CarMax (NYSE:KMX) Reports Sales Below Analyst Estimates In Q3 Earnings, But Stock Soars 5.6%

Full Report / December 21, 2023

Used automotive vehicle retailer Carmax (NYSE:KMX) fell short of analysts' expectations in Q3 FY2024, with revenue down 10.5% year on year to $6.15 billion. It made a GAAP profit of $0.52 per share, improving from its profit of $0.24 per share in the same quarter last year.

Key Takeaways from CarMax's Q3 Results

We were impressed by how significantly CarMax blew past analysts' EPS expectations this quarter due to a more efficient expense base that resulted from cost reduction efforts. Higher-than-expected operating margin and the resulting EPS beat stood out as positives in these results. However, its revenue unfortunately missed analysts' expectations. Zooming out, we know that expectations have been low for the used car industry, and CarMax reported better-than-feared results. The stock is up 5.6% after reporting and currently trades at $78.89 per share.

CarMax (KMX) Q3 FY2024 Highlights:

  • Market Capitalization: $11.85 billion
  • Revenue: $6.15 billion vs analyst estimates of $6.30 billion (2.5% miss)
  • EPS: $0.52 vs analyst estimates of $0.41 (27.2% beat)
  • Free Cash Flow of $64.82 million, down 93.9% from the same quarter last year
  • Gross Margin (GAAP): 10%, down from 10.6% in the same quarter last year
  • Same-Store Sales were down 8.3% year on year (miss)
  • Store Locations: 240 at quarter end, increasing by 10 over the last 12 months

Known for its transparent, customer-centric approach and wide selection of vehicles, Carmax (NYSE:KMX) is the largest automotive retailer in the United States.

Founded in 1993, the company is headquartered in Richmond, Virginia, and operates over 200 stores across the country. Carmax offers a unique car buying experience by providing customers with a no-haggle, no-pressure environment where they can browse a wide selection of high-quality used cars, and take them for test drives without a salesperson. Carmax also offers a range of services such as financing, warranties, and trade-ins.

The core customer for Carmax is someone who is looking for a used car but wants a hassle-free, transparent buying process. Typically, these customers are looking for a car that is less than five years old and has low mileage. Carmax addresses their needs by offering a wide selection of high-quality used cars at competitive prices. Customers can also take advantage of the company's financing options, which include pre-approval and a range of payment plans.

The average Carmax store is around 50,000 square feet and is located in suburban or urban areas. The stores are laid out in a way that makes it easy for customers to browse the cars and take them for test drives. The cars are organized by make and model, and customers can easily find information about each car's features, history, and pricing.

Carmax launched its e-commerce presence in 2019. Customers can browse and purchase cars online, as well as schedule a test drive and arrange for delivery or pickup. The company's online platform also includes a range of resources such as car reviews, buying guides, and financing calculators.

An interesting fact about Carmax is that the company has been consistently ranked as one of the best companies to work for by Fortune magazine. This is in part due to the company's commitment to employee development and training, as well as its focus on creating a positive work culture. Carmax also supports various community initiatives, such as providing funding for education and job training programs.

Vehicle Retailer

Buying a vehicle is a big decision and usually the second-largest purchase behind a home for many people, so retailers that sell new and used cars try to offer selection, convenience, and customer service to shoppers. While there is online competition, especially for research and discovery, the vehicle sales market is still very fragmented and localized given the magnitude of the purchase and the logistical costs associated with moving cars over long distances. At the end of the day, a large swath of the population relies on cars to get from point A to point B, and vehicle sellers are acutely aware of this need.

Competitors in the auto retail space include AutoNation (NYSE:AN), Carvana (NYSE:CVNA), Group 1 Automotive (NYSE:GPI), and Lithia Motors (NYSE:LAD).

Sales Growth

CarMax is one of the larger companies in the consumer retail industry and benefits from economies of scale, enabling it to gain more leverage on fixed costs and offer consumers lower prices.

As you can see below, the company's annualized revenue growth rate of 7.6% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was decent as it opened new stores and expanded its reach.

CarMax Total Revenue

This quarter, CarMax missed Wall Street's estimates and reported a rather uninspiring 10.5% year-on-year revenue decline, generating $6.15 billion in revenue. Looking ahead, Wall Street expects revenue to remain flat over the next 12 months.

Number of Stores

The number of stores a retailer operates is a major determinant of how much it can sell, and its growth is a critical driver of how quickly company-level sales can grow.

When a retailer like CarMax is opening new stores, it usually means it's investing for growth because demand is greater than supply. CarMax's store count increased by 10 locations, or 4.3%, over the last 12 months to 240 total retail locations in the most recently reported quarter.

CarMax Operating Retail Locations

Taking a step back, the company has generally opened new stores over the last eight quarters, averaging 4.4% annual growth in its physical footprint. This is decent store growth and in line with other retailers. With an expanding store base and demand, revenue growth can come from multiple vectors: sales from new stores, sales from e-commerce, or increased foot traffic and higher sales per customer at existing stores.

Same-Store Sales

CarMax's demand has been shrinking over the last eight quarters, and on average, its same-store sales have declined by 9.7% year on year. This performance is quite concerning and the company should reconsider its strategy before investing its precious capital into new store buildouts.

CarMax Year On Year Same Store Sales Growth

In the latest quarter, CarMax's same-store sales fell 8.3% year on year. This decrease was an improvement from the 21% year-on-year decline it posted 12 months ago. It's always great to see a business improve its prospects.

Gross Margin & Pricing Power

Gross profit margins tell us how much money a retailer gets to keep after paying for the goods it sells.

CarMax has poor unit economics for a retailer, leaving it with little room for error if things go awry. As you can see below, it's averaged a 11.1% gross margin over the last two years. This means the company makes $0.11 for every $1 in revenue before accounting for its operating expenses. CarMax Gross Margin (GAAP)

CarMax's gross profit margin came in at 10% this quarter, flat with the same quarter last year. This steady margin stems from its efforts to keep prices low for consumers and signals that it has stable input costs (such as freight expenses to transport goods).

Operating Margin

Operating margin is an important measure of profitability for retailers as it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

in line with the same quarter last year. This indicates the company's costs have been relatively stable.

CarMax Operating Margin (GAAP)

Zooming out, CarMax was profitable over the last two years but held back by its large expense base. Its average operating margin of 2.5% has been paltry for a consumer retail business. Its margin has also seen few fluctuations, meaning it will take a big change to improve profitability.


These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.

In Q3, CarMax reported EPS at $0.52, up from $0.24 in the same quarter a year ago. This print beat Wall Street's estimates by 27.2%.


Between FY2020 and FY2024, CarMax's adjusted diluted EPS dropped 46.8%, translating into 11.7% average annual declines. In a mature sector such as consumer retail, we tend to steer our readers away from companies with falling EPS. If there's no earnings growth, it's difficult to build confidence in a business's underlying fundamentals, leaving a low margin of safety around the company's valuation (making the stock susceptible to large downward swings).

On the bright side, Wall Street expects the company's earnings to grow over the next 12 months, with analysts projecting an average 7.6% year-on-year increase in EPS.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe in the end, cash is king, and you can't use accounting profits to pay the bills.

CarMax's free cash flow came in at $64.82 million in Q3, down 93.9% year on year. This result represents a 1.1% margin.

CarMax Free Cash Flow Margin

Over the last eight quarters, CarMax has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 0.1%, subpar for a consumer retail business. Furthermore, its margin has averaged year-on-year declines of 4.9 percentage points.

Return on Invested Capital (ROIC)

We like to track a company's long-term return on invested capital (ROIC) in addition to its recent results because it gives a big-picture view of a business's past performance. It also sheds light on its management team's decision-making prowess and is a helpful tool for benchmarking against peers.

CarMax's subpar returns on capital over the last five years may signal a need for future capital raising or borrowing to fund growth. Its five-year average ROIC was 3.9%, somewhat low compared to the best retail companies that consistently pump out 25%+ returns.

Balance Sheet Health

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, the risk we care most about is the permanent loss of capital (not short-term stock price volatility), which can happen when a company goes bankrupt or raises capital from a disadvantaged position.

CarMax's balance sheet shows it has $19.49 billion in debt and $1.09 billion in cash. Until CarMax reduces its borrowings or increases its profits, we recommend you avoid the stock. The company is overleveraged as its net debt-to-EBITDA ratio currently sits at NaNx, meaning it generates $1 in annual EBITDA (aka profits) for every $NaN in debt. This ratio is high by Wall Street’s standards (anything over 5x raises an eyebrow) and makes CarMax play with one hand tied behind its back.

Is Now The Time?

CarMax may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of CarMax, we'll be cheering from the sidelines. Its revenue growth has been mediocre over the last four years, and analysts expect growth to deteriorate from here. And while its popular brand makes consumers more likely to purchase its products, the downside is its relatively low ROIC suggests it has struggled to grow profits historically. On top of that, its gross margins make it more challenging to reach positive operating profits compared to other consumer retail businesses.

CarMax's price-to-earnings ratio based on the next 12 months is 21.9x. While the price is reasonable and there are some things to like about CarMax, we think there are better opportunities elsewhere in the market right now.

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