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CarMax (KMX) is modestly lower today, though it has bounced off its lows, after reporting its Q3 (Nov) results this morning. The company beat EPS and revenue expectations, but both declined yr/yr as weaker retail volumes, a less favorable vehicle margin environment, and continued cost pressure weighed. Revenue fell 6.9% yr/yr to $5.79 bln. To improve current performance trends, KMX announced its intention to lower retail unit margins and increase its marketing spend in Q4, which is also weighing on sentiment due to added near-term pressure on profitability.

• Volumes drove the revenue decline, with retail softness the main drag. Total unit sales fell 7.2% yr/yr and used comps were -9%, down from -6.3% in Q2 and in line with prior guidance.
• Retail used units fell 8% and used gross profit per unit (GPU) was $2,235, down $71 yr/yr. Wholesale units fell 6.2% and wholesale GPU was $899, down $116, hit by sharp depreciation.
• CAF income increased 9.3% yr/yr, helped by a securitization gain and higher servicing fees, partially offset by a 40 bp decline in net interest margin.
• The macro and industry backdrop remains challenging, with consumers still highly value focused and used vehicle pricing dynamics tightening near-term margins.
• Management said KMX's average selling prices have drifted higher versus the market, underpinning its move to lean into sharper pricing and higher marketing to better communicate value and re-accelerate sales trends.
• The CEO search is ongoing and the Board said it is moving with greater urgency given recent performance. Management also said it expects to share early learnings from its pricing and marketing actions on the Q4 call.

Briefing.com Analyst Insight

While KMX beat expectations, it is still premature to view this as a turnaround. Unit sales are declining, pressuring comps, and a challenging used vehicle backdrop and prior missteps are tightening GPU. That said, KMX is responding by planning to lower retail unit margins and increase marketing to better communicate its value and help re-accelerate sales trends. We did not get many incremental updates on the CEO search, but the Board emphasized it is moving with greater urgency, and we will be watching closely for both the permanent appointment and the early learnings from these actions on the Q4 call. Overall, KMX is still very much in a challenging position, and while the stock has bounced back from earlier lows, the stock hovering around unchanged suggests investors want to see more tangible improvement before stepping on the gas.