CarMax's Q1 Surge Signals Undervalued Growth in Used-Car Retail

CarMax (NYSE: KMX) delivered a robust Q1 2026 earnings report, showcasing its ability to navigate a challenging macroeconomic environment while expanding its footprint in the used-car retail sector. The company's 42.3% jump in EPS to $1.38, combined with 6.1% revenue growth to $7.55 billion, highlights its operational resilience. Beneath the headline numbers, however, lie several undervalued catalysts that position CarMax to capitalize on a cyclical recovery in the automotive market. Investors should take note: this is a stock primed to benefit from its strategic advantages in inventory, digital innovation, and market share gains.

Resilience Through Operational Excellence

CarMax's Q1 results underscore its ability to thrive in a slowing market. While wholesale vehicle gross profit dipped slightly—likely due to competitive pricing pressures—the company's retail division shone. Used vehicle sales rose 7.5%, with retail units up 9.0% year-over-year, driven by a record $2,407 in gross profit per unit. This outperformance reflects strong pricing discipline and a focus on high-margin vehicles. Crucially, SG&A expenses as a percentage of gross profit improved by 680 basis points, demonstrating cost leverage even as compensation and advertising rose. This efficiency suggests CarMax can sustain margins even if economic headwinds persist.

Digital Dominance: A Strategic Moat

The company's omni-channel strategy is a key differentiator. 80% of retail unit sales now involve digital touchpoints, with 14% completed entirely online—a figure set to rise as new reconditioning centers streamline inventory flow. This shift reduces reliance on physical stores and lowers customer acquisition costs. Competitors like Lithia Motors (LTHA) and AutoNation (AN) lag in digital integration, leaving CarMax well-positioned to capture market share in a sector where online adoption is accelerating.

Market Share Gains in a Fragmented Industry

CarMax's 11.67% market share in the automotive aftermarket—a 0.96% increase year-over-year—reflects its ability to outmaneuver rivals. While Lithia (16.30%) remains the leader, CarMax's 9.0% retail unit growth and 38.4% surge in dealer-sourced vehicle purchases signal a strategic shift to diversify inventory. This approach not only boosts supply but also allows CarMax to undercut competitors on pricing. In a sector where the top five players control just 52% of the market, there's ample room for consolidation, and CarMax's scale and efficiency make it a likely consolidator.

Undervalued Catalysts for Long-Term Growth

1. Store Expansion and Infrastructure: Plans to open six new stores and four reconditioning centers in 2026 will deepen regional dominance and reduce reconditioning costs.
2. Share Buybacks: With $1.74 billion remaining under its repurchase authorization, management is aggressively returning capital to shareholders.
3. CAF Risk Mitigation: Expanding its non-prime funding program (reclassifying $637.9 million in loans as “held for sale”) reduces balance sheet risk and improves liquidity.

Risks and Opportunities Ahead

The stock's current price of $64.33 lags behind the average analyst target of $82.79—a 28.7% upside. However, risks persist: rising loan loss provisions in CAF and weak wholesale margins could pressure near-term profits. Yet, these issues are mitigated by CarMax's disciplined cost management and its focus on high-margin retail sales.

Investment Thesis

CarMax's Q1 results and strategic moves suggest it's undervalued relative to its growth potential. The company's digital dominance, cost efficiencies, and market share gains position it to outperform in a sector poised for recovery as economic uncertainty eases. With a GuruFocus one-year target of $79.17 and strong analyst sentiment, KMX is a buy for long-term investors. Monitor for further share buybacks and store openings as key catalysts.

In a cyclical market, CarMax isn't just surviving—it's building a moat. This is a stock to own for the next upturn in automotive retail.