Why CarMax stock dropped 10% in a day

Shares slumped on missed earnings and waning used car sales. Have rising prices made consumers scared to spend?

Shares of CarMax (KMX) slumped by nearly 10% Tuesday after the used car retailer reported worse-than-expected fourth-quarter earnings results.
CarMax stock opened 3% lower Tuesday and extended its losses over the course of the trading day, falling as much as 10% by close.
It’s another sign inflation may be discouraging big purchases. Which could be bad news if you own auto stocks during this earnings season.

What happened?

CarMax reported an unexpected loss during its fourth quarter and fiscal year 2022 that ended February 28, 2022.
CarMax earned $0.98 per share, falling well short of the $1.34 per share consensus estimate and the $1.27 per share earned in the same period last year. Revenue, on the other hand, came in higher compared to last year’s quarter and above analyst forecasts.
The earnings miss came as sales volumes decelerated and average selling prices continued to rise.
CarMax saw a 5.2% drop in total used car sales last quarter and a 6.5% drop in the number of used cars it sold in stores that have been open at least 13 months. Meanwhile, the average price of a used car rose 40%, or $8,332, year over year.
“We believe several macro factors weighed on market-wide used car sales including consumer confidence, vehicle affordability, the omicron COVID surge and lapping stimulus benefits paid in the prior-year period,” said CarMax President and Chief Executive Officer Bill Nash during a call with investors on Tuesday.
According to Nash, CarMax continues to be the nation’s largest buyer of vehicles from consumers, purchasing approximately 324,000 cars from consumers during the fourth quarter. This is up 69% versus last year’s period.
Investors, then, may be watching CarMax to ensure it can balance margin with keeping its vehicles affordable. Car buyers may see prices start to drop if inventory outpaces demand.

A sign of bad news to come for car stocks?

CarMax’s declining fourth quarter sales suggest that consumers are starting to respond to higher costs and concerns about the economy.
“From an affordability standpoint, you’ve got interest rates going up,” Nash said. “Inflation, you’ve got the Ukraine-Russia war. There’s just a lot weighing on the consumer right now. So as far as when that turns around, I don’t know.”

Recent data from the Bureau of Labor Statistics suggests some relief for car buyers could be somewhere around the corner.
While consumer prices rose 8.5% in March, the fastest annual gain since 1981, used car and truck prices declined 3.8% for the month. It’s the second-straight month of declines, though they’re still up 35.3% on the year.
But according to an Automotive News report, vehicle supply and demand won’t return to normal until sometime between October 2022 and 2023.
Several automakers have already begun to see declining sales because of the global shortage of semiconductor chips and other production disruptions. But waning sales brought on by a change in consumer behavior could spell even more trouble.
Tesla (TSLA) is scheduled to report its first-quarter 2022 earnings on April 20. General Motors (GM) and Ford (F) are slated to report their first-quarter earnings on April 26 and 27, respectively.
At the time of publication, Matt Miczulski owned shares of Tesla and General Motors.

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