CARMAX, INC. Equity Research │05.04.

2021
Sector: Consumer

Industry: Automotive Retail

Rating BUY Company Description

Price Target ($) 148.13 (+8.2% Upside)
CarMax, Inc., through its subsidiaries, operates as a
Ticker KMX US
retailer of used vehicles in the United States. The
Current Share Price ($) 136.94 company operates in two segments, CarMax Sales
Market Cap (bn) 22.4 Operations and CarMax Auto Finance. It offers
52W High/ Low ($) 138.0/ 70.72 customers a range of makes and models of used
Free Float (%) 99.6 vehicles, including domestic, imported, and luxury
vehicles; vehicles that do not meet its retail standards
to licensed dealers through on-site wholesale auctions;
and extended protection plans to customers at the time
of sale.

Investment Thesis

▪ KMX is one of the leading used-car dealer in the US. Its

omni channel platform allows its customer to buy
vehicle in brick-and-mortar store or online or both. The
company is looking to increase its brick-and-mortar
stores to cater niche markets while focusing on
Key Management increasing sales through its online platform as the
market opens up. Owing to this, the company is
President, CEO: Willian D. Nash spending heavily in digital and marketing capabilities to
CFO: Enrique N. Mayor-Mora increase focus on online sales. Total Planned capex for
FY22: $350 mn.
Key Shareholders
▪ The company’s “Love Your Car Guarantee” scheme also
The Vanguard Group: 10.53% allows customers to be assured of the vehicle by taking
Blackrock Inc: 6.38% a 24-hour drive test before committing to purchase. We
Principal Financial group: 5.85% believe the company is taking all necessary steps to
achieve customer’s belief and priority for a seamless
purchase experience.
Risks to our Valuation and Rating
▪ Decline in production of new vehicles (due to COVID-19)
▪ A third virus wave resulted in muted supply that led to increased demand
▪ Increased production of new vehicles and discounts for used vehicles as people prefer less use of public
▪ Terror and geopolitical events transport services. The company saw sequential growth
▪ Recession of +61% and +110% during 2Q21 (ended Aug-20) in unit
sales of used vehicles and wholesale vehicle
respectively, post first wave of COVID-19. Increase in
the infection rate, second wave and lockdowns,
however, may post negative unit sales growth.
▪ The company saw notable yearly decline in sales of -
34.7% and -39.7% in used vehicle and wholesale SEGMENT REVENUE BREAKUP
vehicles respectively in 1Q21 while no sequential
growth was seen in average selling price as well. Robust 14%
3%
Used vehicle sales
sales in both segments in the last two quarters of FY21
along with record increased average selling price of
Wholesale vehicle sales
>$21,400 and >$6,200 in used care and wholesale cars
respectively, raises optimism for the company. 83% Carmax Auto Finance (CAF)
However, it should be noted that unit sales declined
marginally in the aforementioned period on Q-o-Q basis
due to surge in infections. Store closure were affected
Source: Company filings, research
by severe winters that further negatively affected
vehicle sales.

EBITDA vs EBITDA margin %

2,000 9.0%
1,800 8.0%
Strength and Opportunity 1,600 7.0%
1,400 6.0%
1,200
5.0%
▪ One of the leading US Automotive retailer in 1,000
4.0%
800
Wholesale vehicles 600 3.0%

▪ Customer satisfaction for seamless experience 400 2.0%

200 1.0%
▪ Omnichannel presence, resulting in gaining slow yet - 0.0%
strong market share 2019A 2020A 2021A 2022E 2023E

▪ High investment in digitization and expanding EBITDA ($ mn) EBITDA Margin % (RHS)

online presence Source: Company filings, research

Weakness and Threat

▪ Cyclical nature of business

▪ Strong competition from other players
▪ Impact of COVID-19, slow economy growth
▪ Change in prices of new and used vehicles

Used vs Wholesale Units sold (mn)

1,400

1,200

1,000

800

600

400

200

-
2018A 2019A 2020A 2021A 2022E 2023E

Used vehicles Wholesale vehicles

Source: Company filings, research