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Morningstar | CarMax Starts Fiscal 2020 With Excellent Comparable-Store Sales. See Updated Analyst Note from 21 Jun 2019

CarMax reported a great quarter to start fiscal 2020, and we are raising our fair value estimate to $71 per share from $69 on slightly higher revenue expectations for fiscal 2020 than previously modeled as well as higher long-term returns modeled after our five-year explicit forecast period. Fiscal first-quarter diluted earnings per share rose 19.5% (12% excluding buybacks) to $1.59, easily beating consensus of $1.47. Revenue grew 12% to $5.37 billion, also beating consensus of $5.12 billion. Most impressive to us is the 9.5% growth in comparable-store unit sales. During fiscal 2019, this metric never exceeded 2.8% in any single quarter, and 9.5% is the highest level by our records since 10% in the third quarter of fiscal 2014.

We expect sales to moderate from first-quarter levels because CarMax's results are generally better in the first half of the fiscal year and the tax refund tailwind this quarter is not a full-year phenomenon. We calculate that adjusted free cash flow fell 32% year over year, mostly due to growth in inventory versus inventory reductions in the prior year's quarter.

Comments on the earnings call indicated that several factors came together well to drive the performance, including healthy credit availability from CarMax's lending partners for Tier 2 and Tier 3 customers, solid execution at the store level to convert traffic to sales, good inventory selection due to more auction supply, and some tax refund business this quarter that normally is in the fiscal fourth quarter. Used-vehicle supply should continue to be favorable for CarMax as U.S. off-lease volume is expected to peak this year and J.D. Power data has auction volume up 5.4% year over year in the first five months of 2019.

The company's omnichannel rollout is also doing well, with the Atlanta market's comparable sales growth in the double-digit range and the program expanded to Florida in June. Management expects omnichannel to be rolled out to the majority of customers by the end of fiscal 2020 but has not given guidance yet on whether it will eventually lead to fewer stores over time. We continue to believe that omnichannel, which enables consumers to shop exactly how they want across CarMax's digital and brick-and-mortar channels, combined with CarMax's broad inventory, broad financing options, and no-haggle sales approach, will keep the company competitive against growing digital startups such as Shift and Carvana.