![]() More online competition would likely be a headwind for margins. In the long-run, perhaps it attempts to construct its own auto marketplace, but that appears to be a fairly long-term risk. Amazon’s end-goals here are unclear, and it is not trying to bypass the existing dealer model. I note this because Amazon ( AMZN) is dipping its toe into the auto sales market, allowing Hyundai dealers to sell new cars through its site. Interestingly, online sales are 14% of total retail unit sales, up from 11% last year. Given the softening market, I would not expect to see KMX’s gross margins widen over the next year, but it appears that its pricing power has returned to normal, and that benefits from COVID supply chain issues are fully behind the company. Today, KMX is making only about $80 more per car than it used to, but back then, its margin was about 10.65% because car prices were meaningfully lower. In 2019, CarMax had a $2,186 gross profit per used vehicle. This is an 8.1% margin, up slightly from 7.9% last year. In the third quarter, retail used margins were $2,251. As long as the purchase price of its vehicles are moving in tandem with its sales price, it can be somewhat agnostic about used car price levels in this business activity-it is that spread that matters. It is not stockpiling inventory on speculation of where used car prices are going to be in 6-12 months. I think it also important to emphasize that KMX is rolling its inventory over every seven weeks or so. With inventory declining more quickly than sales, KMX should not need to increase promotional activity to move product. Additionally, inventories are down 19% to $3.8 billion as it purchased 292,000 used cars, down 15% from last year. ![]() Impressively, management did reduce SG&A expense by 12%, largely keeping pace with the revenue decline, which is not easy when revenue falls double digits. In response to weaker market dynamics, KMX has been taken action. ![]() Given the combination of elevated interest rates, high absolute prices, and normalized supply chains, there is little reason to expect used car prices to return to meaningfully appreciate over the next 6-12 months. According to Manheim, used car prices have fallen a further 2% in the first half of November, taking the decline to 6.9% from last year. I would note that these dynamics are shared by private-sector measures, and there is no sign of let-up. Used car prices have fallen 7.1% from last year, according to the CPI index. As new car production has recovered and government stimulus has worn off, we have begun to see some normalization. In large part due to supply chain disruptions that hampered new car manufacturing, used car prices soared in the aftermath of the pandemic, posting 40+% gains. At the same time, used vehicles prices were down 4% to $27,500, still over 30% above pre-COVID levels.īy now, the used car pricing dynamics are fairly well known. Revenue fell by 13% to $7.1 billion with comparable store unit sales down 9% with 342,000 vehicles sold. In the company’s fiscal second quarter, it earned $0.75, down from $0.79 last year and $0.03 below consensus. Here, I see pressures, and given where financial firms trade, I view its 20x multiple extremely elevated. However while it is known for its car sales, KMX’s profit engine is really its financing business. The company has been impacted by the normalization in the used car market. Shares of CarMax ( NYSE: KMX) have been a mixed performer over the past year, losing about 2% while the broader market has rallied.
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