CarMax, Inc. (KMX) is the nation's largest retailer of used vehicles, with a unique business model that combines the convenience of online shopping with the trust and expertise of a brick-and-mortar presence. Founded in 1993, the company has grown to operate 249 used car stores across 109 U.S. television markets, covering approximately 85% of the country's population.
Company History and Innovation
The company's history is one of innovation and adaptability. CarMax was founded on the premise of providing customers with a transparent, no-haggle car buying experience, a revolutionary concept at the time. Over the years, the company has seamlessly integrated its physical stores with an advanced online platform, creating an industry-leading omni-channel model that empowers customers to shop and transact on their own terms.
Business Segments
CarMax operates in two reportable segments:
CarMax Sales Operations
This segment encompasses all aspects of the company's auto merchandising and service operations, excluding financing provided by CAF. This includes retail sales of used vehicles and related products and services, wholesale vehicle sales, sale of extended protection plan products, advertising and subscription revenues, and vehicle repair services.
The used vehicle sales business is the core of this segment, accounting for the majority of its net sales and operating revenues. In the third quarter of fiscal 2025, used vehicle sales generated $4.89 billion in revenue, a 1.2% increase compared to the prior year period. For the first nine months of fiscal 2025, used vehicle sales were $16.24 billion, a 1.1% decrease from the same period in the prior year.
Wholesale vehicle sales generated $1.17 billion in revenue in the third quarter, a 0.3% increase year-over-year. For the first nine months, wholesale vehicle sales were $3.58 billion, a 10.5% decrease compared to the prior year period.
The Other Sales and Revenues category, which includes income from the sale of EPP products, net third-party finance fees, advertising and subscription revenues from the Edmunds business, and other revenues, generated $165.9 million in the third quarter, a 9.7% increase year-over-year.
Gross profit in this segment increased 10.6% to $677.6 million in the third quarter and 4.8% to $2.23 billion in the first nine months of fiscal 2025. Used vehicle gross profit per unit was $2,310 in both the third quarter and the first nine months, while wholesale vehicle gross profit per unit was $1,010 in the third quarter and $1,020 in the first nine months.
CarMax Auto Finance (CAF)
This segment consists solely of CarMax's own finance operation, providing financing to customers purchasing retail vehicles from CarMax. In the third quarter of fiscal 2025, CAF income increased 7.6% to $159.9 million compared to the prior year period. For the first nine months, CAF income increased 0.3% to $422.4 million.
The total interest margin rose to 6.2% in both the third quarter and first nine months of fiscal 2025 from 5.9% and 6.0% in the respective prior year periods. This was due to higher customer rates, partially offset by higher funding costs.
The provision for loan losses was $72.6 million in the third quarter and $266.4 million in the first nine months of fiscal 2025, compared to $68.3 million and $239.0 million in the respective prior year periods.
As of November 30, 2024, CAF's managed receivables portfolio totaled $17.76 billion. The allowance for loan losses as a percentage of ending managed receivables was 2.7% at the end of the third quarter, down from 2.92% a year earlier.
Challenges and Adaptations
Throughout its history, CarMax has faced various challenges, including navigating an economic recession and volatility in the used car market in the early 2000s. The company has also had to adapt to changes in consumer preferences, such as the growing popularity of online car shopping. Despite these challenges, CarMax has maintained its position as the nation's largest used car retailer by focusing on providing customers with a unique and differentiated shopping experience.
Key Milestones
- Opening of its first used car superstore in 1993 - Launch of its e-commerce platform in the early 2000s - Acquisition of Edmunds, a leading automotive information and research company, in 2021
Financials
CarMax's financial performance has been resilient, despite navigating the challenges of the COVID-19 pandemic and broader macroeconomic headwinds. In fiscal year 2024, the company reported revenue of $26.54 billion, a 3.5% increase from the prior year. Net income for the same period stood at $479.20 million, with a net profit margin of 1.8%. Annual operating cash flow for fiscal 2024 was $458.62 million, while annual free cash flow was -$6.69 million.
In the most recent quarter (Q3 2025), CarMax reported revenue of $6.22 billion, a 1.2% increase year-over-year. Net income for the quarter was $125.44 million, representing a significant 53.0% increase compared to the same quarter in the previous year. The company delivered robust EPS growth in the third quarter, with EPS of $0.81, up 56% year-over-year.
Liquidity
The company's strong balance sheet is evidenced by a current ratio of 2.30 and a debt-to-equity ratio of 2.84 as of the end of fiscal 2024. CarMax's cash and cash equivalents stood at $271.91 million, with a quick ratio of 0.55. The company also has access to a $2 billion unsecured revolving credit facility, with the full $2 billion available as of November 30, 2024.
Key Success Drivers
One of the key drivers of CarMax's success has been its ability to adapt to changing consumer preferences and leverage technology to enhance the customer experience. The company's omni-channel platform, which allows customers to seamlessly transition between online and in-store interactions, has been a significant competitive advantage. In fiscal 2024, approximately 70% of the company's customers utilized some form of digital engagement, up from around 40% at the end of fiscal 2020.
The company's CarMax Auto Finance (CAF) division has also been a valuable contributor to its overall performance. CAF provides financing solutions to qualified retail customers, enabling CarMax to capture additional profit and sales while managing its reliance on third-party finance providers. In fiscal 2024, CAF generated income of $421.00 million, a testament to the division's strong performance and integration with the broader business.
Future Outlook and Strategy
Looking ahead, CarMax remains focused on enhancing its omni-channel capabilities, expanding its physical footprint, and exploring new opportunities in the used car market. The company has set a long-term target of selling more than 2 million combined retail and wholesale units annually, with a goal of achieving over 5% nationwide market share of age 0- to 10-year-old used vehicles.
To support these ambitious goals, CarMax is making strategic investments in its logistics network, reconditioning operations, and data-driven decision-making. The company's use of artificial intelligence (AI) and advanced analytics is helping to streamline processes, improve inventory management, and provide a more personalized customer experience.
For the fourth quarter of fiscal 2025, CarMax expects GPU margins per unit to be up slightly year-over-year, but not as much as the year-to-date increase. The company also anticipates continued year-over-year improvement in service gross profit and expects its advertising spend to be higher than the year-to-date rate and last year's fourth quarter. Additionally, CarMax expects the fourth quarter comp performance to be stronger than the third quarter, despite some headwinds from losing a Saturday and leap day.
Conclusion
Despite the competitive landscape, CarMax's strong brand recognition, diversified business model, and commitment to innovation position the company well to capitalize on the ongoing transformation of the used car industry. The company's recent financial performance, including robust EPS growth and increased retail and wholesale unit volume, demonstrates its resilience and ability to navigate market challenges. As CarMax continues to execute on its strategic initiatives, including expanding its asset-backed securitization program and testing new full-spectrum credit scoring models, investors will likely keep a close eye on its ability to drive profitable growth and maintain its status as the leading player in the used vehicle retail space.