After a solid Q2 performance, CarMax (KMX, Financial) saw its shares rise by 6%. The used car dealer exceeded revenue estimates, posted in-line earnings, and reported growth in retail used unit sales and comparable store unit sales. CarMax's focus on maintaining margins over volume also helped sustain gross profit per retail used and wholesale unit.
What initially hurt today's sentiment? An increase in the provision for loan losses overshadowed growth in receivables and a stable net interest margin in CarMax Auto Finance. Management noted that the estimate of lifetime losses on existing loans jumped by $52.2 million, significantly higher than the typical $10-30 million range.
This year, headlines have highlighted decade-high auto loan delinquencies as consumers struggle with inflation. However, the industry has not shown significant concerns. Last month, General Motors (GM, Financial) acknowledged cyclicality in its loan portfolio but did not expect it to immediately affect retail sales. America's Car-Mart (CRMT, Financial) reported a 90 basis point year-over-year drop in delinquencies during July. On the banking side, JPMorgan (JPM, Financial) stated it has not seen deterioration in auto delinquencies, while Ally Financial (ALLY, Financial) noted intensified credit challenges in its retail auto segment during July and August.
Despite these concerns, CarMax management expressed cautious optimism about its loan portfolio, which reassured investors. This optimism, combined with the Federal Reserve's rate-lowering campaign, helped shift focus to the longer term.
- CarMax reported decent Q2 numbers, with EPS up 13% year-over-year to $0.85, despite a 1% drop in total revenue to $7.01 billion. Retail used unit sales rose by 5%, and comparable store sales increased by 4%. Though average selling prices for used vehicles dropped nearly 5%, this likely boosted sales.
- Retail gross profit per used unit was $2,269, a slight increase from $2,251 in the previous year, reflecting CarMax's commitment to margins over volume. Wholesale vehicle gross profit per vehicle remained relatively unchanged year-over-year at $975.
- CarMax does not typically issue formal guidance, but management's comments carry weight. They expressed satisfaction with sales progress through Q3 (November), noting sequential improvement in comparable store sales. Additionally, they feel confident about the loans on their books after recent tightening but will remain cautious moving forward.
While the increase in loan losses caused some concern, CarMax's conference call alleviated fears with a positive outlook on its loan portfolio. The improvement in comparable store sales growth was also a bonus. As the Federal Reserve begins to lower rates, financing will become cheaper, potentially easing concerns about auto loans and boosting CarMax's future sales.
