The stock market finally had a strong performance on Wednesday, but Thursday morning brought back some gloominess to Wall Street. Economic reports showed stronger U.S. gross domestic product growth in the third quarter than previously estimated, suggesting to some investors that the Federal Reserve could have room to tighten further than they had hoped. Futures contracts on major market indexes were down in the neighborhood of half a percent as of 9 a.m. ET.
Earnings season won't start in earnest for a few more weeks, but a handful of companies are reporting their latest results. Releases from CarMax (KMX 2.67%) and Micron Technology (MU 3.06%) didn't live up to the expectations their shareholders had for the two businesses, and some of the things CarMax and Micron said raised broader concerns that could spread throughout their respective industries in 2023.
CarMax suffered a hit to demand
Shares of CarMax dropped sharply in premarket trading Thursday morning, falling 15%. The used-car retailer reported fiscal third-quarter results for the period ending Nov. 30 that showed unexpectedly strong headwinds in its business and clear signs of weaker consumer demand.
CarMax's numbers showed considerable deterioration from past results. Net revenue fell 24% year over year to $6.5 billion, as the total number of retail used vehicles sold dropped 21% from year-ago levels to just over 180,000 units. Earnings of $0.24 per share were down 85% from the $1.63 per share that CarMax posted in the year-earlier period.
In explaining the results, CarMax cited problems related to affordability of vehicles, as the combination of high inflation, rising borrowing costs, and poor consumer confidence negatively affected the car dealer's sales volume. Moreover, CarMax said that even though it had gained market share through October, it has seen signs that it might be losing share more recently. In addition, wholesale volumes were even weaker, with unit sales falling 37% and wholesale revenue plunging 40% as selling prices dropped along with volume.
For investors, the news that CarMax has paused stock buybacks and is taking a more conservative view with its capital spending plans also added to uncertainty. CarMax does appear to be faring better than some of its peers in the auto dealer industry, but it's not immune to the macroeconomic challenges that are hitting the sector right now.
Micron makes cuts as a semiconductor glut emerges
Elsewhere, shares of Micron Technology moved lower by 5% in premarket trading Thursday. The maker of semiconductor chips reported its fiscal first-quarter financial results for the period ending Dec. 1, and the report reflected extremely tough industry conditions that prompted the company to make sizable layoffs to its workforce.
Micron's financial numbers weren't pretty. Revenue came in at $4.09 billion, down 47% from year-ago levels. The maker of memory chips and other semiconductors saw its profit from the year-earlier period disappear, posting an adjusted loss of $39 million, or $0.04 per share. Free cash flow was negative by more than $1.5 billion as the company spent nearly $2.5 billion on capital expenditures during the quarter.
CEO Sanjay Mehrotra emphasized that the results were within its range of prior guidance even as industry conditions were challenging throughout the period. Mehrotra expects that Micron's technological advantages and financial strength should help it weather future difficulties, and the company announced moves to reduce supply in the semiconductor glut and cut expenses. That will include cutting 10% of its workforce in 2023.
Weak demand for electronics is feeding through the supply chain to hit Micron, and its guidance for the fiscal second quarter anticipates further sequential sales declines. Although Micron is optimistic that conditions should improve in the second half of 2023, that's not coming soon enough to make its shareholders entirely comfortable.
