CarMax's Strategy for Sourcing Vehicles and Omni-Channel Shift Poised to Drive Profit Despite Increased Competition: Analyst

Needham analyst Chris Pierce reiterated a Hold rating on the shares of CarMax Inc KMX with a price target of $86.21.

The 1QF24 results have left the analyst more positive on company fundamentals but still unsure of the trajectory of its consumer finance business. 

KMX guided full-year Retail GPUs above historical levels (to a range of $2200 to $2300 per vehicle versus $2100 to $2200 prior), and the factors driving higher GPUs could have staying power, said the analyst.

The expected higher gross profit potential on more in-demand, lower-priced vehicles is possible through KMX’s ability to source vehicles better than peers, added the analyst.

The analyst is bullish on used vehicle unit growth in FY24, positioning KMX for an end-market tailwind in conjunction with potentially durable higher absolute levels of gross profit per unit and increasing OPEX leverage as omnichannel investments look to have peaked.

The company was seeing heightened competition from digitally native operators and bulked up franchise dealers post industry consolidation, the analyst noted.

Also, KMX is absorbing the higher advertising and technology expenses associated with adopting an omnichannel operating model that suits the used vehicle retail market’s shift from offline to online.

The new model will comprise both brick-and-mortar locations and digital platforms, but at a cost, the analyst remarked.

The analyst views this higher spending as fully necessary but earnings-limiting in the near and perhaps medium term.

Price Action: KMX shares closed lower by 5.75% at $81.25 on Monday.

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