Margin Pressure Remains an Issue for CarMax in Third Quarter but Total Profit Dollars Look Robust

CarMax posted record third-quarter fiscal 2022 EPS of $1.63 ($1.53 excluding a $22.6 million receipt from a class action settlement) which beat the Refinitiv consensus of $1.44. Demand remains excellent with same store unit sales up an impressive 15.8% year over year and total revenue rose 64.5% to $8.5 billion, a full $1 billion above consensus. The stock fell by over 6% during Dec. 22 trading, likely due to continued margin pressure from higher inventory procurement costs and that higher working capital’s burden on free cash flow. We calculate adjusted free cash flow of negative $347.2 million for the quarter and about a combined $1.1 billion burn across the fiscal second and third quarters. We are raising our fair value estimate to $138 from $133 on the time value of money, a lower share count, and about 7% more revenue across our five-year explicit forecast period (versus our prior model) to reflect fiscal 2022 revenue growing more than 75% from this time in fiscal 2021.