CarMax Posts Solid Fiscal First Quarter Despite Inflation Headwinds

CarMax reported first-quarter fiscal 2023 results that showed improvement from recent free cash flow problems, and we are maintaining our fair value estimate. The firm fought through challenges, including the lack of generous government stimulus to consumers in the prior year’s quarter and inflation causing poor vehicle affordability, to still post diluted EPS of $1.56 that beat the Refinitiv consensus of about $1.50 while also generating free cash flow. Same-store unit volume fell hard by 12.7% year over year, but same-store revenue grew 11.6% as transaction prices rose by 28% to nearly $29,000. Management played a balancing act between gross profit dollars per retail unit, or GPU, and gross margin due to the chip shortage ravaging new vehicle inventory, which in turn has created massive demand for used vehicles. GPU rose by 6.1% to $2,339, which, by our records, is the highest for any quarter back through fiscal 2009, while gross margin per retail unit fell by 170 basis points to 8%. Higher GPU only partially offset an 11% total unit volume decline, and lower units also meant less extended protection plan sales, so total gross profit dollars fell by 5.3%, which led to operating margin excluding CarMax Auto Finance declining by 240 basis points to 1.8%.