Automotive News - February 4, 2008 - (Page 56) 56 • FEBRUARY 4, 2008 INSIGHT CarMax sticks to growth plan despite slowing sales Company is slated to open 12 stores starting in March Arlena Sawyers asawyers@crain.com At CarMax Inc., sales are sluggish and its captive finance company’s costs are up. Still, the giant used-vehicle dealership group is moving ahead with its aggressive expansion plans. The Richmond, Va., retailer is set to open its sixth store in the BaltimoreWashington market, in Ellicott City, Md. In its next fiscal year, which begins next month, CarMax plans to open a dozen stores across the nation. Even though CarMax operates 88 used-vehicle dealerships and five new-vehicle dealerships in 41 U.S. markets, the 15-year-old company says it sees plenty of room for growth. Its long-term plan calls for 250 to 300 used-vehicle stores. Recent market softness has affected CarMax. The company reported a 34 percent drop in its net third-quarter profit, to $29.8 million. It lowered its earnings expectations twice in the past year. But CarMax officials remain bullish. “We believe the primary driver for future earnings growth will be vehicle unit sales growth from comparable-store sales increases and from geographic expansion,” the company said in a filing late last year with the Securities and Exchange Commission. CarMax executives declined to speak with Automotive News for this article. Growth plan Disappointing recent sales aren’t stopping CarMax from pursuing several growth initiatives. Opening “buying centers” that purchase consumers’ used vehicles but do not sell them. CarMax operates such centers in Atlanta; Raleigh, N.C.; and Tampa, Fla. A fourth center is set to open this month in Dallas. CarMax either retails the vehicles it buys at the centers or sends them to auction. Testing a vehicle management system that enables some dealerships to increase used-vehicle inventories by 50 to 100 cars and trucks Adding a tool to its Web site so users can search for vehicles by price, mileage, body style and options, without having first to select a make and model Its long-term growth plan is built on standard-sized stores that have 40,000 to 60,000 square feet and stock 300 to 500 used vehicles. It also operates satellite stores that have 10,000 to 20,000 square feet and stock 250 to 400 used cars and trucks. The smaller stores rely on nearby standard stores to handle their vehicle reconditioning, purchasing and business operations. Skeptic turned believer George Hoffer, an economics professor at Virginia Commonwealth University, is an expert in auto retailing. He was an early critic of CarMax, claiming the company would be unable to get the volume discounts on inventory that made other big-box retailers successful. But Hoffer says he has changed his mind. He credits CarMax with developing sophisticated technology that enables the company to determine which vehicles to stock at individual stores, down to make, model and color. He says the system allowed the company to sell its high-cost inventory after the Sept. 11, 2001, terrorist attacks, before the market drove down prices for used vehicles. CarMax’s current sales and finance problems do not reflect structural weaknesses in the company’s business model, Hoffer says. “I’m looking at the long term — this is more shortterm cyclical,” he says. Sharon Zackfia, an auto industry analyst at the William Blair & Co. investment firm in Chicago, agrees. In a report last month, she cited company executives’ predictions that “CarMax has the potential to increase its store base more than threefold to at least 300 locations, representing nearly another decade of growth at the current 15 percent to 20 percent store growth pace.” But Zackfia’s report cautions: “The nearer term will likely prove more challenging, and we believe visibility on sales trends remains cloudy on the high selling season (spring/summer).” Dimmer forecasts CarMax sold 337,021 used cars and trucks in its last fiscal year, which ended Feb. 28, 2007. That was up 16.3 percent from the previous fiscal year. Its net earnings rose 48 percent from fiscal 2006, to $198.6 million or 92 cents a share. When its 2007 fiscal year began, CarMax projected annual unit sales growth of 3 to 9 percent at stores open for at least a year. The company said it expected annual earnings per share of $1.03 to $1.14. Both of those predictions have fallen short. CarMax CEO Tom Folliard told industry analysts in December that the company now expects 2 percent sales growth this year at stores open for a year or more. Folliard also lowered CarMax’s earnings expectation for the year to 87 to 93 cents per share, down from a previously reduced range of 92 to 98 cents a share. “We’ve seen a level of reluctance from the consumer that we’re not used to and we hadn’t seen before,” Folliard said. “Since we don’t negotiate on the price, we don’t negotiate on the trade-in, we don’t negotiate on the financing, there certainly isn’t any manipulation we can do with the numbers to get the consumer to behave differently.” CarMax also cites problems at its captive finance company, CarMax Auto Finance. In the third quarter that ended Nov. 30, the captive’s net income dropped 49 percent from the year-ago quarter, to $16.3 million. Company officials blamed the decline on higher borrowing costs. Big-box model The consumer electronics company Circuit City Inc. launched CarMax in 1993, intending to bring its big-box retail practices to used-car sales. The CarMax strategy for its usedvehicle superstores includes no-haggle pricing and a low-pressure sales environment. Sales employees get a fixed dollar commission for every car and truck they sell, whatever the vehicle’s price. CarMax posted its first annual profit, of $1.1 million, in fiscal 1999. It became a separate company in 2002. Last year, CarMax ranked No. 27 on Automotive News’ list of the top 125 top U.S. dealership groups. Mark Rikess, a dealership consultant in suburban Los Angeles, estimates that repeat customers and word-of-mouth referrals account for 20 to 25 percent of CarMax’s sales volume. That enables the company to keep its advertising costs low. “Your customers are doing your advertising for you,” Rikess told Automotive News. “These people are easier to sell to because they come in predisposed to buy.” CarMax says 85 percent of the used vehicles it sells are one to six model years old, with less than 60,000 miles. More competition CarMax had the used-car superstore market to itself from 1999, when AutoNation Inc. abandoned its stand-alone used-vehicle dealerships. But the company got new competition last year. Another public dealership group, Lithia Motors Inc., launched a chain of stand-alone used-car stores called L2. CarMax also competes for used-vehicle buyers with franchised new-vehicle dealerships. In Ellicott City, Md., the location of its next new store, Miller Brothers ChevroletCadillac has offered no-haggle pricing for 15 years. Dealership owner John Miller says he can compete with CarMax on price and customer service. He says his used-vehicle sales last year helped offset a decline in sales of new cars and trucks, although he declined to quantify those sales. A new CarMax store will stimulate used-vehicle sales throughout his market, Miller says. “They’ll be a worthy competitor,” he says. “But we’ll be fine, absolutely fine.” c IF NOT, THEN YOU AREN’T PARTNERED WITH ONE OF THE FASTEST GROWING SERVICE CONTRACT PROVIDERS IN NORTH AMERICA INTERSTATE NATIONAL DEALER SERVICES. Our stars are perfectly in line with exciting products including our re-energized Hi-Road and a Missed Opportunity Program to get you financially aligned PLUS our powerhouse StarAuto, F&I training and private labels to keep your stars burning bright. With 27 years of administering nearly $600 million in paid claims to over 1.5 million customers, Interstate National Dealer Services remains the industry leader in strength, stability and your partner for a bright and profitable future. 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