CarMax (KMX) stock gains after first-quarter earnings. What’s in store?

The demand for used vehicles has remained relatively low in the first half of the year, due to concerns over high interest rates and economic instability.  CarMax, Inc. (NYSE: KMX), one of the leading retailers of pre-owned vehicles, reported stronger-than-expected results for the first quarter, triggering a stock rally.

Stock Gains

CarMax’s shares made one of the biggest single-day gains soon after the earning release but pared a part of those gains in the following session. They have traded above the long-term average so far this year. Considering inflation-related risks and macro issues, it would be a good idea to put buying/selling plans on hold until a clearer picture emerges with regard to the company’s future performance. Also, at the current stock price, the valuation is high.

CarMax’s financial health has not been very impressive in recent quarters compared to its performance at the peak of the pandemic when sales boomed, sending the stock to a record high. However, the top line is showing signs of a recovery, reflecting the underlying strength of the used vehicle market. There is a sequential quarterly improvement across the business. CarMax’s sales and profit should bounce back once the market stabilizes and buyer confidence improves.

What’s in Cards

Meanwhile, selling prices would likely stay at the current lows in the near future even as consumers’ spending power remains squeezed. These days, the supply of used cars often exceeds demand, which puts companies at a disadvantage in terms of pricing. At the same time, there is a significant improvement in the availability of new cars because factories are fast returning to full capacity after the market reopening. Also, there has been a dip in loan approvals due to the tightening of lending standards by banks and other lenders, which could have a negative impact on sales.

CarMax’s chief executive officer Bill Nash said while addressing analysts at the earnings conference call, “With our focus on improving experiences and gaining efficiencies, we believe we are well positioned to emerge from the current environment and even stronger company. We’re confident in the future of our diversified business model and believe that the deliberate steps that we’re taking will enable us to drive robust growth as the market improves.”

Sales under Pressure

In the first quarter of 2024, sales and net profit declined but topped expectations, with the bottom line beating for the second time in a row after four consecutive misses.  Earnings dropped to $228.2 million or $1.44 per share in the May quarter from $252.3 million or $1.56 per share a year earlier. The decline reflects a 17.4% fall in revenues to $7.7 billion. Retail used unit sales were down 9.6%, and comparable store used unit sales dropped 11.4% from the corresponding period of 2023. There was a 13.6% annual decrease in wholesale units.

KMX traded higher on Tuesday afternoon, after briefly withdrawing from the post-earnings highs in the previous session. The stock is up 36% since the beginning of the year.