CarMax New Omni-Channel Strategy Seems To Work, But Comes With Near-Term Cost

CarMax, Inc. KMX is in the early stages of a major change in sales strategy as it rolls out what it calls an omni-channel market, allowing customers to go through the whole car buying process online and have the car delivered to their home or work.

Its second-quarter results Tuesday, included the first test market for the new strategy, and showed off the opportunity and the risk of the plan. Sell-side analysts liked a strong roll-out that may portend market share gains but warned about the potential cost of new investments for CarMax, the largest used car retailer in the nation.

The Analysts

Stephens’ Rick Nelson reiterated an Overweight rating on CarMax, while raising the target price from $95 to $103.

Wedbush analyst Seth Basham reiterated a Neutral stance and an $80 price target on the stock.

Credit Suisse analyst Seth Sigman kept a $95 price target and Outperform rating on the stock.

The Theses

CarMax’s earnings of $1.40 per share beat the Street estimate and came with impressive double-digit same store sales in its Atlanta test-market for its new omni-channel sales experience.

“We believe the rollout of omni-channel capabilities is a game changer,” Nelson wrote in a note. “We see continued market share gains and operating leverage over time.”

Omnichannel Costs

But, said Basham, the excitement comes with a cost.

“While we view the company's transition to an omni-channel strategy as imperative to the longer-term outlook, it raises near term risks,” Basham wrote in a note. “We view changing deeply-rooted processes and behaviors in the field on a broader scale to achieve the company’s goal of rolling out omni-channel capabilities for at least half of its customer base by the end of the next fiscal year as potentially disruptive and expensive.”

Slowing Comps

Both Basham and Sigman noted disappointing comps, with Basham also noting that what growth there was came in from lower credit consumers.

Sigman said sales comps in the low single digit range is “probably not enough to support meaningful upside” in light of CarMax’s investments.

“We think the stock will continue to find some support, perhaps more than in the past, as investors get more comfortable with the omni-channel transformation,” Sigman wrote in a note. “However, some acceleration in comps seems needed to support upside to valuation … while efficiencies with the new operating model and slowing investments are required for higher EPS.”

Price Action

CarMax was down slightly in Wednesday trading, off 0.5% to $86.31 per share.

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