EUR 850.00 For Business Accounts Only

Morningstar | CarMax Ends Fiscal 2019 With Strong EPS Growth and Good Omnichannel Progress

CarMax closed fiscal 2019 with a solid fourth quarter. We calculate diluted EPS after adjusting for one-time charges in the prior-year quarter grew 47% to $1.13, which beat consensus of $1.06. That earnings beat and modestly positive comparable-store unit growth of 2.8% likely explains the stock rising over 10% the morning of March 29. Revenue rising 5.7% to $4.32 billion missed consensus of $4.43 billion, but that variance is insignificant to us. We are maintaining our fair value estimate but will reassess all valuation inputs when we fully update our model, likely in early May, for the 10-K filing.

We see CarMax's future as still bright and continue to think the only major risk for the stock is macroeconomic risk rather than any issues with the business model. Management spent time on the call updating the omnichannel pilot in Atlanta; we think this concept will not only please customers and win CarMax new customers, but also keep the firm competitive with online startups such as Carvana and Shift. Omnichannel allows a consumer to buy a car completely online, all in store, or a combination of the two. We think it's the right thing to do even though fiscal 2020 will see more investment as the initiative scales up to the majority of customers nationwide by the end of that year. Consumers in the digital age want to buy things simply and on their terms, and we think omnichannel and a lucrative finance arm in CarMax Auto Finance will keep CarMax on top in used vehicles. The Atlanta pilot increased sales at a double-digit rate in the quarter, above management's expectations.

The company targets 13 fiscal 2020 store openings, down from 15 in fiscal 2019. The small-market store will keep playing a key role, with 6 of the 13 stores in areas with populations of 600,000 or less. Many openings are in the South and West, and we like seeing CarMax continue its push into the Bay Area. At some point, we expect the company to expand into the New York area.

In the meantime, we expect share repurchases to continue because the program has $2.1 billion of authorization left. Fiscal 2019 buybacks of $902.9 million were by our math on average bought at just under $66 per share. We'd like to see a bigger margin of safety to our fair value estimate, but with the stock now at $70, the buybacks do not look like a poor use of capital in fiscal 2019. The fiscal fourth-quarter diluted share count declined 6.5% year over year to 170.5 million.

CAF income grew 2.6% in the quarter to $103.7 million and full-year CAF profit rose 4.2% to $438.7 million. Interest margin in the quarter declined just 10 basis points to 5.5%, but the 7.8% increase in average managed receivables more than offset the interest margin decline. Although the Federal Reserve's recent decision to pause interest rate hikes is good news for CAF's cost of capital, the unit recognizes loan income over several years for a loan rather than all at once, so recent originations reflecting rising rates will continue to drip into earnings in fiscal 2020 and beyond. CarMax is able to continually raise originations as it keeps growing, and its loss allowance is steady as a percentage of ending managed receivables at 1.10%, so we are not worried about margin pressure derailing CAF's earnings anytime soon. CAF's net penetration for vehicles sold in fiscal 2019 grew 10 basis points to 43.2% net of three-day payoffs, so we see plenty of room for CAF's book to grow if management so chooses.