Can you give me an overview of Carmax’s business situation? How are they doing, generally speaking? What are their biggest threats and opportunities in the near-term future?
CarMax, the largest seller of used cars in the U.S., reported revenue of $15.9bln in FY 2017. Sales grew by 5% compared to the previous year. In that timeframe, the store base increased by 9.5% and gross profit went from $1.3bln to $1.4bln, thus growing by 8.4%. Overall, the company's market share is about 3%, based on the number of 0-10 years old vehicles sold. Digitization of the automotive industry is the source of both threats and opportunities for CarMax. On the one hand, it may give the competitive edge to high-tech startups or take away the advantage of the internally developed proprietary system with widely available software solutions. On the other hand, new online and mobile features are expected to help the company grow.
CURRENT BUSINESS SITUATION
According to the company's most recent investor presentation, CarMax has generated $15.9bln in revenue in FY 2017. It grew by 5% compared to FY 2016. It has increased every year since 2009. The ten-year CAGR is 7.8%. Also, gross profit went from $1.3bln to $1.4bln, growing by 8.4%. The company sold over a million vehicles in FY 2017, out of which 671,294 were used vehicle units and 391,686 were wholesale vehicle units. To compare, in the previous year there were 619,936 used vehicles units sold and 394,437 wholesale vehicle units sold.
CarMax is the largest U.S. retailer of used cars. The company currently has about 3% market share, based on the number of 0-10 years old vehicles sold. In the markets in which it operates, it sold approximately 4.4% of all such cars. It considers franchised dealers as its prime competitors, of which there are around 18,000 in the U.S..
STORE AND EMPLOYEE COUNT
CarMax currently has 173 stores in 39 states. Last October, it had about 24,000 workers. However, MarketWatch reported that the company planned to add 2,000 more by the end of 2017. It may be considered an additional indicator of growth.
CARMAX AUTO FINANCE
It's important to note that while the revenue is mostly generated by CarMax Sales Operations, the company has an additional revenue stream — CarMax Auto Finance. According to the annual filing, it's "a significant participant in the auto finance sector." However, its revenue in FY2017 ($369mln) was lower than in FY2016 ($392mln). Main competitors are banks and credit unions.
DIGITIZATION OF THE INDUSTRY
According to the company's annual filing, as well as the article by Wall Street Journal, digitization of the automotive industry holds a number of potential threats to CarMax's situation. First of all, it could favor emerging competitors, e.g., startups like Vroom or Shift Technologies. Also, widely available software solutions for the industry could mean that CarMax will lose the advantage of the internally developed proprietary system. And finally, comparison shopping engines might make competitors more recognizable, while also making it harder to maintain pricing differentiation.
Please note that I found the article from WSJ on the American Stock Market News website. I decided to use this source to make sure that you will be able to access it.
COMPETITION IN THE FRAGMENTED MARKET
According to CarMax's annual filing, the used car market is not only highly competitive, but also unpredictable due to its fragmentation. The company competes both with dealers and individuals who sell their cars. In such an environment, it's forced to continuously improve its strategy. A strategic mistake could result in losing the leading position in the market. At the same time, some of the company's retail competitors are in the process of rapid expansion. They plan to enter the markets where CarMax is operating, with some of them having similar offerings.
DIFFICULTY TO GROW IN THE LARGE MARKETS
CarMax predicts that its market share will decrease in the near future due to entering new large markets, such as San Francisco. According to the article by Wall Street Journal, launching in the expensive markets is especially risky for the company. While the risk seems to be calculated, it's still worth noting, as it will have an impact in the next 2-3 years.
NEW DIGITAL FEATURES
According to the most recent investor presentation, CarMax has introduced some new digital tools, as well as improvements to its online marketing. Website redesign and new online financing capability have already started to generate new leads, with solutions like digital appraisal and Home Delivery (both in the testing phase) expected to improve customer experience. The company recognizes that its online strategy and investments in IT will be crucial to future success.
CarMax opened 15 stores in FY 2017. As mentioned before, the company admits that it takes time to establish its position in the new large market. Therefore, we can expect that launching in the San Francisco market with three stores will not have an impact in the next 2-3 years. However, CarMax also added stores in Boston, Philadelphia, and L.A. Additionally, the company opened a centralized production/auction facility to support growth in Southern California. We can assume that those areas will play a significant role in the near future.
According to Seeking Alpha, CarMax is among the companies that could benefit the most from the tax reform. The whole automotive industry will be positively impacted, with more people in the buying mood and higher wages increasing prices. In the used cars space, CarMax will feel it stronger than its competitors due to the biggest market share. Also, a 38% effective tax rate could help reduce the debt, as it will increase operating income.
Wall Street Journal notes that CarMax owes its success to offering customers a "fast food-like" car-buying experience, which is exactly what they need. In its most recent annual filing, CarMax predicts that its future growth will continue to come from the growth in vehicle unit sales, both in new and existing locations. It will be the driver for sales of wholesale vehicles and the revenue of CarMax Auto Financing. We can conclude that maintaining the company's position is one of the greatest opportunities for growth.
In conclusion, CarMax is the largest U.S. retailer of used cars, accounting for about 3% of sales of 0-10-year-old vehicles. In FY 2017, it generated $15.9bln in revenue. It grew by 5% compared to the previous year. The company is operating in the highly competitive and fragmented market, with its retail competitors planning rapid expansion. Additionally, digitization of the industry may give an edge to the emerging players, while making price differentiation more difficult. At the same time, digital improvements, which the company started to implement, are expected to contribute to its growth. It may also benefit from the tax reform.