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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
-
How to Retire Early by 40: Build the FIRE Now
It's not easy, but you may be able to retire by 40 or 45 if you take these FIRE (Financial Independence, Retire Early) steps now.
By Jacob Schroeder Published
-
If You’re Preparing to Move, Should You Buy or Rent?
Both prospects are expensive these days, but there are several questions you can ask yourself to help you decide what’s right for you.
By Justin Stivers, Esq. Published
-
Stock Market Today: Markets Soar Amid Strong Earnings for Big Tech
Equities ended the week on an up note thanks to some of the market's biggest names.
By Dan Burrows Published
-
Stock Market Today: Markets Tumble Amid Slower Economic Growth and Rising Prices
Disappointing readings on GDP and inflation helped tank equities.
By Dan Burrows Published
-
Stock Market Today: Stocks Run Out of Steam Ahead of Meta Earnings
The Dow Jones Industrial Average snapped a four-day winning streak after Boeing's first-quarter results.
By Karee Venema Published
-
Stock Market Today: Nasdaq Soars Ahead of Tesla Earnings
The EV stock rose nearly 2% ahead of its highly anticipated Q1 earnings report, due after tonight's close.
By Karee Venema Published
-
Stock Market Today: Markets Rebound Ahead of Big Week for Earnings
Equities rallied on easing geopolitical tensions, upcoming quarterly results.
By Dan Burrows Published
-
Stock Market Today: Nasdaq Spirals as Netflix Nosedives
A big earnings boom for credit card giant American Express helped the Dow notch another win.
By Karee Venema Published
-
Stock Market Today: S&P 500, Nasdaq Extend Losing Streaks
The two indexes have closed lower for five straight sessions.
By Karee Venema Published
-
Stock Market Today: Dow Slips After Travelers' Earnings Miss
The property and casualty insurer posted a bottom-line miss as catastrophe losses spiked.
By Karee Venema Published