Markets

How CarMax Profits From Fixed Prices

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

By Thomas M. Anderson, Associate Editor

From Kiplinger's Personal Finance magazine, December 2006

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.

• Print
• Comments
• Email
• RSS