Interest grows in how CarMax margins & Manheim Index relate
CarMax hosted its quarterly conference call to share results of its 2016 fiscal year on the same day that Cox Automotive chief economist Tom Webb conducted his regular phone gathering to discuss a wide array of industry topics.
It just so happened that call participants asked Webb about how CarMax manages to keep its used-vehicle margins strong while investment analysts also questioned CarMax chief executive officer Tom Folliard about how the declining Manheim Used Vehicle Value Index would impact performance of the dealership chain.
As he often does, Webb’s presentation before taking questions included a slide where he tracked the retail gross margin on used vehicles generated by the seven publicly traded dealership groups, which includes CarMax. Webb’s latest information put the sales-weighted average at a level near 8.5 percent, stemming from a streak of declines covering seven of the past eight quarters.
An investment observer wondered if the latest drop from a recent high above 11.5 percent spotted in 2009 might be even more dramatic if CarMax’s performance was taken out of the analysis. CarMax reported at the close of its 2016 fiscal year that gross profit per unit sold came in at $2,159, down by $20 a year earlier.
Just for comparison, AutoNation closed 2015 with a 6.7-percent drop in used-vehicle gross profit as the reported figure was $1,577. Over at Sonic Automotive, the company indicated its used-vehicle gross slipped 3.1 percent year-over-year to come in at $1,384 in 2015.
To explain CarMax’s performance, Webb said, “In fourth quarter of last year where same store sales went down, that was a reflective of the fact that they wanted to hold gross.”
Webb reiterated that his analysis “is sales-weighted and (CarMax has) the volume. It would look worse if you pulled out the other six.”
So why are the other six dealer groups so different from CarMax in terms of used-vehicle margins?
Webb said, “Their philosophy is to a certain extent give away the razor to sell the blade because they’re putting vehicles in operation and hoping for very high margins on the service side.”
Earlier in the morning when CarMax conducted its call, Folliard explained how the company can keep its margins much higher than the rest of the industry.
“It’s an overall inventory management process for us, and it starts with the by having the right car in the right place at the right time,” Folliard said. “That allows us to be able to deliver an exceptional value to the customer.”
Folliard also noted CarMax sometimes avoids inventory pieces that are what company personnel might think are “a little expensive.” During the previous quarter of CarMax’s fiscal year, a segment that fell into that description was full-size SUVs, “so we didn’t buy as many and that allows us to manage our margin.”
The CarMax boss also mentioned how the company transfers vehicles within its dealership network depending on buyer requests. That process happens during about a third of its retail sales, according to Folliard.
“That allows us to turn our inventory quickly,” he said. “I think our turns help us manage our margins pretty well.”
And if CarMax spots a trends where a particular model or segment rises in demand? Folliard explained how the company can evaluate margin variability.
“We are big enough now that we can test pockets and markets and different types of product all across the country and learn a lot about price elasticity,” Folliard said. “And then that’s reflected in the ultimate margins that we achieve and the sales that we get.
“I am very pleased with the quarter and with the results and a positive comp based on one of our tougher comparisons last year,” he continued. “And yes, I think we can get better at this as time goes along. I think we are better at managing our inventory and our margins than we were a few years ago.
“And with continued use of external and internal data and training and development of the process, I think we will just continue to get better at it. So I am pretty pleased with the progress that we have made and the results we have been able to deliver,” Folliard went on to say.
Later in CarMax’s call, the topic of margins returned. But this time, it was in connection with the Manheim Index, which now has dropped for three consecutive quarters. An industry observer wanted to know if CarMax’s retail margins could move even higher if wholesale vehicle prices continue to soften.
“When the Manheim Index goes down and we can buy cars cheaper, we want to give our customers a better deal,” Folliard said. “We have chosen whether it’s right or wrong to not increase our margins when our prices go down because we want to give our customers a better deal.
“We are building our business over a very, very long period of time,” he continued. “We want (customers) to leave and say, ‘Why I got a really fantastic deal. The next time I buy a car, I want to buy it from CarMax.’”
“You can argue with our motives but when our ability to buy a car is cheaper, we have chosen to pass those savings onto our customers as opposed to taking it into margin. That’s just what we have done,” Folliard went on to say.
The CarMax CEO pointed to how the company performed during the last recession.
“Our average retail price dropped by over $2,000 in three months and we kept our margins and we bought cars cheaper over that period of time by that same amount and we chose to keep our margins flat,” Folliard said. “That’s just the decision that we made.
“I think we gave a whole bunch of customers a great deal and hopefully made customers for life,” he continued. “That’s how we have chosen to run our business. It doesn’t mean that we will do it exactly that way going forward. But when we have the ability to buy cars cheaper, we pass those savings onto our customers.”