CarMax's Turnaround Hinges on Closing the Pricing Gap as New CEO Navigates Sales Slump and Cost-Cutting Push

CarMax's recent struggles aren't a mystery. The numbers tell a clear story of a business that has drifted out of alignment with its customers. For the third quarter of its 2026 fiscal year, the company reported net sales down 6.9% and earnings down 50.4%, with used-vehicle unit sales falling 8%. This isn't just a blip; it's a sustained decline in the core activity that drives the business.

The root of the problem appears to be a pricing gap. While the company's average selling price increased slightly to $26,383, that move seems to have made its offering less attractive. Leadership has been candid, calling recent results "unacceptable" and stating the company has "fallen well short of its underlying potential." In other words, the business model that once worked is now out of step. The premium pricing, combined with rising costs that have pushed selling, general, and administrative expenses to 98.5% of gross profit, has created a situation where the value proposition no longer clicks for buyers.

The result is a classic case of sacrificing volume for margin. When prices drift too high, even in a strong used-car market, customers simply walk away. CarMax's unit sales are the canary in the coal mine, showing that the gap between what the company is offering and what the market is willing to pay has grown too wide. The company's new leadership, from interim CEO David McCreight to interim chair Tom Folliard, is now tasked with closing that gap. Their strategy-lowering prices, boosting marketing, and cutting costs-is a direct admission that the old approach wasn't working. The turnaround begins with a simple business rule: you can't sell cars you don't price competitively.

The New CEO's Playbook: Lower Prices, Tighter Costs

The turnaround plan is now concrete, moving from broad statements to specific, actionable steps. The new leadership, guided by both internal urgency and external pressure from activist investor Starboard Value, has laid out a clear dual strategy: lower prices to attract buyers and slash costs to improve the bottom line.

The first pillar is a targeted price cut. Leadership acknowledges that average selling prices have drifted too high, making the offering less attractive. Their plan is to make modest price reductions of approximately $100 to $300 per vehicle. This isn't a blanket discount but a more nuanced approach, with some vehicles priced lower by $500 and others by $1,000. The goal is to close the gap between CarMax's prices and what the market is willing to pay, directly addressing the core problem of falling unit sales.

The second, equally critical pillar is a major overhaul of expenses. The company has set a goal to slash selling, general, and administrative expenses by $150 million per year. This is a significant operational shift aimed at improving the fundamental cost structure. To guide this effort, Starboard Value has recommended a specific target: bringing SG&A down to 70%-75% of gross profit. That's a major discipline move from the current level of 98.5% of gross profit, which has been a key drag on earnings.

Crucially, this cost-cutting is paired with a strategic pivot in marketing. While spending on SG&A is being slashed, the company plans to invest more in marketing. This is a deliberate shift from previous spending patterns. The idea is to use marketing dollars more effectively to drive unit sales, creating a virtuous cycle where lower prices attract more volume, and targeted advertising helps fill the lots.

The math here is straightforward. Lower prices risk squeezing gross profit per car, but the $150 million annual expense reduction provides a direct offset. The marketing investment aims to boost volume enough to compensate for the price drop, while the new SG&A target ensures the company doesn't simply trade one inefficiency for another. This playbook is a classic business reset: it sacrifices some near-term margin to win back volume and, ultimately, long-term profitability.

The Catalysts and Risks: Can the Turnaround Work?

The success of CarMax's turnaround now hinges on a few critical factors, where execution will be everything. The plan is clear, but the path is narrow. The primary catalyst is whether the company can reverse its 8% decline in used-vehicle unit sales. This is the core metric that has been falling for three straight quarters. The new strategy-lowering prices and boosting marketing-is a direct bet that customers will return if the value proposition improves. The goal is to drive sales growth again, as interim chair Tom Folliard stated. If this works, it creates the volume needed to offset the price cuts and make the cost savings more impactful.

The major risk, however, is that aggressive price cuts could further compress already thin profit margins. The company's gross profit per car is under pressure, and the plan explicitly involves "lowering used-vehicle prices and margins." This creates a tension: lower prices attract volume, but they also squeeze the profit on each sale. The $150 million annual SG&A reduction is meant to be a direct offset, but hitting that target is no small feat. The company's SG&A expenses were already a massive 98.5% of gross profit last quarter, up from 85% the year before. Slashing that by $150 million requires deep operational discipline, and any shortfall would leave the company with lower prices and no cushion to protect earnings.

Then there's the key uncertainty: the new CEO's background. Keith Barr, who officially took the helm on March 16, 2026, comes from the hospitality world, having led InterContinental Hotels Group. While he brings over 25 years of executive experience, the leap from managing hotel chains to running a massive automotive retail network is significant. The question is whether his expertise in customer service and operational efficiency can be effectively translated to a business where inventory turnover, pricing dynamics, and dealer competition are fundamentally different. His ability to understand the nuances of the used-car market and execute the complex pricing and marketing strategy will be the ultimate test of his leadership.

In the end, the turnaround is a balancing act. It requires the price cuts to work immediately to stop the sales slide, while the cost cuts must be implemented rigorously to protect the bottom line. The new CEO's unfamiliarity with the industry adds a layer of risk, but also the potential for fresh, outside-the-box thinking. The market will be watching closely to see if CarMax can close the gap between its offering and the marketplace, and if its new leader has the right playbook for the job.