CarMax Misses Used Sales Forecasts, Shares D Dip 7% Pre-Market

CarMax Inc. Reports Weaker Than Expected Used Car Sales

CarMax Inc. reported weaker-than-expected used car sales in the third quarter, signaling continued struggles for the used car retailer amid shifting market conditions and stiffening competition. The company said its comparable used-vehicle sales fell 9%, more than the 8.4% analysts had predicted. The contraction added to pressure on the interim leadership team to stabilize the business as the company works to reverse declining sales.

The results underscored a broader industry slowdown, with CarMax also reporting a 6.2% drop in wholesale units. The company attributed the decline to steep market depreciation and weakening consumer demand, factors that have also impacted its gross profit margins. CarMax expects to cut retail used unit margins in the fourth quarter while increasing marketing spend to boost customer acquisition.

Earnings for the quarter came in at $0.43 per share, exceeding the $0.38 consensus estimate but falling below last year's $0.81. Despite the earnings beat, CarMax's shares fell as much as 7% in premarket trading, reflecting investor concerns about the company's long-term growth prospects. The stock has lost nearly half its value since the start of the year.

Market Pressures and Leadership Changes

CarMax's struggles have been amplified by broader market challenges, including rising tariffs and deteriorating credit conditions. These factors have weakened consumer confidence and reduced vehicle demand, particularly for used cars. At the same time, online-focused competitors such as Carvana and Amazon have drawn attention and market share, with Amazon recently announcing plans to sell Ford's used vehicles on its platform.

In response, CarMax has taken steps to stabilize its operations. The company announced leadership changes in late November, with David McCreight appointed as interim CEO after the sudden departure of William D. Nash. McCreight emphasized the need for change, stating that the company's recent performance made it clear that a strategic shift was necessary. The board is currently conducting a search for a permanent CEO.

Strategic Adjustments and Financial Moves

To address the declining sales and margins, CarMax plans to lower used vehicle retail unit margins in the fourth quarter. The move is intended to improve price competitiveness and attract more buyers in a challenging market. The company also announced it would increase marketing spend compared to the previous year, although to a lesser extent than in the third quarter. The focus will be on customer acquisition to drive both sales and inventory turnover according to recent reports.

On the financial front, CarMax repurchased $201.6 million in shares during the third quarter, continuing its capital return efforts. The company also outlined plans to reduce SG&A expenses by at least $150 million by the end of fiscal 2027, a move it said would improve operational efficiency. The cost-cutting initiatives include workforce reductions at its Customer Experience Center.

Investor Skepticism and Legal Risks

Despite these efforts, investor skepticism remains high. CarMax's stock has been under pressure for months, and a class-action lawsuit was recently filed against the company, alleging that it misled investors by overstating its growth prospects. The lawsuit claims that CarMax exaggerated its long-term sales outlook, failing to disclose that earlier growth had been driven by tariff-related speculation according to legal filings.

The legal risks add to the uncertainty surrounding CarMax's future. With shares trading at 14 times the next 12-month earnings and a price target of $35 - about 14.8% below the recent closing price - investors are cautious. Analysts have assigned a "hold" rating to the stock, with only two "buy" recommendations among 20 total.

Looking Ahead

As CarMax moves into the fourth quarter, the focus will be on executing its strategic adjustments and stabilizing sales. The company's ability to adapt to changing market conditions and compete with digital-first players will be critical. With a new leadership team in place and a revised pricing strategy, the company aims to regain momentum.

For now, the road ahead remains uncertain. The combination of macroeconomic headwinds, competitive pressures, and investor skepticism presents a challenging environment. CarMax's success in navigating these challenges will likely determine its long-term viability in the evolving used car market.