CarMax Faces Material Affordability Challenges, Says Analyst

Truist analyst Scot Ciccarelli reiterated a Hold rating on the shares of CarMax Inc KMX with an unchanged price target of $72.00.

The analyst lowered the Q3 FY24 used unit comparable estimate to a decline of 2% from a growth of 2.0% prior.

If realized, this would mark the 8th straight quarter of comp declines for CarMax and represent another deceleration on a geo-stack basis relative to 2Q, writes the analyst.

The analyst also lowered the gross profit estimate to $619 million from $644 million due to the lower unit projection.

Related: US Car Owners Drowning In Debt: Underwater Crisis Deepens, Delinquency Rates Rise

According to the analyst, CarMax continues to see plenty of demand at the "top of the funnel" for people starting a search process and trying to getting pre-qualified for a vehicle.

However, in the process consumers are often confronted with a severe mismatch between what they want versus what they can afford, which turns into a headwind, notes the analyst.

According to the analyst, CarMax's average selling price is still 35% - 40% higher than they were in 2019, making monthly payments 40%+ more expensive due to higher interest rates.

While used vehicle prices have declined modestly over the past couple months, they remain well above historical levels, which, according to the analyst, continues to pressure sales trends.

CarMax Auto Finance (CAF) continues to weigh on profitability. While the company is doing a good job controlling what it can, the current environment remains highly challenging, writes the analyst.

CarMax will report its financial results for the third quarter ended November 30, 2023, before the market opens on December 21, 2023.

Price Action: KMX shares are trading higher by 0.47% at $77.00 on the last check Wednesday.

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