March CPI & KMX Earnings Spell Trouble

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The March CPI came in +8.5% year over year and +1.2% month over month. For whatever reason stocks initially jumped on the number before giving back all the morning gains and closing red on the day. I’m not sure how you spin 8.5% inflation as bullish.

This means that the Fed is very likely to raise rates by 50 basis points when it next meets in three weeks on Wednesday May 4. We haven’t seen a 50 basis point increase in a long time and I don’t think the market is ready for it.

In the meantime 1Q22 earnings are getting underway and Carmax’s (KMX) report this morning rings some bells. KMX’s used vehicle sales fell 15% compared to a quarter ago and 28% compared to the peak in 2Q21 as the average selling price was +40% year over year. Car buyers are being priced out of the market by inflation.

In addition to being hit on the top line by inflation, KMX’s margins are being squeezed by the same. Gross margin declined to 9.2% and operating margin to 1.2% from 12.0% and 4.8%, respectively, during the peak 2Q21 quarter. This resulted in a 40% decline in EPS compared to the previous quarter and a 63% decline compared to 2Q21. KMX shares were smacked down almost 10% on 5x average volume to 52-week lows. This could be a harbinger of things to come.

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