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CarMax (KMX +4%) got off to a hot start this morning, driving to 52-week highs following a double-digit earnings beat on a return to positive yr/yr revenue growth in Q3 (Nov) following nine consecutive quarters of sales declines. Shares are still higher on the day but have since pulled back from intraday highs, underscoring a few concerns still hanging over the stock, primarily surrounding interest rates and how they will affect borrowers.

• KMX's bottom-line performance was impressive, posting its widest earnings beat since 1Q24 (May). The company has focused on margin preservation over volume growth during the current wobbly economic climate. As such, retail gross profit per used unit remained stable, inching over 1% higher yr/yr to $2,306, while wholesale margins improved by over 5% to $1,015 per unit.
• Average selling prices continued to contract in Q3, sliding by roughly 4% and 6% for used and wholesale vehicles, respectively. The price drop spurred decent volume growth, with used units boasting a 5% jump while wholesale edged 6% higher compared to last year. Meanwhile, used unit comps ticked +4.3% higher, consistent with last quarter. As a result, KMX finally returned to positive yr/yr revenue growth at 1.2% to $6.22 bln, crushing analyst expectations, which called for another yr/yr decline.
• An uptick in the provision for loan losses last quarter raised a few alarms. Encouragingly, in Q3, the trend did not persist. KMX stabilized the provision for loan losses, ending the quarter at $73 mln compared to last year's provision of $68 mln, far better than how KMX exited Q2 (Aug) at $113 mln versus $90 mln in the year-ago period. KMX noted that the provision this quarter was at a much more normalized level.
• KMX did not outline formal guidance but expressed satisfaction with its current sales momentum. In fact, last quarter, KMX said that comp growth would likely run slightly lighter in Q3 compared to Q2. Sales trends shaping up more favorably than expected bodes well for KMX heading into 2025.

Overall, KMX performed well in Q3, keeping margins stable while returning to positive revenue growth. Delinquency rates will likely remain a concern over the near term, especially given that the Fed may not cut interest rates as aggressively as previously thought. Most of the headwinds lie in financing during 2022 and 2023 when inflation was peaking at the same time interest rates were climbing. However, KMX continues to explore ways to help its customers through adjustments, such as offering payment extensions. At the same time, the company continues to test its new credit scoring models to better assess risk across the full spectrum of borrowers.