KMX

Business Context and Reporting Period

Company: CARMAX, INC.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended November 30, 2025 (Fiscal 2026)
Business Overview: CarMax is the nation's largest retailer of used vehicles, operating through two segments: CarMax Sales Operations (retail and wholesale vehicle sales, services) and CarMax Auto Finance (CAF). The company utilizes an omni-channel sales model.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 6.9% in Q3 and 2.0% over nine months, driven by an 8.0% drop in used unit sales (Q3) and a 1.1% drop (9M). Wholesale unit sales also declined.
• Profitability Pressure: Net earnings fell 50.4% in Q3 and 10.4% over nine months. Gross profit declined 12.9% in Q3 due to lower volume and reduced margins per unit.
• CAF Performance: CAF income increased 9.3% in Q3, aided by a $27.0 million gain on the sale of auto loans (securitization). However, the provision for loan losses increased to $317.3 million (9M) due to unfavorable performance in loans originated in 2022-2023.
• SG&A Leverage: SG&A expenses increased slightly (1.0% Q3, 0.9% 9M) but deleveraged significantly as a percentage of gross profit (98.5% in Q3 vs. 85.0% prior year) due to the drop in gross profit.
• Inventory Reduction: Inventory decreased by $806.7 million year-to-date as the company strategically reduced inventory levels in response to lower consumer demand.

Guidance, Outlook, and Management Commentary

• Leadership Transition: Bill Nash stepped down as CEO effective December 1, 2025. David McCreight serves as Interim President and CEO. The board is searching for a permanent CEO.
• Strategic Pivot: Management acknowledges the need for change to address drifting average selling prices and market share pressure. The company plans to meaningfully lower margins to improve competitiveness and increase marketing spend.
• Cost Reduction Goals: CarMax aims to reduce SG&A expenses by at least $150 million by the end of fiscal 2027. A 30% reduction in the Customer Experience Center (CEC) workforce is expected to yield $35 million in annualized savings.
• CAF Expansion: The company is expanding CAF into the full credit spectrum, targeting 50% penetration. A recent non-prime securitization of $930 million in loans provided a $27 million gain and off-balance sheet funding flexibility.
• Capital Allocation: The company accelerated share repurchases in fiscal 2026. As of November 30, 2025, $1.36 billion remained available under the $2.0 billion authorization.
• Outlook: Management expects near-term earnings pressure from margin reductions and increased marketing but anticipates long-term offset from unit growth, CAF expansion, and SG&A savings.

Investor Verification Checklist

• Margin Compression Strategy: Verify the impact of the planned margin reduction on unit sales volume and market share recovery in subsequent quarters.
• CAF Credit Quality: Monitor the allowance for loan losses (currently 2.87% of portfolio) and net credit loss rates, particularly for the 2022-2023 vintage loans cited as underperforming.
• SG&A Execution: Track progress toward the $150 million SG&A reduction target and the efficiency of the new omni-channel cost structure.
• Liquidity and Funding: Assess the renewal terms and capacity of warehouse facilities ($3.32 billion unused) and the stability of non-recourse funding vehicles.
• Legal Proceedings: Review the status of the putative class action lawsuit filed in November 2025 regarding securities violations and the ongoing Takata airbag litigation.