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CarMax (NYSE:KMX) Reports Q2 In Line With Expectations But Stock Drops 12.5%

StockStory - Thu Sep 28, 2023

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Used automotive vehicle retailer Carmax (NYSE:KMX) reported results in line with analysts' expectations in Q2 FY2024, with revenue down 13.1% year on year to $7.07 billion. Turning to EPS, CarMax made a GAAP profit of $0.75 per share, down from its profit of $0.79 per share in the same quarter last year.

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CarMax (KMX) Q2 FY2024 Highlights:

  • Revenue: $7.07 billion vs analyst estimates of $7.03 billion (small beat)
  • EPS: $0.75 vs analyst expectations of $0.78 (3.3% miss)
  • Free Cash Flow of $50.7 million is up from -$161 million in the same quarter last year
  • Gross Margin (GAAP): 9.85%, up from 6.91% in the same quarter last year
  • Same-Store Sales were down 12.5% year on year
  • Store Locations: 240 at quarter end, increasing by 10 over the last 12 months

“We continue to drive sequential improvements in our business despite persistent widespread pressures across the used car industry. Through deliberate steps we are taking to control what we can, we delivered strong retail and wholesale gross profit per unit, reduced SG&A, and stabilized CAF’s net interest margin,” said Bill Nash, President and Chief Executive Officer.

Known for its transparent, customer-centric approach and wide selection of vehicles, Carmax (NYSE:KMX) is the largest automotive retailer in the United States.

Vehicle Retailer

Buying a vehicle is a big decision and usually the second-largest purchase behind a home for many people, so retailers that sell new and used cars try to offer selection, convenience, and customer service to shoppers. While there is online competition, especially for research and discovery, the vehicle sales market is still very fragmented and localized given the magnitude of the purchase and the logistical costs associated with moving cars over long distances. At the end of the day, a large swath of the population relies on cars to get from point A to point B, and vehicle sellers are acutely aware of this need.

Sales Growth

CarMax is one of the larger companies in the consumer retail industry and benefits from economies of scale, enabling it to gain more leverage on fixed costs and offer consumers lower prices.

As you can see below, the company's annualized revenue growth rate of 7.48% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was decent as it opened new stores and expanded its reach.

CarMax Total Revenue

This quarter, CarMax reported a rather uninspiring 13.1% year-on-year revenue decline, in line with Wall Street's estimates. Looking ahead, the analysts covering the company expect sales to grow 2.73% over the next 12 months.

The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Number of Stores

When a retailer like CarMax is opening new stores, it usually means it's investing for growth because demand is greater than supply. CarMax's store count increased by 10 locations, or 4.35%, over the last 12 months to 240 total retail locations in the most recently reported quarter.

CarMax Operating Retail Locations

Over the last two years, the company has generally opened new stores and averaged 3.81% annual growth in its physical footprint, which is decent and on par with the broader sector. With an expanding store base and demand, revenue growth can come from multiple vectors: sales from new stores, sales from e-commerce, or increased foot traffic and higher sales per customer at existing stores.

Same-Store Sales

CarMax's demand has been shrinking over the last eight quarters, and on average, its same-store sales have declined by 1.19% year on year. This performance is quite concerning and the company should reconsider its strategy before investing its precious capital into new store buildouts.

CarMax Year On Year Same Store Sales Growth

In the latest quarter, CarMax's same-store sales fell 12.5% year on year. This decline was a reversal from the 0.4% year-on-year increase it posted 12 months ago. A one quarter hiccup isn't material for the long-term prospects of a business, but we'll keep a close eye on the company.

Key Takeaways from CarMax's Q2 Results

Sporting a market capitalization of $12.6 billion, more than $521.1 million in cash on hand, and positive free cash flow over the last 12 months, we believe that CarMax is attractively positioned to invest in growth.

It was encouraging to see CarMax narrowly top analysts' revenue expectations this quarter. That stood out as a positive in these results. On the other hand, its EPS missed Wall Street's estimates and its management team cited persistent widespread pressures across the used car industry. Overall, this was a mediocre quarter for CarMax. The company is down 9.78% on the results and currently trades at $71.88 per share.

CarMax may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 50% year on year and best-in-class SaaS metrics it should definitely be on your radar.

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The author has no position in any of the stocks mentioned in this report.

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