehicles sold decreased from 377,244 in 2008 to 345,465 in 2009, an 8% drop.[12] Return on invested capital similarly fell, dropping from 10.1% in 2008 to 4.4% in 2009.[12] Capping these losses were a 16% decrease in comparable store used unit sales for the fiscal year, as compared to 3% and 9% increases for the past two years respectively.[12]
FY 2008 Annual Summary
CarMax posted net sales and operating revenues of $8.2 billion for FY 2008, marking a 10% increase from the previous year's net sales of $7.5 billion[13] Despite these gains, CarMax also posted an 8% and 10% decrease in both net earnings and diluted earnings per share, finishing at $182.0 million for net earnings and %0.83 for diluted earnings per share[13] This may be explained partially by the 42% decrease in cash provided by operating activities, dropping from $136.8 million in 2007 to $79.5 in 2008.[13] Used car superstores, however, increased in number by 16% totaling at the year's end with 89 superstores.[13]
Macro Trends and Drivers
Travel & Hurricanes in the South
Increased travel and natural disasters like hurricanes can affect pricing for the company. When Americans travel more, rental companies like Hertz Global Holdings (HTZ) and Avis Budget Group (CAR) demand greater numbers of used-cars at CarMax's wholesale auctions, and bidding intensifies and prices rise. Similarly, hurricanes, such as those of the magnitude of Katrina and Rita, destroy large quantities of vehicles in the South, a key market for the company. When replacements are sought in mass, demand drives pricing to favorable levels. For instance, the company experienced 6%+ growth in pricing in 2006 due to both an unseasonable hurricane season and lack of supply to meet rental company demands.[14]
Subprime Delinquencies on Auto Loans
As many auto buyers finance their purchases with loans, there exists a risk of spillover from the subprime lending crisis into the auto-loan business. As homeowners/car buyers struggle to pay both their mortgages and auto-loans, the company may assume losses due to loan delinquencies as well as hampered demand for auto loans going forward.[15]
Weathering Recessions
CarMax deals in 1-6 year old vehicles. This means that when the economy is strong, people can buy a car that is a little better/newer than during a down economy. So those who would normally buy a 1-2 year old used car can now buy a new car. But people normally in the market for a 7-10 year old car can now afford a 5-6 year old car. Conversely when the economy is very bad, car buyers move down a year or two on their purchase. CarMax has a sort of natural buffer because of the age range of cars it sells.
Rising Oil Prices
Competition and Used Car Market Share
The US auto-industry stopped growing long ago. The same is true of the used car industry. The used car industry is extremely competitive and price sensitive. Carmax does well because it has huge Economies of scale. It can buy cars in bulk, make standardized offers on nearly any car, and deploy technically advanced automated customer service systems to keep costs down. Carmax also uses its website, carmax.com to sell cars. Carmax.com has seen its traffic decline, perhaps due to the fact that Carmax now sells on cars.com as well.[16] Carmax thinks it has strong competitive advantage in its customer satisfaction due to fast turnaround, warranties, a no-haggle policy and a well-trained and friendly staff.
Despite its large size, Carmax controls less than 2% of the total market for used cars in the United States, estimated to be about 16 million cars per year. Its next largest competitor, AutoNation (AN) controls about 1%. There are about 39,000 used vehicle dealers and millions of private individuals directly competing with Carmax. [7]
Indirect competition for used cars include new cars, motorcycles, and public transit. This is especially relevant to consider, because the advent of Hybrid and Alternative Energy Technology may make new cars temporarily more attractive and do serious short-term damage to Carmax's business of selling old vehicles.
Footnotes
- ↑ 1.0 1.1 KMX 2009 10K
- ↑ FY09 ARS Final Complete Report
- ↑ hopes for higher ethanol production
- ↑ Nothing Can Hold a Candle to Stocks
- ↑ Mad Money Recap: Cash for Caulkers
- ↑ 6.0 6.1 KMX, Q1 2009, 10-Q, Item 1, Page 3
- ↑ 7.0 7.1 | The Carmax 2008 Annual Report, p. 22
- ↑ Competitiveness
- ↑ l|Warren Buffett Stock Picks, GuruFocus
- ↑ 10.0 10.1 10.2 10.3 10.4 10.5 10.6 10.7 CarMax Reports Third Quarter Earnings
- ↑ 11.0 11.1 11.2 11.3 11.4 11.5 11.6 CarMax Reports Record Quarterly Earnings
- ↑ 12.0 12.1 12.2 12.3 12.4 CarMax 2009 Annual Report; Page 4
- ↑ 13.0 13.1 13.2 13.3 CarMax 2008 Annual Report; Page 5
- ↑ 2007 CarMax Annual Report, pg 23
- ↑ Associated Press article, "Subprime crisis could spread to auto loans," November 26, 2007
- ↑ profile of Carmax.com
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