CarMax Isn't Getting Enough Credit For Strong Same-Store Sales Trends

“We remain buyers of CarMax, Inc KMX post 4Q17 results as softer credit profits should be more than offset by stronger volume and margin performance in FY18,” Susquehanna Financial’s Ali Faghri said in a note, while maintaining a Positive rating on the company and lowering the price target from $72 to $70.

Same-Store Sales

The analyst believes the consensus forecasts are achievable, while accelerating comps against a backdrop of low growth retail could potentially drive multiple expansion for CarMax.

Faghri called the company's core business momentum robust, with same-store sales accelerating for the third successive quarter despite a meaningful drag from lower subprime sales and disruption due to delayed tax refunds.

“We believe the sales improvement reflects some combination of recent digital initiatives, better availability of trucks/SUVs, and consumer trade down to used vehicles as affordability improves,” the analyst mentioned.

Faghri also noted gross profit per vehicle grew despite material declines in used car prices, which suggests CarMax could be able to hold margins even in a declining price environment.

One Concern

On the other hand, the performance of CarMax Auto Finance (CAF) was meaningfully weaker than anticipated, due to higher loss provisions.

The analyst believes that this is “likely emboldening bears that point to a continued deterioration in credit profits, but the miss was largely a function of a discretionary adjustment that should provide a buffer and limit future downside if trends get worse.”

Going forward, Faghri pointed out that while CAF continues to be a primary cause for concern, given the pressure from falling residual pricing and increasing interest rates, CarMax’s stronger unit volumes might offset this in the coming quarters, as the company recaptures sales from delayed tax refunds and cycles the April 2017 credit tightening.

Related Links: Barron's Picks And Pans: Under Armour, CarMax, Lowe's And More _________ Image Credit: By Ildar Sagdejev (Specious) (Own work) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC BY-SA 4.0-3.0-2.5-2.0-1.0 (http://creativecommons.org/licenses/by-sa/4.0-3.0-2.5-2.0-1.0)], via Wikimedia Commons

CarMax Higher After Q4 Beat