Tariffs Spark Turbulence for CarMax: A Double-Edged Sword for Used Car Demand

The automotive sector is bracing for a seismic shift as U.S. tariffs on imported vehicles and parts take effect, reshaping the market for both new and used cars. For carmax (KMX), the nation’s largest used-car retailer, the 25% tariffs on imports and components—set to escalate further in May 2025—present a paradoxical opportunity: rising new-car prices could drive consumers toward its inventory, even as supply chain disruptions and inflationary pressures threaten its margins.

The Tariff-Driven Demand Surge (and Its Limits)

Analysts project tariffs will push new-vehicle prices up 10–15%, pricing many buyers out of the market. This has already spurred a rush to purchase before the April 2025 tariff deadline, with March 2025 new-car sales hitting a four-year high of 1.59 million units. But this pre-tariff buying frenzy has left inventories strained, particularly for affordable models like the Honda Civic and Toyota Corolla—vehicles that often end up in used-car lots like CarMax’s.

“Used-car demand could surge as buyers pivot to pre-owned options,” said RBC analyst Steven Shemesh. “However, the affordability of used vehicles is also at risk if parts costs and prices rise.”

The used-car market is already under pressure. March 2025 saw inventory dip to 2.15 million units nationwide, a 12% drop from 2024 levels. Meanwhile, Cox Automotive forecasts used-vehicle values could rise 2–3% in 2025 due to supply constraints. For CarMax, this creates a precarious balance: higher prices might boost revenue per vehicle, but they could also deter budget-conscious buyers.

Supply Chain Headwinds

The tariffs’ indirect effects are equally concerning. Imported parts—critical for maintaining and repairing used cars—face a 25% tariff starting May 2025. This could inflate the cost of routine repairs, such as transmissions or engines, by thousands of dollars per vehicle. CarMax, which refurbishes 60% of its inventory, will likely face margin pressure as repair costs rise.

Analysts estimate tariffs could add $4,000 to $12,000 to the cost of U.S.-made vehicles, depending on imported component reliance. Even domestic vehicles like the Ford F-150, which includes 40% imported parts, will see higher production costs. This could reduce the flow of trade-ins to CarMax, as automakers scale back cheaper models or shift production overseas.

Financial Strains and Strategic Shifts

CarMax’s Q1 2025 results hinted at these challenges. While same-store sales grew in the high-single-digit range, vehicle sales missed estimates by nearly 10,000 units. Loan loss provisions jumped 40–50% to $68 million as the company retained riskier subprime loans. Management cited “broader macro factors,” including tariffs, when removing long-term financial targets.

The company is adapting by expanding its newer pre-owned inventory (0–4-year-old vehicles) and reclaiming outsourced financing to boost margins. Yet, rising interest rates and stagnant wage growth are squeezing consumer budgets. Younger buyers, particularly those under 35, are delaying purchases, while rural consumers prioritize trucks and SUVs—vehicles CarMax may struggle to source affordably.

The Long Game: Risks and Opportunities

The tariffs’ full impact remains uncertain. A Telemetry forecast warns U.S. and Canadian auto sales could drop 1.8 million units in 2025, with long-term sales falling 7 million by 2035. This could amplify demand for used cars but also deepen affordability gaps. Meanwhile, CarMax’s 250+ locations and tech-driven inventory management—like AI for pricing and sourcing—position it to capitalize on market shifts.

However, risks persist. Retaliatory tariffs from Mexico and Canada could disrupt cross-border supply chains, while domestic automakers like Stellantis may halt U.S. production of lower-cost models. If new-car shortages persist, used prices could rise to unsustainable levels, dampening demand.

Conclusion: Navigating a Volatile Landscape

CarMax’s performance hinges on balancing two forces: the tailwind of used-car demand and the headwinds of cost inflation and supply chain fragility. While tariffs may drive short-term gains, prolonged disruptions could strain its ability to maintain affordability and inventory quality.

The numbers tell the story: the U.S. used-car market is projected to grow $40.2 billion by 2029, but CarMax’s Q1 results show that margins are already under pressure. Investors should watch for trends in used-vehicle pricing, repair cost inflation, and the company’s ability to diversify suppliers. For now, the tariffs remain a double-edged sword—one that could cut deep into profits if CarMax cannot adapt.

In this turbulent market, CarMax’s fate mirrors the broader industry’s struggle: thriving in chaos requires both agility and a dose of luck.