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Stock Analyst Update

Used-Vehicle Affordability Slams CarMax’s Q2, but We See Stock as Attractive for Long Term

We believe CarMax’s results will recover rapidly once pricing normalizes.

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CarMax (KMX) reported poor fiscal 2023 second-quarter results, with diluted earnings per share of $0.79 missing the Refinitiv consensus of $1.39, causing the stock to fall over 23% on Sept. 29. We have cut our fiscal 2023 EPS modeled by 18% as well as reduced fiscal 2024 profits; this offset the time value of money, so we are not changing our fair value estimate. Macroeconomic pressure from poor consumer confidence and inflation from many areas, as well as poor used-vehicle affordability, hammered results. Comparable-store unit sales fell 8.3% year over year while comparable revenue rose 0.4%. Demand collapsed in July, and late August’s unit comps fell by a midteens percentage. The 8.3% is an improvement from the first quarter’s 12.7% decline but still at levels not seen—other than the start of the pandemic and late fiscal 2018—since fiscal 2010.

Average selling price grew 9.6% year over year to $28,657, but management continues to not pass along all the impact of higher prices to consumers, as retail vehicle gross profit margin dollars per unit rose 4.4% to $2,282 and retail gross margin fell 40 basis points to 7.9%. We agree with forgoing some profit to not gouge consumers in bad times, but the lost gross profit (while overhead costs grow from higher compensation and technology spending) means profit contraction for now. It’s also important to remember that most of the vehicles CarMax sold this quarter were procured prior to the quarter at much higher prices. This lag works against the company when prices fall. ASP fell by $187 versus the fiscal first quarter, and we expect more declines in fiscal 2023 because auction prices are falling due to minor improvements in new-vehicle inventory and the market saying it won’t tolerate further price increases. The Manheim Used Vehicle Value Index is down 12.9% from an all-time high in January. We believe CarMax’s results will recover rapidly once pricing normalizes; also, consumers cannot defer buying a vehicle forever.