10-Q: CarMax Q3 Earnings Plunge 50% Amid Sales Decline, CEO Shift

CarMax reported a significant 50.4% drop in third-quarter net earnings and announced a CEO transition, alongside strategic shifts to address declining sales and market share.

Summary

• Net earnings for the third quarter ended November 30, 2025, plummeted 50.4% to $62.2 million, down from $125.4 million in the prior year.
• Diluted earnings per share (EPS) decreased 46.9% to $0.43 for the third quarter, compared to $0.81 in the same period last year.
• Net sales and operating revenues for the third quarter fell 6.9% to $5.79 billion, driven by an 8.0% decrease in used unit sales and a 6.2% decrease in wholesale unit sales.
• Comparable store used unit sales declined 9.0% in the third quarter.
• Gross profit decreased 12.9% to $590.0 million in the third quarter.
• CarMax Auto Finance (CAF) income increased 9.3% to $174.7 million in the third quarter, partly due to a $27.0 million gain on the sale of auto loans.
• Selling, general and administrative (SG&A) expenses increased 1.0% to $581.4 million in the third quarter, leading to significant deleveraging with SG&A as 98.5% of gross profit.
• The allowance for loan losses as a percentage of ending auto loans held for investment increased to 2.87% as of November 30, 2025, from 2.61% at February 28, 2025.
• Bill Nash stepped down as CEO and board member, effective December 1, 2025; David McCreight was named Interim President and CEO, and Tom Folliard became Interim Executive Chair of the Board.
• The company plans to meaningfully lower margins in the fourth quarter of fiscal 2026 to reduce the price gap with the marketplace and increase marketing spend.
• A workforce reduction of approximately 30% in Customer Experience Centers (CECs) is expected to result in annualized SG&A savings of approximately $35 million, contributing to a goal of at least $150 million in SG&A savings by the end of fiscal 2027.

Sentiment

Score: 3

Explanation: The filing indicates significantly worse financial performance in Q3, with substantial declines in net earnings, sales, and gross profit. While strategic initiatives and a CEO change are announced to address these issues, the near-term outlook is pressured, and credit quality metrics show deterioration. The sentiment is negative due to current results and the uncertainty of the turnaround strategy's immediate impact.

Positives

• CarMax Auto Finance (CAF) income increased 9.3% to $174.7 million in the third quarter of fiscal 2026, demonstrating strength in the financing segment.
• A gain on sale of auto loans of $27.0 million was recognized in the third quarter of fiscal 2026 from a non-prime securitization transaction.
• CAF's new underwriting models for loans originated after April 2024 are performing in line with expectations, indicating improved risk management.
• The company is committed to reducing SG&A expense by at least $150 million by the end of fiscal 2027, with an initial ~30% reduction in CEC workforce expected to yield $35 million in annualized savings.
• Omni-channel costs per used unit, per total unit, and as a percentage of gross profit were more efficient in Q3 FY26 compared to both the prior year and before the omni-channel rollout.
• Service department margins increased in the first nine months of fiscal 2026 due to implemented cost coverage measures and increased efficiencies.
• The company maintains strong liquidity and access to capital, with $2.00 billion in unused revolving credit facility capacity and compliance with all financial covenants.
• New EPP products, MaxCare (mechanical coverage) and MaxCare Plus (cosmetic protection), are migrating from test to pilot with a near nationwide rollout expected in Q1 fiscal 2027, potentially enhancing future profitability.

Negatives

• Net earnings for the third quarter of fiscal 2026 decreased 50.4% to $62.2 million, and diluted EPS fell 46.9% to $0.43.
• Net sales and operating revenues declined 6.9% to $5.79 billion in the third quarter and 2.0% to $19.94 billion for the first nine months of fiscal 2026.
• Used unit sales decreased 8.0% in the third quarter and 1.1% for the first nine months of fiscal 2026.
• Comparable store used unit sales experienced a significant 9.0% decline in the third quarter.
• Gross profit decreased 12.9% in the third quarter and 1.3% for the first nine months of fiscal 2026.
• SG&A expenses deleveraged by 1,350 basis points in the third quarter, reaching 98.5% of gross profit, indicating a significant increase in overhead relative to profitability.
• The provision for loan losses increased for the nine-month period, primarily due to unfavorable loss performance in loans originated in 2022 and 2023, which were challenged by the inflationary environment.
• The allowance for loan losses as a percentage of ending auto loans held for investment increased to 2.87% as of November 30, 2025, from 2.61% at February 28, 2025, reflecting higher expected future losses.
• Annualized net credit losses as a percentage of average auto loans held for investment increased to 2.54% in Q3 FY26 from 2.13% in Q3 FY25.
• Past due accounts as a percentage of ending auto loans held for investment increased to 5.43% as of November 30, 2025, from 4.90% as of November 30, 2024.
• Market share is expected to decrease for the full calendar year 2025, despite gains in the first half.
• Restructuring expenses of $0.08 per diluted share were incurred in the third quarter related to the CEO change and workforce reductions.

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 the company's reputation or harm the perception of the quality of its brand.
• 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.
• The loss of key associates from store, regional or corporate management teams, the failure to effectively execute key executive succession plans 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 the third-party vendors relied on for key components of the business.
• Adverse conditions affecting one or more automotive manufacturers.
• The 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.
• The failure or inability to adequately protect intellectual property.
• The occurrence of severe weather events.
• The 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.
• The failure of or inability to sufficiently enhance key information systems.
• Factors related to the regulatory and legislative environment in which the company operates.
• The effect of evolving regulations, disclosure requirements, standards and expectations relating to environmental, social and governance matters.
• The effect of various litigation matters, including the Jason Cap v. CarMax, Inc. class action lawsuit.
• The volatility in the market price for common stock.

Future Outlook

CarMax is undergoing a significant strategic shift, prioritizing lowering used vehicle margins to enhance competitiveness and increasing marketing spend, which is expected to pressure near-term earnings. However, this pressure is anticipated to be offset over the longer term by unit growth, expanded profitability in CAF and ancillary products, and reductions in SG&A and cost of sales. The company aims to achieve at least $150 million in SG&A expense savings by the end of fiscal 2027, with initial steps already taken through workforce reductions. CarMax also plans to expand CAF penetration to 50% and expects EPP margin per unit to be relatively flat in fiscal 2026 with potential growth in fiscal 2027. Service margins are projected to be near breakeven for the full fiscal year. The company expects to be omni cost neutral for the full year of fiscal 2026 and will continue investing in digital capabilities, store expansion, and new growth opportunities.

Management Comments

• "Our average selling prices have drifted upward and appear to be less attractive to customers. To ensure that CarMax is a preferred choice, we are meaningfully lowering margins to reduce the gap between our offerings and the marketplace."
• "We plan to support this action by increasing marketing spend, while also building more effective ways to communicate our value to customers."
• "We plan to comprehensively review all costs associated with bringing a car to market to find ways to eliminate the unproductive costs while maintaining our reputation of having a high-quality fleet."
• "We plan to sharpen our focus on the customer. In guiding decisions, we plan to challenge long-held institutional beliefs as we work to discover the most fundamental elements to the consumer in closing the sale."
• "We plan to incorporate a clearer and more effective selling voice to our digital experience in order to drive conversion and further improve customer satisfaction."
• "We are committed to eliminating unproductive costs, with the goal of reducing SG&A expense by at least $150 million by the end of fiscal 2027."
• "We are optimistic that our actions of lowering margins and increasing marketing will improve our sales performance trends, but these actions may pressure earnings in the near-term."
• "Over the longer-term, we expect that this pressure will be offset by unit growth and expanded profitability in CAF and ancillary products as well as through reductions in SG&A and cost of sales."
• "We are on track to achieve our goal of at least $150 million in exit rate savings in SG&A expense by the end of fiscal 2027."
• "We took our first significant step toward these savings during the third quarter with an approximately 30% reduction in our CEC workforce, which we expect will result in annualized savings of approximately $35 million."
• "Our initial goal on the path to strengthening our SG&A to gross profit leverage over time is to achieve a rate in the mid-70% range on an annual basis."
• "We expect our omni-channel costs per used unit, per total unit and as a percentage of gross profit for the full year of fiscal 2026 to be more efficient than before our omni-channel roll-out."
• "We are also focused on driving down our cost of sales by pursuing incremental efficiency opportunities that we have identified across our logistics network and reconditioning operations."
• "We believe our unique finance platform with a full-spectrum in-house lending operation, coupled with a robust network of partner lenders, will strengthen our competitive advantage."
• "We would expect each additional percentage point of CAF penetration to generate $10 million to $12 million in lifetime pre-tax income per year of origination, net of the impact to finance partner participation fees."

Industry Context

CarMax operates in a highly fragmented used vehicle market, where consumer preferences are shifting towards seamless digital and physical experiences. The broader industry is facing challenges from inflationary pressures, fluctuating interest rates, and changes in consumer credit availability, which have impacted vehicle affordability and demand. CarMax's strategic decision to lower margins and increase marketing spend reflects an attempt to regain competitiveness and market share in a challenging environment where average selling prices have become less attractive. The focus on expanding CarMax Auto Finance's full-spectrum lending and enhancing extended protection plans aligns with industry trends to capture more value from each transaction and diversify revenue streams beyond just vehicle sales.

Comparison to Industry Standards

• CarMax's estimated market share of 3.7% of age 0to 10-year old vehicles sold nationwide in calendar 2024 was consistent with calendar 2023, indicating a stable but not growing position in a fragmented market.
• The decline in comparable store used unit sales by 9.0% in Q3 FY26 suggests underperformance relative to a healthy retail automotive market, which typically sees more stable or modest growth in unit sales.
• The increase in the allowance for loan losses and net credit losses for CarMax Auto Finance indicates a deterioration in credit quality, which could be a broader industry trend given the inflationary environment and higher interest rates impacting consumer affordability and loan performance across the subprime and near-prime auto lending sectors.
• The significant deleveraging of SG&A as a percentage of gross profit (98.5% in Q3 FY26) is substantially higher than typical healthy retail benchmarks, which often aim for SG&A leverage in the mid-70% range, highlighting operational efficiency challenges.

Management Changes

Corporate Governance

Legal Proceedings

• Jason Cap v. CarMax, Inc., et al.: A putative class action complaint filed on November 3, 2025 (amended November 6, 2025) in the U.S. District Court for the District of Maryland. It alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, on behalf of investors who purchased securities between June 20, 2025, and November 5, 2025. The complaint seeks unspecified damages, fees, costs, and expenses. CarMax believes the claims are without merit and intends to vigorously defend itself. The likelihood or range of potential loss cannot be assessed at this preliminary stage.
• In re: Takata Airbag Product Liability Litigation: CarMax received $8.2 million in additional residual funds from the Ford settlement on December 19, 2025. The Volkswagen settlement in this consolidated class action lawsuit has not yet been resolved, and the amount or range of gain from CarMax's participation cannot be reasonably estimated.

Stakeholder Impact

• Shareholders: Negative impact due to significant decline in net earnings and diluted EPS, increased credit losses, and deleveraging of SG&A. Uncertainty introduced by CEO transition and strategic shift, though long-term goals aim for improved profitability.
• Employees: Impacted by a ~30% reduction in the Customer Experience Centers (CECs) workforce, leading to severance costs. Leadership changes at the top may affect morale and strategic direction.
• Customers: Potential positive impact from the company's plan to meaningfully lower margins and increase marketing, aiming to make offerings more attractive and improve affordability. New EPP products (MaxCare, MaxCare Plus) could offer enhanced protection options.
• Creditors: The company remains in compliance with all financial covenants and performance triggers, indicating continued financial stability for debt holders. The non-prime securitization transaction provides additional funding flexibility.

Next Steps

• Board is urgently searching for a permanent CEO to drive sales, maximize omni-channel benefits, strengthen the brand, improve operations, and champion culture.
• Meaningfully lowering margins in Q4 fiscal 2026 to reduce the price gap between offerings and the marketplace.
• Increasing marketing spend to support lower margins and communicate value to customers.
• Comprehensively reviewing all costs associated with bringing a car to market to eliminate unproductive costs.
• Sharpening focus on customer-insighted decision making, rooted in fact-based research.
• Incorporating a clearer and more effective selling voice to the digital experience to drive conversion and improve customer satisfaction.
• Leveraging technology platforms and process enhancements to reduce spending, with a goal of at least $150 million in SG&A expense reduction by the end of fiscal 2027.
• Continuing measured expansion of CAF into the full credit spectrum, with an initial goal of increasing CAF penetration to 50%.
• Achieving near nationwide rollout of redesigned MaxCare and new MaxCare Plus plans during the first quarter of fiscal 2027.
• Opening one additional store location and one additional stand-alone reconditioning/auction center during the remainder of fiscal 2026.
• Monitoring consumer behavior and the broader economy to adjust CAF origination strategy as needed.

Key Dates

Recommendation

The company's third-quarter results show a significant decline in profitability and sales, coupled with deteriorating credit metrics. The announced CEO transition and strategic shift to lower margins and increase marketing are substantial changes aimed at addressing these issues. While these initiatives could lead to long-term improvements, they are expected to pressure near-term earnings and introduce execution risk. Given the current poor performance and the uncertainty surrounding the immediate impact of the new strategy and leadership, a 'hold' recommendation is appropriate. Investors should monitor the effectiveness of the new management team and the progress of the strategic initiatives before making further investment decisions.

Keywords

Used Vehicles, Auto Retail, CarMax Auto Finance, SEC Filing, 10-Q, Earnings Report, Used Car Sales, Wholesale Vehicles, Credit Losses, SG&A, Omni-channel, Leadership Change, Strategic Initiatives, Share Repurchase, Extended Protection Plans, Vehicle Financing, Market Share, Capital Expenditures