CarMax is the largest used-car
retailer in the United States, with a growing network of over 200 locations
across 100 television markets. The company spent its first nine years as a
subsidiary of parent company, Circuit City, before being spun out on its own in
2002. For both the past 5- and 10-year periods, CarMax has grown its
used-vehicle unit sales in excess of 7% compounded (and at a faster pace
prior). Despite decades of greater-than-industry growth, the company still
sells only a low-single-digit percentage share of U.S. used vehicles up to 10
years old and has a credible glide path to much higher share over the coming years.
Selling used cars is a competitive
business, yet CarMax has grown profitably over the decades by disassociating
itself from the behaviors that earn used-car dealers their spotty reputations.
All vehicle pricing is “no haggle.” CarMax sales associates are paid fixed
commissions, regardless of the vehicle sold. Additionally, CarMax makes a cash
offer on every car presented at their door, telling consumers, “We'll buy your
car even if you don't buy ours.” Each piece of their consumer offer—vehicle
pricing, trade-in, financing and service plan—competes on its own merit.
Over the past decade, same-store unit
sales growth for CarMax stores open one year or more has averaged about +4%.
Still, the most recent two-year period has seen the lowest rate of same-store
growth since the Great Recession. We see a couple contributing headwinds.
First, recent data from Manheim's wholesale auctions suggests used-vehicle
pricing remains near historic highs relative to that of new vehicles. Such a
narrow gap between new- and used-vehicle pricing is likely indicative of
cyclically aggressive competitive behavior, an issue we've seen before and that
we expect will again revert to CarMax's benefit.
Second, we have seen the growth of
online offerings such as that of Carvana. Though selling only about one-seventh
of CarMax's recent volumes, Carvana is growing rapidly and has likely taken
some wind out of CarMax's sails in common markets. Admittedly later to the
e-commerce game, CarMax has spent the past few years developing an online
buying option to enhance its best-in-class physical store experience. We
believe the resultant physical-online hybrid will be a step-change improvement
in an already advantaged CarMax consumer experience, allowing CarMax to serve
the greatest percentage of shoppers in the manner of their choice. Crucially,
this evolution rides the same rail of customer primacy CarMax has ridden since
the opening of its first store in 1993.
Already shipping upwards of 2 million
vehicles per year within its network, CarMax has the procurement heft,
refurbishment capacity, IT budget, advertising scale and brand awareness to
layer on a compelling e-commerce option for those consumers who prefer it. In
testing for the past few years, CarMax's first commercial omni-channel market
was launched in the Atlanta area in December, and these capabilities will roll
out to the bulk of their footprint in the coming year.
Early returns from the first live market
have been promising, with same-market volumes up double digits. Also encouraging
is the way the company talks about future investment. Three customer experience
centers will be added this year, each serving multi-state regions and each more
efficiently performing work currently tasked to local store associates. The
removal of operating expense incurred by physical stores combined with the
ability to conduct the entire car-buying experience from home—including test
drives, financing and taking delivery of a vehicle—means that future physical
consumer “touchpoints” can eventually be far different from those of the legacy
store base. Those touchpoints can be much less costly, less time consuming to
develop and can quickly allow for a physical presence in new, smaller markets
or greater coverage and convenience in existing markets than the legacy store
model alone can afford.
This evolution may begin to take some
wind from Carvana's sails, or it may not. But with a combined low-single-digit
share of used-vehicle sales between them, it may not matter. By better adapting
their physical presence to consumers' evolving preferences and by pressing the
advantages a national network confers, we believe the other 95%+ of the market
can keep both companies happy and growing for many years to come. Carvana has
burned cash every year of its existence, including over half a billion dollars
in 2018 alone. We have opted instead for the long-profitable CarMax, trading at
14 times forward earnings and buying back its undervalued shares. We value
CarMax in the low-to-mid $90s per share.
performance is not a guarantee of future results. All investments involve risks,
including possible loss of principal.
of 03/31/2019, CarMax, Inc. (KMX) constituted a portion of the net assets of
the following Weitz Funds: Value Fund (3.9%), Partners Value Fund (3.9%),
Partners III Opportunity Fund (2.8%), Hickory Fund (3.3%).
are subject to change and may not be representative of the Fund's current or
opinions expressed are those of Weitz Investment Management and are not meant
as investment advice or to predict or project the future performance of any
investment product. The opinions are current through the date of publication,
are subject to change at any time based on market and other current conditions,
and no forecasts can be guaranteed. This commentary is being provided as a
general source of information and is not intended as a recommendation to
purchase, sell, or hold any specific security or to engage in any investment
strategy. Investment decisions should always be made based on an investor›s
specific objectives, financial needs, risk tolerance and time horizon.