8-K: CarMax Q2 FY26 Earnings: Sales Dip, Profit Falls Amid Credit Woes

CarMax reports a challenging second quarter with decreased retail and wholesale unit sales, lower net earnings, but plans for significant SG&A reductions and a successful securitization.

Summary

• Retail used unit sales decreased 5.4% and comparable store used unit sales decreased 6.3% for the second quarter ended August 31, 2025.
• Wholesale units decreased 2.2% during the quarter.
• Gross profit per retail used unit was $2,216, gross profit per wholesale unit was $993, and Extended Protection Plans (EPP) margin per retail unit was $576, all in line with the prior year's second quarter.
• Bought 293,000 vehicles from consumers and dealers, a decrease of 2.4% compared to the prior year.
• Selling, General, and Administrative (SG&A) expenses decreased 1.6% to $601.1 million.
• Established plans for incremental SG&A reductions of at least $150 million over the next 18 months.
• CarMax Auto Finance (CAF) income decreased 11.2% to $102.6 million, primarily due to an increase in the provision for loan losses.
• Net earnings per diluted share were $0.64, down from $0.85 a year ago.
• Repurchased $180.0 million in shares of common stock, continuing an accelerated quarterly pace.
• Launched a new brand positioning campaign, 'Wanna Drive?', in late August.
• Executed a $900 million non-prime securitization transaction on September 24, 2025, expecting a $25-$30 million gain on sale in the third quarter and $40-$45 million in additional CAF income over the life of the transaction.

Sentiment

Score: 4

Explanation: The quarter showed significant declines in sales and net earnings, driven by a challenging market and increased loan loss provisions. While management is taking proactive steps like SG&A reductions and a successful securitization, the immediate financial performance is weak, indicating a negative short-term outlook despite strategic efforts.

Positives

• Solid unit margins were maintained with gross profit per retail used unit of $2,216, gross profit per wholesale unit of $993, and EPP margin per retail unit of $576, all consistent with the prior year's second quarter.
• SG&A expenses decreased 1.6% to $601.1 million, primarily driven by a reduction in share-based compensation.
• Established plans for incremental SG&A reductions of at least $150 million over the next 18 months, with some savings expected in fiscal 2026 and the majority by the end of fiscal 2027.
• Repurchased $180.0 million in shares of common stock, indicating continued capital return to shareholders.
• Successfully executed a $900 million non-prime securitization transaction on September 24, 2025, which is expected to generate a $25-$30 million gain on sale in the third quarter and $40-$45 million in additional CAF income over the life of the transaction, with no future loss allowance for this specific pool of loans.
• Launched a new brand positioning campaign, 'Wanna Drive?', to enhance the omni-channel customer experience.
• Opened three new store locations and one stand-alone reconditioning/auction center during the quarter.
• CAF's total interest margin percentage increased 50 basis points to 6.6% of average auto loans outstanding.
• CAF financed 42.6% of units sold in the current quarter, up from 42.0% in the prior year's second quarter.

Negatives

• Retail used unit sales decreased 5.4% to 199,729 units, and comparable store used unit sales decreased 6.3%.
• Wholesale vehicle unit sales decreased 2.2% to 138,302 units.
• Combined retail and wholesale used vehicle unit sales decreased 4.1% to 338,031.
• Total retail used vehicle revenues decreased 7.2% compared to the prior year's second quarter.
• Total gross profit was $717.7 million, down 5.6% versus the prior year's second quarter.
• CarMax Auto Finance (CAF) income decreased 11.2% to $102.6 million.
• The provision for loan losses increased to $142.2 million from $112.6 million in the prior year, primarily due to worsening performance among the 2022 and 2023 loan vintages.
• Net earnings per diluted share decreased 24.7% to $0.64 from $0.85 a year ago.
• SG&A as a percent of gross profit increased to 83.8% in the second quarter compared to 80.3% in the prior year, driven by the decline in gross profit.
• The allowance for loan losses increased to $507.3 million, representing 3.02% of auto loans held for investment, up from 2.76% as of May 31, 2025.

Risks

• Changes in the competitive landscape and/or failure 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 the potential impact of 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 CarMax's reputation or harm the perception of the quality of its brand.
• Significant changes in prices of new and 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.
• Loss of key associates from store, regional or corporate management teams 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.
• 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.
• Performance of third-party vendors relied on for key components of the business.
• Adverse conditions affecting one or more automotive manufacturers.
• Inaccuracy of estimates and assumptions used in the preparation of financial statements, or the effect of new accounting requirements or changes to U.S. generally accepted accounting principles.
• Failure or inability to adequately protect intellectual property.
• 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 that result in the misappropriation, loss or other unauthorized disclosure of confidential customer, associate or corporate information.
• Failure of or inability to sufficiently enhance key information systems.
• Factors related to the regulatory and legislative environment in which CarMax operates.
• Effect of evolving regulations, disclosure requirements, standards and expectations relating to environmental, social and governance matters.
• Effect of various litigation matters.
• Volatility in the market price for common stock.

Future Outlook

CarMax plans to achieve at least $150 million in incremental SG&A reductions over the next 18 months, with some savings expected in fiscal year 2026 and the majority by the end of fiscal year 2027. The recent $900 million non-prime securitization transaction is anticipated to generate a $25-$30 million gain on sale in the third quarter and $40-$45 million in additional CAF income over the life of the transaction, with no future loss allowance for that specific pool of loans.

Management Comments

• "While this was a challenging quarter, we remain confident in our long-term strategy and the strength of the earnings model that we have built." Bill Nash, President and Chief Executive Officer.
• "We are excited about the recent launch of our new brand positioning campaign Wanna Drive? that brings our differentiated omni-channel experience to life and underscores our ongoing commitment to empowering the customer." Bill Nash, President and Chief Executive Officer.
• "Also, we will continue to drive SG&A efficiency, targeting at least $150 million in incremental SG&A reductions over the next 18 months." Bill Nash, President and Chief Executive Officer.

Industry Context

The filing reflects a challenging operating environment for used vehicle retailers, likely influenced by broader macroeconomic factors such as inflationary pressures, fluctuating interest rates, and tighter consumer credit conditions. The increase in loan loss provisions for older loan vintages suggests ongoing credit quality concerns, although CarMax's proactive tightening of underwriting standards for newer vintages appears to be yielding expected performance. The company's focus on SG&A efficiency and enhancing its omni-channel experience indicates a strategic response to market headwinds and evolving consumer purchasing behaviors in the used car market.

Comparison to Industry Standards

• NA

Stakeholder Impact

• Shareholders: Experienced a decrease in net earnings and diluted EPS, but benefited from share repurchases and potential future efficiencies from SG&A reductions and the securitization transaction.
• Customers: The new 'Wanna Drive?' brand campaign aims to enhance the omni-channel experience, offering more clarity, confidence, and control in their purchasing journey.
• Employees: SG&A reduction plans could imply potential impacts on staffing or operational structures, though specific details are not provided.
• Creditors/Lenders: The increase in provision for loan losses indicates higher credit risk within older loan vintages, but the new securitization strategy aims to manage risk and generate income from new loan pools.

Next Steps

• Realize some SG&A savings in fiscal 2026, with the vast majority materializing in the exit rate by the end of fiscal 2027.
• Release results for the third quarter ending November 30, 2025, on Thursday, December 18, 2025.
• Host a conference call for investors at 9:00 a.m. ET on December 18, 2025, to discuss third-quarter results.

Key Dates

Recommendation

The second quarter results show significant declines in sales and profitability, primarily driven by a challenging used vehicle market and increased loan loss provisions within the CarMax Auto Finance segment. While the company is taking proactive steps such as implementing substantial SG&A reductions and executing a successful non-prime securitization transaction to manage credit risk and generate future income, the immediate financial performance is weak. The maintenance of solid unit margins and continued share repurchases offer some support, but the overall headwinds warrant a cautious stance. A 'Hold' recommendation reflects the current operational and financial challenges, balanced by management's strategic initiatives that could improve performance in the medium to long term.

Keywords

Used cars, Auto retail, CarMax, KMX, Vehicle sales, Auto finance, Earnings report, Q2 results, Financial performance, Credit losses, SG&A, Share repurchase, Omni-channel, Securitization