Morningstar

Used-Vehicle Affordability Slams CarMax’s Q2, but We See Stock as Attractive for Long Term

We believe CarMax’s results will recover rapidly once pricing normalizes.

alt=""

CarMax (KMX) 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.

Average selling price grew 9.6% year over year to $28,657, but management continues to not pass along all the impact of higher prices to consumers, as retail vehicle gross profit margin dollars per unit rose 4.4% to $2,282 and retail gross margin fell 40 basis points to 7.9%. We agree with forgoing some profit to not gouge consumers in bad times, but the lost gross profit (while overhead costs grow from higher compensation and technology spending) means profit contraction for now. It’s also important to remember that most of the vehicles CarMax sold this quarter were procured prior to the quarter at much higher prices. This lag works against the company when prices fall. ASP fell by $187 versus the fiscal first quarter, and we expect more declines in fiscal 2023 because auction prices are falling due to minor improvements in new-vehicle inventory and the market saying it won’t tolerate further price increases. The Manheim Used Vehicle Value Index is down 12.9% from an all-time high in January. We believe CarMax’s results will recover rapidly once pricing normalizes; also, consumers cannot defer buying a vehicle forever.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

More in Stocks

Consumer Defensives: Despite Angst, Thirsty Investors Have Names to Pursue

Estee Lauder, Kraft Heinz, and Dollar General are our top consumer defensive stocks.
Erin Lash, CFA

Industrials: Many Stocks Overvalued After Q3 Outperformance

Our top stocks in this sector are Chart Industries, Wesco, and CNH Industrial.
Brian Bernard, CFA, CPA

Basic Materials: Despite Index Rise, We See Multiple Long-Term Opportunities

In this sector, our favored stocks are Albemarle, Dow, and FMC.
Andrew Bischof, CFA and Travis Miller

About the Author

David Whiston, CFA, CPA, CFE

Strategist
More from Author

David Whiston, CFA, CPA, CFE, is a strategist, AM Industrials, for Morningstar*. He covers stocks in the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007. He writes stock reports, ad hoc reports, stock analyst notes, and builds discounted cash flow models for each company covered. He also assesses their economic moat and makes frequent television and print media appearances in local, national, and international news outlets. Key stocks covered include GM, Ford, CarMax, and all six publicly traded franchise auto dealers, such as AutoNation and Penske Automotive Group.

Before joining Morningstar in 2007, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence, gaining experience around assessing an asset’s cash flow.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond’s Robins School of Business. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner.

In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011 .

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

Sponsor Center