Executive Summary / Key Takeaways

• CarMax, the nation's largest used vehicle retailer, is strategically leveraging its differentiated omnichannel experience and advanced AI capabilities to enhance customer satisfaction and drive operational efficiencies, positioning it for long-term market share gains.
• Despite a challenging Q2 FY26 marked by inventory depreciation and a demand pull-forward, CarMax is aggressively pursuing at least $150 million in SG&A reductions over the next 18 months and expects an additional $125 per unit in COGS savings in FY26, aiming for omni cost neutrality.
• CarMax Auto Finance (CAF) is expanding its participation across the credit spectrum, including programmatic non-prime securitizations, to capture profitable returns and mitigate risk, despite a recent increase in loan loss provisions for older vintages.
• The company's earnings model targets high-teen EPS growth with mid-single-digit retail unit growth, supported by operational efficiencies, CAF expansion, and an accelerated share repurchase program.
• Investors should monitor CarMax's execution on cost reduction initiatives, the performance of its expanded credit portfolio, and its ability to adapt pricing strategies in a fluid macroeconomic and competitive environment.

CarMax's Enduring Vision and Market Landscape

CarMax, Inc. (NYSE:KMX), founded in 1993, has evolved into the nation's largest retailer of used vehicles, built on a dual-segment model encompassing CarMax Sales Operations and CarMax Auto Finance (CAF). This integrated approach has been foundational, enabling CarMax to capture additional profits and manage its reliance on third-party finance providers. The company's history is marked by strategic expansion, reaching 253 used car stores across 109 U.S. television markets as of August 31, 2025. This physical footprint is complemented by investments in offsite reconditioning and auction centers, enhancing capacity and driving efficiencies across its logistics network.

A pivotal aspect of CarMax's strategy is its omnichannel experience, a common platform that seamlessly integrates online and in-store capabilities. This approach empowers customers to buy vehicles on their terms, a key differentiator in the highly fragmented used car market. The company's commitment to innovation is evident in its continuous deployment of advanced technology. Skye, CarMax's AI-powered virtual assistant, has delivered significant year-over-year improvements, with its containment rate, Customer Experience Center (CEC) consultant productivity, and phone and web response rate SLAs all improving by double digits. The recent full rollout of Skye 2.0, leveraging agentic AI, is expected to drive even greater efficiency and experience enhancements. These technological advancements contribute directly to CarMax's competitive moat, fostering customer satisfaction and operational excellence.

In the broader industry, the used car market remains dynamic. According to Cox Automotive research, the majority of customers shopping for used cars intend to transact via an omnichannel experience, a trend CarMax is uniquely positioned to capitalize on. While CarMax's nationwide share of age 0-10 year-old used vehicles was 3.7% in calendar 2024, consistent with 2023, the company expects to gain market share in calendar 2025. This ambition is set against a backdrop of evolving consumer preferences, with increased sales of older, higher-mileage vehicles partially offsetting pressured performance in the 0-5 year inventory segment during the second quarter of fiscal 2026.

The Omni-Channel Advantage: A Differentiated Customer Experience

CarMax's omnichannel platform is a core competitive advantage, providing a unique blend of digital convenience and physical presence. This integration allows customers to progress seamlessly through their shopping journey, whether online, in-store, or a combination of both. The company's Net Promoter Score (NPS) has reached its highest point since the nationwide rollout of its digital capabilities, driven by record-high satisfaction among customers purchasing online and those utilizing the omnichannel experience. This indicates that CarMax's customer-centric approach is resonating strongly with consumers.

Technological innovation, particularly in AI, is central to enhancing this experience and driving efficiency. Skye, the AI-powered virtual assistant, exemplifies this, demonstrating double-digit percentage improvements in key performance metrics. The recent launch of Skye 2.0, which leverages agentic AI, is anticipated to further boost efficiency and improve customer interactions. Beyond virtual assistance, CarMax has introduced customer shopping accounts, making it easier for customers to track their progress and empowering associates with seamless access to customer records. The company also provides helpful online tools, such as vehicle-specific battery health information for EVs and filters for tax credit-eligible vehicles, catering to evolving market demands. These technological differentiators not only improve the customer journey but also contribute to operational efficiencies, ultimately supporting CarMax's financial performance by driving conversion and reducing operational costs.

CarMax Auto Finance: Expanding the Credit Frontier

CarMax Auto Finance (CAF) is a vital component of CarMax's diversified business model, providing financing exclusively to retail customers. CAF's strategic objective is to expand its participation across the credit spectrum, aiming to grow penetration and capture profitable returns. For the six months ended August 31, 2025, CAF income stood at $244.3 million, a 7% decrease year-over-year, primarily due to an increased provision for loan losses, partially offset by an improved interest margin. The total interest margin for the period increased to $578.5 million from $541 million in the prior year.

A significant development in CAF's strategy is the programmatic sale of financial interests in non-prime securitizations. In September 2025, CarMax executed a non-prime securitization transaction, selling approximately $930 million of auto loans off its balance sheet. This upsized $900 million 25-B transaction, which included the sale of most of the residual financial interest to third-party investors, is expected to generate a gain on sale of approximately $25 million to $30 million in Q3 FY26 income. Additionally, it is projected to yield $40 million to $45 million in additional CAF income over the life of the transaction from servicing fees and retained beneficial interest. This initiative provides significant funding flexibility, mitigates risk, and supports CAF's growth plan, allowing CarMax to efficiently fund non-prime receivables while retaining economic value.

The provision for loan losses has been a notable factor, increasing to $243.9 million for the six months ended August 31, 2025, from $193.8 million in the prior year period. The allowance for loan losses as a percentage of total auto loans held for investment rose to 3.02% as of August 31, 2025, from 2.82% a year prior. This increase was primarily driven by unfavorable loan loss performance within loans originated in 2022 and 2023, where customers faced challenges from elevated average selling prices and the inflationary environment. Despite these adjustments, management notes that these vintages remain highly profitable, with an estimated lifetime profit of $1,500 per unit compared to $1,800 contemplated at origination. For Q3 FY26, the provision for loan losses is expected to be less than $100 million, with future true-ups anticipated to be minimal. CarMax expects CAF income to be flat to slightly down year-over-year for fiscal 2026.

Operational Excellence: Driving Efficiency and Affordability

CarMax is intensely focused on driving operational efficiencies to enhance profitability and support vehicle affordability. The company has made substantial progress in reducing its cost of goods sold (COGS) through improvements in its logistics network and reconditioning operations. These efforts yielded approximately $125 per unit in savings in fiscal year 2025, and CarMax anticipates achieving at least another $125 per unit in fiscal year 2026, surpassing its initial $200 target. These efficiencies are crucial for offsetting inflationary pressures and maintaining competitive pricing for customers.

Beyond COGS, CarMax is committed to significant reductions in selling, general, and administrative (SG&A) expenses. The company has identified a clear path to at least $150 million in incremental SG&A reductions over the next 18 months, with the majority expected to materialize by the end of fiscal year 2027. These reductions are broad-based, targeting areas such as modernizing and consolidating technology infrastructure, automating manual processes, renegotiating third-party contracts, and eliminating organizational redundancies. These initiatives are designed to strengthen CarMax's cost profile without compromising its growth strategy, providing flexibility to reinvest in sales-driving areas like marketing. CarMax also aims to achieve omni cost neutrality for the full year of fiscal 2026, expecting omnichannel costs per used unit, per total unit, and as a percentage of gross profit to be more efficient than before the omnichannel rollout.

Competitive Positioning: A Unique Model in a Fragmented Market

CarMax operates in a highly competitive and fragmented used car market, where its unique business model provides distinct advantages. Compared to diversified automotive retailers like AutoNation , which sells both new and used vehicles, CarMax's exclusive focus on used cars allows it to specialize in value pricing and volume sales. CarMax's no-haggle pricing model and emphasis on quality assurance foster customer trust, potentially leading to stronger customer loyalty and better gross margins in the used vehicle segment. While AutoNation (AN) benefits from a broader scale and diversification, CarMax's streamlined processes in used car operations may offer greater efficiency in inventory management and credit risk.

Against online-only competitors such as Carvana , CarMax's integrated omnichannel experience, combining digital convenience with a physical store network, offers a crucial differentiator. While Carvana excels in the speed of fully digital transactions, CarMax's in-store expertise and comprehensive reconditioning services address customer concerns about vehicle condition, leading to better customer retention. CarMax's established financing operations, particularly its CAF segment, provide a more stable and efficient cash flow generation compared to Carvana's (CVNA) high-growth, often capital-intensive, online model.

CarMax also differentiates itself from traditional dealership groups like Sonic Automotive (SAH) and Group 1 Automotive (GPI), which often focus on premium or luxury new and used vehicles. CarMax's accessible, no-pressure sales environment appeals to a broader customer base. Its ability to source a wide variety of vehicles directly from consumers and dealers through platforms like MaxOffer, which saw a 114% increase in dealer-sourced vehicles in Q4 FY25, enhances its inventory advantage. MaxOffer's enhancements, including easier usage and integration into dealer inventory management systems, continue to attract more dealers, expanding CarMax's access to directly sourced vehicles.

The entry of Amazon (AMZN) into the auto space, focusing on listings and lead generation, is viewed by CarMax as more of a facilitator than a direct competitor. CarMax sees potential for collaboration, leveraging such platforms to complement its existing traffic and reach. This strategic perspective underscores CarMax's adaptability and willingness to engage with new market dynamics while relying on its established competitive moats.

Financial Performance and Outlook: A Path to High-Teen EPS Growth

CarMax's financial performance in the first half of fiscal 2026 reflects a mixed but strategically responsive period. For the three months ended August 31, 2025, net sales and operating revenues were $6.59 billion, a 6% decrease from the prior year, primarily due to lower volume. Net earnings for the quarter were $95.38 million, down 28.2% year-over-year, resulting in diluted net earnings per share of $0.64. This performance was impacted by a $1,000 depreciation in inventory values from May through June, following a ramp-up in anticipation of tariff speculation, which led CarMax to intentionally lower retail margins to drive sell-through. Used vehicle gross profit per unit was $2,216, similar to the prior year but down approximately $200 from the first quarter of fiscal 2026.

Despite these short-term pressures, CarMax's underlying operational improvements are evident. For the six months ended August 31, 2025, net sales and operating revenues were $14.14 billion, a slight increase of 0.1% year-over-year. Net earnings for the six-month period were $305.76 million, up 7.2% year-over-year, with diluted net earnings per share of $2.02. Other gross profit, which includes EPP and service revenues, increased by 13.2% for the six-month period, driven by improved service department margins and favorable EPP reserve adjustments. Service recorded a $4 million margin in Q2 FY26, a small improvement over the prior year.

Looking ahead, CarMax's earnings model is designed to deliver an earnings per share compound annual growth rate (CAGR) in the high teens when used unit growth is in the mid-single digits. This growth is expected to be driven by used and wholesale unit growth, strength in other gross profit, CAF's credit spectrum expansion, continued operational efficiencies, ongoing SG&A leverage, and the share repurchase program.

Capital expenditures are estimated at approximately $575 million in fiscal 2026, primarily for long-term growth capacity in offsite reconditioning and auction facilities, as well as six new store locations and four stand-alone reconditioning and auction centers. While long-term unit and revenue goals have had their timeframes removed due to broader macroeconomic uncertainties, CarMax remains focused on driving sales and robust EPS growth.

Key Risks and Strategic Responses

CarMax faces several pertinent risks that could impact its investment thesis. The primary concern revolves around loan loss performance, particularly within the 2022 and 2023 loan vintages, where customers who purchased vehicles at elevated average selling prices are now challenged by the inflationary environment. This led to a significant adjustment in the provision for loan losses in Q2 FY26. CarMax is responding by tightening underwriting standards for newer originations and adjusting extension policies to help delinquent customers, which has shown encouraging early results.

Macroeconomic conditions, including inflationary pressures and fluctuating interest rates, pose ongoing challenges. Consumer strain, especially among mid to high FICO customers, is evident in reduced application volumes. Potential new car tariffs could also impact parts costs for reconditioning, requiring CarMax to rely on its COGS efficiency initiatives to mitigate these effects. Furthermore, risks associated with non-recourse funding vehicles, such as counterparties refusing loan repurchases or non-compliance with covenants, could affect CAF's funding program. CarMax mitigates these by maintaining strong compliance and exploring additional off-balance sheet funding levers. The company's strategic initiatives, including aggressive cost management, diversified sourcing, and flexible pricing strategies, are designed to enhance its resilience in this fluid environment.

Conclusion

CarMax stands at a pivotal juncture, leveraging its foundational strengths and strategic initiatives to navigate a dynamic used car market. The company's differentiated omnichannel experience, underpinned by advanced AI technologies like Skye, provides a robust competitive moat, fostering customer loyalty and operational efficiency. Despite recent challenges in retail sales and loan loss provisions, CarMax's proactive measures in cost reduction, including significant SG&A and COGS savings, are poised to strengthen its financial profile.

The strategic expansion of CarMax Auto Finance into the full credit spectrum, supported by innovative non-prime securitization programs, is a key driver for future profitability and market share gains. While macroeconomic uncertainties persist, CarMax's disciplined capital allocation, including accelerated share repurchases, underscores management's confidence in its long-term earnings model. With a clear focus on driving sales, enhancing customer experience, and optimizing operational performance, CarMax is well-positioned to deliver high-teen EPS growth and unlock sustained value for discerning investors.