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Robert Stephens, CFA
Robert Stephens, CFA
Articles (84) 

Why CarMax Has Investment Appeal Despite Stock Price Slump

The company’s strategy could enhance its competitive advantage

October 11, 2018 | About:

Changes to CarMax (NYSE:KMX)'s strategy could provide an increasing competitive advantage during an uncertain period for the used vehicle market. Concerns surrounding tariffs look set to continue, while shopper volumes have declined. CarMax, though, has been able to improve its conversion rates through a variety of digital initiatives.

A focus on providing an omnichannel offering could capitalize on changing consumer tastes. More flexible delivery options and features such as an online appraisal estimator may also improve customer service levels, and result in higher sales.

With the company’s stock price having fallen 9% in the last year versus a rise of 9% for the S&P 500, it seems to offer good value for money.

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New opportunities

A potential catalyst for CarMax’s financial performance is its aim to provide an integrated customer experience across its online and in-store offerings. It is seeking to build an immersive omnichannel experience which enables customers to move seamlessly across its online and in-store operations. This could prove popular with customers, many of whom seek assistance at various points of the buying process, while also desiring the flexibility that shopping online provides.

Website traffic increased 19% in the second quarter, with the company having 20 million visits to its website per month. Since CarMax has a large national distribution network of 192 stores, it has the capacity to provide a superior omnichannel offering than many of its smaller peers. This could provide it with a competitive advantage, also having the potential to create efficiencies and utilize the company’s inventory scale more effectively.

New stores are also set to catalyze its financial performance, with three locations opened during the second quarter. Two of those stores were in existing markets, while the third was in a new market. It plans to open a further four stores in the third quarter of the fiscal 2019 year. They will all be in new markets and could further diversify its sales growth.

Customer service

CarMax’s competitive advantage could be boosted by the rollout of its alternative delivery options. These will allow customers to complete the majority of their browsing requirements and the purchase process online, with the company providing greater flexibility on how the vehicle will be delivered to them. Options include an express pickup service, as well as a home delivery service that launched in September. In a culture where convenience is becoming increasingly important to consumers, a more flexible and smoother purchasing process could prove popular among customers.

Customer service levels are also expected to be boosted by the release of an online appraisal estimator. It provides customers with a personalized estimate of the value for their vehicle after answering a relatively small number of questions. Alongside the Customer Experience Center, which provides customers with support all the way through the buying process, this could help to improve the company’s conversion rates among potential buyers.

Risks

The second quarter results released recently by the company showed a continued decline in shopper volumes. It is also experiencing volatile used car cost trends, which caused its vehicle acquisition costs to remain high. Concerns surrounding further tariffs being implemented look set to continue. There have been few indicators of a reversal in policy by the U.S., China and other countries that are adopting increasingly protectionist stances on trade. Should the threat of further tariffs continue, the outlook for the wider automotive industry could deteriorate.

CarMax, though, has been able to offset lower customer traffic with higher conversion rates. It has been able to turn browsers into buyers more effectively due to increased contributions from its digital initiatives, as well as improved levels of customer service. Since the stock has a forward price-earnings ratio of 13.8 using forecast earnings per share for the 2019 fiscal year, it appears to offer a margin of safety.

Outlook

With an increasing focus on customer service, CarMax could strengthen its competitive position versus peers. Its aim to leverage its rising online customer base and large estate through an omnichannel experience could enhance growth, while also making the business more efficient.

New initiatives such as an online estimator and greater flexibility may boost the company’s appeal among potential customers. The company’s long-term focus means that increasing store numbers and enhanced digital initiatives could keep conversion rates high.

After underperforming the S&P 500 in the last year, the company’s valuation suggests that it offers a margin of safety. It could therefore offer investment appeal.


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