CarMax soars but consumers still feeling skittish
The used car retailer's better than expected earnings are a reminder that for stocks, beating expectations is key...even when the numbers are lousy.
CarMax’s earnings were celebrated by Wall Street traders who were thrilled to see the used car retailer report a profit and sales that topped analysts’s forecasts. But let’s be honest here. The company still kind of put up a lemon of a quarter.
Yes, CarMax beat expectations. But that’s because the bar was set low. The company said that revenue slid more than 17% from the same period a year ago. Earnings per share tumbled 8% from the fiscal first quarter of 2022.
Investors cheered nonetheless. The stock soared 11% and is now up more than 40% this year. Again, it’s all about relative results as opposed to absolute performance. You can have a winning stock with losing numbers as long as your earnings are “less bad.”
It’s a bit perverse. But that’s the way Wall Street works. Still, there are some ominous signs about the economy and health of the US consumer if you dig deeper in CarMax’s earnings report. CEO Bill Nash noted that it is still a “challenging macro environment.”
The company added that “vehicle affordability challenges continued to impact our…sales performance, as headwinds remained due to widespread inflationary pressures, higher interest rates, tightening lending standards and prolonged low consumer confidence.”
In other words, the Federal Reserve isn’t helping CarMax. Neither are banks, many of whom are growing more nervous and are less willing to extend credit to prospective car buyers.
To be sure, CarMax’s stock could keep chugging along even if its earnings and sales don’t get much better anytime soon as long as the company keeps topping Wall Street’s consensus targets. Just don’t get too excited. Analysts are still predicting that earnings per share will fall 9% for the full fiscal year and that sales will be down 20% from a year ago. That’s not really a sign of a healthy consumer.