Shares of the largest U.S. used car retailer CarMax, Inc. NYSE: KMX
have been melting down since late July 2020 falling back under its February pre-COVID highs. The stock is underperforming the benchmark S&P 500 index NYSEARCA: SPY
but may be bottoming out as the weekly stochastic nears a full oscillation move down. The used car market bottomed out in April 2020 and has seen sequential improvements especially with bottlenecked supply chains for new cars
. The pandemic
has bolstered demand for used cars as consumers avoid public transportation and rideshare
preferring the safety of using their own cars. As the restarts continue to accelerate despite international rollbacks, used car sales should continue to experience heavy demand and improving margins. Prudent investors seeking exposure in the rebound in consumer demand for autos can monitor shares of CarMax for opportunistic pullbacks price levels this time around.
Q2 FY 2020 Earnings Release
On Sept. 24, 2020, CarMax released its fiscal second-quarter 2020 results for the quarter ending August 2020. The Company reported an adjusted earnings-per-share (EPS) profit of $1.79 excluding non-recurring items versus consensus analyst estimates for $1.11, handily beating estimates by $0.68. Revenues grew by 3.3% year-over-year (YOY) to $5.37 billion beating analyst estimates for $5.08 billion. Total used car units grew by 3.9%. Gross profit margin grew to 14% as the operating profit margin grew to 7.%, representing the highest Q2 margins in nearly a decade. Rising used-car prices drove higher margins as inventory levels also improved back to normal levels. Total used vehicle unit sales rose 3.9% and comp-store used unit sales rose 1.2% YoY. Wholesale vehicle unit sales exhibited an amazing rebound to 5.1% growth YoY, considering wholesale vehicle unit sales were down (-47.1%) during the height of the pandemic in Q1 2020.
Conference Call Takeaways
CarMax CEO, Bill Nash, provided extra color on the quarter. Net earnings grew 27% YoY to $297 million. Strength reverberated across all business segments including retail, wholesale and CarMax auto finance (CAF) to make CarMax the “nation’s largest and most profitable retailer of used cars.” The Company completed it omnichannel rollout offerings which was a culmination of “years in the making”. The omnichannel experience combines world-class in-store and online experience seamlessly integrated giving the Company the largest addressable market in the user car industry. Web traffic grew to average 29 million visits per month as salable inventory grew by over 50% in the quarter. The Company grew inventory to over 55,000 vehicles ranging from zero to 10-years-old to meet customer demand trends. The Company saw revenues for the 5 to 10-year old vehicles grow to 27% of total sales, up from 22% last year. This reflects customer demand for cheaper and older vehicles. Gross profit per unit rose by $31 to an average of $2,214. The Company plans to hire 3,500 more employees to accommodate the demand. Total CAF income rose 29% YoY to $147.2 million.
Despite the impressive beat, the Company issued in-line guidance for fiscal Q2 EPS in the $0.70 to $0.74 range in-line with $0.71 consensus analyst estimates. The Company projects organic net sales growth of 6% to 8%. Conagra reaffirmed fiscal full-year 2022 EPS guidance range of $2.66 to $2.76 versus the $2.49 consensus analyst estimates. The Company raised the quarterly dividend by 29% to $1.10 on an annualized basis. The potential for low-balling estimates is highly possible play downplaying the continued acceleration of consumer trends like at-home dining running parallel with the work-from-home trend. This was actually identified in the slide presentation. In addition to a new normal, there is no denying the economic downturn triggered by the pandemic despite the arguable V-shaped recovery.
CarMax upgraded its website for customers to execute the full sales process online in a touchless and frictionless sequence. However, customers have the option to shop in-store, online or both. While CarMax sells cars to consumers and wholesalers. Consumers prefer the option of a hybrid model. CarMax has cataloged 95% of inventory with high-quality photos containing 360-degree interior and exterior perspective views. The personalization factor and beefed up customer hub should generate improved customer conversion rates. Prudent investors seeking to step in at bargain price levels can monitor shares for opportunistic pullback levels on the downdraft to gain exposure as CarMax evolves its next-gen hybrid model.
KMX Opportunistic Pullback Levels
Using the rifle charts on the monthly and weekly time frames provides a broader view of the landscape for KMX stock. The monthly rifle chart peaked out on a double top near the $109.60 Fibonacci (fib) level. The monthly stochastic has started to cross down near the 80-band as the moving averages (MAs) stall out flat. The monthly 5-period MA needs to break out through the $95.70 fib with a stochastic cross up for the bull case to play out. The weekly rifle chart formed a market structure low (MSL) buy trigger on a breakout through $68.24. The weekly stochastic is falling towards the 20-band oversold level. This can provide opportunistic pullback levels at the $83.35 fib, $81.59 fib, $76.51 fib and the $72.22 fib. Nimble traders can track the weekly rifle chart for a MSL trigger above the weekly 5-period MA for a firmer entry.
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