- Leadership & Restructuring Interim executives lead amid leadership changes, with a $0.08/share restructuring expense and $150M SG&A reduction target by 2027.
- Sales & Profitability Decline Q3 revenue fell 6.9% YoY to $5.8B, with net earnings per share dropping from $0.81 to $0.43 due to 8% retail unit sales decline.
- CAF Growth & Margin Strategy Auto Finance income rose to $175M (+$15M YoY), with 11% weighted average loan rate and 42.6% sales penetration.
- Digital & Operational Overhaul Prioritizing digital platform simplification to mirror in-store experiences and streamline reconditioning centers to reduce COGS.
- Market Position & Challenges Faces 9% same-store sales declines, high competition, and wholesale depreciation >10%, prioritizing pricing agility and omnichannel integration.
Operational Challenges and Strategic Initiatives
The company's recent results have been "unacceptable" and do not reflect its potential, prompting leadership changes and a search for a permanent CEO. Key areas of focus for improvement include pricing, digital experience, and cost structure. The company aims to shrink the gap between its offering and the marketplace by lowering margins and supporting this action with marketing spend. Enrique Mayor-Mora noted that the company is on track to achieve at least $150 million in exit rate savings by the end of fiscal year 2027.
CarMax Auto Finance Performance
CarMax Auto Finance originated $1.8 billion in loans, with a sales penetration of 42.6%. The weighted average contract rate charged to new customers was 11%. CAF income for the quarter was $175 million, up $15 million from the same period last year. The company is focused on growing its full credit spectrum expansion and enhancing profitable growth drivers.
Valuation and Outlook
With a P/E Ratio of 12.52 and an EV/EBITDA of 16.01, the market seems to be pricing in some level of recovery. Analysts estimate next year's revenue growth at -3.6%. The company's ROE is 7.39%, indicating a relatively stable return profile. As CarMax navigates its operational challenges and implements strategic initiatives, the market will be watching closely for signs of improvement.
Digital Transformation and Cost Reduction
The company is reassessing its digital platform to drive a better selling experience, making it easier for customers to shop online. The company aims to streamline the digital experience, similar to in-store sales associates. The impact on the operating cost structure will be assessed as changes are made. Early indicators of progress are expected in the next month or two. The strategy to reduce COGS includes a focus on reconditioning centers, with five centers rolled out.
Management's Focus and Priorities
The board is searching for a new CEO, prioritizing someone who has led a complex business with a diverse set of assets and has experience with digital transformation. The company aims to find someone who understands its culture. The new CEO will review and position the campaign to align with the new strategy, focusing on driving sales and getting things moving in the other direction.