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  • Blinders Off Research

Is CarMax Running Out Of Gas?


  • CarMax has difficult sales volume comps going forward combined with increased competition for retail inventory.

  • Revenue and earnings expectations for fiscal year 2020 are very aggressive given current circumstances.

  • Current inventory levels are providing a strong warning signal.


The ability to source vehicles at a rate sufficient enough to fuel sales growth is one of, if not, the most important challenge that a stand-alone used-vehicle retailer faces. Standalone used-vehicle stores have a notable disadvantage over traditional retail dealers: less trade-ins (new-vehicle sales provide a greater percentage of trade-ins that can be kept and sold compared to used-vehicle sales) and no lease returns (matured leases are returned to new-vehicle dealers which have the opportunity to purchase the vehicles before they are sent to auction). Without the benefit of additional trade-ins and lease returns enjoyed by franchised new-vehicle dealers, standalone used-vehicle dealers are forced to acquire the majority of their inventory at wholesale auctions.


To date, CarMax has done a terrific job at of sourcing vehicles from both wholesales auction and consumer which has led to 9 consecutive years of uninterrupted volume growth (likely 10 years when Q4 earnings are reported on 3/29/2019).


So what could possibly break the very impressive trend in sales volume growth which for obvious reasons, has the tightest correlation to both the revenue and net earnings of the company? In one word, competition. Fearing a slowdown in business, traditional dealers decided to invest in stand-alone used-vehicle stores in order to offset a potential decline in new-vehicle sales. As mentioned earlier, the main source of supply for stand-alone used-vehicle stores is wholesale auctions. The increase in stand-alone used-vehicle retailers which now includes formidable players like Carvana, the leader in online-only used-vehicle sales, has added a level of competition to CarMax’s sourcing efforts that have not previously been experienced. So how is CarMax performing in this new and more competitive environment?

If Q4 (December through February) sales volume is impacted by the decline in retail inventory shown above, it’s likely to be minimal since inventory levels did not start to meaningfully decline until February. However, going forward, I believe the inventory declines will pose a significant threat to volume comps. If I am correct, CarMax’s stock price could decline significantly as analysts realize that current consensus estimates for fiscal year 2020 are not attainable (currently expecting an increase of 6.3% in revenue and a 3.3% increase in net earnings for fiscal year 2020 per Capital IQ). Due to the increase in competition for retail used-vehicle supply, the significant inventory decline observed since February, and forward earnings expectations, I believe a material increase in price ahead of or following Q4 earnings would provide a very good medium to long-term short opportunity.


The thesis is simple, you can’t sell what you don’t have.


These are my opinions and the content contained in or made available through this article is not intended to and does not constitute investment advice. Your use of the information or materials linked from this article is at your own risk.



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