Company Reports

CarMax's revenue has increased at a compound annual rate of 11.3% since fiscal 2000 because of the success of customer-friendly sales practices and use of information technology. We think the firm will eventually reach its over 5% zero to 10-year-old vehicle market share target, up from 3.7% in 2023 and 4% in 2022. Revenue of at least $33 billion should come before reaching another goal of selling a combined 2 million annual retail and auction units between fiscal 2026 and fiscal 2030.

CarMax finished fiscal 2024 with diluted EPS of $0.32 that missed the LSEG consensus of $0.49, sending the stock down over 13% during April 11 trading. We are not changing our fair value estimate and still believe the stock offers attractive value for long-term investors, but we will reassess all valuation inputs when we roll our model forward for the 10-K. We think CarMax did not have a bad quarter, but consensus expectations were probably too high and perhaps did not adequately account for no extended warranty profit sharing (an $0.08 EPS hit versus the prior year’s quarter) and this year’s quarterly tax rate up 680 basis points ($0.04 impact) to a more normal level.

CarMax's revenue has increased at a compound annual rate of about 12.5% since fiscal 2000 because of the success of customer-friendly sales practices and use of information technology. The firm targets fiscal 2026 revenue between $33 billion and $45 billion with over 5% zero to 10-year-old vehicle market share by end of calendar 2025, up from 4% in 2022. Competing dealerships have tried no-haggle pricing and failed because their salesforces are trained to focus on selling vehicles that earn the highest possible gross profit rather than vehicles that customers actually want or need. A traditional dealership relies on profits from service to offset the typically lower margins it gets on new-vehicle sales. CarMax does not hire salespeople from the auto industry, and salespeople receive the same commission regardless of the vehicle sold. They do not even know the profit on the vehicle sold. The CarMax customer stays with the same salesperson throughout the transaction rather than being passed off to a finance department, receiving a buying experience that is hard to match at a dealership. This focus on customer satisfaction, combined with scale advantages that allow for a wide inventory selection and extensive pricing data, creates a narrow economic moat.

We are not changing our CarMax fair value estimate after the firm reported fiscal 2024 third-quarter results that showed modest improvement in used vehicle affordability. Comparable store unit sales fell year over year by 4.1% for their eighth straight quarterly decline, but it was the smallest decline of that stretch. Diluted EPS more than doubled to $0.52 and beat the $0.43 Refinitiv consensus. Retail average selling prices fell by 4.6% and by under 1% versus fiscal second quarter to $27,228 as used vehicle affordability continues to slowly improve from the chip shortage, a problem that will likely last into calendar 2025 as off-lease volume shrinks as a byproduct of poor new vehicle sales three years prior. Retail vehicle gross profit per unit remained stable year over year at $2,277 while gross margin per retail unit increased by 50 basis points to 8.2%, which, along with auction growth, helped overall gross margin rise by 110 basis points to 10%.

At the Los Angeles auto show on Nov. 16, Hyundai announced a partnership with Amazon in which, starting next year, some of its dealers will sell new vehicles on Amazon.com. The news sent each of the six franchise dealers and CarMax down about 5%-8%, which we think is a large overreaction predicated on fears of Amazon taking share away from dealers. Such a risk is not even possible on new vehicle sales due to state franchise laws, nor do we think it is likely that Amazon wants to do all aspects of auto retailing such as handling and disposing of trade-ins, service, and finance and insurance offerings. Service is a very underappreciated benefit that dealers provide customers when comparing the traditional auto industry to digital retailing and electric vehicle startups' direct sales formats. Should Amazon directly sell used vehicles someday, CarMax would have more competition, but it also has the ability to sell via brick-and-mortar, digital-only, or any combination of both depending on what the customer wants, something a digital-only retailer cannot offer. Our auto coverage has been implementing omnichannel tools for years and we doubt that any of their management teams are surprised by the Amazon news.

CarMax stock declined over 11% on Sept. 28 after the company reported fiscal 2024 second-quarter diluted earnings per share 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 some less affluent customers being unable or unwilling to pay higher interest rates than a few years ago.

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.

CarMax's revenue has increased at a compound annual rate of about 12.5% since fiscal 2000 because of the success of customer-friendly sales practices and use of information technology. The firm targets fiscal 2026 revenue between $33 billion and $45 billion with over 5% zero to 10-year-old vehicle market share by end of calendar 2025, up from 4% in 2022. Competing dealerships have tried no-haggle pricing and failed because their salesforces are trained to focus on selling vehicles that earn the highest possible gross profit rather than vehicles that customers actually want or need. A traditional dealership relies on profits from service to offset the typically lower margins it gets on new-vehicle sales. CarMax does not hire salespeople from the auto industry, and salespeople receive the same commission regardless of the vehicle sold. They do not even know the profit on the vehicle sold. The CarMax customer stays with the same salesperson throughout the transaction rather than being passed off to a finance department, receiving a buying experience that is hard to match at a dealership. This focus on customer satisfaction, combined with scale advantages that allow for a wide inventory selection and extensive pricing data, creates a narrow economic moat.

CarMax's revenue has increased at a compound annual rate of about 13% since fiscal 2000 because of the success of customer-friendly sales practices and use of information technology. The firm targets a 12%-19% annual growth rate for fiscal 2021-26. Competing dealerships have tried no-haggle pricing and failed because their salesforces are trained to focus on selling vehicles that earn the highest possible gross profit rather than vehicles that customers actually want or need. A traditional dealership relies on profits from service to offset the typically lower margins it gets on new-vehicle sales. CarMax does not hire salespeople from the auto industry, and salespeople receive the same commission regardless of the vehicle sold. They do not even know the profit on the vehicle sold. The CarMax customer stays with the same salesperson throughout the transaction rather than being passed off to a finance department, receiving a buying experience that is hard to match at a dealership. This focus on customer satisfaction, combined with scale advantages that allow for a wide inventory selection and extensive pricing data, creates a narrow economic moat.

CarMax finished fiscal 2023 with fourth-quarter diluted EPS of $0.44 easily beating the Refinitiv consensus of $0.24 and sending the stock up by over 10% during April 11 trading. We are leaving our fair value estimate in place but will reassess all valuation inputs when we roll the model forward for the 10-K yet to be filed. Ever since CarMax entered its current rough profitability state due to the pandemic and chip shortage, we’ve felt that the stock can eventually rise as used vehicle affordability improves.

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.

CarMax's revenue has increased at a compound annual rate of about 13% since fiscal 2000 because of the success of customer-friendly sales practices and use of information technology. The firm targets a 12%-19% annual growth rate for fiscal 2021-26. Competing dealerships have tried no-haggle pricing and failed because their salesforces are trained to focus on selling vehicles that earn the highest possible gross profit rather than vehicles that customers actually want or need. A traditional dealership relies on profits from service to offset the typically lower margins it gets on new-vehicle sales. CarMax does not hire salespeople from the auto industry, and salespeople receive the same commission regardless of the vehicle sold. They do not even know the profit on the vehicle sold. The CarMax customer stays with the same salesperson throughout the transaction rather than being passed off to a finance department, receiving a buying experience that is hard to match at a dealership. This focus on customer satisfaction, combined with scale advantages that allow for a wide inventory selection and extensive pricing data, creates a narrow economic moat.

CarMax reported poor fiscal 2023 second-quarter results, with diluted earnings per share of $0.79 missing the Refinitiv consensus of $1.39, causing the stock to fall over 23% on Sept. 29. We have cut our fiscal 2023 EPS modeled by 18% as well as reduced fiscal 2024 profits; this offset the time value of money, so we are not changing our fair value estimate. Macroeconomic pressure from poor consumer confidence and inflation from many areas, as well as poor used-vehicle affordability, hammered results. Comparable-store unit sales fell 8.3% year over year while comparable revenue rose 0.4%. Demand collapsed in July, and late August’s unit comps fell by a midteens percentage. The 8.3% is an improvement from the first quarter’s 12.7% decline but still at levels not seen—other than the start of the pandemic and late fiscal 2018—since fiscal 2010.

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%.

CarMax's revenue has increased at a compound annual rate of about 13% since fiscal 2000 because of the success of customer-friendly sales practices and use of information technology. The firm targets between a 12%-19% annual growth rate for fiscal 2021 to fiscal 2026. Competing dealerships have tried no-haggle pricing and failed because their salesforces are trained to focus on selling vehicles that earn the highest possible gross profit rather than vehicles that customers actually want or need. A traditional dealership relies on profits from service to offset the typically lower margins it gets on new-vehicle sales. CarMax does not hire salespeople from the auto industry, and salespeople receive the same commission regardless of the vehicle sold. They do not even know the profit on the vehicle sold. The CarMax customer stays with the same salesperson throughout the transaction rather than being passed off to a finance department, receiving a buying experience that is hard to match at a dealership. This focus on customer satisfaction, combined with scale advantages that allow for a wide inventory selection and extensive pricing data, create a narrow economic moat.

CarMax ended fiscal 2022 with a quarter bombarded with macroeconomic headwinds and the impact of the chip shortage. Management, continuing to focus on maintaining gross profit per retail unit in the low $2,000 range, squeezed retail gross margin per unit by 250 basis points year over year to 7.4%, while diluted EPS of $0.98 missed the Refinitiv consensus of $1.25. One reason the stock fell over 7% on April 12 is likely the poor comparable store unit sales decline of 6.5%, which was the worst level for this metric, other than at the start of the pandemic, since an 8% fall in fourth-quarter fiscal 2018. Management called out headwinds around poor consumer confidence, expensive vehicles (transaction prices increased 39.7% to $29,312), the omicron COVID-19 variant, and the absence of government stimulus that occurred in the prior year’s quarter. Management also updated its May 2021 long-term targets, which needed updating because full-year fiscal 2022 revenue of $31.9 billion (up 68% from fiscal 2021) is almost at the fiscal 2026 target of $33 billion. The new targets are $33 billion to $45 billion of revenue by fiscal 2026 (we currently model $35.6 billion) and selling between 2 million and 2.4 million combined retail and wholesale units by then, up from a prior target of 2 million.

We are raising our CarMax fair value estimate to $155 from $138. The change is from time value of money ($3 of the change), about a 4% increase in revenue modeled over our five-year forecast period ($4), and from lowering our tax rate ($10) for fiscal 2023-26 back to 25% from the increase to 30% made last June 25. CarMax reports fiscal 2022 fourth-quarter results on April 12. As discussed in our Dec. 23 note, given recent political developments around the Build Back Better bill, we are reversing our forecast from summer 2021 that the U.S. corporate tax rate will rise to 26% in 2022. CarMax has high sensitivity for its fair value estimate to our tax rate assumption because it operates exclusively in the United States. We now believe the U.S. statutory tax rate will remain at 21% at least through President Joe Biden’s remaining term, which ends in early 2025. Considering recent polling numbers and midterm election patterns, we would not be surprised to see Democrats lose a majority in at least one of the congressional bodies after 2022’s election, which would prevent passage of such significant legislation in the remainder of Biden’s term. Any way we slice it, the Build Back Better bill may not pass, and even if a slimmed-down version passes in 2022, we think it is highly unlikely that the U.S. corporate tax rate will increase, given various Senate objections to the bill.

CarMax's revenue has increased at a compound annual rate of about 11% since fiscal 2000 because of the success of customer-friendly sales practices and use of information technology. The firm targets a 12% annual rate for fiscal 2021 to fiscal 2026. Competing dealerships have tried no-haggle pricing and failed because their salesforces are trained to focus on selling vehicles that earn the highest possible gross profit rather than vehicles that customers actually want or need. A traditional dealership relies on profits from service to offset the lower margins it gets on new-vehicle sales. CarMax does not hire salespeople from the auto industry, and salespeople receive the same commission regardless of the vehicle sold. They do not even know the profit on the vehicle sold. The CarMax customer stays with the same salesperson throughout the transaction rather than being passed off to a finance department, receiving a buying experience that is hard to match at a dealership. This culture of customer satisfaction, combined with scale advantages that allow for a wide inventory selection and extensive pricing data, gives the company a narrow economic moat.

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.

CarMax's revenue has increased at a compound annual rate of about 11% since fiscal 2000 because of the success of customer-friendly sales practices and use of information technology. The firm targets a 12% annual rate for fiscal 2021 to fiscal 2026. Competing dealerships have tried no-haggle pricing and failed because their salesforces are trained to focus on selling vehicles that earn the highest possible gross profit rather than vehicles that customers actually want or need. A traditional dealership relies on profits from service to offset the lower margins it gets on new-vehicle sales. CarMax does not hire salespeople from the auto industry, and salespeople receive the same commission regardless of the vehicle sold. They do not even know the profit on the vehicle sold. The CarMax customer stays with the same salesperson throughout the transaction rather than being passed off to a finance department, receiving a buying experience that is hard to match at a dealership. This culture of customer satisfaction, combined with scale advantages that allow for a wide inventory selection and extensive pricing data, gives the company a narrow economic moat.