CarMax As Microcosm

| | | |

$20 billion used car retailer CarMax (KMX) reported earnings for the quarter ended November 30 Wednesday morning. While the top line was on fire at +65% this didn’t translate to the bottom line with EPS up only 15%.

Why? Similar to last quarter, KMX’s margins are being squeezed by the rising cost of used cars. While KMX is getting great prices for the used cars it sells, it is also having to pay up for its inventory. Cost of Goods Sold (COGS) – what they paid for used cars – increased even more than revenue at +69%. As a result, KMX’s Gross Margin decreased to 9.8% from 12.2% a year ago.

I believe KMX’s results are a microcosm of what’s going on in the macroeconomy. Demand is super strong due to all the monetary and fiscal stimulus that has been unleashed. But supply is unable to keep up with this demand resulting in supply chain stress and inflation.

Put it all together and KMX’s profitability is not improving nearly as much as its hot top line would lead one to expect. I think this is why KMX shares had an initial pop at the open Wednesday but sold off throughout the remainder of the session as investors processed the report. My inference is that this analysis doesn’t only apply to KMX.

Similar Posts