CarMax’s fiscal 2025 first-quarter earnings fell year over year, but the used car dealer’s business is still more attractive than Carvana’s.
CarMax (KMX 1.80%) is a giant in the used car market, but the industry remains highly fragmented market with around 18,000 dealers. That has left an opening for Carvana (CVNA 7.05%) to quickly build a business that relies heavily on online sales. Carvana has made a lot of headlines thanks to its rapid growth, but CarMax is the better company. Here’s why.
CarMax had a tough start to its new fiscal year
In its fiscal 2025 first quarter, CarMax reported earnings of $0.97 per share, down 34% year over year, though last year’s figure benefited from a $0.28 per share one-time legal settlement. On an adjusted basis, earnings fell 16% as the company sold 5.3% fewer vehicles. On the retail side, same-store sales were down 3.8%.
Image source: Getty Images.
On the cost side, CarMax experienced a 3.1% increase in selling, general, and administrative costs (excluding the legal settlement). Inflation is an ongoing issue, and it’s hampering profitability. That said, it wasn’t all bad with CarMax delivering gross profit per retail unit sold of $2,347, flat year over year, and record extended protection plan sales of $563 per unit.
All in all, CarMax is dealing with notable headwinds and muddling through as best it can. That’s not a shocking result, given the used car industry is cyclical. Higher interest rates, while allowing the company to benefit by increasing the rates it charges in its finance unit, are also putting pressure on the ability of consumers to afford a new vehicle.
So, here’s the big takeaway: Despite the difficulties it’s facing, CarMax is a well-known, large, and profitable business.
Carvana is making bold claims
Carvana, meanwhile, has touted that it earned $0.23 per share in the first quarter of 2024, up from a loss of $1.51 per share a year earlier. And in 2023, it earned $0.75 per share, reversing a steep loss of $15.74 per share the previous year. Carvana is the upstart building its online business — losses are to be expected. Still, if you take the company’s reported earnings at face value, it looks like the company has turned an important corner. Or has it?
In late February, Carvana noted, “Net income for FY 2023 totaled $150 million and benefited by $878 million gain on debt extinguishment as a result of our corporate debt exchange.” Without that one-time gain, the company is still deep in the red. And the debt exchange was an agreement that may have saved Carvana from declaring bankruptcy. That’s not the type of thing an investor wants to see because it means the company is working from a position of weakness.
For the first quarter, meanwhile, Carvana highlighted in its earnings release: “Net income totaled $49 million and included a ~$75 million gain in the fair value of our warrants to acquire Root common stock.” Once again, without the one-time gain, the company is not profitable.
Carvana is making progress as it tries to get its business onto more solid ground, including dramatically reducing its cost structure and working to improve its balance sheet. But in the end, CarMax is the healthier company here.
Carvana is still a work in progress
I tend to be a conservative investor, so I shy away from businesses that carry too much uncertainty. Carvana is still in the process of rebuilding its business after overextending itself during the pandemic. I’m much more impressed by the established company that has proven itself in all manner of economic conditions, and in the used car space, that’s CarMax.
