Wedbush Sees CarMax As Still Stuck In A Low Gear

Wedbush’s Seth Basham believes transitioning its business model without impacting profitability would not be an easy task for CarMax, Inc KMX, and the company was likely to face growing cyclical pressures in 2017.

Basham maintains a Neutral rating on the company with a price target of $55.

Several Pressures

“As consumer shopping behavior for used autos shifts, we appreciate new CEO Bill Nash’s emphasis on extending KMX’s brand offer to the online channel by building new infrastructure and testing new capabilities such as pre-qualification of financing online and delivery to customers,” the analyst mentioned.

Related Link: There Were Significant Bright Spots Amid CarMax's Mixed Results

CarMax reported its FQ2 results below expectations on both the top and bottom line. However, Basham expects compares to ease in H2 but not the pressures.

In fact, the analyst pointed out that financing seemed to be tightening while affordability was weakening, which was resulting in lost sales and could potentially drive a 300 bps sales mix shift to lower priced, older vehicles during the current quarter.

Continuing Pressure

According to the Wedbush report, “Further evidence of pressures appeared in a sharp ~500 bps decline in Tier 3 (subprime) and Tier 2 (non-prime) financing penetration, a 10 percent decline in wholesale gross profit, and above-plan CAF loan loss provisions as loss frequency increases.”

In addition, the analyst does not expect the benefits from the over 200 bps mix shift to large SUVs and trucks, as well as potential share gains in “stop-sale” vehicles, to persist into 2017.

Full ratings data available on Benzinga Pro.