CarMax Stock Falls 7% as Margin Compression Overshadows Revenue Beat

CarMax reported its first revenue growth in a year, but the stock still dropped. Shares fell 7% on Wednesday after the used-car retailer posted first-quarter results that beat expectations for both revenue and earnings. However, the company made a clear choice to focus on growing sales volume over profitability, a move that Wall Street has not embraced. Here’s what the results showed and why analysts are still cautious, even with the positive headlines.

Adjusted earnings were $1.31 per share, beating the 96-cent estimate but down from $1.38 a year ago. Revenue rose 6% to $8.01 billion, topping the $7.43 billion forecast. Total used vehicle sales, including retail and wholesale, increased 3.3% to 392,357 units. This was the first year-over-year revenue growth in a year for CarMax. William Blair analysts called this progress important, but said it does not answer the bigger questions facing the company.

Margins are the main concern. Gross profit per used retail vehicle was $2,177, which is $230 less than last year’s record. CarMax said this drop was due to pricing changes meant to boost sales volume. Comparable-store used vehicle sales fell 0.8%. Benchmark called this a clear move to focus on volume over profit per car. They noted that while this supports management’s belief that sales volume is improving, the lower margins highlight the trade-off. Benchmark has a Hold rating and no price target.

CarMax’s stock drop also affected other companies in the sector. Carvana fell 8.2% and was the worst performer in the S&P 500 that day. AutoNation slipped 1.9%, and Group 1 Automotive lost 2.7%.

CarMax is three months into a turnaround led by new CEO Keith Barr, who started in March after four years of falling sales. In March, activist investor Starboard Value revealed a $350 million stake and pushed management to cut costs and improve the digital trade-in process. In the earnings release, Barr said he is more confident than ever that the company can succeed. The new plan focuses on competitive pricing, a smooth customer experience, lower reconditioning costs with technology, better logistics, and cutting selling and administrative expenses.

William Blair kept its Market Perform rating, saying there are still questions about how CarMax can regain its past profit margins while also growing sales at existing stores.