CarMax Stock Just Tanked. Time to Buy?

Key Points

• The latest quarter disappointed, but unit margins held up, and management is moving to cut costs.

• Financing credit losses rose again, masking progress elsewhere and clouding near-term earnings.

• After a double-digit drop, the stock's valuation looks more reasonable.

• 10 stocks we like better than CarMax ›

CarMax (NYSE: KMX), the leading omnichannel seller of used vehicles, was hit hard after its latest update. The stock fell more than 20% on Thursday following weaker-than-expected results and a cautious tone on demand. Additionally, the market's reaction may also reflect mounting concerns about credit trends inside CarMax Auto Finance and the durability of consumer demand as rates stay elevated.

Stepping back from the noise, the core question is whether this is a crack in the business or a cyclical air pocket. Further, investors should look to see whether the company's issues have been fully priced in following the stock's beating.

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Ultimately, CarMax's numbers do show pressure, but they also show resilience where it matters. With shares now at fresh 52-week lows, the risk-reward finally looks more balanced.

Image source: Getty Images.

Resilient unit economics, but slower demand

For the quarter ended Aug. 31 (fiscal Q2), total sales were $6.59 billion, down 6% year over year as retail used unit sales fell 5.4% and comparable store used units declined 6.3%. The average retail selling price slipped 1% to about $26,000. Wholesale units decreased 2.2%.

Looking to profits, earnings per share was $0.64 -- compared with $0.85 a year ago. Selling, general, and administrative (SG&A) expenses were down modestly to $601 million, helping the bottom line.

Notably, unit economics held up: Retail gross profit per used vehicle was $2,216, and wholesale gross profit per unit was $993. These were about in line with last year's second quarter.

President and CEO Bill Nash acknowledged the quarter's challenges while pointing to actions underway.

"While this was a challenging quarter, we remain confident in our long-term strategy and the strength of the earnings model that we have built," he said. "We will continue to drive SG&A efficiency, targeting at least $150 million in incremental SG&A reductions over the next 18 months."

In other words, CarMax plans to take costs out while protecting its pricing and omnichannel experience.

A key headwind is financing. CarMax Auto Finance income declined 11% to $103 million as the provision for loan losses rose to $142 million from $113 million a year ago. The company increased lifetime loss estimates primarily on 2022 and 2023 vintages, though it said those vintages remain profitable and that loans originated after April 2024 are performing in line with expectations. As of quarter-end, the allowance for loan losses was just over 3% of auto loans held for investment, up from 2.8% as of May 31.

Highlighting CarMax's long-term confidence in the business, management repurchased $180 million of stock during the period.

What the sell-off gets right (and what it may be missing)

The drop makes sense: Demand softened, credit costs rose, and earnings missed analysts' consensus forecast.

However, the key elements of the long-term model still look intact. First, unit margins held steady despite lower volumes, suggesting pricing discipline and sourcing remain sound. Second, digital capabilities continue to support the omnichannel approach; management said 80% of retail unit sales used its digital tools in the quarter. Third, SG&A actions should help earnings power as volumes stabilize. Finally, auto finance provisioning reflects vintage-specific normalization more than a structural break; management says newer originations are tracking expectations.

Despite its challenges, the stock's valuation looks attractive now. After the sell-off to new 52-week lows in the mid-$40s, investors could essentially be paid more to wait for volumes to recover and for credit to normalize (assuming the stock eventually recovers).

Of course, the stock's reset lower won't eliminate volatility. If macro conditions worsen, comps and credit could worsen or fail to recover. However, the downside now more accurately reflects these risks.

Overall, the market just priced in a lot of bad news at once. Meanwhile, CarMax remains a scaled category leader with stable per-unit profitability, a proven omnichannel model, and levers for cost reduction and sourcing that can support earnings when demand improves. After this week's sell-off, the stock looks attractive for patient investors. But, given the weak macroeconomic environment for autos, the prudent move may be to start small and add over time as comps stabilize and credit trends confirm improvement.

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Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CarMax. The Motley Fool has a disclosure policy.