CarMax Earnings: Some Improvements Visible but Recovery Has a Long Way To Go

CarMax’s KMX stock declined by over 11% on Sept. 28 after reporting fiscal 2024 second-quarter diluted EPS of $0.75 that fell 5.1% year over year and missed the Refinitiv consensus of $0.78. We see no reason to change our fair value estimate because we continue to expect CarMax’s profit to improve from recent levels once used vehicle affordability improves. Vehicle affordability will improve gradually over a long time due to poor late model used vehicle supply following the pandemic and chip shortage and from some less affluent customers unable or unwilling to pay higher interest rates than a few years ago.

We believe management is doing the best it can to control expenses and how much inventory to buy when pricing declines rapidly, as it did in June and July. For example, inventory reductions from the fiscal first quarter, by our calculations, helped adjusted free cash flow more than triple year over year and rise seven-fold from the fiscal first quarter to $686.6 million. Other improvements, although still headwinds, include comparable store unit sales down 9%, which was the first single-digit decline in three straight quarters, and average retail selling price down 4% year over year to $27,500. This level is still causing consumer affordability problems—which is understandable given prepandemic ASPs of around $20,000.

Management said that over 25% of inventory is priced below $20,000, but we suspect those vehicles are not that desirable. The company also says it has strong demand across all consumer credit spectrums but many midtier to subprime consumers often don’t close the deal once they see the high monthly payment offered. We don’t see that problem abating until interest rates fall or stop rising, and we have more years of robust new vehicle sales to create future used vehicle supply. We are glad to see the company announce it intends to resume share repurchases in the fiscal third quarter.