CarMax (NYSE:KMX) stock has once again dipped below the psychological level of $100 on Tuesday. The catalyst for this was the company’s fourth-quarter earnings miss. Can the below-consensus earnings be shrugged off as a one-off event? Or it is reflective of a problem that runs deeper and will have ramification for the near- to medium-term?
CarMax reported fourth-quarter revenue of $7.7 billion, ahead of the consensus estimate of $7.5 billion. Compared to a year ago, topline grew 48.8% thanks to strong increases in average selling prices of both used vehicles and wholesale vehicles.
Granted, the year-over-year growth was solid, but it still represented a slowdown from the third-quarter’s pace of 64.5%. On a sequential basis, revenue slid about 9.4%. Much of the growth came from an increase in wholesale vehicle sales, which accounted for 23% of the total revenues.
Comparable used vehicle units fell 6.5% in the quarter, steeper than the 2.3% drop in the year-ago quarter. These are sales from outlets that have been open for more than a year. Mind you, used vehicles contributed about 74.7% to the topline.
CarMax offered several explanations for its performance:
“We believe a number of macro factors weighed on our fourth quarter unit sales performance, including declining consumer confidence, the Omicron-fueled surge in COVID cases, vehicle affordability, and the lapping of stimulus benefits paid in the prior year period.”
Direct costs weighed on profit growth, as evident from the 54.2% jump in cost of sales. Consequently, gross profit increased about 11%, markedly slower than the nearly 50% revenue growth.
CarMax opened four new retail locations in the fourth quarter and plans to open ten stores in fiscal year 2023. The company also reiterated its planned foray into the New York metro market.
On a positive note, the company upwardly revised its long-term targets for vehicle sales and revenue, but maintained its estimate for the share of the market for used vehicles, ages 0-10 years, unchanged.
The macroeconomic condition is still fluid, as the Federal Reserve has signaled that more rate hikes could be coming despite things not stabilizing yet following the Covid-19 damage. And the Russia-Ukraine war has confounded the economic picture further. These could keep consumer sentiment subdued in the near term.
The Conference Board’s consumer confidence report for March showed a slight uptick in the headline index but the expectations index fell 4.2 points month-over-month. This suggests that consumers are less confident about the future.
Until macroeconomic picture clears up and the company can reignite unit sales growth, while also reining in costs, it may be better avoiding KMX stock.
On the date of publication, Shanthi Rexaline did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
