CarMax's Q1 Crossroads: Navigating Near-Term Storms for Long-Term Gains

As CarMax prepares to release its fiscal Q1 2026 results on June 20, investors face a paradox: the company's recent performance highlights robust growth in sales and profitability, yet lingering headwinds in service margins, wholesale dynamics, and macroeconomic pressures cloud the near-term outlook. This analysis weighs the risks against CarMax's long-term strategic strengths, offering clarity for investors seeking to position themselves in this critical juncture.

Backtest the performance of CarMax (KMX) when 'buy 5 days before quarterly earnings announcement' and 'hold for 10 trading days after the earnings release', from 2020 to 2025.

The Q1 Foundation: Strength in Numbers

CarMax's fiscal 2025 fourth-quarter results, reported in April 2025, underscored its operational resilience. Net revenues rose 6.7% year-over-year to $6.0 billion, driven by a 6.2% jump in retail used vehicle sales and record-breaking vehicle purchases from dealers (up 15% to 269,000 units). Retail gross profit per used unit hit $2,322, a 3% increase from the prior year, while CarMax Auto Finance (CAF) income grew 8.2% to $159.3 million. Cost efficiencies were notable, with SG&A as a percentage of gross profit improving by 770 basis points, fueling an 81% surge in EPS to $0.58.

The company's digital transformation also shone: 80% of sales involved digital tools, and 67% of retail units were omni-channel transactions—a 3-percentage-point increase from 2024. These metrics, coupled with $1.94 billion remaining in share buybacks, suggest a disciplined focus on shareholder value.

Q1 Headwinds: The Clouds on the Horizon

Despite Q4's success, Q1 2026 faces significant challenges. First, the wholesale segment's struggles persist: gross profit per unit fell $75 to $1,045 year-over-year, reflecting pricing pressures in bulk vehicle sales. Second, service profitability remains elusive. Management noted during the Q4 call that service margins were “below target,” a recurring issue exacerbated by competition and cost inflation.

Additionally, macroeconomic risks loom. Rising interest rates could dampen consumer demand for financed vehicles, while tariffs on imported components (e.g., from China) threaten margins. These factors, combined with the withdrawal of forward guidance—a move that spooked investors in April—create uncertainty around the Q1 EPS consensus of $1.21. Analysts have already tempered expectations, with some下调 estimates after the April earnings miss.

Strategic Advantages: The Silver Lining

Beneath the near-term turbulence, CarMax's long-term trajectory remains compelling. Its omni-channel dominance is unmatched: 67% of sales now involve digital touchpoints, a trend that should deepen as younger buyers prioritize online research. The expansion of its “full credit spectrum” underwriting model—targeting subprime borrowers without sacrificing risk—has driven incremental revenue. In Q4, this strategy contributed to a 29% rise in CAF income, proving that broadening credit access can boost both top-line growth and recurring finance revenue.

Furthermore, CarMax's capital allocation strategy is prudent. With $575 million earmarked for fiscal 2026 investments—including six new stores and four reconditioning centers—the company is scaling its physical footprint while maintaining a manageable debt-to-equity ratio of 2.92. Institutional investors, including Acadian Asset Management and Intech, have increased stakes, signaling confidence in the business's durability.

Investment Considerations: When to Bet on Resilience

Investors must weigh two critical questions: Can CarMax sustain margin improvements despite Q1's headwinds? and Is the stock's valuation justified?

On valuation, CarMax trades at a P/E of 22.40, below its five-year average of 25.10, suggesting some discount to its growth potential. The $85.82 average analyst target price—14% above current levels—hints at upside if Q1 results beat lowered expectations.

For long-term investors, the case is stronger. The company's omni-channel lead, disciplined cost management, and credit expansion initiatives position it to capitalize on a used-car market that remains fragmented and ripe for consolidation. The absence of forward guidance, while unsettling, may reflect management's preference for flexibility in a volatile environment—a trait that could pay off if macro risks subside.

Final Take: Hold for Now, Buy on Dip

While Q1 results will likely disappoint in the short term, CarMax's fundamentals remain intact. Historically, a strategy of buying 5 days before earnings and holding for 10 days has underperformed, with a negative CAGR of -4.31% from 2020 to 2025, underscoring the risks of short-term timing around earnings events. Until the service margin and wholesale issues are resolved, cautious optimism is warranted. Investors should consider adding positions if the stock dips below $60—a level that would reflect excessive pessimism—and hold for the long-term EPS growth (~24% to $3.74 in fiscal 2026) and digital-driven market share gains.

In the near term, the storm clouds are real, but CarMax's strategic moat remains formidable. The question is whether the company can weather them—and deliver the clarity investors need to see the sun again.

Risk Disclosure: This analysis is for informational purposes only and should not be construed as financial advice. Investors should conduct their own research and consult a financial advisor before making decisions.