When we last covered CarMax, Inc. (NYSE:KMX) we suggested a buy sub-$70 in late September 2023. For our many new followers, KMX is a stock that we routinely cover, as it provides some insight into both car demand and the state of the consumer. And of course, it is one we have traded successfully many times.
Sometimes the public ratings we issue are certainly short-term, for example, we sell a position, but then want to buy it back at a lower price. Or issue a hold at a current price, but outline an entry strategy on a decline. We love to trade around core positions. We teach investors how to magnify returns doing this, rather than just buying and holding. So KMX stock is one that we have done this a number of times on, and it is setting up to start considering buying in the mid-$60s.
The stock is getting nailed today following its Q4 earnings report. There were notable strengths and weaknesses. As the consumer is getting ever more stretched as high rates persist, and consumer credit delinquencies are at highs, coupled with record housing and rental prices, the car market has been quite resilient, though not immune to the pain. Let us discuss.
Sales fall slightly year-over-year, again
CarMax's just-reported Q4 revenues saw a slight dip from last year. Here is the good news. While they were down, and expectations were for about flat to slightly up sales, the declines are minimal relative to the double-digit drops we had been seeing. Sales are still down, and it is a mixed picture of volumes and pricing. Sales were down 1.7% versus last year's Q4. Q4 revenues were $5.6 billion, but a $180 million miss versus consensus. While inflation has helped used car pricing, pricing has normalized.
Securing car loans is tougher now due to stricter credit requirements and rising interest rates. This puts pressure on CarMax's sales and profit margins. Let's take a look at some crucial performance indicators we watch.
CarMax's key metrics
CarMax comparable sales
Comparable sales are our favorite indicator for retailers, and we watch this metric closely for CarMax. That said, total used vehicle unit sales actually increased 1.3% in the quarter, and comparable store used unit sales also ticked up 0.1% versus the prior year's Q4. It was and still is a challenging environment for used vehicle sales.
But increasing units is encouraging. Bill Nash, President, and CEO of CarMax stated in the press release:
We are encouraged by the performance of our business during the fourth quarter. We reported growth in total used unit sales and comps, delivered strong retail and wholesale gross profit per unit, continued to actively manage SG&A, and grew CAF income significantly year-over-year.
It was mixed overall, however. The total retail used vehicle volume was up, but revenues decreased 0.7% compared to last year, driven by the decrease in average retail selling price, which declined approximately $600 per unit, or 2.3%. Total wholesale vehicle unit sales decreased 4.0%, while total wholesale revenues were down 5.5% as the average wholesale selling price fell $250 per unit or 3.2%, in addition to the volumes being lower.
So-called "other sales and revenues" declined by 3.7% or $5.9 million from last year. The decrease stemmed from a $6.2 million decline in extended protection plan revenues.
CarMax margins and profits decline
So, mixed volumes and lower selling prices combined to erode margins. Total gross profit fell to $586.2 million, falling 4.1% from last year. However, the cost to acquire used vehicles also came down, which is part of the equation. Used vehicle gross profit per unit is a metric you should watch. On the retail side, used vehicle gross profit increased by 0.1% and retail gross profit per used unit was $2,251, flat from a year ago. Not too bad, all things considered. Over in wholesale, gross profit decreased 9.4% from last year because of both lower wholesale unit volume and gross profit per unit, which declined from $67 to $1,120. This is not as ugly as the steep decline in shares suggests.
That said, with a decrease in the top line and mixed margins, the bottom line missed consensus expectations. Earnings were $0.32 per share, missing consensus by $0.13 per share. This has pressured CarMax, Inc. shares.
Repurchase program
We still like the share repurchase program. A half dozen quarters ago, the company paused all repurchase activity. But it started buying shares back again in recent quarters. In Q4, CarMax repurchased 685,600 shares of common stock for $49.3 million. At the end of the quarter, it had $2.36 billion remaining available for repurchase on its authorization. This helps put a floor under share prices.
Looking ahead to Fiscal 2025
CarMax, Inc. stock is being hit pretty hard here once again on earnings, creating a buying opportunity in the $60s in our opinion. We still love the share repurchase program. For fiscal 2025, the company is targeting five new stores, as well as its second stand-alone reconditioning center and one stand-alone auction facility. Capital expenditures will be between $500 million and $550 million in fiscal year 2025, largely reflecting spending to support future long-term growth in offsite reconditioning and auction facilities, as well as new stores.
One other reason shares are getting hit is that for the long-term target of 2 million units sold annually, that target was delayed to fiscal 2026 - fiscal 2030 due to "uncertainty in the timing of market recovery." This is something to be aware of. For fiscal 2025 we are looking for sales that are flat to up 2%, with margins commensurate with fiscal 2024. We expect lower revenue per unit but lower costs as well, as well as strength in their auto-finance division. Rate cuts should also help ease the pressure on borrowers. For EPS, we are looking for $3.10-$3.60 for the year, valuing shares at 20.5X FWD EPS at $69 per share. This is a historically good value. We think you can buy CarMax, Inc. sub-$70.
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