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CarMax (KMX) Is ‘Compelling and Profitable Unit Growth’ Story in U.S. Retail: RiverPark

RiverPark is bullish on CarMax, Inc (NYSE: KMX), which is the largest used-car retailer in the U.S. In its Q2’18 investor letter, the RiverPark Large Growth Fund discussed its thesis on CarMax, noting that it expects the company to “double its store base over the long-term and more than double its earnings, while also generating substantial excess capital to return to shareholders.” Let’s take a look at the comments made by the fund about CarMax in the letter.

KMX shares were the next top contributor for the quarter, also following a better-than-expected earnings report. EPS rose 17% for the quarter on 6% revenue growth as same store sales improved, wholesale units remained strong, the contribution from Finance evidenced a healthy credit market and the company actively repurchased shares. Used car prices moderated from the elevated levels in the wake of Hurricane Harvey last fall, increasing the spread between new and used car pricing, contributing to better sales growth. As is often the case with KMX, the ebb and flow of the value proposition for used vs. new cars creates near-term demand volatility for the company’s late model, used-car dominated inventory. Results for the next few quarters should continue to improve year-over-year as the company now faces progressively easier comparisons for the coming three quarters.

It remains our belief that KMX is one of the most compelling and profitable unit growth stories in U.S. retail with an excellent management team and a fortress balance sheet. The company’s market share in its markets grew nearly 7% last year, the largest increase in four years, and we see little evidence of any competitive intrusion that impacts CarMax’s longer-term growth story. We expect the company to double its store base over the long-term and more than double its earnings, while also generating substantial excess capital to return to shareholders.

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Richmond, Va.-based CarMax, Inc (NYSE:KMX) is the largest used-car retailer in the U.S., currently operating more than 190 stores in 92 television markets. The company offers retail merchandising, wholesale auctions, extended protection plans, reconditioning and service, and customer credit. During the fiscal-year ended February 28, 2018, the company retailed 721,512 retail units and sold 408,509 wholesale units at our in-store auctions.

A number of hedge funds tracked by Insider Monkey also see a value in holding shares of CarMax. As of the end of the second quarter of 208, there were 31 funds in our database with positions in the used car retailer, including SQ Advisors, Giverny Capital, and Sheffield Asset Management.

Disclosure: none

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