CarMax’s revenue growth still in the fast lane, though pressure on profits concerns investors
However, all this is not turning into profits. Earnings per share have actually declined compared to a year ago and are 12.4 per cent lower than analysts’ expectations. This seems to have been a major disappointment for investors after the company exceeded EPS estimates by higher margins for four consecutive quarters. After hitting an all-time high share price on Wednesday, CarMax shares fell more than 11% following Thursday’s morning earnings call.
However, CarMax shares were probably due for some correction. The stock is still up 39% year-over-year, outperforming even high-growth online used car seller Carvana by about 12 percentage points.
Some of the decline in profitability was because CarMax had to spend more on staffing and advertising to sell more. Gross profit per unit sold to retail customers declined from a quarter ago, and the company said it plans to keep profit per unit at historically normal levels to ensure that it able to sell at competitive prices.
The good news is that CarMax doesn’t have to be too much of a hassle to find a vehicle to sell. The company sold 6.7% more units to retail customers than a year ago. According to Evercore, Cox Automotive’s estimate is much better than the midsingle-digit percentage decline the industry has seen during the same period.
This bodes well for CarMax sales growth in the coming quarters. Sales prices really picked up this month compared to July and August, when used vehicle prices dropped slightly. As of mid-September, wholesale prices for used cars were 3.5% higher than in the previous month and 25% more expensive than a year ago, according to mannheim.
Even in a hot market, CarMax has no choice but to invest to stay competitive. According to a recent report by Oppenheimer, the used-car market remains a very fragmented space, with only 3.5% of used vehicles set to change hands in the US for CarMax and its three online competitors. As long as used-car demand and prices remain high, there should be plenty of business.
What’s more, the used car boom can overcome the chip crunch. After reaping higher profits during the inventory-constrained pandemic, some auto makers have said they plan to permanently stock fewer vehicles at dealerships. Payabhandjob
Said, for example, said it plans to reduce dealership stock levels by up to a third over the long term. That in turn should help boost demand for used vehicles compared to pre-pandemic levels.
CarMax’s share price could rise further as it invests in navigating a difficult, though generally favorable, period for the industry as a whole. It should not deviate from its open road ahead.