Disclosure : DEAR is the acronym for Digital Earnings Analysis & Review. Comments, opinions & recommendations are personal and do not reflect actual operations within the enterprise. I do not have any investments with KMX .I am not receiving any compensation for writing this article and not employed by and/or direct representative of, any company mentioned in this article. 3. Key Challenges were inferences from 8K filing & teleconference transcript 4.Recommendations are based on experience & trends without any knowledge about KMXs operations 5.Expected outcomes are estimates of digital initiatives impact on information provided in 8K filling for Q3 2020,only. Expected outcomes are calculated estimates based on industry experience and publicly available trend reports. All statements made are based on multiple assumptions and covered. by Risk Factors defined by KMX. This document should not be used to make stock purchase decisions. If you have any query or feedback about this disclosure, please reach me at sagar@sagarmandal.com
On December 20th 2019, CarMax, Inc. (KMX) the nation’s largest retailer of used cars, reported results for the third quarter ended November 30, 2019. With an overall positive growth rate, Q3 revenues have enhanced by 11.4% by $4.79 Bn , beating estimates by $120 Mn.
During the conference call, the company’s efforts to roll out omni-channel Customer Experience Centers gained attention with detailed insights from Bill Nash, President & CEO. Operating in a highly competitive & seasonal US automotive sector, these initiatives & capabilities should drive gross profit per unit & unit sales over each quarter.
After DEAR – Digital Earnings Analysis & Review exercise based on 8K filings for Q3 2020, recommendations for digital initiatives are elaborated below
a. Hybrid Strategy for Omni-Channel CEC roll out
Bill Nash, President & CEO, CarMax shared that the business is facing headwinds in omni markets related to customer experience centers & these capabilities are expected to be complete rolled out by Feb 2020. The delay & furthermore to establish presence, advantages local competition to fill the existing market demand. Adopting hybrid strategy should drive faster roll out and boost efficiencies from each omni-channel CEC.
For Established Markets : With established presence and tenured staff, these stores should focus on reaching prospects with non-paid/organic channels and increasing unit sales per walk-in. Existing CRM capabilities should drive interactions based on right messaging & the prospects purchase journey. Think segmentation & optimization. Data-enabled CarMax associates then can drive the right discussions to connect the dots for the prospect. Further lead generation efforts should be organically driven before making any paid investments. Expected Outcomes : $0 – Digital Spend/Unit
For New Markets : Building presence through paid channels should be key. Search engines, blogs & forums continue to dominate customer’s research pie. Contextual ads with prominent above the fold placement, followed by personalized landing pages – should drive a connected experience aimed at increasing appointments. Expected Outcomes : Digital Spend/Unit reduced to ~$50
b. Go Hyper-Local with Digital Capabilities
Instead of measuring Advertising Spend nationally, they should be budgeted based on local market presence , trends and needs. According to this data from Bloomberg, cities like Dallas, Phoenix, Austin etc. are seeing >100 arrivals per day. There are data providers available that can help reach these migrating population. Additionally, tie-ups with Harris-Teeter and apartment complexes should open new top of mind opportunities. In such car-intensive markets, car purchase decisions are made within 100 days after arrival backed by online research and closeness to stores/dealerships. Localizing budgets & efforts would help CarMax stay ahead of the local competition. Expected Outcomes : Controlled ad spend per market; Increase in web traffic by 30%
c. Scale Omni-Channel to Service Department
CarMax has talent uniquely skilled in refurbishing and valuating life of car. This advantaged-business unit should be made available for any car owner with gamut of services from oil change to any repair. With omni-channel capabilities available it can compete with known brands like PepBoys and enhancing presence in the local car market. Additionally, car health information acquired through this business unit can flow into the top of funnel for unit sales conversion. Possibly housed in the same campus , customers can walk in to check existing inventory while their car is serviced. Definitely a better experience than sitting in the waiting room at any local shop. Expected Outcomes : $9 Mn in Service Profit Revenue; $0 Ad Spend per Unit Sales through this channel; Increase in reach by 10%
d. CAF as Customer Retention Channel
Latest earnings report shows that 47.9% of car purchases were financed by CAF aka CarMax Finance. Firstly, kudos to Tom Reedy & team for executing amazing adoption of in-housed financing option to customers. Compared to brand , auto-finance has higher post-sales interaction with customers. Customer and behavioural insights this BU re-designed as marketing channel would open up more opportunities to market the 2nd car for the customer and/or grow same store organic sales. A great financing experience is always top of mind and drives trust & word-of-mouth numbers for the brand. Expected Outcomes : $0 Ad Spend per Unit Sales through this channel; $0 Ad Spend per new lead acquisition; 10% increase in ASP per unit
Measures of Success
With no visibility to CarMax’s marketing plan and road map it would be difficult to predict if & when they would implement strategies/benefits as discussed above. The following measures should paint a better picture about the financial gains through digital/omni-channel initiatives, over the next few quarters:
Web Traffic : Thanks to Bill Nash and team for sharing this measure, though not a requirement for SEC fillings. As the omni-channel markets go live and strategic initiatives, are undertaken, I predict web traffic to increase to 45% from current levels, over the next few quarters. A higher percentage of this traffic would be from mobile searches and mobile devices, which would introduce them to CarMax’s mobile apps. In the later quarters of 2021, I predict web traffic would get steady while mobile app usage & installs shoot up.
Gross Profit per Unit : With higher opportunities for recurring unit sales and hybrid omni-channel strategies, I predict Gross Profit per Unit to increase by 10% to $2359 from current levels. In a highly dynamic and sensitive environment like car retail, it would be difficult to measure the direct impact of omni-channel on GPU vs other external/internal factors. But a reduction in ad spend per unit & increase in ASP is definitely expected in the next quarters.
Used Unit Sales : Keeping other factors constant, I predict that KMX would experience near term increase in used unit sales by 5%. Connected digital experiences powered by data-enabled teams should power unit sales and increase reach to new prospects.