Executive Summary / Key Takeaways

• CarMax is leveraging its differentiated omni-channel model, combining physical stores with advanced digital capabilities, to drive conversion and gain market share in the fragmented used car market.
• Operational efficiency initiatives, particularly in logistics and vehicle reconditioning, are yielding significant cost savings, supporting both affordability for customers and margin expansion.
• CarMax Auto Finance (CAF) is strategically expanding its participation across the full credit spectrum, supported by a bifurcated securitization program and new funding approaches, positioning it for future income growth despite near-term provisioning impacts.
• Recent financial performance shows positive retail unit sales momentum, robust gross profit margins across segments, and strong SG&A leverage, reflecting effective execution in a dynamic environment.
• While macroeconomic factors introduce uncertainty, management's outlook points to continued sales growth, market share gains, and a model designed to deliver double-digit EPS growth, supported by strategic investments and capital allocation priorities like share repurchases.

Setting the Scene: CarMax's Differentiated Foundation in a Fragmented Market

CarMax, Inc. stands as the nation's largest retailer of used vehicles, a position it has built since its inception in 1993 and subsequent spin-off from Circuit City in 2002. From the outset, CarMax disrupted the traditional auto retail model by introducing competitive, no-haggle pricing and offering to buy any customer's vehicle, regardless of whether they purchased one. This foundational commitment to transparency and customer-friendly processes remains central to its strategy today.

Operating across two primary segments – CarMax Sales Operations and CarMax Auto Finance (CAF) – the company has evolved its business model significantly. While its physical footprint has grown to 250 stores across 109 U.S. markets as of February 28, 2025, a key strategic pivot has been the development of a sophisticated omni-channel platform. This platform seamlessly integrates the in-store experience with online and mobile capabilities, empowering customers to transact on their terms – whether entirely online, in a store, or through a blend of both. This integrated approach, leveraging CarMax's extensive physical network, associates, and technology, is viewed by management as a critical differentiator in the highly fragmented U.S. used car marketplace.

The competitive landscape is diverse, encompassing franchised new car dealers (who dominate late-model used vehicle sales and offer certified pre-owned programs), independent used car dealers, online-only platforms like Carvana (CVNA), and even private party sales. While CarMax holds a leading position, capturing an estimated 3.7% of the 0-10 year old used vehicle market in calendar 2024 (consistent with 2023), competition is intensifying, particularly with the rise of digital-first models and the increasing use of online tools for buying and selling. CarMax's ability to source a significant portion of its inventory directly from consumers through its appraisal process (in-store and online instant offers) and from dealers via MaxOffer provides a competitive advantage in acquiring vehicles, which is crucial in a market where supply can be constrained.

Technological Differentiation and Operational Excellence

At the heart of CarMax's strategic evolution and competitive positioning is its deep investment in technology, data science, and artificial intelligence (AI). The company leverages a combination of proprietary systems and cloud-based solutions to automate and optimize nearly every aspect of its operations, from vehicle acquisition and reconditioning to merchandising, sales, financing, and customer service.

Key technological differentiators include:

• Proprietary Inventory Management and Pricing System: This system tracks each vehicle and uses algorithms based on sales history, consumer interest, and seasonal patterns to generate recommended retail prices and markdowns. This systematic approach aims to optimize inventory turns, mitigate depreciation risk, and achieve targeted gross profit per unit. The effectiveness is underscored by the fact that generally 99% of CarMax's retail used car inventory is sold at retail.
• Digital Appraisal Tools (Online Instant Offer, MaxOffer): These tools provide quick, guaranteed offers to consumers and dealers, significantly driving vehicle purchases. The buy rate for customers engaging after receiving an online instant appraisal offer is typically higher than through traditional methods, demonstrating the effectiveness of this digital channel. MaxOffer has seen substantial growth, with active dealers increasing approximately 47% in fiscal 2025, contributing to a 114.2% increase in vehicles purchased from dealers in Q4 FY25.
• Omni-Channel Enablement Technologies: Recent rollouts like the new order processing system (completed Q2 FY25) and customer shopping accounts (completed Q3 FY25) create a seamless experience across channels for both customers and associates. These tools guide customers through their journey and provide associates with real-time, integrated information, regardless of where the interaction began.
• AI and Data Science in Customer Experience and Operations: CarMax is deploying AI to enhance efficiency and service. Skye, the AI-powered virtual assistant, realized a 30% improvement in containment rate year-over-year in Q1 FY26. A new knowledge management system leveraging generative AI is being tested in Customer Experience Centers (CECs) to provide associates with instant, state-specific information, aiming to improve CEC effectiveness and efficiency (CEC productivity improved 24% in Q1 FY26). Data science algorithms are also being used in a new transportation management process to optimize logistics planning and execution.
• Finance Technology: The finance-based shopping experience, enhanced to incorporate instant appraisal offers into prequalification, provides customers with more precise credit terms upfront. CAF's proprietary scoring models are optimized for the CarMax channel, leveraging historical data to predict repayment likelihood. New full-spectrum credit scoring models are being tested to support CAF's expansion strategy.

The "so what" for investors is clear: these technological investments are not merely features but foundational elements driving operational efficiency, enhancing the customer experience, and strengthening CarMax's competitive moat. The focus on efficiency, particularly in logistics and reconditioning, has yielded tangible results, with approximately $125 per unit in COGS savings achieved in fiscal 2025 and a target of at least another $125 per unit in fiscal 2026, exceeding the initial $200 target. These savings support competitive pricing and contribute to gross profit margins. The digital tools enhance sourcing capabilities and drive conversion, while AI applications improve labor productivity and customer service, contributing to SG&A leverage.

Financial Performance and Operational Execution

CarMax's financial performance in fiscal year 2025 reflected a business gaining momentum after navigating a challenging period. Total net sales and operating revenues were $26.35 billion, a slight decrease of 0.7% from fiscal 2024, primarily due to lower average selling prices offsetting unit volume growth. Used vehicle sales increased 0.8% to $21.08 billion, driven by a 3.1% rise in used unit sales to 789,050, partially offset by a 2.8% decrease in average retail selling price. Wholesale vehicle sales decreased 7.8% to $4.59 billion, mainly due to a 7.9% drop in average selling price, despite a modest 0.4% decrease in unit sales to 544,312. Other sales and revenues saw a healthy 7.6% increase to $686.3 million, largely fueled by a 12.4% increase in EPP revenues.

Gross profit demonstrated stronger performance, increasing 6.8% to $2.90 billion in fiscal 2025. Used vehicle gross profit rose 4.1% to $1.82 billion, with the per-unit margin holding steady at $2,311. Wholesale vehicle gross profit was largely flat at $557.6 million, with the per-unit margin at $1,024. Other gross profit surged 27.9% to $517.1 million, significantly boosted by a $70.7 million improvement in service department margins and the increase in EPP revenues. The improvement in service margins was attributed to cost coverage measures, increased efficiencies, and higher sales volume.

Selling, general, and administrative (SGA) expenses increased 6.5% to $2.44 billion in fiscal 2025. However, SGA leveraged by 30 basis points as a percentage of gross profit. Excluding a legal settlement benefit in the prior year, SGA leveraged by a more significant 270 basis points, highlighting the impact of gross profit growth and ongoing expense efficiency actions.

CarMax Auto Finance (CAF) income increased 2.4% to $581.7 million in fiscal 2025. This was driven by an increase in the net interest margin percentage (6.2% vs. 6.0% in FY24) and higher average managed receivables ($17.68 billion vs. $17.31 billion in FY24), partially offset by an increase in the provision for loan losses. The provision for loan losses rose to $334.7 million (1.9% of average managed receivables) from $310.5 million (1.8%) in FY24, primarily due to unfavorable loss performance on loans originated in 2022 and 2023 and higher losses in a segment of lower-Tier 1 customers. The allowance for loan losses as a percentage of ending managed receivables decreased to 2.61% from 2.78%, reflecting the impact of previously implemented tightened underwriting standards, partially offset by the observed loss performance and expanded investment in Tier 2.

Recent quarterly results further underscore the positive trajectory. Q1 FY26 saw net earnings per diluted share jump 42% year-over-year, total sales up 6%, retail unit sales up 9%, and used unit comps up 8.1%. Total gross profit increased 13%, with retail GPU hitting an all-time record of $2,407. Other gross profit grew 31%, driven by EPP and a substantial $30 million improvement in service margin. SG&A leveraged by 180 basis points to 74% of gross profit. While CAF income was down slightly in Q1 FY26 ($142M vs. $159M in Q4 FY25), NIM increased to 6.5%. The Q1 FY26 provision ($102M) was impacted by seasonality, loss performance on older vintages, and strategic actions like reclassifying a non-prime loan pool as held-for-sale.

Liquidity remains supported by operations, non-recourse funding vehicles ($17.12 billion non-recourse notes payable outstanding as of Feb 28, 2025, primarily funded via securitization), and the revolving credit facility ($2 billion unused capacity as of Feb 28, 2025). Capital allocation priorities include investing in the core business (digital, capacity expansion), CAF expansion, new growth opportunities, and returning capital. Share repurchases totaled $428.5 million in FY25, with $1.94 billion remaining authorized. The pace of repurchases accelerated in Q1 FY26 ($200 million spent).

Strategic Initiatives and Future Outlook

CarMax's strategic focus is firmly on leveraging its built capabilities to drive future growth and profitability. Key initiatives include:

• CAF Full Credit Spectrum Expansion: CAF is actively testing new underwriting models and strategies across all credit tiers (Tier 1, 2, and 3). This is supported by the bifurcation of its securitization program into distinct higher prime and non-prime issuances, providing additional funding capacity. A measured expansion began in March 2025 by recapturing profitable Tier 1 originations previously shifted to Tier 2 lenders, targeting 100-150 basis points of penetration growth near-term. Management anticipates capturing additional volume across Tier 2 and Tier 3 in the second half of fiscal 2026. The plan includes executing programmatic off-balance sheet sales of financial interest in non-prime securitizations periodically (e.g., once a year) as a tool to mitigate risk and accelerate penetration. Despite anticipated increases in the provision for loan losses in Q1 FY26 (estimated 45-50% increase vs. Q4 FY25 provision due to seasonality and Tier 1 recapture), management expects CAF income to increase in fiscal 2026.
• Operational Efficiency: The drive for efficiency continues, with a target of achieving at least another $125 per unit in COGS savings in fiscal 2026 from logistics and reconditioning initiatives. This builds on the $125 per unit saved in FY25. The goal is to achieve full-year omni cost neutrality in fiscal 2026 for the first time, with omni-channel costs per unit and as a percentage of gross profit expected to be more efficient than pre-omni levels.
• Physical Footprint and Capacity Expansion: CarMax plans to open six new stores and four standalone reconditioning/auction centers in fiscal 2026, supported by estimated capital expenditures of $575 million. These investments in offsite facilities are aimed at balancing capacity and driving network efficiencies.
• Enhanced Customer Experience and Technology: Continued investment in digital tools (streamlining online appraisal checkout, expanding appraisal pickup) and AI applications (expanding Skye functionality, new marketing campaign highlighting omni-channel) are planned for FY26 to further drive conversion and efficiency.
• EPP and Service Growth: EPP product enhancements are being tested with the goal of increasing penetration and per-unit margins, expected to contribute modestly in FY26 and potentially more in FY27. Service margin is expected to grow year-over-year in FY26, predominantly in the first half, contributing slightly positive profit for the full year and continuing as a slight profit lever beyond FY26.

Management has positioned the company to achieve ongoing growth in retail and wholesale unit sales and market share, with a long-term earnings model designed to deliver an EPS CAGR in the high teens when used unit growth is in the mid-single digits. This growth is expected to be fueled by unit growth, strength in other gross profit, CAF expansion, continued efficiencies, SGA leverage, and share repurchases. While the timeframes for long-term goals have been removed due to macroeconomic uncertainty, the focus on driving sales and gaining market share remains. Q1 FY26 comparable store used unit sales were trending in the high single-digits through early April, indicating positive momentum.

Competitive Dynamics and Risk Assessment

CarMax operates in a fiercely competitive environment. Its primary competitors, including large franchised dealer groups like AutoNation (AN), Lithia Motors (LAD), and Group 1 Automotive (GPI), as well as online-focused players like Carvana (CVNA), constantly vie for market share. While CarMax's omni-channel model offers a unique blend of physical and digital capabilities, competitors are also investing in online tools and expanding their reach. Carvana (CVNA), with its purely digital model, emphasizes speed and convenience, potentially appealing to a segment of buyers seeking minimal human interaction. However, Carvana (CVNA) has faced profitability and operational challenges. Traditional dealers leverage their new car franchises and certified pre-owned programs, while independent dealers and private sellers contribute to market fragmentation.

CarMax's competitive advantages lie in its established brand reputation for transparency and customer service, its scale as the largest used car retailer, its diversified sourcing network (particularly direct consumer and dealer buys), its integrated retail and finance model (CAF), and its evolving omni-channel platform supported by proprietary technology and data science. The ability to offer competitive financing through CAF and a network of third-party lenders across a wide credit spectrum is a key strength.

However, significant risks and challenges persist. The business is highly sensitive to macroeconomic conditions, including interest rates, inflation, unemployment, and consumer sentiment, which directly impact demand, affordability, and credit availability. Volatility in vehicle prices can affect margins and inventory values. Credit risk within the CAF portfolio is a material concern; while management believes its allowance for loan losses is adequate and has tightened underwriting standards, unfavorable loss performance (as seen in FY25 and Q2 FY25) can necessitate increased provisions, impacting profitability. The expansion into the full credit spectrum, while offering growth potential, also introduces exposure to higher-risk loans. Funding risk for CAF, particularly reliance on the asset-backed securitization market, is a key vulnerability.

Operational risks include the ability to effectively manage growth, maintain inventory levels and quality, control costs (especially reconditioning and logistics, despite efficiency efforts), and attract/retain skilled associates. Technology and cybersecurity risks are increasingly important, given the reliance on sophisticated systems and the collection of sensitive data. Failure to protect data or disruptions to systems could damage reputation and operations. Regulatory risks, including compliance with consumer protection, finance, and privacy laws, are also significant. Competition for vehicle sourcing and sales, particularly from digitally advanced players, requires continuous adaptation and investment.

Conclusion

CarMax's investment thesis is centered on its position as the market leader in used car retail, underpinned by a robust and increasingly differentiated omni-channel business model. The company has successfully navigated recent macroeconomic and credit headwinds by focusing on operational execution, driving efficiencies in areas like logistics and reconditioning, and strategically enhancing its customer experience through technology and AI. The planned expansion of CarMax Auto Finance across the full credit spectrum, supported by innovative funding strategies, represents a significant avenue for future income growth, although it introduces near-term provisioning volatility.

While the broader economic environment and competitive pressures, particularly from digital-first rivals, remain key factors to monitor, CarMax's strengths in brand, scale, diversified sourcing, and integrated finance capabilities provide a solid foundation. Management's outlook for continued sales growth, market share gains, and double-digit EPS growth, supported by ongoing efficiency gains and strategic investments, suggests a positive trajectory. For investors, the story is one of a market leader leveraging its unique assets and adapting its strategy to capture growth opportunities in a dynamic industry, balancing investment for the future with disciplined financial management and capital returns. The execution of its CAF expansion and the realization of targeted operational efficiencies will be critical indicators to watch in the coming quarters.