CarMax Inc. (KMX) delivered fiscal third-quarter results Thursday that hit the guidance range but painted a pretty grim picture underneath. When your profits drop 47% in a quarter, hitting expectations isn't exactly cause for celebration.
The used car retailer is now betting that lower prices and more advertising can reverse a sales slump that's hitting hard. Same-store units fell 9%, while total units declined 7.2%. Retail gross profit per unit contracted 3.1% year-over-year to $2,235, and EBITDA tumbled 26.3% to $219 million. Earnings landed at 43 cents per share, down from 81 cents a year ago.
The Pricing Pivot
Management's response? Cut prices to trigger unit growth. The company didn't specify how deep the discounts would go, but they're clearly prioritizing volume over margin at this point. CarMax also cranked up advertising spending in the third quarter and plans to keep the pedal down in the fourth quarter, though Stephens analyst Jeff Lick noted the increase won't be quite as aggressive as last quarter.
Lick maintained an Equal-Weight rating on CarMax but trimmed his price target from $39 to $36, reflecting concerns about the margin pressure this strategy might create.
Cost Cuts and Bright Spots
CarMax isn't just spending its way out of trouble. The company is targeting $150 million in SG&A expense reductions by the end of fiscal 2027. It already slashed its customer experience center workforce by about 30% in the third quarter, replacing humans with technology enhancements.
There were some positives buried in the results. CarMax Auto Finance income grew 9% year-over-year to $175 million, beating consensus estimates of $153 million. And the company found success in older, higher-mileage vehicles, which represented more than 40% of quarterly sales—up 5% both sequentially and compared to the prior year.
RBC Capital Markets analyst Steven Shemesh maintained a Sector Perform rating while raising his price target from $34 to $37, apparently more optimistic about the financing business and used vehicle demand trends.
CarMax shares fell 2.16% to $38.49 on Friday following the report.
