CarMax, Inc. (KMX) is the nation's largest retailer of used vehicles, operating in two reportable segments: CarMax Sales Operations and CarMax Auto Finance (CAF). The company's innovative approach to the used car industry has made it a standout performer, as it continues to adapt to evolving market dynamics and customer preferences.

Established in 1993, CarMax has steadily grown its footprint across the United States, now operating 247 used car stores in 109 television markets as of August 31, 2024. The company's unique business model, which combines a vast selection of quality used vehicles, competitive no-haggle pricing, and a customer-friendly sales process, has resonated with consumers and allowed CarMax to capture a sizable share of the used car market.

Company History and Evolution

CarMax's revolutionary approach to the used car industry began in its early years, as it pioneered a customer-friendly sales process that disrupted the traditional used car buying experience. This innovative model quickly gained traction with consumers, setting the foundation for the company's future success. As CarMax expanded, it encountered various challenges, including difficulties integrating its in-house financing operations in the late 1990s. The company responded by revamping its credit underwriting standards and tightening lending criteria, which improved the performance of its loan portfolio and the profitability of CAF.

During the Great Recession in the late 2000s, CarMax faced severe impacts on auto sales and consumer demand. The company demonstrated its resilience by implementing cost-cutting measures, streamlining operations, and focusing on preserving liquidity. These strategic actions allowed CarMax to weather the economic downturn and emerge in a strong competitive position as the economy recovered.

Financials

CarMax's financial performance has been robust, with the company reporting annual revenue of $26.54 billion and net income of $479.20 million in the fiscal year ended February 29, 2024. The company's strong liquidity position, with $574.14 million in cash and cash equivalents as of the same date, has enabled it to navigate challenging market conditions and invest in strategic initiatives to drive future growth.

In the most recent quarter (Q2 2025), CarMax reported revenue of $7,013,529,000, a slight decrease of 0.9% compared to the prior year quarter. Net income increased by 11.9% to $132,809,000. Operating cash flow (OCF) improved to $619,103,000, while free cash flow (FCF) rose to $509,894,000. The decrease in revenue was primarily driven by lower retail and wholesale vehicle prices, partially offset by higher retail unit sales volume.

Liquidity

CarMax's strong liquidity position is reflected in its financial metrics. As of August 31, 2024, the company had $524.67 million in cash and cash equivalents. The company's debt-to-equity ratio stands at 3.11, while its current ratio is 2.25 and quick ratio is 0.68. Additionally, CarMax has access to a $2.00 billion unsecured revolving credit facility, which was fully available as of August 31, 2024. This robust financial position allows CarMax to navigate challenging market conditions and invest in strategic initiatives to drive future growth.

Key Drivers of Success

One of the key drivers of CarMax's success has been its focus on providing a seamless omni-channel experience for its customers. The company's online and in-store capabilities allow customers to research, finance, and purchase vehicles on their own terms, whether through a fully digital transaction or a blended in-store and online experience. This flexibility has resonated with consumers and contributed to the company's market share gains, with online and omni-channel sales accounting for 15% and 57% of total unit sales, respectively, in the second quarter of fiscal 2025.

CarMax's proprietary finance arm, CAF, has also played a pivotal role in the company's success. CAF provides financing to qualified retail customers, allowing CarMax to capture additional profits and manage its reliance on third-party finance providers. As of August 31, 2024, CAF serviced approximately 1.10 million customer accounts in its $17.77 billion portfolio of managed receivables.

Challenges and Responses

However, the company has not been immune to the challenges faced by the broader automotive industry. In the second quarter of fiscal 2025, CarMax reported a 14.4% decrease in CAF income compared to the prior-year period, driven by an increase in the provision for loan losses as the company navigated industry-wide credit headwinds. The company has responded by tightening its underwriting standards and expanding its full-spectrum lending initiatives, aiming to balance risk and capture a greater share of the financing market.

Despite these near-term pressures, CarMax remains well-positioned for long-term success. The company's continued investments in its omni-channel platform, logistics optimization, and reconditioning operations are expected to drive efficiencies and strengthen its competitive position. Furthermore, the company's diversified business model, with revenue streams from used vehicle sales, wholesale vehicle sales, extended protection plan products, and advertising and subscription services, provides a level of stability in the face of market fluctuations.

Future Outlook

Looking ahead, CarMax is focused on maintaining its leadership in the used car industry, with long-term goals of selling more than 2 million combined retail and wholesale units annually and capturing over 5% nationwide market share of age 0- to 10-year-old used vehicles. To achieve these objectives, the company is committed to delivering a best-in-class customer experience, leveraging data and advanced analytics to drive continuous improvements, and exploring strategic initiatives that will support its growth and profitability.

For the fiscal year 2025, CarMax management expressed encouragement based on the second quarter performance and indicated positive expectations for sales in the second half of the year, assuming current market conditions continue. The company is seeing positive year-over-year same-store sales trends in the early part of the third quarter, though slightly softer than the second quarter. CarMax expects continued year-over-year improvement in service gross profit for the balance of the fiscal year.

The company plans to continue evaluating its logistics operations to drive further efficiencies, which may result in less than $10 million in near-term charges but are expected to be more than offset by the efficiencies gained. CarMax remains excited about its full spectrum lending initiative and will continue testing its new credit scoring models in the Tier 1, Tier 2, and Tier 3 spaces.

Segment Performance

CarMax operates in two reportable segments: CarMax Sales Operations and CarMax Auto Finance (CAF).

The CarMax Sales Operations segment encompasses all aspects of the company's auto merchandising and service operations, excluding financing provided by CAF. This segment generates revenue from various sources, including:

1. Retail sales of used vehicles 2. Wholesale vehicle sales through on-site or virtual auctions 3. Extended protection plan (EPP) product sales, including extended service plans (ESPs) and guaranteed asset protection (GAP) 4. Advertising and subscription revenues from Edmunds 5. Vehicle repair services

Key financial metrics for this segment include used vehicle sales revenue and unit volumes, wholesale vehicle sales revenue and unit volumes, gross profit per unit for used and wholesale vehicle sales, other sales and revenues (including EPP, third-party finance fees, and Edmunds), and selling, general and administrative (SG&A) expenses as a percentage of gross profit.

The CarMax Auto Finance (CAF) segment consists solely of CarMax's in-house finance operation, providing financing to customers purchasing retail vehicles from CarMax. CAF generates revenue from interest and fee income on auto loans it originates, less interest expense on debt issued to fund these receivables, provision for loan losses, and direct CAF expenses.

Key financial metrics for the CAF segment include interest margin, provision for loan losses, CAF income, loan performance metrics (such as net credit losses, past due accounts, and recovery rates), origination volume, penetration rate, weighted average credit score, and loan-to-value ratio.

Industry Trends

The used vehicle industry has experienced significant volatility in recent years, with sharp fluctuations in vehicle prices and consumer demand. Despite these challenges, CarMax's diversified business model and scale have allowed it to navigate the market relatively well. The industry is expected to see a compound annual growth rate (CAGR) of 3-5% over the next 5 years as consumer preferences continue to shift towards used vehicles.

In conclusion, CarMax's adaptability, innovative approach, and diversified business model have positioned the company as a resilient player in the dynamic used car industry. As it navigates the evolving market landscape, CarMax's focus on enhancing the customer experience, optimizing its operations, and capturing a larger share of the financing market will be critical to its continued success. With its strong financial position, strategic initiatives, and positive outlook, CarMax appears well-positioned to maintain its leadership in the used car market and drive long-term growth.