KMX Earnings Preview: Will recovery plan bring CarMax back on track?

CarMax, Inc. (NYSE: KMX) witnessed a sales boom during the pandemic as people opted for pre-owned cars rather than spending larger amounts on new vehicles, due to the economic uncertainty. But the company’s recent performance shows that weak buyer sentiment amid fears of an impending recession and inflation pressures have dented the demand for used cars.

The management has a recovery plan in place, with a focus on reducing costs, implementing a new sales mix, and achieving capital flexibility by pausing share buyback and delaying planned store openings. CarMax delivered its best stock market performance in the COVID era, especially in the early phase of the crisis. However, the trend reversed in the second half of 2021 – after the stock rose to an all-time high. KMX entered a downward spiral since then and has shed most of those gains.

Outlook

Experts’ outlook shows that as the company enters the new fiscal year, the stock has more downside risks than upside risks. Shareholders do not have much to cheer about in terms of returns as the value is likely to decline further this year. Ideally, prospective buyers should wait patiently until they see a good entry point. Those who already own the stock can continue holding it since it is not the right time to sell either.

The continuing squeeze on consumer spending, due to elevated inflation and rising interest rates, will likely dissuade people from spending on big-ticket items like automobiles in the near future. That means it would take some time for CarMax’s sales and profitability to recover.

Weak Q4 in Cards

When the company reports fourth-quarter results on April 11, before regular trading starts, the market will be looking for updates on the emerging trends in the industry. Meanwhile, market watchers are cautious in their outlook, predicting a 76% plunge in earnings to $0.24 per share. It is estimated that revenues decreased 21% annually to $6.05 billion in the three months that ended February 2023.

CarMax’s CEO Bill Nash said at the Q3 earnings call: “Actions that we took during the quarter include further reducing SG&A, selling a higher mix of older, lower-priced vehicles, slowing buys in light of the steep market depreciation, maintaining used saleable inventory units while driving down total inventory dollars more than 25% year over year, raising CAFs consumer rates to help offset the rising cost of funds, pausing share buyback to give us capital flexibility, and slowing our planned store growth for next fiscal year to five locations while maintaining our ability to open more locations if market conditions change.”

Sales under Pressure

The forecast is in line with the company’s unimpressive performance in recent quarters, marked by sharp declines in earnings and inconsistent revenue performance. In the third quarter, earnings declined and missed the consensus estimates for the fourth time in a row. The weak bottom-line performance is attributable to a 24% fall in revenues to $6.5 billion, which also fell short of expectations. All three operating segments contracted, which was almost in line with their performance in the preceding quarter. Used unit sales in comparable stores were down 22.4%, and total retail used units sold dropped 20.8%.

The stock has declined 37% in the past twelve months. Meanwhile, the shares traded slightly higher on Monday — extending the recent trend — in a sign that it is probably gaining momentum ahead of earnings.