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Why Is CarMax (KMX) Down 3.2% Since Last Earnings Report?

A month has gone by since the last earnings report for CarMax (KMX). Shares have lost about 3.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is CarMax due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

CarMax Earnings Miss Estimates in Q3, Down Y/Y

CarMax, the specialty retailer of used and new vehicles, posted third-quarter fiscal 2020 (ended Nov 30, 2019) net earnings per share of $1.04, missing the Zacks Consensus Estimate of $1.16. Notably, lower-than-expected revenues across the wholesale vehicle segment resulted in the underperformance. Precisely, sales in the wholesale vehicle segment came in at $611 million, missing the consensus mark of $634 million.

The bottom line also compared unfavorably with a profit of $1.09 per share reported in the year-ago quarter.

Net sales and operating revenues in the reported quarter increased 11.5% year over year to $5,790 million. The top line beat the Zacks Consensus Estimate of $4,709 million. Total gross profit rose 7.8% year over year to $613.6 million.

In third-quarter fiscal 2020, CarMax opened four stores: two in existing markets —Texas andGeorgia, and two in new markets— California and Mississippi.

Segmental Performance

In the fiscal third quarter, CarMax’s used-vehicle sales rose 13.6% from the prior-year period to $4,028.8 million, on the back of higher unit sales and improved average selling price. The units sold also climbed11% year over year to 192,563 vehicles. The average selling price of used vehicles increased 2.2% from the year-ago quarter to $20,710. Used vehicle gross profit per unit came in at $2,145 versus $2,133 in the year-ago period. Comparable store used-vehicle units and revenues sold rose 7.5% from the prior-year level. This robust performance reflects improved conversion and solid growth in web traffic.

Wholesale vehicle revenues inched up 1.2% from the prioryear to $611 million in the reported quarter. Units sold also increased 3.3% year over year to 113,996 vehicles, courtesy of growth in store base and appraisal buy rate. Moreover, the average selling price of wholesale vehicles declined 2.6% from the prior-year quarter to $5,079.Wholesale vehicle gross profit per unit came in at $937 versus $949 in the year-ago period.

Other sales and revenues increased 4.1% year over year in the quarter. Moreover, the extended protection plan’s revenues rose 13.3% to $97 million from the year-ago level.

CarMax Auto Finance reported a 3.9% year-over-year increase in income to $114 million in the quarter, reflecting collective effects of 7.5% rise in average managed receivables, partly offset by a decline in total interest margin percentage.

Costs, Financials and Share Buyback

Selling, general and administrative expenses flared up 18.4% from the prior-year quarter to $484.8 million. Store openings and spending to boost the firm’s technology, along withomni-channel strategic initiatives led to the rise in SG&A costs.

CarMax had cash and cash equivalents of $56.6 million as of Nov 30, 2019, up from $35.05 million in the corresponding period of 2018. Long-term debt (excluding current position) amounted $1,704.3 million, reflecting an increase from $1,649.2 million in the year-ago comparable period. Its debt-to-capital ratio stands at 31.5%.

In the quarter, the company spent$114.8 million to repurchase 1.3 million shares under the existing share-buyback program. As of Nov 30, 2019, it had $1.67 billion remaining under its share-repurchase authorization.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, CarMax has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, CarMax has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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