10-Q: CarMax Q2 Earnings Dip Amid Sales Decline, Higher Loan Losses

CarMax reported a 28.2% drop in second-quarter net earnings and a 6.0% revenue decrease, driven by lower used vehicle sales and increased loan loss provisions, despite strategic initiatives.

Summary

• Net earnings for the second quarter ended August 31, 2025, decreased by 28.2% to $95.4 million, down from $132.8 million in the prior year.
• Diluted net earnings per share for the second quarter fell 24.7% to $0.64 from $0.85 in the prior year.
• Net sales and operating revenues for the second quarter decreased by 6.0% to $6.59 billion, compared to $7.01 billion in the same period last year.
• Used vehicle sales revenues declined by 7.2% in the second quarter, with used unit sales down 5.4% to 199,729 units.
• Comparable store used unit sales decreased by 6.3% in the second quarter.
• CarMax Auto Finance (CAF) income decreased by 11.2% to $102.6 million in the second quarter.
• The provision for loan losses increased to $142.2 million in the second quarter, up from $112.6 million in the prior year.
• For the six months ended August 31, 2025, net earnings increased by 7.2% to $305.8 million, and diluted EPS rose 11.0% to $2.02.
• Six-month net sales and operating revenues saw a slight increase of 0.1% to $14.14 billion, with used unit sales up 1.8% to 429,939 units.
• The allowance for loan losses as a percentage of auto loans held for investment increased to 3.02% as of August 31, 2025, from 2.61% at February 28, 2025.
• Executed a non-prime securitization transaction on September 24, 2025, for approximately $930 million of auto loans, expecting a gain on sale of $25 million to $30 million in Q3 fiscal 2026.

Sentiment

Score: 4

Explanation: The second quarter saw significant declines in key financial metrics, including net earnings, sales, and used unit sales, coupled with increased loan loss provisions. While the six-month results show some growth, the immediate quarter's performance and rising credit losses are concerning. Strategic initiatives and future cost savings are positive, but their impact is yet to be fully realized.

Positives

• Six-month net earnings increased by 7.2% to $305.8 million, and diluted EPS rose 11.0% to $2.02.
• Six-month net sales and operating revenues saw a slight increase of 0.1% to $14.14 billion.
• Used unit sales for the six months increased by 1.8% to 429,939 units, with comparable store used unit sales up 0.9%.
• SG&A leveraged by 230 basis points for the first six months of fiscal 2026, driven by gross profit growth and cost management.
• Wholesale vehicle gross profit per unit increased by 1.8% to $993 in the second quarter.
• CAF net penetration rate increased by 60 basis points to 42.6% in the second quarter.
• Successfully completed a non-prime securitization transaction of approximately $930 million in auto loans, expected to generate a gain on sale of $25 million to $30 million in Q3 FY26 and $40 million to $45 million in additional CAF income over the life of the transaction.
• Skye AI continued to deliver year-over-year improvements in containment rate, CEC consultant productivity, and phone/web response rates.
• New "Wanna Drive" brand positioning campaign launched to emphasize omni-channel experience.
• Anticipate achieving another $125 per unit in cost of sales savings in fiscal 2026, following $125 per unit in fiscal 2025.

Negatives

• Net earnings for the second quarter decreased by 28.2% to $95.4 million.
• Diluted net earnings per share for the second quarter fell 24.7% to $0.64.
• Net sales and operating revenues for the second quarter decreased by 6.0% to $6.59 billion.
• Used vehicle sales revenues declined by 7.2% in the second quarter, with used unit sales down 5.4%.
• Comparable store used unit sales decreased by 6.3% in the second quarter.
• Used vehicle gross profit decreased 7.6% in the second quarter, with gross profit per unit down $53 to $2,216.
• CarMax Auto Finance (CAF) income decreased by 11.2% to $102.6 million in the second quarter and 7.0% to $244.3 million for the six months.
• The provision for loan losses increased to $142.2 million in the second quarter and $243.9 million for the six months, primarily due to unfavorable loss performance in loans originated in 2022 and 2023.
• SG&A deleveraged by 350 basis points in the second quarter, reaching 83.8% of gross profit.
• Allowance for loan losses as a percentage of auto loans held for investment increased to 3.02% as of August 31, 2025, from 2.61% at February 28, 2025.
• Net credit losses increased to $109.1 million in the second quarter and $195.3 million for the six months.
• Past due accounts as a percentage of ending auto loans held for investment increased to 5.63% as of August 31, 2025.
• Inventory depreciation of approximately $1,000 across inventory during the back half of May and through June negatively impacted price competitiveness and sales in the second quarter.

Risks

• Changes in the competitive landscape and inability to successfully adjust to such changes.
• Changes in general or regional U.S. economic conditions, including economic downturns, inflationary pressures, fluctuating interest rates, tariffs, or the effect of trade policies and international events.
• Changes in the availability or cost of capital and working capital financing, including changes related to the asset-backed securitization market.
• Events that damage reputation or harm the perception of brand quality.
• Significant changes in prices of new and used vehicles.
• A reduction in the availability of or access to sources of inventory or a failure to expeditiously liquidate inventory.
• Inability to realize the benefits associated with the omni-channel platform or initiatives designed to leverage evolving technologies, including AI.
• Factors related to geographic and sales growth, including the inability to effectively manage growth.
• Inability to recruit, develop, and retain associates and maintain positive associate relations, or a significant increase in labor costs.
• Changes in economic conditions or other factors that result in greater credit losses for CAF's portfolio of auto loans than anticipated.
• The failure or inability to realize the benefits associated with strategic investments.
• Changes in consumer credit availability provided by third-party finance providers.
• Changes in the availability of extended protection plan products from third-party providers.
• The performance of third-party vendors relied on for key business components.
• Adverse conditions affecting one or more automotive manufacturers.
• Inaccuracy of estimates and assumptions used in financial statements, or the effect of new accounting requirements or changes to U.S. GAAP.
• Failure or inability to adequately protect intellectual property.
• The occurrence of severe weather events.
• Failure or inability to meet environmental goals or satisfy related disclosure requirements.
• Factors related to the geographic concentration of stores.
• Security breaches or other events resulting in misappropriation, loss, or unauthorized disclosure of confidential information.
• Failure of or inability to sufficiently enhance key information systems.
• Factors related to the regulatory and legislative environment.
• The effect of evolving regulations, disclosure requirements, standards, and expectations relating to environmental, social, and governance matters.
• The effect of various litigation matters.
• The volatility in the market price for common stock.
• Warehouse facility counterparties refusing repurchases, charging higher interest rates, or replacing CarMax as servicer.

Future Outlook

CarMax expects online and omni sales to grow, aiming to provide a seamless customer experience. The company anticipates driving sales, gaining market share, and delivering significant year-over-year earnings growth, targeting a high-teens EPS compound annual growth rate with mid-single-digit used unit growth. Strategic initiatives for fiscal 2026 include leveraging data science and AI for digital experiences, improving online vehicle transfers, expanding the Skye AI virtual assistant, and launching the "Wanna Drive" brand campaign. Supply chain efforts will focus on streamlining online appraisals and enhancing MaxOffer. CarMax Auto Finance (CAF) plans to expand its participation across the credit spectrum, aiming for 100 to 200 basis points of penetration growth in the near term, with an initial goal of increasing CAF penetration to 50%. Each additional percentage point of CAF penetration is expected to generate $10 million to $12 million in lifetime pre-tax income per year of origination. The company also plans to drive down cost of sales, targeting another $125 per unit in savings in fiscal 2026, and accelerate SG&A expense reductions by at least $150 million over the next 18 months, with most savings realized by the end of fiscal 2027. For fiscal 2026, CAF income is expected to be down slightly year-over-year, and the provision for loan losses in the third quarter is expected to be less than $100 million. Used and wholesale vehicle gross profit per unit for the third quarter are expected to be consistent with historical averages but down from the prior year's record highs.

Management Comments

• "We believe our diversified business model, combined with our exceptional associates, stores, technology and digital capabilities seamlessly tied together, is a key differentiator in a very large and fragmented market that positions us to continue to drive sales, gain market share and deliver significant year-over-year earnings growth for years to come."
• "Our net promoter score is the highest it has been since we rolled out our digital capabilities nationwide, driven by record-high satisfaction among customers purchasing online as well as those using our omni-channel experience."
• "We believe there are significant opportunities to continue expanding AI applications across our business to drive both top-line growth and operational excellence."
• "Our 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."

Industry Context

The used car industry is characterized as a "very large and fragmented market." CarMax's omni-channel strategy aligns with broader industry trends, as Cox Automotive research and internal data indicate that the majority of customers prefer a seamless digital and physical experience when shopping for used cars. CarMax's market share for age 0to 10-year old vehicles sold nationwide remained consistent at approximately 3.7% in calendar 2024 compared to 2023, with an expectation to gain market share in calendar 2025. The company's focus on AI, digital experiences, and expanding CAF's credit spectrum reflects efforts to differentiate and capture a larger portion of this competitive market.

Legal Proceedings

• CarMax is a class member in the consolidated and settled class action lawsuit (In re: Takata Airbag Product Liability Litigation).
• Received $40.3 million in net recoveries from Toyota, Mazda, Subaru, BMW, Honda, and Nissan settlement funds in April 2020.
• Received $3.8 million in net recoveries from Ford settlement funds in January 2022.
• Received $59.3 million in net recoveries from residual undisbursed funds in Toyota, Mazda, Subaru, BMW, Honda, and Nissan settlements on April 21, 2023.
• Received $7.9 million in additional residual funds in BMW, Mazda, and Nissan settlements on August 9, 2023.
• Remains a class member for residual funds in the Ford settlement and the Volkswagen settlement has not yet been resolved; unable to make a reasonable estimate of gain.
• Involved in various other legal proceedings in the normal course of business, with ultimate resolution not expected to have a material adverse effect on financial condition, results of operations, or cash flows.
• Has a 90-day/4,000-mile limited warranty on retail used vehicles, with a liability of $30.3 million as of August 31, 2025.

Stakeholder Impact

• Shareholders: Impacted by decreased net earnings and EPS in Q2, increased loan loss provisions, and volatility in stock price. Potential for future earnings growth from strategic initiatives and share repurchase program.
• Customers: Benefit from omni-channel experience, competitive no-haggle prices, and expanded financing options through CAF. Affected by changes in vehicle pricing and credit availability.
• Employees (Associates): Impacted by efforts to improve efficiency and SG&A leverage, but also by focus on hiring, developing, and retaining a skilled workforce.
• Creditors/Lenders: Non-recourse notes payable are secured by auto loans. Compliance with financial covenants and performance triggers is maintained. Warehouse facility investors face potential changes in cost, structure, and capacity at renewal.
• Suppliers/Dealers: MaxOffer enhancements aim to attract new dealers for vehicle sourcing. Wholesale auctions provide a channel for vehicles not meeting retail standards.

Next Steps

• Continue leveraging data science and AI to offer better digital experiences for associates and consumers, driving conversion and efficiency.
• Improve online vehicle transfer experience and expand the functionality of Skye, the AI-powered virtual assistant.
• Streamline the online appraisal checkout process, expand appraisal pick-up availability to new markets, and further enhance MaxOffer.
• Continue expanding CAF's participation across the credit spectrum to grow penetration and capture profitable returns.
• Execute the programmatic sale of the financial interest in a non-prime securitization once per year.
• Modernize the ownership experience on CAF's digital platform.
• Drive down cost of sales by pursuing incremental efficiency opportunities across logistics network and reconditioning operations, aiming for another $125 per unit in savings in fiscal 2026.
• Accelerate SG&A expense reduction, targeting at least $150 million in reductions over the next 18 months, with the vast majority realized by the end of fiscal 2027.
• Increase market share in calendar 2025 through customer-driven omni-channel experience, advertising, workforce development, data analytics, efficiency improvements, and new store openings.
• Open three additional stores and one additional stand-alone reconditioning/auction facility during the remainder of fiscal 2026.
• Capital expenditures estimated at approximately $575 million in fiscal 2026.
• Monitor consumer behavior and the broader economy, adjusting origination strategy as needed.
• Continue investment in Tier 2 and Tier 3 loan volume, remaining within targets of less than 15% and 5% respectively.
• Test EPP product enhancements to increase penetration and margin per unit in fiscal 2026, with potential for more expansion in fiscal 2027.

Key Dates

Recommendation

CarMax's second-quarter results were notably weak, with significant declines in net earnings, sales, and used unit volume, alongside an increase in loan loss provisions. This short-term underperformance and rising credit risk are concerning. However, the company's six-month performance shows some resilience with slight revenue and earnings growth, and management is actively pursuing strategic initiatives to drive long-term growth, including AI integration, cost efficiencies, and expanding CAF's credit penetration. The recent non-prime securitization provides a new funding lever and is expected to generate future income. Given the mixed performance, with clear short-term headwinds but also promising long-term strategic plays and a commitment to share repurchases, a 'hold' recommendation is appropriate. Investors should monitor the execution of these strategies and trends in credit quality closely.

Keywords

CarMax, KMX, SEC filing, 10-Q, used vehicles, auto retail, financial results, earnings, revenue, gross profit, CarMax Auto Finance, CAF, loan losses, credit quality, inventory, omni-channel, AI, securitization, share repurchase, capital expenditures, market share, automotive industry