What happened
CarMax (KMX 0.54%) shareholders had a great June, with shares rising 16% in the month, according to data provided by S&P Global Market Intelligence. That's compared to a 6.5% rally in the wider S&P 500. The increase added to a good year so far for investors in the automotive retailing stock, which is up over 30% so far in 2023.
The market's rally, which occurred as investors gained more confidence in economic growth trends, played a big role in CarMax's June gains. But shareholders also celebrated some encouraging operating trends.
So what
CarMax announced in late June that sales fell 17% in the Q1 period as selling conditions remain stressed in the used car market. Interest rates are still elevated, adding to the cost of most purchases, and consumers continued to pull back on spending in the automotive industry after several years of higher demand. Prices of new cars have come down in some cases, too, adding pressure on the used car niche.
Still, CarMax remained profitable and even expanded its net margin to 3% of sales from 2.7% of sales a year ago, partly thanks to steady car prices. Management said that sales volumes are looking better now compared to the second half of 2022 as well, indicating that the worst of the declines have already passed. "Our deliberate actions are driving improved trends in the business, despite the challenging macro environment," CEO Bill Nash said in a press release.
Now what
It's too early to say CarMax's business is in rebound mode. In fact, most Wall Street pros are expecting sales to fall 18% in the Q2 period. It might be several quarters before the company begins setting sales records again, and that's assuming a steady recovery in the wider used car market.
There's always the potential for a recession to develop, which would pressure sales further into 2023 and 2024. CarMax might be stuck with excess inventory in that situation, too, likely reducing its short-term earnings prospects.
KMX Operating Margin (TTM) data by YCharts
As a result, most investors will want to watch this stock from the sidelines as they wait for more information about the latest operating trends. It's important to remember that CarMax is situated in a competitive industry that's highly sensitive to interest rate swings and wider economic growth trends. That's why the stock will remain volatile as investors digest changing information on these factors.
