CarMax's Q1 Earnings Signal Resilience in Auto Retail: A Buy for Defensive Growth

CarMax (KMX) delivered a robust Q1 2026 earnings report, showcasing its ability to navigate used-vehicle pricing pressures while expanding margins and shareholder value. The company's 9% rise in retail used-vehicle sales, record gross profit per unit, and aggressive buybacks position it as a compelling investment in an uncertain macroeconomic environment. Despite headwinds from declining average selling prices (ASPs), CarMax's operational discipline and strategic execution make it a rare defensive yet growth-oriented play in the auto retail sector.

Sales Growth Amid ASP Declines: Operational Leverage Trumps Pricing

CarMax's retail used-vehicle sales surged 9% year-over-year to 230,210 units, with comparable-store sales up 8.1%. This growth defied a 1.5% decline in average retail selling prices to $26,120. While ASPs have softened due to industry-wide competition, CarMax's margin resilience is striking: retail gross profit per unit hit a record $2,407, up $60 from last year. This reflects superior cost management—reconditioning efficiencies, optimized logistics, and lower variable expenses—offsetting pricing pressures.

The company's digital-first strategy also drives scalability. 80% of retail sales involved digital touchpoints, with 14% completed fully online. This shift reduces customer acquisition costs and improves productivity, as evidenced by a 30% rise in containment rates (self-service interactions) and 24% boost in consultant efficiency via AI tools like its Sky virtual assistant. These advantages allow CarMax to maintain margins even as competitors grapple with higher costs.

Margin Resilience and Financial Discipline: A Recipe for Shareholder Value

CarMax's SG&A expenses rose just 3% to $660 million, but as a percentage of gross profit, they improved by 680 basis points to 74%. This leverage, combined with higher volumes, fueled a 42% surge in net earnings per share to $1.38. Meanwhile, the company accelerated share repurchases, buying back $200 million worth of stock (3 million shares) in Q1, with $1.74 billion remaining under its buyback authorization.

The buybacks are a strategic masterstroke. With shares trading at 12.5x forward earnings—below its five-year average of 14x—CarMax is capitalizing on undervaluation. Each repurchase directly boosts EPS and ownership stakes, rewarding shareholders even as the company invests in growth initiatives like new reconditioning centers in Arizona and Texas.

Addressing ASP Headwinds: Structural Advantages in a Competitive Market

Critics may question whether ASP declines signal a slowdown in demand. But CarMax's data tells a different story. Its 8.1% comparable-store sales growth reflects market share gains, not just volume chasing. The company's dealer-sourced inventory rose 38% year-over-year, broadening its vehicle mix and attracting price-sensitive buyers. Meanwhile, digital sales—now 66% omnichannel—reduce reliance on foot traffic, making demand more resilient to economic swings.

The ASP drop also highlights industry-wide supply dynamics, not weakness in CarMax's execution. In wholesale markets, where prices fell 1.7%, CarMax still posted gross profit per unit of $1,047—historically strong for the segment. This underscores the company's ability to extract value from both retail and wholesale channels.

Risks and Mitigants: Navigating Credit and Economic Uncertainties

CarMax isn't immune to macro risks. Its auto finance division (CAF) saw a 3.6% decline in income due to a $20.5 million rise in loan loss provisions. Rising credit costs and a potential economic slowdown could pressure margins. However, CarMax is proactive: - Non-prime loan securitization—earmarking $638 million for off-balance-sheet sales—reduces risk exposure while funding growth. - Loan penetration dipped to 41.8% as more buyers self-fund purchases, but this reflects a healthier credit environment rather than a demand collapse.

Investment Thesis: Buy for Defensive Growth

CarMax's Q1 results validate its dual appeal: 1. Defensive qualities: High visibility in used-vehicle sales, recurring revenue from extended protection plans (EPP margins rose to $572 per unit), and a fortress balance sheet (net debt/EBITDA <1x) insulate it from recessions. 2. Growth catalysts: Digital dominance, cost leverage, and buybacks fuel EPS expansion even in flat markets.

At current valuations, CarMax offers a 12% earnings yield—a premium over 10-year Treasuries—and a 1.5% dividend yield. With ~$1.7 billion in buybacks remaining and a track record of compounding EPS at 10-15% annually, this is a rare “buy” in a volatile sector.

Final Call: Buy

CarMax's operational execution and financial discipline make it a standout in auto retail. Despite ASP headwinds, its margin resilience, scalable digital model, and shareholder-friendly capital allocation justify a buy rating. Investors seeking defensive growth with upside in recovery scenarios should take note.