CarMax (KMX) exploring more aggressive cost-cutting is 'particularly relevant' - Morgan Stanley

Morgan Stanley analyst Adam Jonas said in a research note Friday that following reports of activist investor interest in CarMax (NYSE: KMX), which pushed its stock higher, they believe an exploration of more aggressive cost-cutting or even a potential restructuring is "particularly relevant."

"Reports of potential activist investor interest drove Carmax share prices 5% higher on January 17th. We note the company has not commented with regard to the press reports," wrote Jonas, who has an Overweight rating and a $75 per share price target on the stock.

Jonas stated that while the firm is generally supportive of KMX's strategy to move towards an 'omnichannel' retail model that leverages the company's commercial scale, brick & mortar infrastructure, and data expertise in a 'bricks & clicks' operation, "this may have come at some cost to returns and there may be areas where they can materially improve."

"We believe an exploration of more aggressive cost-cutting or even potential restructuring actions is particularly relevant given increasing evidence that the market may be entering the largest and most sustained used car market we have seen in decade," adds Jonas.

"What stands out to us is that while KMX retail volumes are relatively unchanged in FY23 vs. FY20 and CAF profits are materially higher vs. pre-Covid levels, EPS is down 53% in the same period. Bloated SG&A is the source of the problem," the analyst argues.

By Sam Boughedda

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