CarMax Slammed by Consumer Activists but Investors Could Care Less

NEW YORK (TheStreet) -- Consumer activists in California are slamming CarMax (KMX), the nation's No. 1 retailer of used cars, for what they claim are sales of "unrepaired, defective" vehicles subject to manufacturers' recalls. They want the state's attorney general to go after the company.

CarMax responded with a statement explaining that information about recalls pertaining to vehicles its sells are provided and that every buyer signs a form acknowledging that the information was received. The company noted that only authorized dealers are authorized to perform recall-related repairs. 

What do investors think about the activists' call for California's attorney general to crack down? Not much. CarMax shares closed Friday up by a fraction to $72.86 but the stock is up 12.5% for the year to date compared with the S&P 500, up 3.4% year to date. Over the past five years, CarMax is up 253%, compared with 87% for the S&P. 

As a longer-term investment in U.S. automotive retailing, CarMax not only outpaced the market but also the largest retailer of new and used vehicles, AutoNation  (AN). Over the past five years, AutoNation shares have gained 198%. Shares of two other large publicly held retail chains, Penske Automotive  (PAG) and Group 1 Automotive  (GPI) tracked those of CarMax. 

While new car sales came in at about 16.5 million last year in the U.S., the number of used cars sold by retailers and individuals was more than double that. For CarMax, the gross profit amounts to between $2,100 and $2,200 per unit sold. 

CarMax has grown steadily since its founding, in part because of retailing methods designed to alleviate consumer anxiety over buying a vehicle with problems, as well as a distaste by many for haggling with sales personnel. Each vehicle is sold with a five-day money back guarantee as well as a 30-day limited warranty. The listed prices aren't negotiable. 

With many online services available free of charge that provide an accurate estimate of a vehicle's retail and wholesale value, retailers of new and used cars increasingly have no incentive to try to bamboozle customers with an asking price that's too high. Quite the opposite: A retailer whose prices coincide with recent transactions of similar vehicles is likely to command repeat business. 

Founded in 1993, CarMax has been on a steady growth curve in terms of unit volume, average price per vehicle sold and number of outlets. In 2005, the company was retailing about 250,000 used cars annually; this year it expects to retail about 600,000. Over the same period, the average price per unit sold went from about $16,000 to about $20,000. 

CarMax has numerous other automotive retailing businesses, including one of the nation's largest automotive lenders, auctions for wholesaling used vehicles to other dealers and extended-service protection. The company has 147 stores nationally and hopes to have 190 by the end of 2018. 

Just in case consumers have a stereotypically jaundiced view of used-car salesmen, the company boasts an excellent employment culture, having been selected one of Fortune's "100 Best Companies to Work For" over the past 11 years.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

More from Opinion

It's Dumb to Think Legalizing Weed Is Still a Political Issue

It's Dumb to Think Legalizing Weed Is Still a Political Issue

AAP Exclusive: Cramer Says The President is No Longer on the Side of the Bulls

AAP Exclusive: Cramer Says The President is No Longer on the Side of the Bulls

Why It Makes Perfect Sense for Netflix and Amazon to Buy Up Movie Theaters

Why It Makes Perfect Sense for Netflix and Amazon to Buy Up Movie Theaters

2 More Reasons to Sell All Your Stocks and Run Away

2 More Reasons to Sell All Your Stocks and Run Away

Sean Hannity's Link to Trump Lawyer Raises Questions: Doug Kass Insider

Sean Hannity's Link to Trump Lawyer Raises Questions: Doug Kass Insider