10-Q: CarMax Reports Strong Q1 Earnings Growth Driven by Used Vehicle Sales and SG&A Leverage, Despite Auto Finance Headwinds

CarMax, the nation's largest used vehicle retailer, announced a significant increase in net earnings and diluted earnings per share for the first quarter of fiscal 2026, fueled by higher used unit sales and improved SG&A efficiency, even as its auto finance segment faced increased loan loss provisions.

Summary

• Net sales and operating revenues increased by 6.1% to $7.55 billion for the first quarter of fiscal 2026, up from $7.11 billion in the prior year.
• Used vehicle sales rose 7.5% to $6.10 billion, driven by a 9.0% increase in used unit sales to 230,210 units, including an 8.1% rise in comparable store used unit sales.
• Wholesale vehicle sales slightly decreased by 0.3% to $1.25 billion, with a 1.7% decrease in average selling price partially offset by a 1.2% increase in unit sales.
• Gross profit increased by 12.8% to $893.6 million, with used vehicle gross profit per unit increasing by $60 to $2,407.
• CarMax Auto Finance (CAF) income decreased by 3.6% to $141.7 million, primarily due to a higher provision for loan losses of $101.7 million, up from $81.2 million in the prior year.
• Selling, general and administrative (SG&A) expenses increased by 3.3% to $659.6 million, but SG&A as a percentage of gross profit improved significantly to 73.8% from 80.6%.
• Net earnings surged by 38.0% to $210.4 million, and diluted net earnings per share increased by 42.3% to $1.38.
• The allowance for loan losses as a percentage of auto loans held for investment increased to 2.76% as of May 31, 2025, from 2.61% as of February 28, 2025, driven by unfavorable loan loss performance in older loan vintages.
• Past due accounts as a percentage of ending auto loans held for investment increased to 5.48% as of May 31, 2025, from 4.85% as of February 28, 2025.
• The company repurchased $204.0 million of common stock during the quarter, with $1.74 billion remaining under the current authorization.
• Capital expenditures for fiscal 2026 are estimated to be approximately $575 million, supporting growth in offsite reconditioning and auction facilities, and new stores.

Sentiment

Score: 7

Explanation: The sentiment is generally positive due to strong top-line growth, significant earnings per share improvement, and effective SG&A leverage. Strategic initiatives leveraging technology and expanding financing options are also positive. However, the decline in CarMax Auto Finance income driven by increased loan loss provisions and deteriorating credit quality metrics (higher allowance for loan losses and past due accounts) introduces a notable cautionary element, preventing a higher score.

Positives

• Net earnings increased by a substantial 38.0% to $210.4 million, demonstrating strong profitability growth.
• Diluted net earnings per share rose by 42.3% to $1.38, indicating improved shareholder value.
• Total net sales and operating revenues grew by 6.1% to $7.55 billion, reflecting overall business expansion.
• Used unit sales increased by 9.0% to 230,210 units, with comparable store used unit sales up 8.1%, signaling strong consumer demand for used vehicles.
• Gross profit increased by 12.8% to $893.6 million, with used vehicle gross profit per unit improving by $60 to $2,407.
• SG&A expenses leveraged significantly, decreasing to 73.8% of gross profit from 80.6% in the prior year, driven by ongoing cost management and efficiency gains.
• Other gross profit, including service department margins and Extended Protection Plan (EPP) revenues, increased by 31.3%, contributing positively to overall profitability.
• The company is leveraging data science and AI to enhance digital experiences, improve conversion, and drive efficiency, with a 30% improvement in Skye's containment rate and 24% improvement in CEC consultant productivity.
• CarMax plans to expand CAF's participation across the credit spectrum and execute programmatic sales of non-prime securitizations, providing significant funding flexibility and growth opportunities.
• The company intends to modestly accelerate its share repurchase pace in fiscal 2026, returning excess capital to shareholders.

Negatives

• CarMax Auto Finance (CAF) income decreased by 3.6% to $141.7 million, primarily due to a higher provision for loan losses.
• The provision for loan losses increased to $101.7 million from $81.2 million, reflecting unfavorable loan loss performance, particularly in loans originated in 2022 and 2023.
• The allowance for loan losses as a percentage of auto loans held for investment increased to 2.76% from 2.61% at the end of the previous fiscal year, indicating a deterioration in credit quality outlook.
• Past due accounts as a percentage of ending auto loans held for investment rose to 5.48% from 4.85%, suggesting an increase in loan delinquencies.
• CAF net penetration rate decreased to 41.8% from 43.3% in the prior year period, partly due to an increase in self-funded higher credit customers and increased penetration from third-party Tier 3 finance providers.
• Average retail selling price for used vehicles decreased by 1.5% to $26,120, reflecting shifts in vehicle age mix.
• Wholesale vehicle revenues decreased by 0.3%, driven by a 1.7% decrease in average selling price.

Risks

• Changes in the competitive landscape and the company's ability to 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, particularly related to the asset-backed securitization market.
• Events that damage the company's reputation or harm the perception of its brand quality.
• Significant changes in prices of new and used vehicles.
• A reduction in the availability of or access to inventory sources or a failure to expeditiously liquidate inventory.
• Inability to realize the benefits associated with the omni-channel platform or initiatives leveraging evolving technologies, including AI.
• Challenges 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.
• 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 issues with third-party vendors crucial to the business.
• Adverse conditions affecting one or more automotive manufacturers.
• Inaccuracy of estimates and assumptions in financial statements, or the effect of new accounting requirements or changes to U.S. GAAP.
• 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 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.
• Volatility in the market price for the common stock.

Future Outlook

CarMax aims to achieve low-single-digit gross profit growth in fiscal 2026 to leverage SG&A, with a goal of becoming omni cost neutral for the full year. The company plans to continue expanding CAF's participation across the credit spectrum, targeting an increase in CAF penetration to 50% over time, enabled by programmatic sales of non-prime securitizations. They anticipate achieving another $125 per unit in cost of sales savings in fiscal 2026, building on fiscal 2025's savings. The long-term earnings model targets a high-teens compound annual growth rate (CAGR) when used unit growth is in the mid-single digits, driven by unit growth, other gross profit strength, CAF expansion, operational efficiencies, SG&A leverage, and share repurchases. The company plans to open six new stores and two additional stand-alone reconditioning/auction facilities during the remainder of fiscal 2026.

Management Comments

• "Our omni-channel experience provides a common platform across all of CarMax that leverages our scale, nationwide footprint and infrastructure and empowers our customers to buy a vehicle on their terms, whether online, in-store or through a seamless combination of both."
• "We believe that 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."
• "In fiscal 2026, we plan to leverage and enhance our capabilities to drive growth through better execution, innovative efforts and upleveled experiences."
• "For retail, we plan to continue leveraging data science and AI to offer even better digital experiences for associates and consumers, driving conversion and efficiency."
• "For credit, we plan to continue expanding CAFs participation across the credit spectrum to grow penetration and capture profitable returns."
• "We achieved savings of approximately $125 per unit in fiscal 2025 and anticipate that we will achieve another $125 per unit in fiscal 2026."
• "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."
• "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

CarMax operates in a large and fragmented used vehicle market. The company's omni-channel strategy, integrating online and in-store experiences, aligns with evolving consumer preferences for flexibility in car buying, as supported by internal and Cox Automotive research indicating a majority of customers prefer an omni experience. The focus on leveraging AI and data science for efficiency and customer experience is a key trend in retail. While the broader used car market faces inflationary pressures and fluctuating vehicle values, CarMax's ability to adjust appraisal offers and optimize pricing algorithms helps manage these dynamics. The increase in loan loss provisions and past due accounts in its auto finance segment reflects broader challenges in consumer credit quality, particularly for loans originated during periods of elevated average selling prices and subsequent inflationary environments.

Legal Proceedings

• CarMax is a class member in the consolidated and settled class action lawsuit (In re: Takata Airbag Product Liability Litigation) against several automotive manufacturers.
• The company received net recoveries of $40.3 million in April 2020, $3.8 million in January 2022, $59.3 million in April 2023, and $7.9 million in August 2023 from various Takata settlement funds.
• CarMax remains a class member for residual funds in the Ford settlement and the Volkswagen settlement has not yet been resolved, with the amount or range of gain currently unestimable.
• The company is involved in various other legal proceedings in the normal course of business, which are not expected to have a material adverse effect on financial condition, results of operations, or cash flows.

Stakeholder Impact

• **Shareholders:** Positive impact from significant increases in net earnings and diluted EPS, along with an accelerated share repurchase program, indicating improved profitability and capital return.
• **Customers:** Benefit from the enhanced omni-channel experience, competitive no-haggle pricing, value-added Extended Protection Plan (EPP) products, and the 90-day/4,000-mile limited warranty. CAF's expansion across the credit spectrum aims to provide more financing options.
• **Employees (Associates):** The company's focus on recruiting, developing, and retaining a skilled workforce, along with share-based compensation plans, impacts employee satisfaction and retention. Efficiency gains in operations may affect roles.
• **Creditors:** The company's compliance with financial covenants for its debt agreements and non-recourse funding vehicles ensures stability for creditors, though increased loan loss provisions in CAF could be a point of monitoring.
• **Suppliers/Dealers:** MaxOffer enhancements and expansion of appraisal pick-up availability aim to attract new dealers, impacting the wholesale vehicle sourcing and sales channels.

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 Skye (AI-powered virtual assistant) functionality.
• Launch a new marketing campaign to highlight the omni-channel experience.
• Streamline online appraisal checkout process, expand appraisal pick-up availability to new markets, and enhance MaxOffer to attract new dealers.
• 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 to enhance customer experience and drive operating efficiencies.
• Drive down cost of sales by pursuing incremental efficiency opportunities in logistics network and reconditioning operations, targeting another $125 per unit savings in fiscal 2026.
• Achieve low-single-digit gross profit growth to lever SG&A and become omni cost neutral for the full year of fiscal 2026.
• Open six new store locations and two additional stand-alone reconditioning/auction centers during the remainder of fiscal 2026.

Key Dates

Recommendation

Keywords

Used Vehicle Retail, Auto Finance, Omni-channel, SEC Filing, Quarterly Report, Financial Results, Earnings, Sales, Gross Profit, Loan Losses, Credit Quality, SG&A, Share Repurchase, Capital Expenditures, AI Technology, Market Share, Inventory Management, Risk Management