The last several years have been rough on CarMax (NYSE: KMX), the largest U.S. used-car retailer. Everything from customer reports of low-quality cars to heated competition from digital-only upstart Carvana (NYSE: CVNA) has hurt CarMax.
The company’s stock has dropped 71% over the last five years, compared to a 56% increase for Carvana and a 121% gain for AutoNation (NYSE: AN), another major competitor.
There are some economic developments that have hurt all the players. That includes rising interest rates in 2022 and 2023, which increased vehicle costs for the 35% to 40% of consumers buying on credit. Also, inflation, which has stayed above 2% since 2021, has lifted costs for auto retailers, forcing them to raise prices on their cars.
CarMax reports that all but the most creditworthy car buyers are hurting from high prices and loan payments. The average monthly charge for a used car was $532 last year, according to Experian.
Some buyers complain that CarMax prices exceed even those of new cars. The retailer is trying to assuage those complaints by offering older cars with more mileage on them that cost less than newer cars. The older vehicles make up about 35% of CarMax’s inventory, up from less than 20% 10 to 15 years ago.
Carvana provides stiff competition
Carvana, founded in 2012, has an advantage over CarMax for online devotees. It allows customers to buy, finance, and trade-in entirely online. It offers home delivery, seven-day returns, and a vast online inventory.
It frequently provides higher offers for used vehicles than brick-and-mortar dealers do. That’s thanks to lower overhead costs compared to physical dealers. And Carvana offers easier financing options for those with less-than-perfect credit. Carvana has almost surpassed CarMax in the number of vehicles sold quarterly.
CarMax isn’t standing still. It has an “omnichannel” sales strategy, letting drivers buy in a dealership or online. But it’s aiming to generate more of its sales on the web.
It just hired a new CEO to boost its online sales platform and cut costs on purchasing and spiffing up used cars for sale. It’s Keith Barr, who was formerly chief executive of InterContinental Hotels Group (NYSE: IHG).
He doesn’t have experience in the auto industry, but he’s an expert in digital and consumer issues, The Wall Street Journal notes. Under him, IHG created a new global reservation system and mobile app for its 6,800 hotels.
He has work at do at CarMax. Its revenue dipped 1.8% in the year ended Feb. 28, and profit slid 51%.
However, Morningstar analyst David Whiston hasn’t given up on the company. Its “focus on customer satisfaction, combined with scale advantages, a wide inventory selection, and extensive pricing data, creates a narrow economic moat,” he wrote. That means he expects CarMax’ return on capital to top its cost of capital for the next 10 years.
So CarMax may soon get its engines revved up
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