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CarMax Earnings Preview: The Trends to Watch

Investors have pushed CarMax (NYSE: KMX) shares higher since its March earnings report on increasing confidence that the used-auto retailer will end its sales slump. Customer traffic has been trending lower for over a year, but the chain notched encouraging wins in 2018, including a return to sales growth in the year's final quarter.

Investors are even more excited about CarMax's national rollout of its online sales program, which demonstrated strong early returns in test markets last year. The chain will provide shareholders with important updates on that initiative, along with CarMax's other key growth metrics, when it kicks off fiscal 2019 with an earnings report on Friday, June 21.

A customer shakes hands with a car salesman.

Image source: Getty Images.

Market share trends

The biggest question investors have heading into this report is whether CarMax's market share trends are stable, falling, or improving. They dipped overall last year, with the retailer's share of used-vehicle volume falling to 4.5% of the massive used car industry from 4.4%. This decline helped ensure that comparable-store sales were flat after rising by 2% in the prior year and jumping 4.3% in 2016.

CEO Bill Nash and his team said in March that this disappointing market share trend began to reverse itself in the second half of 2018. That improvement powered an encouraging 3% comps increase in the year's final quarter. Investors will find out on Friday whether that positive momentum carried into the new fiscal year, or whether the chain might post a third straight year of decelerating sales gains.

Offsetting costs

CarMax has shown an impressive ability to maintain its profitability through wide swings in demand between used and new cars over the years. Gross profit per vehicle has held at just under $2,200 in each of the last five fiscal years, in fact.

Other costs are rising, especially as the chain spends money putting more of the sales process online. However, CarMax is finding plenty of ways to offset those expenses. Adjusted pre-tax earnings jumped last quarter thanks to these wins, and investors are hoping for further evidence of efficiency gains this week.

The online shift

The company is betting heavily on the move toward digital car shopping, but details on this initiative have been scarce so far. The early indications from its test in Atlanta showed strong sales growth and healthy customer satisfaction last quarter, but CarMax also noted reduced conversion for ancillary products like parts and servicing plans.

The retailer plans to roll out the online car-buying offering to all of its markets by early 2020, and so investors will discover its real potential over the next few quarters. As of late March, Nash and his team said they thought the process could spark faster sales growth while potentially being even more profitable than its current selling model.

Management will have the opportunity to double down on those bullish comments this week, and the good news for investors is that they'll have more data from its online business to scour as they judge whether the move could really help accelerate sales growth in 2019 and 2020.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends CarMax. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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