Here's Why CarMax Shares Slumped This Week
Key Points
Lower vehicle prices drove slight unit sales growth but reduced gross profit.
New CEO plans $200 million in expense reductions for fiscal 2027, and structure the company to deal with the trading environment.
CarMax (NYSE: KMX) shares declined 13.3% in the week to Friday morning. The decline came after a disappointing fourth-quarter 2026 earnings report released earlier in the week.
Challenging end markets
CarMax has a new CEO in place, and Keith Barr (appointed in mid-March) faces an immediate challenge in dealing with difficult end markets. The consumer automotive market is price-sensitive at the moment, and, as many automakers found out last year, it's moving toward lower-priced models.
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That observation holds for new cars and the kind of used cars that CarMax sells. Consequently, CarMax sought to lower the average selling price of its vehicles to drive volume growth. CFO Enrique Mayor-Mora discussed the matter on the earnings call and disclosed that of the three levers (increased marketing, better online selling capability, and lower prices) the company pulled to drive 0.7% unit sales growth in the quarter, "we do believe that our lower pricing had the biggest impact on the quarter."
The result was a drop in average selling prices of used vehicles (down 0.4% to $26,019) and wholesale vehicle prices (down 3.3% to $7,776), but a combined (used and wholesale). Unfortunately, the mix led to a lower gross profit of $605.3 million in the quarter, down 9.4% from the same quarter of last year.
Image source: Getty Images.
Where next for CarMax
There isn't a lot the company can do about its end markets. Still, it can restructure to better deal with them, and Barr's plans reduce expenses by $200 million in its fiscal 2027, which makes sense, not least as it will help the company deal with margin challenges coming from having to lower prices. In addition, management announced it had bought relatively more used cars from consumers than from dealers, which should help profitability.In short, it's a game of blocking and tackling as the company navigates a difficult trading environment.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CarMax. The Motley Fool has a disclosure policy.