CarMax is cutting prices but volume is still falling.

I was digging through CarMax’s ($KMX) Q4 numbers this morning, and man, it’s a bit of a mess. The headlines said they “beat estimates,” but the stock still got absolutely cratered—down 15% in a single day.

When you look past the adjusted EPS, it’s pretty clear why. The company is basically in the middle of a forced transformation with an activist at the door (Starboard Value) and a brand new CEO, but the central bet they’re making isn’t paying off yet.

The “Margin-for-Volume” Trap

The most brutal stat from the quarter: CarMax cut retail prices by $114 per vehicle, watched their profit per unit drop by $207… and they still sold fewer cars than last year. Comps were down 1.9%.

Think about that. You’re selling your product for less, making significantly less on every sale, and people are still walking away. That’s a tough spot to be in. Management is already telegraphing that margins will probably drop another $300 in Q1. The trade isn’t stabilizing; it’s accelerating.

This isn’t just a “bad quarter”

I pulled the long-term charts, and this margin erosion looks pretty structural. Their gross margin peaked at 15% back in 2008 and it’s been a slow, steady slide down to 10.8% today. They’re caught between rising acquisition costs and a used car market that is getting way more competitive. FWIW, they’re trying to cut $200M in costs to compensate, but half of that is getting eaten by “normalizing” compensation costs.

The $141 Million Write-Down

One thing I didn’t see many people talking about was a $141 million goodwill impairment buried in the fine print. Basically, they’re admitting that some part of the business they bought is worth way less than they paid for it. Between that and restructuring charges, they swung from a “beat” to a massive -$0.85 GAAP loss. Not great.

The New CEO (from Hotels?)

They just brought in Keith Barr as CEO last month. He’s from IHG Hotels & Resorts—so, hospitality, not cars. He talked a lot about “frictionless” tech and “urgency” on the call, but TBH, it was all pretty generic. We won’t actually hear the real strategy until June.

So right now, investors are being asked to buy into a turnaround with a CEO who doesn’t have a public plan yet, while an activist investor watches over his shoulder.

The Silver Lining (Maybe?)

Their finance arm (CAF) is actually holding up okay. They’re planning to push deeper into “Tier 2” lending to try and juice volume. Basically: if we can’t lower the price enough, maybe we can just lend people more money. It’s a lever, but obviously comes with more credit risk if the economy softens.

-------------

KMX is trading at the bottom of its 52-week range. If you believe the June strategy reveal is going to be a game-changer, maybe this is a “blood in the streets” moment. But that margin trend is scary (source: https://deepfundamental.com/KMX/metrics/gross\_margin).

Curious what you guys think—does anyone actually see used car volume picking up soon, or is the consumer just completely tapped out?