Halls of Shrewd'm / US Policy
No. of Recommendations: 5
Another leg lower on CEO change and interim forecast of 8-12% unit sales decline. Each time I think this cant go lower I am proven wrong
No. of Recommendations: 3
It first reached the current price in, what, 2012?
Now that CVNA is 7x the market cap of KMX, maybe they will acquire them.
No. of Recommendations: 3
While it is terrible, replacing the CEO feels like the change that was needed. I was really surprised at how poorly they seemed to be doing in the marketplace. They are losing and this seems like the first real action by the BOD to address complacency.
No. of Recommendations: 7
One has to wonder if there is a place that it is really too cheap.
Used car prices weakening? I can ignore that, they're a flow business: profits vary primarily with transaction volume, not car prices.
Weakening economy? Likewise. Americans buy cars through fat times and lean times--when "new" is too expensive for how they're doing, they buy "used".
Bad stock prices? No problem, I can buy on weakness and sell in the strong part of the cycle, rinse and repeat.
But those unit sales declines are not good news at all.
The main consolation is that they're still making money every quarter, so they're not going anywhere. The only other big bad shoe to drop would be if the securitization market closes on them.
Jim
No. of Recommendations: 1
would be great to hear some kmx expert weigh in on the strength of repair\refurb\physical services.
this is a weirdly underappreciated foundation in any quasi-dealer biz.
No. of Recommendations: 9
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
No. of Recommendations: 3
I honestly don't know why they have been struggling so much recently
I assumed Carvana was outcompeting them. At first I thought CVNA would wipe out for the reasons pretty much in the Hindenburg report, but more recently I haven't been sure if they'd succeeded at "fake it til you make it" or if the short thesis was wrong. The ownership appeared so sketchy either way I've never seriously researched or considered it, and hadn't followed it due to limited time.
What worries me is KMX is Sears and CVNA is Amazon. The numbers are just absurd (CVNA ttm revenue $18B, market cap $46B, EV $50B; KMX respectively $28B, $5B, $24B).
I look at total shares short as secondary indicator and it _increased_ for Carmax from end of Sep to end of Oct.
I've owned KMX off and (mostly) on for 20 years, after Arne Alsin recommended it in his value investing newsletter on TheStreet. A most of that time I thought they were patient, disciplined, and were playing the long game but lately it has felt like they are just losing to a more aggressive competitor. I haven't bought the dip and considered selling into it for tax purposes.
No. of Recommendations: 2
I always assumed (maybe incorrectly) that car sales were just a channel for the service department at most dealerships; so KMX is focusing on the least attractive part of their business...
tecmo
...
No. of Recommendations: 11
What worries me is KMX is Sears and CVNA is Amazon.
CVNA is surely having an impact on them, but how much? KMX claims to have approximately 13% of the used car market. If we use the revenue numbers of $28B for KMX and $18B for CVNA then the two of them combined make up about 21% of the total used car market. That leaves nearly 80% of the market spread across various franchise and independent dealers and the private market. There has been a lot of consolidation across the dealer landscape in the last 10 years so your typical car dealer today isn't the family owned dealership sponsoring the local little league baseball team. One source claims there are now 10 different ownership groups in the US that collectively own over 1900 combined locations.
If we look at it in that light, there are now potentially up to ten additional competitors that are exceeding or approaching the location scale of KMX and have the additional benefit of new car sales and parts/service revenues. Perhaps 10 years ago you had a dealership that leased 50 new cars and at lease end maybe they let 25 go to wholesale where KMX was able to profitably acquire and sell them. Now that same dealership is part of a 190+ store group across 5+ states and they are moving more/all of their lease/trade in volume through their channel and limiting KMX access to inventory. And those same dealers that have built scale likely have a much stronger retail finance process with access to third party lenders similar to what KMX has built over the years to better service the low credit score consumer.
Good discussion and pushing me more towards the bear case unfortunately.
Jeff
No. of Recommendations: 6
great thread.
i follow (and hold) asbury, where real world services are far above just fixed cost offset. they have tried to build services to sustain breakeven in a typical recession scenario. and they have a nice ratio of reliable japanese\korean models to luxury brands.
asbury seem to run on a 'local oligopoly' hypothesis, which is to cluster high quality dealerships within a certain geo-logistical distance. this allows them to exceed some car selection\variety threshold while keeping low transport costs, and share staff in a pinch.
i dont know how valid this model is, but one can see a pattern in their dealers acquired\disposed.
of course, this would not work w/out great capital allocation in a rough business; especially as trump brutalizes the entire auto ecosystem.
No. of Recommendations: 1
