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 KMX 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.

Management’s cost control actions are showing results with overhead cost as a percentage of gross profit excluding the legal settlement gain at 75.7%, up only 70 basis points year over year, despite a 6.6% fall in gross profit. Also helping gross profit and partially offsetting the 9.6% decline in retail used units sold was retail unit gross margin up 60 basis points to 8.6%. Retail gross profit per unit held about flat year over year at $2,361, and management raised its GPU expectation for fiscal 2024 to be $2,200-$2,300 instead of the $2,100-$2,200 range talked about on the April call. The company has increased its inventory of vehicles priced under $20,000, which are higher margin than more expensive vehicles, to over 25% from about 20% a year ago to help consumers with affordability. Share repurchases remained suspended for the second straight quarter, and we hope buybacks resume soon.