Here's a classic market puzzle: a company beats earnings estimates, beats revenue estimates, and its stock tanks 16%. Welcome to the world of CarMax Inc. (KMX), where the headline numbers looked good but the details told a much tougher story.
CarMax reported fourth-quarter adjusted earnings per share of 34 cents, well above the analyst consensus of 21 cents. Quarterly sales came in at $5.946 billion, also beating the Street view of $5.681 billion. On paper, that's a win. But investors aren't buying the paper—they're looking at the actual cars, and the demand for them seems to be softening.
The real story here is in the unit sales. Combined retail and wholesale used vehicle unit sales were 303,969, up just 0.7% from the prior year. Dig a little deeper, and retail used unit sales actually fell 0.8%, while comparable store used unit sales dropped 1.9%. That's not the kind of growth that gets investors excited, especially when you consider what it took to achieve those sales.
Total gross profit was $605.3 million, down 9.4% versus last year's fourth quarter. Retail used vehicle gross profit decreased 9.6%. More tellingly, the gross profit per retail used unit was $2,115, down $207 from last year's record fourth quarter. The company says that decline "reflects pricing actions taken to improve sales trends." In plain English: they had to cut prices to sell cars, and that squeezed their margins.
Meanwhile, the financing side of the business isn't helping much. CarMax Auto Finance income decreased 9.8% to $143.7 million, driven by a lower total interest margin. That was partly due to a decline in auto loans outstanding following a $900 million non‑prime securitization in the third quarter. So even the company's own lending arm is bringing in less money.
On the operational front, CarMax purchased 270,000 vehicles from consumers and dealers, a tiny 0.4% increase. They opened one new store in Florence, Kentucky and one stand-alone reconditioning/auction center in Frederick, Maryland during the quarter. Their cash position also shrank—as of Feb 28, they had $122.83 million in cash and equivalents, significantly lower than the $246.96 million they had a year ago.
Looking ahead, CarMax said it plans to open four new stores, two stand-alone reconditioning and auction centers, and two stand-alone auction facilities in fiscal 2027, with capital expenditures of about $400 million to support long-term growth. That's the optimistic, forward-looking part of the story.
But today, investors are focused on the here and now: weak used-vehicle demand and margin pressure that overshadowed the headline earnings beat. CarMax shares are trading lower by 16.14% to $41.16 at last check on Tuesday. Sometimes beating estimates isn't enough—you have to beat expectations for the business itself.
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