CarMax downgraded by Morgan Stanley amid execution woes and leadership uncertainty

Investing.com -- Morgan Stanley has downgraded CarMax (NYSE: KMX) to Equal-weight from Overweight in a note on Monday and slashed its price target to $35 from $56, citing “degradation in execution and uncertainty around new leadership” as key risks during a critical transition period.

Analyst Daniela Haigian stated that CarMax’s latest announcement marks “the first step towards a strategic pivot” after a 60% year-to-date stock decline, but warned that shares are likely to remain “range-bound until investors can build confidence in a transformational CEO and strategy.”

Morgan Stanley explained that its prior bullish stance had been based on the belief that expectations were already reset, but “that was not the case.”

The firm pointed to weaker-than-expected volume growth, “-10% year-on-year at the midpoint vs. -6% last quarter and consensus of -3%” and “steeper depreciation curves impacting wholesale margins” as evidence that “the trajectory of execution worsened rather than improved.”

The analyst identified three main factors behind the deterioration: “a highly competitive environment,” “a consumer challenged by affordability issues,” and “ongoing strategy execution issues that are KMX-specific.”

They added that the upcoming CEO appointment “reflects a Board with a sense of urgency for change.”

Morgan Stanley said it is looking for a new leader who can “build stronger brand awareness for CarMax’s omnichannel platform,” “improve the current digital buying experience,” and “bring a fresh perspective with a strategic pivot.”

Despite the downgrade, Haigian believes CarMax remains “a high-quality brand with valuable strategic assets,” but added it prefers Carvana, which continues to show “40%+ year-on-year growth.”

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