Headwinds Mount For Carmax, Don’t Count On Higher Share Prices

Carmax Buckles Under Strain Of Economic Headwinds 

Carmax (NYSE: KMX) put in a good quarter to be sure but the report is rife with evidence inflation is hurting the economy. The company produced a solid increase in revenue versus the year-ago period but the gains are driven almost entirely by price increases. At the retail level, the data is worst. Carmax reports a decline in retail units sold and prices that are still rising at a nearly 40% clip. Based on our view of the inflation situation, used car prices will likely keep climbing and cut deeper into demand.

We’ve yet to see any analyst's commentary on the subject but the trend in sentiment coming into the report is telling. The analysts were rating the stock at a firm Buy but the Marketbeat.com consensus is slipping as is the price target. The consensus price target is down in the 3-month and 1-month comparison and we think will move lower in the wake of the earnings report. 

Carmax Falls On Mixed Results 

Carmax had a great quarter at the top line and a terrible quarter on the bottom line. The company reported $7.69 billion in net revenue for a gain of 49% over last year and it beat the consensus estimate by 145 basis points. The bad news starts almost immediately after that, however, because the gains were driven almost entirely by higher prices coupled with expansion, wholesales, and market share gains. 

“While the fourth quarter was adversely affected by macro factors, our retail market share growth for the year was the highest it’s been during my tenure as CEO and is a reflection of our ability to deliver the most customer-centric experience in the industry.”

On a segment basis, wholesale units increased by 43% while retail units declined by 5% for a combined 11.3% gain for the company. eCommerce accounted for a fair amount of the increase as well, rising 600 basis points as a percentage of retail revenue to 11%. The bad news is that at the comp level sales are down 6.5% and in large part because of the average selling price. The revenue per retail car surged 39.7% to drive a 32.6% increase in retail revenue and only partially offset the decline in retail unit volume. 

Carmax Outlook Is Cloudy, Very Cloudy

The company didn’t give any specific guidance for the coming year but said it would open 10 new stores and increase its CAPEX to support growth. The company did increase its long-term targets for revenue and earnings (store count and market share gain) but the long-term is a long time away. Until then we expect to see YOY revenue growth slow dramatically in the coming quarter and possibly stall as comps get tougher and tougher. Earnings are the real question and we see only downside risk where they are concerned. 

The takeaway for us is the company may still grow due to market share gains and store expansions but there will be a serious headwind in the form of comp sales and pricing that will negatively impact earnings. Rising prices will cut into retail unit volume and comp sales and eventually cause a correction in retail pricing that will suck earnings power down the drain. 

The Technical Outlook: Carmax At Risk Of Extending Sell-Off 

Carmax shares appeared to have put in a bottom near the $100 level after correcting roughly 30% in the first quarter of the year. The bottom was aided by institutional buying but now we’re not so sure it will hold. The Q4 results have shares down more than 5.0% in premarket trading and below our support line at $98.50. The premarket action has been volatile, support may keep price action above $98.50, but we aren’t ready to call the bottom. Assuming price action confirms support at this level, it could move back to the $130 range and the 150-day moving average. If support fails at this level, especially if the institutions start shedding the 95% of shares they own, this stock could fall to the $85 level before hitting the next firm support.