Entering text into the input field will update the search result below

CarMax Turns Inventory Faster Than Competitors

May 01, 2020 1:58 PM ETCarMax, Inc. (KMX)ABG, AN, CVNA, LAD, PAG, SAH5 Comments
Eric Sprague profile picture
Eric Sprague


  • CarMax retailed 832,640 vehicles in the last fiscal year from an inventory of just 80,000.
  • Focusing on used vehicles gives CarMax more control over inventory.
  • If cars are substantially repriced downward because of Covid-19, then the companies that can get inventory down quickly are advantaged.


My thesis is that CarMax (NYSE:KMX) is advantaged relative to competitors with respect to moving inventory quickly. CarMax retails more used cars than anyone in the U.S. and its 4Q20 earnings release (ending February 29, 2019) shows 206,718 units sold. AutoNation (AN) sold 59,022 units in 4Q19 and Carvana (CVNA) sold 50,370. Other competitors include Asbury (ABG), Lithia Motors (LAD), Penske (PAG) and Sonic (SAH).

The latest fiscal year for CarMax is 2020 and it ended February 29th, 2020. We use the word "cars" loosely in this article seeing as the CarMax 3Q20 earnings call stated that SUVs and trucks accounted for about 49% of sales in the quarter.


If cars are substantially repriced downward because of Covid-19, then the companies that can get inventory down quickly are advantaged. The gross profit per unit as opposed to the average selling price is the key to this business. Despite inventory advantages, I think the 1Q21 earnings for CarMax from March to May could be egregious. The 2020 10-K says half the stores are closed and most of the remaining stores are selling 50% of normal or less. 15,500 of the 27,050 associates have been placed on furlough as of April 18th. The 10-K acknowledges there will be pressure on the gross profit per unit as it reduces inventory. And the 10-K gives us reasons to have concerns with CarMax Auto Finance (CAF):

During the second half of March and continuing into April 2020, we have seen an increase in delinquencies and greater demand for payment extensions.

Investors have been honing in on balance sheets during the Covid-19 pandemic but an April 2020 Morningstar report says CarMax's balance sheet looks safe:

The balance sheet looks safe to us should the U.S. enter a long recession in 2020-21. Debt has no balances due

This article was written by

Eric Sprague profile picture
I'm an individual investor heavily influenced by Warren Buffett and Charlie Munger. Munger's 1994 USC Business School Speech is something I think about a lot: ### Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result. ... Another very simple effect I very seldom see discussed either by investment managers or anybody else is the effect of taxes. If you're going to buy something which compounds for 30 years at 15% per annum and you pay one 35% tax at the very end, the way that works out is that after taxes, you keep 13.3% per annum. In contrast, if you bought the same investment, but had to pay taxes every year of 35% out of the 15% that you earned, then your return would be 15% minus 35% of 15%—or only 9.75% per year compounded. So the difference there is over 3.5%. And what 3.5% does to the numbers over long holding periods like 30 years is truly eye-opening. If you sit back for long, long stretches in great companies, you can get a huge edge from nothing but the way that income taxes work. ### Feel free to follow me on twitter: https://twitter.com/ftreric

Analyst’s Disclosure: I am/we are long KMX, VOO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Any material in this article should not be relied on as a formal investment recommendation. Never buy a stock without doing your own thorough research.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (5)

How about the carmax buyback program? Both in the context of compared to other businesses and also, could there be a meaningful run on cashout sales that costs carmax cash and puts more cars on their lots or in their disposal cycle as consumers downshift in car or reduce to 1 car families due to the recession?
KMX suspended the buyback program.
OverTheHorizon profile picture
Inventory turns will be greatly reduced ((along with stock price) once repos and excess inventory from rental agencies flood the lots. Yes they’ll be cheap but with 30m unemployed there’ll be few takers.
I’m in the car business and the age of inventory can be a good or bad thing depending on a lot of factors. I would not put to much into this. The advantage will be short-lived.
Eric Sprague profile picture
Thanks for reading, krisdail.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.