CarMax Earnings: Cost Controls and Stable Retail Gross Margins Offset Some Unit Sales Decline

We’ve long believed that used vehicle affordability problems for CarMax customers will take a long time to go away but slowly improve as new vehicle sales grow. That process appears to be under way based on CarMax’s fiscal 2024 first-quarter results, showing a 5.5% year-over-year decline in average selling price to $27,258. Prices and interest rates remain elevated, however, and comparable-store unit volume still fell by 11.4%. Still, this rate is an improvement from fiscal fourth quarter’s 14.1% decline and the prior-year quarter’s 12.7% fall. Revenue fell year over year by 17.4% but still beat the Refinitiv consensus. Adjusted diluted EPS, excluding a $0.28 gain from a legal settlement for economic loss caused by the Takata airbag recalls, of $1.16 fell 26.6% but far exceeded the $0.79 consensus and led to the stock rising by about 10% the morning of June 23. We see no reason to change our fair value estimate and continue to believe CarMax’s woes are tied to factors beyond its control from the chip shortage rather than due to strategic or executional problems.