Despite a relatively strong fiscal second quarter, CarMax's stock price dipped slightly after the company released its earnings report last week, largely because of competition in the used-vehicle market.
CarMax executives declined to address competitors by name, but "the elephant in the room is Carvana," said Glenn Chin, analyst at Buckingham Research Group. "But the competition is really coming from everywhere."
On Wednesday, Sept. 26, when earnings were announced, CarMax's stock price opened at $79.30 and closed at $74.66. It was trading at $75.50 on Friday, Sept. 28.
In the hotly contested but voluminous used-car market, other publicly traded retailers are competing directly with CarMax by expanding their footprints with standalone used-vehicle stores, and the ones who aren't doing that are still going after used car and truck sales in general, Chin said.
"In the last downturn they sort of saw the light," he said. "Used cars typically hold up better in a recession." Plus, margins are higher on used-vehicle sales than new-vehicle sales, he added.
Another reason investors could be hesitant is some tightening in CarMax's Tier 3 credit space, which is loosely defined as customers who neither qualify for financing from CarMax nor from lenders it works with.
But Buckingham Research Group said these potential headwinds are "overblown."