CarMax (NYSE:KMX) Q1: Beats On Revenue

Full Report / August 22, 2023

Used automotive vehicle retailer Carmax (NYSE:KMX) reported Q1 FY2024 results exceeding Wall Street analysts' expectations, with revenue down 20.4% year on year to $7.69 billion. CarMax made a GAAP profit of $228.3 million, down from its profit of $252.3 million in the same quarter last year.

CarMax (KMX) Q1 FY2024 Highlights:

  • Revenue: $7.69 billion vs analyst estimates of $7.52 billion (2.29% beat)
  • EPS: $1.44 vs analyst estimates of $0.79 (81.5% beat)
  • Free Cash Flow was -$322 million compared to $436.1 million in the same quarter last year
  • Gross Margin (GAAP): 7.21%, down from 11.2% in the same quarter last year
  • Same-Store Sales were down 14.4% year on year
  • 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.

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 10.2% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was impressive as it opened new stores and grew sales at existing, established stores.

CarMax Total Revenue

This quarter, CarMax's revenue fell 20.4% year on year to $7.69 billion but beat Wall Street's estimates by 2.29%. Looking ahead, Wall Street expects revenue to decline 5.6% over the next 12 months.

Number of Stores

When a retailer like CarMax is opening new stores, it usually means that demand is greater than supply, and in turn, it's investing for growth. Since last year, CarMax's store count increased by 10 locations, or 4.35%, to 240 total retail locations in the most recently reported quarter.

CarMax Operating Retail Locations

Over the last two years, the company has generally opened new stores and averaged 3.19% annual growth in its physical footprint, which is decent and on par with the broader sector. 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 within its existing stores has generally risen over the last two years but lagged behind the broader consumer retail sector. On average, the company's same-store sales have grown by 6.4% year on year. With positive same-store sales growth amid an increasing physical footprint of stores, CarMax is reaching more customers and growing sales.

CarMax Year On Year Same Store Sales Growth

In the latest quarter, CarMax's same-store sales fell 14.4% year on year. This decline was a reversal from the 11.6% year-on-year increase it posted 12 months ago. A one quarter hiccup isn't material for the long-term prospects of a business, but we'll keep a close eye on the company.

Gross Margin & Pricing Power

We prefer higher gross margins because they not only make it easier to generate more operating profits but also generally indicate product differentiation, negotiating leverage, and pricing power.

As you can see below, CarMax has averaged a poor 10.8% gross margin over the last two years. This means that the company makes $0.11 for every $1 in revenue before accounting for its operating expenses.

CarMax Gross Margin (GAAP)

In Q1, CarMax's gross profit margin was 7.21%, marking a 4 percentage point decrease from 11.2% in the same quarter last year. One quarter of margin contraction shouldn't worry investors as retailers' gross margins often change due to factors such as product discounting and dynamic input costs (think distribution and freight expenses to move goods).

Operating Margin

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

In Q1, CarMax generated an operating profit margin of 3.61%, down 0.2 percentage points year on year. This reduction was likely driven by weaker pricing power, as indicated by the company's larger drop in gross margin.

CarMax Operating Margin (GAAP)

From an operational perspective, CarMax was profitable but held back because of its large expense base over the last two years. Its average operating margin of 3.02% has been paltry for a consumer retail business. On top of that, CarMax's margin has slightly declined, on average, by 1.6 percentage points year on year. This shows that CarMax has faced some speed bumps along the way.


Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.

In Q1, CarMax reported EPS at $1.44, down from $1.56 in the same quarter a year ago. This print beat Wall Street's estimates by 81.5%, a welcome development that should delight shareholders.


Between 2021 and 2024, CarMax's adjusted diluted EPS dropped 25.3%, translating into 8.43% average annual declines. In a mature sector such as consumer retail, we tend to steer our readers away from companies with multiple years of 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).

Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.

CarMax burned through $322 million of cash in Q1, representing a negative 4.19% free cash flow margin. The company shifted to cash flow negative from cash flow positive in the same quarter last year, which could've happened for several reasons including (but not limited to) the stockpiling of inventory in anticipation of higher demand or unforeseen, one-time events.

CarMax Free Cash Flow Margin

Over the last eight quarters, CarMax's capital-intensive business model, loose cost controls, and demanding reinvestment strategy have consumed many company resources. Its free cash flow margin has averaged negative 3.24%, poor for a consumer retail business. However, its margin has averaged year-on-year increases of 7.3 percentage points. Investors should feel relieved as this is certainly a step in the right direction.

Return on Invested Capital (ROIC)

CarMax's subpar returns on capital may signal a need for future capital raising or borrowing to fund growth. Its five-year average return on invested capital (ROIC) is 4.43%, low compared to the best retail companies that consistently pump out 25%+.

We like to track ROIC because it tells us about a company’s prospects for profitable growth and its management team's ability to achieve it through capital allocation decisions such as organic investments, acquisitions, and share buybacks. ROIC can also be used as a tool to benchmark a company's performance versus its peers, and just like how we focus on long-term investment returns, we care more about analyzing a company's long-term ROIC because short-term market volatility can distort results.

Key Takeaways from CarMax's Q1 Results

Sporting a market capitalization of $12.8 billion, more than $264.2 million in cash on hand, and positive free cash flow over the last 12 months, we believe that CarMax is attractively positioned to invest in growth.

We were impressed by how significantly CarMax blew past analysts' EPS expectations this quarter. That really stood out as a positive and displayed the management team's cost control capabilities. However, the correction in the used car market caused same-store sales to drag, leading to declining revenue. Overall, the quarter could've been better. The company is down 2.08% on the results and currently trades at $79.21 per share.

Is Now The Time?

When considering an investment in CarMax, investors should take into account its valuation and business qualities as well as what happened in the latest quarter. 

We cheer for everyone who's improving the lives of others but in the case of CarMax, we'll be cheering from the sidelines. Its revenue growth has been decent, though we don't expect it to maintain historical growth rates. Unfortunately, its relatively low ROIC suggests suboptimal profitability prospects and its gross margins make it more challenging to reach positive operating profits compared to other consumer retail businesses.

While we've no doubt one can find things to like about CarMax, we think there might be better opportunities in the market, and at the moment, don't see many reasons to get involved.

Wall Street analysts covering the company had a one-year price target of $72.4 per share right before these results, implying that they didn't see much short-term potential in CarMax.

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