CarMax's earnings beat marred by margin and credit worries, but analysts upgrade
Margin compression persists Gross profit per retail used vehicle fell $230 to $2,177 as CarMax cut prices to boost sales. This squeezes profit per car and worries investors that earnings growth may be hard to sustain.
Margin pressure is a key reason the stock initially dropped despite an earnings beat.
Credit quality concerns at CarMax Auto Finance CarMax Auto Finance income slipped 1% to $140.2 million, and loan penetration rose to 43.3% from 41.8%. More loans to less-creditworthy buyers could lead to higher delinquencies, a risk if the economy weakens.
Credit risk is a major overhang on CarMax's earnings and was cited as a reason for the stock's decline.
Earnings beat and cost cuts show progress CarMax reported adjusted EPS of $1.31, well above the $0.95 expected, and revenue rose 6.2% to $8.01 billion. Cost cuts are on track to save $200 million by fiscal 2027, supporting future profits.
The strong earnings beat and cost-cutting progress are key positives that initially lifted shares and later fueled analyst upgrades.
Analyst upgrades and price target hikes After earnings, Stephens upgraded CarMax to overweight and raised its target to $66 from $43. Baird also hiked its target to $55. These votes of confidence helped the stock rebound 13% on Thursday.
Analyst upgrades directly drove the sharp rebound in CarMax's stock price the day after earnings.