Subject: Re: KMX
would be great to hear some kmx expert weigh in on the strength of repair\refurb\physical services.

I won't call myself an expert but i can provide some background. What you are describing is typically called "Absorption" in the franchise dealer world. Absorption is defined as the percentage of fixed overhead costs of the business that are covered by the gross profits of the parts and service departments. The goal that most dealer organizations will strive for is 100% absorption, meaning that their steadier parts and service departments cover the fixed overheads and the business doesn't rely as much on the more volatile whole-good sales.

In short, this basically doesn't apply to the CarMax business model. They have one line in the report for Service Revenues described as follows:

Service Revenues. Service revenue consists of labor and parts income related to vehicle repair service, including repairs of vehicles covered under an ESP we
sell or warranty program. Service revenue is recognized at the time the work is completed.

For the first six months of this year Service Revenues were $38.6M, not very meaningful in their business model even if we assume 50% gross margins.

As others have mentioned, they are a flow business. They want to "turn and burn" inventory and they have historically been extremely good at it.

I honestly don't know why they have been struggling so much recently. I thought they would have been back to more normal per store volumes by now, but they are not. It sounds like the mid to lower income consumers who are their main customers continue to struggle. I have started to hear of more independent used car dealers going under and defaulting on their floor plan notes. Maybe that will take some competition out of the market for CarMax? Only time will tell.

Jeff