Middle Class – Hungry and Itching for Pre-Owned Wheels

Yesterday’s post Sector Weights and Limo Drivers provided a quick look at the hidden strength of middle class America.  On a same-store basis, Macy’s, Inc.’s (Public, NYSE:M) second quarter sales were up 6.4 percent.  Today, let’s look at three additional beacons of the middle class: Brinker International, Inc. (Public, NYSE:EAT), Darden Restaurants, Inc. (Public, NYSE:DRI), and CarMax, Inc. (Public, NYSE:KMX). 

Brinker is better known to you as 1,550 restaurants, mainly Chili’s.  Darden represents 1,894 restaurants, mainly Olive Garden and Red Lobster.  And CarMax operates 103 used car superstores in 49 markets.

The restaurant story is simple and that’s always best.  These stocks are beating sales and earnings growth expectations and more importantly outperforming the S&P 500 year-to-date and trailing 12 months.  Regular, working folks are voting with their feet by leaving the kitchen and lining up for a table at a nearby strip mall.

CarMax is a bit more complex.  Its outperformance of the S&P 500 isn’t all about the strength of used car sales versus new car sales.  The economy would certainly be stronger if consumers showed a greater willingness to buy new cars.  But given the success CarMax is seeing, let’s not get mad.  My firsthand experience with this business was nothing short of amazing. 

A few weeks ago I walked into a local San Diego CarMax.  I wanted to sell them my used car or at least get a reasonable quote.  I came ten minutes after they open doors on a random Wednesday.  I expected to wait another ten minutes for the appraisal.  After being greeted by a friendly member of the staff and explained the no haggle process, I knew things weren’t looking good.  The place was packed to the gills!  I had to wait for 45 minutes for the appraisal to be completed.  Was I angry?  No, I was amazed.  This business is successfully putting the shady used car lot out of business.  I would never buy a car there because they mark them up 20-30% over wholesale, but lots of people do.  The sales folks are friendly, the process is simple and the selection of cars is huge.  They keep margins high by taking the haggle out of the deal, offering three simple financing options at point of sale and paying just commission to most “sales” folks on their floor.  I chatted with a few folks and you will find remnants of the mortgage industry, new car dealers and other now-defunct industries in the CarMax HR files.  It’s amazingly rare to get an indepth look under the hood of a business from a single visit like this.