CarMax Stock Down 6.2% on Dismal Q3 Earnings

CarMax’s (KMX) weak Q3 earnings pulled down its stock by 6.2% today. The leading used-cars retailer’s EPS of $1.04 lagged Wall Street’s forecast of $1.16. However, revenue rose 11.5% YoY to $4.79 billion and beat analysts’ prediction of $4.68 billion.

Why CarMax Q3 earnings declined

CarMax’s EPS shrunk by 4.6% YoY (year-over-year). Higher share-based compensation expenses hurt their earnings. Additionally, increased advertising expenses did not help. Also, gross margin fell 50 basis points YoY to 12.8% in Q3.

The company’s advertising expenses rose 39% to support the omnichannel rollout and a new advertising campaign launched in October. Also, CarMax’s expenses increased as it opened new stores. Also, the company invested in technology advancement, digital initiatives, and omnichannel capabilities.

The company’s third-quarter revenue growth was a result of a 13.6% rise in used car sales to $4.03 billion. An 11% rise in unit volumes of used vehicles and a 2.2% rise in average selling price boosted used car sales. Used vehicles comparable-store sales grew by 7.5% YoY. Also, strong conversion with support of third-party lending partners and higher web traffic boosted comparable store sales.

Wholesale vehicle sales grew 1.2% YoY to $611 million. A 3.3% rise in unit sales volumes was partially offset by a 2.6% decline in average selling prices for wholesale vehicles.

CarMax and peers focus on omnichannel

CarMax is investing a lot in its omnichannel growth to compete with online used car retailers like Carvana. The company saw a 15% rise in web traffic this quarter. It is also improving omnichannel sales through the use of customer lead management tools, self-service tools, finance options, and digital merchandising.  

Through its network of over 200 stores and enhanced omnichannel capabilities, CarMax is well positioned to cater to customers who want to shop at stores, online, or a combination of both. Even retailer AutoZone (AZO) is focused on omnichannel growth. On December 10, AutoZone saw impressive fiscal 2020 first-quarter earnings. Its first-quarter revenue grew 5.7% YoY to $2.79 billion. Also, AutoZone’s EPS rose 6.2% YoY to $14.30.

More stores, more opportunities

In the fiscal 2020 Q3, CarMax opened two stores in new markets, namely Palm Springs, California, and Gulfport, Mississippi. Also, it opened two stores in existing markets: Dallas, Texas, and Atlanta, Georgia. Moreover, the company aims to open three new stores in the fourth quarter of fiscal 2020.

To support its omnichannel sales, CarMax now operates four CECs (or customer experience centers) in Raleigh, Atlanta, Kansas City, and a new center in Phoenix. Currently, 40% of CarMax’s customers have access to the omnichannel experience. Also, the company is on track to offer the omnichannel experience to most customers by the end of fiscal 2020. It aims to complete its rollout in fiscal 2021.