Is CarMax (KMX) a Buy After Q4 Earnings: A Deep Dive into Margins, Turnaround Plans, and Valuation

CarMax (KMX) has long been a bellwether for the used car retail industry, but its recent Q4 2025 earnings report has sparked a critical debate: Is the company's aggressive margin reset and cost-cutting strategy a compelling long-term value opportunity, or a high-risk recovery play? With declining same-store sales, leadership upheaval, and a valuation that appears undervalued relative to peers, investors must weigh the risks of short-term margin compression against the potential for a durable turnaround.

Margin Reset and Cost-Cutting: A Double-Edged Sword

CarMax's Q4 2025 results underscored the challenges of navigating a competitive market. Total revenue fell 6.9% year-over-year to $5.79 billion, while same-store sales plummeted 8.1% YoY, reflecting broader struggles in price competitiveness and operational efficiency. In response, the company announced a strategic shift: lowering retail used unit margins to stimulate sales volumes and increasing marketing spend to attract price-sensitive customers. While these moves are expected to pressure near-term earnings, they align with a broader industry trend of resetting pricing models to regain market share.

Interim CEO David McCraight has emphasized cost discipline as a cornerstone of the turnaround. CarMax aims to achieve $150 million in SG&A reductions by 2027 through workforce optimization, technology investments, and process improvements according to Autonews. Analysts acknowledge the short-term pain but highlight the potential for long-term gains, noting that disciplined cost management could stabilize margins while unit growth and expanded profitability in CarMax Auto Finance (CAF) provide tailwinds according to Barchart.

Leadership Changes and Operational Overhauls: A New Direction?

The appointment of McCraight as interim CEO signals a pivot in strategy. The board's search for a permanent leader with expertise in omnichannel and digital transformation underscores the urgency of modernizing CarMax's operations according to Yahoo Finance. Key initiatives include overhauling the digital platform to mirror the effectiveness of physical stores, simplifying the online shopping experience, and expanding CAF's credit underwriting capabilities to boost finance penetration from 42% to 50% according to Barchart.

These operational shifts are critical. CarMax's digital sales channels have lagged behind its physical locations, and improving conversion rates could mitigate the impact of declining foot traffic. Additionally, the company's focus on customer experience-such as introducing protection plans like MaxCare Plus-aims to enhance ancillary revenue streams according to MarketChameleon. However, the success of these initiatives hinges on execution, and the leadership transition introduces uncertainty about continuity.

Valuation Metrics: A Discounted Opportunity?

CarMax's valuation appears attractive at first glance. As of December 2025, the stock trades at a trailing P/E ratio of 11.25, significantly below the peer average of 12.3x and the Consumer Cyclical sector average of 20.71. Its EV/EBITDA ratio of 21.8x also lags behind its historical average of 27.2x, suggesting undervaluation relative to past performance according to Finbox. These metrics imply that the market is pricing in pessimism about near-term earnings but may be underestimating the potential for margin recovery and operational improvements.

However, valuation alone cannot justify a buy recommendation. CarMax's revenue is projected to decline at an annual rate of 0.7%, while EPS is expected to grow at 15% annually according to SimplyWall St. This divergence highlights the tension between margin compression and earnings growth. Investors must assess whether the company's cost-cutting and margin reset strategies can sustainably offset revenue declines without eroding long-term profitability.

Same-Store Sales and the Path to Recovery

The 8.1% YoY decline in same-store sales for Q4 2025 is a red flag. Management attributes this to higher average selling prices, which reduced price competitiveness, and inefficiencies in the cost structure according to StockStory. While lowering margins may help regain market share, the effectiveness of this strategy depends on the elasticity of demand in the used car sector. If competitors match price cuts, CarMax's margins could face further pressure without a corresponding boost in sales.

The company's response-increasing marketing spend and refining digital strategies-aims to address these challenges. However, the results will take time to materialize. For now, CarMax's ability to exceed revenue expectations despite declining sales by 3.3% in Q4 2025 suggests that its cost discipline and operational adjustments are providing some buffer.

Conclusion: A Calculated Bet on Turnaround

CarMax's Q4 earnings and subsequent strategic shifts present a mixed picture. On one hand, the company's aggressive margin reset, cost-cutting initiatives, and digital overhauls position it to regain competitiveness in a challenging market. On the other, declining same-store sales, leadership uncertainty, and the risk of margin erosion in a price-sensitive industry introduce significant risks.

For investors, the key question is whether CarMax's turnaround plan can deliver sustainable growth. The undervalued stock price and disciplined cost strategy offer a margin of safety, but success hinges on the execution of digital transformation, the effectiveness of marketing spend, and the ability to balance margin compression with unit growth. While the path is fraught with challenges, the combination of a compelling valuation and a clear strategic direction makes KMX a high-risk, high-reward opportunity for those willing to bet on a durable recovery.