Some investors think that once the dust settles in North American auto markets, used-car seller CarMax Inc. will be in the winners’ circle.
But those shareholders, who include Warren Buffett, could face a bumpy ride in the meantime.
Amid soaring gas prices and sagging consumer confidence, buyers are flocking to smaller, more fuel-efficient cars. That has roiled the market for older vehicles.
CarMax President and Chief Executive Thomas Folliard said in a recent conference call that the “superior CarMax model will facilitate our ability to outperform our competitors in any environment and allow us to focus on our long-term growth proposition.”
But for now, he added, CarMax can’t give investors any meaningful guidance for the rest of 2008.
Richmond, Va.-based CarMax does have an innovative growth proposition, and its concept has drawn a lot of attention since the company began in 1993 as a unit of Circuit City Stores Inc. before being spun off six years ago.
Contrasting with the adversarial sales tack used by most dealers, CarMax takes a “no haggle” approach that aims to develop customer loyalty and foster repeat business. Its sales people make the same commission, regardless of what vehicle they sell, so they have no incentive to badger customers to buy pricier, higher-margin models.
CarMax competitors have found that idea tough to copy.
In the current roiled auto markets, though, it may be difficult for any used-auto dealer to have a friendly transaction with customers. Wholesale prices for larger vehicles have fallen by about 25 percent this spring, or four times the typical pace of depreciation, according to CarMax’s first-quarter report.
On average, someone trading in a large SUV now is getting $3,100 less than two years ago, says Jessica Caldwell, manager of pricing and industry analysis at Edmunds.com, which tracks auto industry trends.
Making matters worse, a large number of such vehicles are bought with dealer financing. “People just can’t afford to write a multithousand-dollar check to get out of [owning] a sport utility” and switch to a hybrid, CarMax’s Folliard said in the conference call.
Still, there are many reasons to think that CarMax will weather the storm and perhaps emerge stronger.
The U.S. used-car market is highly fragmented, comprising some 21,500 franchised new-car dealerships and 43,000 independent used-car dealers.
With annual sales of more than $8 billion, CarMax still has a relatively modest share of a $340 billion used-car market, and that share has continued to grow despite the sagging market.
The company has been expanding into new markets around the country with new superstores, which total more than 90. That growth will continue, executives said.
And despite ongoing jitters in parts of the credit markets, CarMax recently found the asset-backed bond market receptive to a $742 million auto loan securitization. That makes it easier for the company to maintain its lending business.
Justin Fuller, an equity strategist at Morningstar Inc., has been watching for CarMax shares (KMX) to cheapen up, expecting swelling new-car inventories to pressure—and take demand away from—the used-car market. Such developments would make the shares a long-term buy, he said.
“CarMax is a big company. It has a lot of financial resources, and it can live through this,” Fuller said. Many smaller used-car dealerships probably won’t, he added.
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