CarMax: Absolute Disaster

Sep. 29, 2022 12:51 PM ETCarMax, Inc. (KMX)24 Comments

Summary

  • CarMax comparable sales were terrible, and it shows, in our opinion, the Fed's results are restricting the economy.
  • Gross profit took a hard hit, and we expect per-vehicle profit erodes from here (despite being up year-over-year).
  • The results were not even close to any estimates.
  • Earnings could be 30% lower than anticipated this year.
  • Looking for a helping hand in the market? Members of BAD BEAT Investing get exclusive ideas and guidance to navigate any climate. Learn More »

Building demolition aftermath by controlled implosion

Cylonphoto

Somebody send Fed Chair Jerome Powell the just reported CarMax, Inc. (NYSE:KMX) earnings report as evidence that his actions are indeed having the intended consequences. Send help.

This was a complete disaster. The company was not even close to any analyst estimate. The report shows that both the consumer was weak, and the price of its vehicle sales was down. it was a horrific report. Make no mistake, sales have been growing over time, but this is a heavily saturated market, with a consumer economy that was just on fire. Now, with rates on the rise again to try and slow the economy, it is becoming more expensive to finance purchases. This is hurting demand.

Inflation in general is a damper on consumers' budgets. Then factor in a much higher monthly payment on any financed debt, and it is no surprise as to why sales are slowing. We are in a recession, in our opinion and according to GDP. The rate hikes are just taking effect. We hope the Fed slows down at year-end.

We believe you should watch the price of used autos closely, as they are normalizing and declining, so we expect some margin pressure. In short, we love the company, but the stock, we would not touch here. They executed poorly and the consumer is clearly weak. Avoid KMX stock for now. Let us discuss.

Sales trends weaken

CarMax's just reported revenues were once again up from a year ago, but sales growth weakened tremendously. The top-line growth is now anemic, as the quarter saw slower sales each month that passed. Eye-popping slowdown, really. Prices are normalizing. Car sales are down. Keep in mind the used car market picked up quite a bit during COVID and really picked up as we emerged from the height of the crisis into 2021. Now, the Fed's actions have had their consequences. We are just starting to see it. Sales were up just 1.9% over last year.

Q2 revenues were $8.14 billion, badly missing estimates by $0.410 billion. it gets worse. Margin pressure is creeping up and it is a big warning sign for the next few quarters. We are seeing, at best, mixed results in the critical metrics that we follow for CarMax, and this is something to consider going forward.

Critical metrics a cause for concern

CarMax comparable sales

Sales were up very slightly. Just because the rates are higher and consumer is weakened to a degree, it does not mean sales will completely implode, but in this report, the critical metrics we follow for this company were again mixed. Total used vehicle unit sales fell 6.4% in the quarter and comparable store used unit sales cratered 8.3% versus the prior year's Q2. It was a horrible quarter for used vehicle sales, and way below expectations.

Here is the key. Comparable store sales "saw a low single-digit decline in June and then fell sharply through the end of the quarter." Further, wholesale units dropped 15.1% to 159,677 vehicles from the prior-year second quarter. Ouch.

As a whole, combined retail and wholesale used vehicle unit sales were 376,616, a decrease of 10.3% from Q2 2021.

Turning to the service plans and financing side of the business, revenues were also down 6.6%, due to less financing and lower sales volumes.

CarMax margins and profits

So volumes were anemic, and margins are starting to feel some pressure too. This is where the problem arises. We have revenues up from last year, but the company made far less money. This is because margins were weaker and there are massive charges for loan loss provisions that hurt earnings.

Total gross profit fell to $737.1 million in the quarter, declining 9.6%%. A massive fall despite a slight revenue increase. This was a result of some pressure on profit per vehicle.

This is the key metric we follow: used vehicle gross profit per unit. This actually held up to a small degree. While retail used profit was down 2.6% overall, it was a volume-driven result. The per-vehicle profit was better than a year ago, reflecting higher prices over the past year. But as the quarter went on, prices began to fall. The per vehicle profit was a slight bright spot, increasing $97 per vehicle from last year to $2,282.

We expect pressure here as used car pricing reductions continue as the market normalizes. This is a key point going forward. Wholesale vehicle gross profit plummeted 25.6%, driven by reduced volumes. However, the margin per vehicle was down. Wholesale per vehicle profit of $881 was down from $1,005 in the Q2 2021 period. It is worth noting margins in the other lines of sales were down 15.4% as well, as lower protection plans were sold, and service department margins were crimped.

So, you have some price per vehicle issues, yet to make matters worse on the profit side of things, selling, general and administrative expenses rose 16.0% to $686.0 million. Advertising expenses were up, as were technology costs (for the new online appraisal system). There were also more staffing costs as wages are higher. They also spent to ramp up their online presence, which paid off as 30% of sales were online, up from 28% a year ago. Perhaps not surprisingly, earnings power was way down.

With a slight increase in the top line but clearly reduced margin power and expenses that grew, the bottom line missed consensus expectations. It did not just miss, it was not even close. Earnings were $0.79 (way below last year's $1.72), badly missing consensus by $0.58 per share. Horrific. This horrible result comes even with the company buying back shares, something we love about the company. CarMax repurchased 1.7 million shares of common stock for $163.0 million. At the end of the quarter, it had $2.45 billion remaining available for repurchase. This could help create a floor here.

Looking ahead

We think investors have to wait for the stock to take a breather and the economy to stabilize some. It may take a few quarters. We cannot even project an earnings outlook for fiscal 2023. We expect the company, of course, will be earnings positive, but this horrible miss could mean EPS comes in perhaps 30% lower than originally expected. While about $5.50 was expected for the year, we think EPS is more likely to hit $4.00 following this report. We assume volumes decline 10%, and gross profit trickles lower per vehicle as well. The company could reduce expenses to help EPS, but at this point, sales are stalling, and likely to stay about flat this fiscal year, eroding the growth we had seen. We think you have to avoid this one for now.

Let us help you crush this horrific market

Like our thought process? Stop wasting time and join the community of 100's of traders at BAD BEAT Investing at an annual 50% discount.

It is simple. We turn losers into winners with rapid-return gains

  • You get access to a dedicated team, available all day during market hours.
  • Rapid-return trade ideas each week
  • Target entries, profit taking, and stops rooted in technical and fundamental analysis
  • Deep value situations identified through proprietary analysis
  • Stocks, options, trades, dividends, long and short ideas

 

This article was written by

Quad 7 Capital profile picture
37.17K Followers
The #1 service for high performing trades run by active hedge fund analysts

We have turned thousands of losing investors into WINNERS. We are the team behind the top performing trading service BAD BEAT Investing. Quad 7 Capital was founded in 2017 by a team that consists of a long time investor, health researcher, financial author, professor, professional cardplayer, and a politician. 

The BAD BEAT Investing service launched in 2018 and is a top performing Marketplace service relative to market returns. It is focused on extreme value, and leveraging mispriced stocks and momentum driven events for rapid return swing trades, options education, and long-term investments. Further, it offers a direct access line to our traders all day during market hours.

Quad 7 Capital as a whole has expertise in business, policy, economics, mathematics, game theory and the sciences. The company has experience with government, academia, and private industry. We offer market opinion and analysis, and we cover a wide range of sectors and companies, with particular emphasis on news related items and analyses on growth companies, cryptocurrencies, REITS, biotechnology/ pharmaceuticals, precious metals, blue chips and small-cap companies.

If you want to win, follow us, and if you want to make money, sign up to BAD BEAT investing today. 

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Recommended For You

Comments (24)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.