Executive Summary / Key Takeaways

• CarMax demonstrated robust execution in Q1 FY26, delivering a 9.0% increase in retail used unit sales and an 8.1% rise in comparable store sales, alongside a record $2,407 retail gross profit per unit, signaling operational strength and effective inventory management.
• Strategic deployment of technology, particularly AI, is yielding tangible efficiency gains, including a 30% improvement in Skye's containment rate and a 24% increase in CEC consultant productivity, contributing to SG&A leverage and enhancing the omni-channel customer experience.
• The CarMax Auto Finance (CAF) segment is strategically expanding into the full credit spectrum, supported by new securitization capabilities and a near-term goal to increase penetration by 100-150 basis points, positioning CAF for future income growth despite current pressures from loan loss provisions on older vintages.
• Management's earnings model targets a high-teen EPS CAGR with mid-single-digit used unit growth, underpinned by expected continued gross profit expansion, operational efficiencies (targeting an additional $125/unit COGS savings in FY26), SG&A leverage (aiming for omni cost neutrality in FY26), and ongoing share repurchases.
• While facing macroeconomic risks like potential tariff impacts and elevated loan losses on specific prior vintages, CarMax's diversified business model, integrated omni-channel platform, and focus on efficiency and strategic finance growth provide a differentiated competitive position and runway for long-term earnings expansion.

The Omni-Channel Engine Accelerates

CarMax, Inc. stands as the nation's largest retailer of used vehicles, a position built over more than 30 years through a commitment to transparent, no-haggle pricing and a customer-centric sales process. Operating in the vast and fragmented used car market, CarMax has strategically evolved from a brick-and-mortar pioneer to a leader in integrated retail, seamlessly blending physical stores with robust digital capabilities. This omni-channel transformation is central to its competitive positioning, offering customers the flexibility to transact online, in-store, or through a combination of both, a preference increasingly favored by consumers.

The competitive landscape is dynamic, featuring online-only players like Carvana (CVNA) emphasizing speed and digital convenience, and traditional dealership groups such as AutoNation (AN) and Group 1 Automotive (GPI) with diversified new and used vehicle sales and service operations. While online competitors may offer faster processing speeds in certain digital workflows, CarMax differentiates itself through its unique blend of a nationwide physical footprint (250 stores as of Q1 FY26), a standardized, high-quality reconditioning process, and its powerful in-house financing arm, CarMax Auto Finance (CAF). This integrated model provides a competitive moat, fostering higher customer loyalty and enabling a diversified revenue stream that includes retail and wholesale vehicle sales, financing, extended protection plans (EPP), and service.

Underpinning this strategy is a significant investment in technology and data science. CarMax has strategically deployed AI and advanced analytics across its operations to enhance both the customer and associate experience and drive efficiency. Tools like the AI-powered virtual assistant, Skye, are improving customer self-service, evidenced by a 30% improvement in containment rate. Within customer experience centers (CECs), AI-driven knowledge management systems are boosting associate productivity by 24% and improving phone and web response rates by double digits. On the operational side, data science algorithms are being leveraged in transportation management to optimize logistics, contributing to cost reduction efforts. These technological advancements are not merely features; they are integral to reducing operational friction, improving conversion rates across channels, and driving tangible cost savings, directly supporting the company's profitability and competitive edge.

Performance Reflecting Strategic Execution

CarMax's first quarter fiscal year 2026 results underscore the impact of its strategic focus and operational execution. Net sales and operating revenues increased 6.1% year-over-year to $7.55 billion, driven by a strong 9.0% increase in total used unit sales and an 8.1% rise in comparable store used unit sales. This volume growth was partially offset by a 1.5% decrease in the average retail selling price, reflecting shifts in vehicle age mix. Wholesale vehicle revenues saw a slight 0.3% decrease, as a 1.2% increase in units was more than offset by a 1.7% decline in average selling price.

Gross profit outpaced revenue growth, increasing 12.8% to $893.6 million. This was fueled by higher unit volumes and robust per-unit margins. Retail gross profit per used unit reached an all-time record of $2,407, up 2.6% from the prior year, a testament to effective pricing strategies and operational efficiencies in reconditioning and logistics. Wholesale gross profit per unit remained historically strong at $1,047, despite a slight year-over-year decrease. Other gross profit saw significant growth, increasing 31.3% to $182.8 million, primarily driven by improvements in service department margins and higher EPP revenues. The increase in service margins reflects implemented cost coverage measures, higher sales volume, and efficiency gains.

Selling, general, and administrative (SG&A) expenses increased 3.3% to $659.6 million, largely due to costs associated with higher unit volume. However, SG&A leveraged significantly as a percentage of gross profit, improving by 680 basis points to 73.8%, demonstrating the impact of ongoing cost management efforts and the scalability of the business model as gross profit expands.

The CarMax Auto Finance (CAF) segment, a critical component of CarMax's integrated offering, saw income decrease by 3.6% to $141.7 million. This was primarily due to a 25.2% increase in the provision for loan losses, which rose to $101.7 million. The higher provision was mainly attributed to unfavorable loss performance within loans originated in 2022 and 2023 vintages, periods characterized by elevated average selling prices and subsequent consumer challenges in an inflationary environment. This impact was partially offset by an increase in the total interest margin, which expanded to 6.5% of average auto loans outstanding (up from 6.2%), driven by higher customer rates. CAF's net penetration rate (after 3-day payoffs) decreased slightly to 41.8% from 43.3% in the prior year, influenced by factors including an influx of self-funded higher credit purchasers and increased penetration from third-party Tier 3 finance providers.

Liquidity remains solid, with primary sources including funds from operations, non-recourse funding vehicles, and the revolving credit facility. Net cash provided by operating activities was $299.5 million in Q1 FY26, a significant improvement from cash used in the prior year, reflecting changes in inventory and auto loans. Capital expenditures totaled $136.7 million, primarily supporting growth initiatives like new stores and stand-alone reconditioning/auction centers. The company continues to return capital to shareholders, repurchasing $204.0 million of common stock in Q1 FY26, with $1.74 billion remaining under the current authorization.

Strategic Outlook and Growth Levers

CarMax's management is focused on leveraging its established omni-channel platform and operational efficiencies to drive future growth and profitability. The company's earnings model is designed to deliver a high-teen EPS compound annual growth rate (CAGR) when used unit growth is in the mid-single digits. This growth is expected to be driven by continued unit sales expansion, strength in other gross profit (including EPP and service), CAF credit spectrum expansion, ongoing operational efficiencies, SG&A leverage, and share repurchases.

Specific initiatives for fiscal 2026 include enhancing digital experiences through AI and data science, streamlining online appraisal and vehicle transfer processes, and expanding appraisal pick-up availability. On the supply side, efforts are focused on further enhancing MaxOffer to attract more dealers and increase directly sourced vehicles. Operational efficiencies in logistics and reconditioning are expected to yield an additional $125 per unit in COGS savings in FY26, building on the $125 per unit achieved in FY25.

A key strategic focus is the expansion of CAF's participation across the full credit spectrum. This is enabled by the successful execution of non-recourse funding vehicles, including the programmatic sale of financial interests in non-prime securitizations (planned once per year). Management anticipates this expansion will increase CAF penetration by 100 to 150 basis points in the near-term by recapturing profitable Tier 1 originations. Further volume capture across Tier 2 and Tier 3 is expected in the latter half of FY26, contingent on market conditions. Each additional percentage point of CAF penetration is projected to generate $10 million to $12 million in lifetime pre-tax income per year of origination. While this expansion will necessitate a higher provision for loan losses in the near term (Q1 FY26 provision is expected to be the high watermark), the long-term expectation is for this to be materially offset by future income.

Management is targeting SG&A as a percentage of gross profit in the mid-70s range annually over time, requiring low-single-digit gross profit growth to lever in FY26. A significant step towards this is the goal of achieving omni cost neutrality for the full year of FY26, with omni-channel costs expected to be more efficient than pre-omni levels across key metrics. Store expansion continues, with plans to open six new stores and two additional stand-alone reconditioning/auction facilities in the remainder of FY26, supported by estimated capital expenditures of $575 million for the year.

Risks and Considerations

Despite the positive momentum and clear strategic roadmap, CarMax faces several risks. The macroeconomic environment, including inflationary pressures, fluctuating interest rates, and potential impacts from tariffs (on vehicle demand and parts costs), could affect consumer demand, affordability, and operational costs. The performance of CAF's loan portfolio, particularly the elevated loss rates observed in 2022 and 2023 vintages, remains a key area to monitor, although management believes the current allowance adequately reflects expected future losses and 2024 vintages are performing in line with expectations.

Competition in the used vehicle market is intense, with both online and traditional players vying for market share. While CarMax's omni-channel model provides differentiation, the pace of digital innovation and competitive pricing strategies from rivals could pressure sales and margins. The availability and cost of capital, particularly within the asset-backed securitization market and warehouse facilities, are crucial for funding CAF's growth and overall liquidity. Compliance with financial covenants and performance triggers in debt agreements is essential. Furthermore, the ability to successfully execute strategic initiatives, including the full spectrum CAF expansion and operational efficiency programs, is critical to realizing the projected growth and profitability targets.

Conclusion

CarMax's first quarter fiscal year 2026 results demonstrate solid execution and the increasing effectiveness of its strategic pivot towards leveraging its integrated omni-channel model and technological investments. Record retail gross profit per unit, significant SG&A leverage, and continued unit volume growth highlight operational strength. The strategic expansion of the CAF segment, supported by new funding capabilities, positions the company for future income growth, complementing its core vehicle merchandising business. While macroeconomic headwinds and elevated loan losses on specific prior vintages present challenges, CarMax's diversified revenue streams, focus on efficiency, and differentiated customer experience provide a strong foundation. The company's clear outlook, targeting high-teen EPS growth driven by unit expansion, margin improvement, cost leverage, and strategic finance initiatives, suggests a compelling investment thesis centered on the continued acceleration of its earnings model in the years ahead.