Vehicles are getting far more expensive. But CarMax (KMX 0.83%), one of the country's biggest used-car retailers, is struggling with declining sales volumes and falling earnings.
That apparent contradiction caught investors' attention this past week as CarMax reported its Q1 earnings results. While revenue is rising thanks to soaring prices, the chain is seeing mounting pressures on its customer traffic that all point to a weaker selling environment ahead.
Let's dive right in and see what this all means for investors.
Sales trends sending a mixed message for CarMax
CarMax's overall revenue landed at $9.3 billion, or 21% higher year over year. That result was enough to edge past investors' expectations for $9.2 billion in sales.
That 21% sales spike isn't as strong as it might seem at first glance, though.
CarMax revealed a jarring 11% drop in the volume of car sales in its core retailing business. And the wholesale business was nearly flat, rising just 3%. Comparable-store sales volumes across its dealerships were down 13%.
Management highlighted three factors pressuring those results. Federal stimulus payments last year didn't repeat in early 2022, for one. And vehicles are much more expensive today than they were a year ago. Finally, consumers appear to be less eager to spend on discretionary purchases right now thanks to inflation and what management described as "waning consumer confidence."
CarMax didn't cash in on the price rise as much as it could have
Price increases were substantial, with average retail prices jumping 14% to $6,300 per vehicle. Yet this boost didn't lift CarMax's bottom line. Gross profit per vehicle only rose 6% to $2,339. Net earnings continued their downward march, falling to $252 million, or 2.7% of sales, from $437 million, or 5.7% of sales a year ago. "The used vehicle market environment was challenging in the first quarter," CEO Bill Nash said in a press release.
KMX Operating Margin (TTM) data by YCharts.
The short-term profit picture wasn't helped much by CarMax's decision to keep prices low compared to wider industry trends. This choice kept customers browsing at its dealerships, but many people opted to delay their purchases or to pick less-expensive models. Management said that tilt toward lower-priced vehicles was another factor pressuring results.
Looking ahead
There was good in this report, too. CarMax remains solidly profitable and cash flow is strong. Its online selling platform is still a hit with consumers, with digital sales rising to 11% of total sales, compared to 8% a year ago.
And CarMax has a large inventory of used cars, which is becoming more valuable in an era of rising prices. That supply should also be handy as the chain fights to improve market share over the next several quarters.
But investors are right to feel disappointed that CarMax can't capitalize on the historic increases in used-car prices that have characterized 2022 so far.
Sure, management made the right call to prioritize market share over short-term profits. But CarMax's weakening profitability metrics show that it is still far from the type of dominant market-share position that would allow it to capture more than its fair share of those automobile industry gains.
