CarMax, Inc (NYSE:KMX) is a used car retailer with a unique business model. It sells cars at a premium, won’t negotiate on pricing, has zero new inventory, and if you so desire, it’ll even make you a cash quote to buy your car on a moment’s notice.
How’s that for different?
What makes CarMax different is what makes its business model superior to the competition. CarMax has quickly become the largest used car retailer in the country. CarMax, Inc (NYSE:KMX) sold 447,728 used cars in the United States in its last fiscal year through 118 dealerships.
For those without a calculator, that’s more than 10 cars per day from every single dealership in 2012.
But that’s just the retail business. The company’s wholesale and auction services sold 324,779 cars, bringing the total count to 772,507 cars in a single year.
The lightly used car market is off to a fast start
CarMax has outperformed other automotive retailers because of its focus on barely used, 0-6 year old vehicles. In the last fiscal year, 87% of cars the company sold met that criteria. Rival companies are less levered to the fast-growing, barely used car market.
Rival AutoNation, Inc. (NYSE:AN) reported new car revenue double that of used car sales, 57% of revenue came from new cars vs. 24% for used cars. By volume, CarMax’s retail used car business is two times larger than AutoNation. Autonation relies on more volume from automakers to drive growth. That supply line is muted by an American auto industry focused first on market share, then on profits. (Read: Autonation’s growth faces a direct limit in new car manufacturing. CarMax, Inc (NYSE:KMX)’s does not.)
Geography risk with Autonation deserves particular scrutiny. The company derives nearly half of its revenue from California and Florida, two high cost-of-living states with weak housing markets. Housing recoveries and new construction coupled with fracking in the Midwest is behind the rise in car and truck sales. Automakers and dealerships earn significantly more per truck than they do on sedans and compact cars, but trucks aren’t hot sellers in Florida or California given the lull in construction. At 14 times forward earnings, Autonation may seem like a relative bargin, but its exposure to weaker car markets and product mix are the reason behind its relatively low multiple.
Profits are in used cars
Used car sales are much more profitable than new cars. First, used cars are coming off multi-year supply constraints. Large-scale fleet purchases were slowed by American businesses and governments during the great recession. Secondly, a 2009 “Cash for Clunkers” program intended to take old, inefficient used cars off the road led to the destruction of more than a million working automobiles.