CarMax's Q1 FY2026 Results: A Beacon of Resilience in a Challenging Market

CarMax (KMX) delivered a robust Q1 FY2026 performance, defying macroeconomic headwinds with 42.3% year-over-year EPS growth to $1.21, fueled by operational discipline and strategic execution. Amid rising interest rates and inflationary pressures, the company's 680 basis-point SG&A margin expansion and record retail unit sales underscore its ability to maintain profitability while scaling its omni-channel dominance. This article explores how CarMax's balance of volume growth, cost control, and risk mitigation positions it to outperform peers in a slowing market, warranting a buy rating.

Key Results: Operational Leverage in Action

CarMax's Q1 results reflect its mastery of operational leverage:

1. EPS Growth of 42.3%:
   EPS rose to $1.21 from $0.85 in Q1 FY2025, driven by higher gross profits and cost efficiencies. Even as SG&A expenses grew 3.4%, the company leveraged rising gross profit to keep SG&A as a percentage of sales below 92%, a significant improvement from 99.1% a year ago. This margin discipline is critical in an environment where peers are struggling with inflation and supply chain costs.

2. Retail Unit Sales Surge:
   Used vehicle sales jumped 6.2% year-over-year, with 182,655 units sold. 80% of transactions involved digital tools, showcasing the success of its omni-channel strategy. Omnichannel sales (67% of total units) grew by 3 percentage points, reflecting the company's ability to attract younger, tech-savvy buyers.

1. CarMax Auto Finance (CAF) Strength:
   CAF income rose 8.2% to $159.3 million in Q4 FY2025, and momentum likely carried into Q1. The “full credit spectrum” model expanded access to subprime borrowers without excessive risk, boosting penetration to 41.8%. While loan loss provisions increased to $101.7 million (up from $81.2 million), the non-prime funding program—which reclassified $637.9 million in loans as “held for sale”—mitigated balance sheet exposure and reduced provisioning needs.

CAF Funding and Loan Loss Provisions: A Delicate Balance

CarMax's CAF division faces twin challenges: rising loan loss provisions and the need to maintain growth. The $20.5 million year-over-year increase in provisions stemmed from weaker performance in 2022–2023 vintage loans and broader economic uncertainty. However, management's strategic move to offload non-prime loans as “held for sale” reduced provisioning pressure by $26 million, demonstrating proactive risk management.

The allowance for loan losses as a percentage of loans held for investment rose to 2.76%, reflecting cautious underwriting. While this may weigh on near-term margins, it ensures long-term stability. Meanwhile, CAF's net interest margin improved by 30 basis points to 6.5%, offsetting some of the provision drag.

Strategic Resilience: Navigating Macro Challenges

CarMax's ability to thrive in a slowing market hinges on its strategic resilience:

1. Omni-Channel Dominance:
   With 80% of sales involving digital tools and 67% as omnichannel transactions, CarMax is capturing share from fragmented competitors. Its “digital first” approach reduces customer acquisition costs and improves retention, a key advantage as traditional dealers struggle with foot traffic.

2. Cost Discipline:
   SG&A efficiency, despite rising compensation costs, highlights the company's ability to scale without sacrificing margins. Management's guidance of low-single-digit gross profit growth needed to maintain leverage signals confidence in its cost structure.

3. Capital Allocation:
   $575 million in fiscal 2026 investments—including six new stores and four reconditioning centers—will boost capacity while maintaining a manageable debt-to-equity ratio of 2.92. This disciplined expansion avoids overextending the balance sheet.

Risks and Considerations

• Service Margin Pressures: Persistent losses in service operations (down $4 per retail unit) reflect intense competition and cost inflation. Sustaining margins here remains a near-term hurdle.
• Wholesale Segment Struggles: Gross profit per wholesale unit fell $75 to $1,045, a vulnerability as bulk sales face pricing pressures.
• Macroeconomic Uncertainty: Rising interest rates and tariffs on imported parts could dampen demand for financed vehicles.

Investment Thesis: Buy on Dip, Hold for Long-Term Growth

CarMax's Q1 results affirm its status as a defensive play in a slowing market. Its omni-channel leadership, disciplined capital allocation, and CAF's recurring revenue model position it to outpace peers. Analysts project a 24% FY2026 EPS growth to $3.74, implying a P/E of 22.4—below its five-year average of 25.1.

While near-term volatility may push shares below $60—a level signaling excessive pessimism—the long-term high-teens EPS CAGR makes this a compelling entry point. Investors should consider:

• Buying on dips below $60, where the stock offers a margin of safety.
• Holding for the long term, as digital adoption and credit expansion drive sustained growth.

Conclusion

CarMax's Q1 results are a testament to its operational excellence and strategic foresight. Despite macroeconomic headwinds, the company continues to execute flawlessly, balancing growth and cost control. With a fortress balance sheet and a market share grab enabled by its digital edge, CarMax is poised to capitalize on industry fragmentation. For investors seeking resilience in a volatile market, KMX is a buy.

Stay disciplined, stay curious.