Categories Analysis, Industrials

KMX Earnings Preview: After a tough year, what awaits CarMax?

The company is expanding its omni-channel capabilities and adopting technologies like automation and AI

For CarMax, Inc. (NYSE: KMX), fiscal 2024 was a challenging year in terms of sales and profitability due to general weakness in the used-car market. The company is expected to report first-quarter earnings on Friday before the opening bell, with market watchers predicting a modest outcome. Of late, inventory issues and lower average selling prices have been a drag on performance.

After trading mostly sideways, CarMax’s stock is currently hovering where it was nearly two years ago. The value has more than halved since peaking in November 2021. The average share price for the last 52 weeks is $74.51. The recent dip has made the stock more affordable. KMX is unlikely to disappoint long-term investors, considering the company’s strong recovery prospects this year.

What to Expect    

When CarMax reports its May quarter results on Friday, June 21, at 6:50 am ET, the market will be looking for earnings of $0.98 per share. In the prior-year quarter, the company had earned $1.16 per share. The consensus revenue estimate is $7.25 billion. In the previous quarter, both earnings and revenues missed the Street view.

The CarMax leadership is working to enhance customer experience and drive sales through measures like expanding omnichannel capabilities and leveraging technologies like automation and artificial intelligence. Those efforts will likely have a positive effect on performance this fiscal year, considering the underlying strength of the used car market. Due to economic uncertainties and high interest rates, prospective buyers may prefer pre-owned vehicles over new, more expensive ones.

Road to Recovery

At the same time, the broad car market has been largely resilient to market headwinds, and the positive demand condition is expected to persist. It is worth noting that despite a weakness in overall performance, CarMax’s used car comparable sales and unit sales increased modestly in Q4. The management targets capital spending of $500-550 million for fiscal 2025, with a focus on the buildout of facilities for long-term growth capacity and offsite reconditioning and auctions. Also, plans are afoot to open five new store locations this fiscal year.

CarMax’s CEO Bill Nash said in a recent statement, “In regard to our long-term financial targets, we’re maintaining our goal to sell more than 2 million combined retail and wholesale units annually. However, we are extending the timeframe for this goal between fiscal 2026 and fiscal 2030, due to the uncertainty in the timing of the market recovery and as we continue to focus on profitable market share growth. We will adjust the timeframe as we gain greater visibility into the industry’s pace of recovery. Given higher average selling prices, we expect to achieve the $33 billion annual revenue target sooner than units.”

Weak Q4

In the final three months of fiscal 2024, CarMax’s revenue decreased 1.7% from last year to $5.6 billion, mainly reflecting weakness in the core Used Vehicle segment. The weak top-line performance translated into a 27% fall in net profit to $50.3 million or $0.32 per share. Average selling prices declined both in the Used Vehicle and Wholesale Vehicle segments, continuing the recent trend. Meanwhile, used vehicle unit sales and comparable store used vehicle sales moved up 1% and 0.1% year-over-year, respectively.

Shares of CarMax have lost about 12% in the past three months. They traded above $71 on Tuesday afternoon, slightly below the previous closing price.  

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