Used-Vehicle Industry Problems Crush CarMax's Fiscal Q3, but We See Issues as Temporary

CarMax’s fiscal 2023 third-quarter diluted EPS of $0.24 fell 84.3% year over year after excluding a favorable legal settlement in the prior-year quarter. EPS also badly missed the $0.70 Refinitiv consensus. Revenue fell 23.7% to $6.5 billion and missed consensus of $7.3 billion. We are lowering our fair value estimate by 9% to $141 per share. The change is mostly from lowering our fiscal 2023 and 2024 profit and revenue projections, which have proved too optimistic, given the affordability problems consumers have today with buying used vehicles. We also increased our tax rate assumption to 24.5% from 23%, based on where the firm’s current tax is trending, and slightly lowered our long-term profit growth assumption. We have not changed our midcycle EBIT margin from 6.7%. Total revenue across fiscal 2023-27 is now 7.4% lower than our prior valuation at $162.7 billion.