CarMax's Retail Resilience: A Buying Opportunity in a Slowing Auto Market?

CarMax (NYSE: KMX) reported fiscal 2026 Q1 earnings on June 20, 2025, delivering a 42.3% surge in net earnings per diluted share to $1.38 and a 12.8% jump in total gross profit to $893.6 million. While average selling prices for used vehicles dipped 1.5% year-over-year, the company's 9% rise in retail used unit sales and record gross profit per retail used vehicle ($2,407) highlight a critical theme: operational efficiency and omni-channel dominance are insulating CarMax from macroeconomic headwinds. For investors, this raises a compelling question: Is the stock's 18% YTD decline a mispricing of CarMax's long-term strengths?

The Profit Paradox: Higher Volumes, Lower Prices, Stronger Margins

CarMax's retail used vehicle sales rose 9% to 230,210 units in Q1, even as average selling prices fell. This might seem counterintuitive in a market where used car values have softened, but the company's strategy has shifted focus from price to volume and margin. Gross profit per retail used unit hit a record high, driven by:
1. Omni-channel execution: Digital sales accounted for 80% of retail units (14% fully online), with hybrid “omni” interactions (e.g., virtual consultations paired with in-person purchases) making up 66%. This reduced costs per sale while expanding reach.
2. Operational leverage: SG&A expenses rose only 3.3%, shrinking as a percentage of gross profit by 680 basis points to 73.8%. This efficiency is a testament to automation tools like the Sky virtual assistant, which boosted consultant productivity by 24%.

The result? A gross profit margin expansion that offset price declines. Even as total revenue growth slowed, the company's ability to sell more cars at higher margins per unit positions it to thrive in a consolidating used car market.

The CAF Headwind: A Temporary Setback or Structural Issue?

CarMax Auto Finance (CAF) income fell 3.6% to $141.7 million, largely due to a $20.5 million increase in loan loss provisions. This reflects broader concerns about credit quality in non-prime lending, particularly for loans originated in 2022–2023. However, this appears more cyclical than structural.
- Risk mitigation: The company expanded its non-prime funding program and reclassified $637.9 million in loans as “held for sale,” reducing exposure to deteriorating vintages.
- Loan penetration: While CAF's role in customer acquisition dipped slightly (41.8% vs. 43.3%), this may be a feature, not a bug. A rise in self-funded buyers and higher penetration of its lower-risk Tier 3 financing (which requires higher down payments) could improve long-term credit stability.

Investors should view CAF's Q1 struggles as a necessary cost of navigating a tougher credit environment—not an indictment of the business model.

Why the Stock's Decline May Be Overdone

CarMax's shares are down 18% year-to-date, underperforming the S&P 500 and the broader retail sector. This discount reflects fears of a slowing used car market, rising credit defaults, and competition from private sellers. Yet three factors suggest the stock is priced for pessimism:
1. Market dominance: CarMax controls ~5% of U.S. used car sales, but its omni-channel model and reconditioning expertise make it the clear leader in the “$10k–$30k” price segment—a sweet spot for budget-conscious buyers.
2. Balance sheet flexibility: The company repurchased $199.8 million in shares in Q1, leaving $1.74 billion authorized. This signals confidence in valuation and reinvestment opportunities.
3. Resilience in downturns: Used car demand is less discretionary than new vehicles, and CarMax's focus on affordability positions it to outperform peers if the economy slows.

Valuation: A Buying Opportunity?

At a trailing P/E of 12.3x (vs. its five-year average of 15.6x), CarMax is undervalued relative to its growth trajectory. Even if used car volumes flatten in 2025, the company's margin expansion and share buybacks could drive earnings upside. Analysts project a 10% EPS growth rate over the next five years—a modest target given CarMax's 9% unit growth in a challenging quarter.

The key risk is a prolonged economic downturn that weakens both credit performance and consumer demand. But in a sector where peers like Sonic Automotive and Lithia Motors have struggled to balance growth and margins, CarMax's execution stands out.

Conclusion: A Core Holding for the Defensive Investor

CarMax's Q1 results underscore its ability to grow profitably even as average prices decline—a rare feat in the used car industry. The stock's YTD underperformance creates an entry point for investors willing to bet on its omni-channel dominance and operational discipline. While CAF's credit challenges merit monitoring, they are unlikely to derail the company's long-term trajectory. For a defensive investor seeking exposure to a consolidating auto retail landscape, CarMax looks like a buy at current levels.

Final thought: In a market obsessed with price trends, CarMax is proving that volume and margin matter more.