CarMax profit falls as excess inventory, falling prices squeeze margins; shares tank

By Apratim Sarkar and Anshuman Tripathy

Sept 25 (Reuters) - CarMax KMX.N reported a drop in second-quarter profit on Thursday, as excess inventory build up, depreciation costs and fall in used-vehicle prices hammered its margins, sending its shares tumbling down 24% in morning trade.

The used-car retailer, whose shares hit a five-year low, said its results were impacted by a pull-forward in demand earlier this year and a sharp rise in vehicle depreciation that hurt pricing power.

CEO Bill Nash said the company had ramped up inventory following stronger sales in March and April amid tariff speculation, but saw about $1,000 in depreciation per vehicle from mid-May through June, pressuring margins and sales.

To offset the impact, CarMax said it cut retail margins to spur demand and deliberately slowed purchases to better align inventory with sales.

CarMax sold 199,729 units of used vehicles in the June-to-August period, down 5.4% from a year ago, while sales of wholesale vehicles also fell 2.2% year-over-year.

"The narrative has turned cautious, and we believe CarMax is now losing share at an accelerating pace relative to its closest competitor," Wedbush analyst Scott Devitt said. The brokerage downgraded its rating on the company's stock to 'neutral' from 'outperform'.

Peer AutoNation AN.N said during its July earnings call that automakers are likely to maintain competitive pricing on flagship models, while gradually adjusting prices across their broader lineup.

CarMax reported a net profit of $95.4 million, or 64 cents per share, for the quarter ended August 31, compared with $133 million, or 85 cents per share, in the year-ago period.

Quarterly revenue fell 6% to $6.59 billion, compared with Wall Street estimates of $7.02 billion, according to data compiled by LSEG.