CarMax's Impressive Growth? We Believe They're Just Getting Started

| About: CarMax Group (KMX)

Few people would rate used car shopping as one of their favorite activities. Finding the right vehicle at the right price is difficult enough without having to haggle with pushy salesmen or worry about unseen mechanical problems. Fortunately, CarMax (NYSE:KMX) has made the process as enjoyable and hassle-free as possible.

First, the company has a friendly and knowledgeable sales staff to assist shoppers in a strict "no-haggle" setting. Furthermore, all sales consultants are compensated the same regardless of the type of car purchased. Next, the company sells predominately newer (1-6 years old), low-mileage cars that have all undergone a thorough 125-point quality inspection process. Only a fraction of the vehicles that CarMax acquires ever see the sales lot, and those that don't make the cut are sold at wholesale auctions to other dealers. Finally, anyone frustrated by their local dealers' lack of selection will appreciate CarMax's extensive inventory of 20,000+ automobiles. Shoppers can peruse either the nearest well-stocked superstore or the company's web site at their leisure -- and if the perfect vehicle is not available locally, then the company can arrange to have it shipped in for a modest charge.

A CarMax employee scans bar codes in each parking space in a bid to keep track of inventory

This seemingly simple formula has connected with shoppers, and the CarMax concept continues to expand around the country. Over the past five years, CarMax has delivered healthy annual revenue growth of around +18%, while its earnings have climbed at a rapid +25% annual clip. Despite those impressive growth rates, we at believe the firm is just getting started. With an extensive selection of cars that few competitors can match, the company should continue to take market share from conventional dealers in the years ahead.

Although the used car business is by no means a high-growth market, CarMax is still in the early phases of its growth cycle. With current operations in just 20 U.S. states, the firm has plenty of room for further expansion. Going forward, management is planning to increase the number of retail locations by as much as +20% per year.

With each new outlet rapidly gobbling up market share when entering a new market, this aggressive expansion should fuel steady growth in the years ahead. Considering CarMax currently controls around 1% of the highly fragmented $350 billion used car market, the company has plenty of untapped potential. We believe the firm's market share could eventually reach 20% or more, leading to enormous returns for early investors in KMX.

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