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How CarMax Profits From Fixed Prices

The biggest used-car dealer wins over customers with no haggling.

At CarMax, the familiar image of used-car salesmen has been scrubbed clean. Polo shirts and khakis have replaced polyester suits. More important, CarMax tags its vehicles -- used and new (a smaller part of the business) -- with reasonable, no-haggle prices. There's no need to play the usual mind games with salespeople.

Although CarMax is the nation's largest used-car dealer, it has only 2% of the $370-billion-a-year market. The Richmond, Va., company now operates 71 "stores," a number it seeks to increase by 10% to 15% annually over the next five years. CarMax generated sales of $6.3 billion in its latest fiscal year, and it says revenues could reach $12 billion by 2010. "CarMax is one of the few open-ended growth stories in retail -- period," says analyst Sharon Zackfia, of William Blair Co.

CarMax's rapid growth is exciting investors. In September, the company raised its profit forecast for the fiscal year ending next February by 30 cents a share, to a range of $1.55 to $1.65 per share. Its stock has soared 62% over the past year, to $44 in mid October, giving the company a market capitalization of $4.7 billion.

What separates CarMax from the pack is the sheer number of cars its sites can sell. A typical used-car dealership may unload 50 vehicles in a good month, and thus needs to generate a large profit per sale to stay in business. An average CarMax dealership sells 420 vehicles a month. That means a store can earn as little as $300 on a sale and still generate acceptable profits, says Joe Kunkel, CarMax's marketing chief.


There are other no-haggle used-car dealers, but they tend to be small and either local or regional. Rival AutoNation lost more than $440 million competing with CarMax before it exited the used-car superstore business in 1999. CarMax, which was spun off by electronics retailer Circuit City four years ago, suffered seven years of red ink before turning a profit in 1999.

CarMax shares are not cheap. The stock sells at 28 times $1.60 per share, the midpoint of CarMax's current-year earnings forecast. But the stock (symbol KMX) may take investors for a nice ride if CarMax succeeds in becoming a nationally recognized retailer.