Carmax (KMX): Short term woe means opportunity
4-24-07: Carmax (NYSE: KMX) is the largest retailer of used and new car in North America. In addition to its carmax.com, the company operates over 79 used car superstores in 38 states and seven new car franchises. The fundamental business model of KMX is providing a friendly environment of “No Hassles, No Haggling," meaning the price on the sticker is what you pay. Thus far, this concept appears to be working.
Few people would consider car shopping as one of their favorite activities. The idea of dealing with a pushy sales person and having to haggle over the price is no fun. The experience is even more daunting when shopping for a used vehicle. The idea of having to deal with unforeseen mechanical problems down the road is a major concern. Carmax’s model of selling vehicles utilizing a no haggle approach in combination with the internet experience appears to be future.
What separates Carmax from many of its competitors is the all sales consultants are compensated the same regardless of the vehicle they sell. This model help reduce the “pushy” sales tactics. Carmax also concentrate on selling predominantly newer vehicles (1-6 years old), low mileage vehicles that goes through a 125 point inspection process. The selection offer by Carmax is impressive. With over 20,000+ automobiles, shoppers usually will find what they are looking for nearby or have it shipped over for a nominal fee.
Over the past five years, Carmax has delivered healthy annual revenue growth of around +18%, while its earnings have climbed at a rapid +25% annual clip. However, the latest quarter was not as impressive. The company’s earning fell short of expectation, delivering 2 cents per share less than what most analyst had expected. The stock is now trading in the $25 per share range. In comparing KMX with its competitors, we did notice the stock’s P/E ratio is on the higher end. Given the recent news of slower growth, KMX share could head further south in the short term.
Despite the short term setback, we believed the long term prospect of Carmax regains attractive as the company plans to aggressive grow. In our view, the short term decline represents an opportunity. While the retail automotive business is indeed one of the most challenging businesses, the overall market of $350 billion is huge. Given the solid performance of KMX in the last 5 years, we believed the firm still has plenty of room to further their expansion and capture additional market share moving forward.