CarMax mixed quarter: credit loss surge hits CAF despite securitization, buybacks, cost cuts

CarMax, Inc. (NYSE: KMX) - quick take

Straightforward summary: CarMax reported mixed results for the quarter ended August 31, 2025. Six‑month performance shows underlying strength (higher gross profit, higher operating cash flow and EPS), while the quarter was pressured by lower used vehicle volumes, margin management and notably higher credit loss provisions in CarMax Auto Finance (CAF). Management is executing securitizations, accelerating buybacks and pursuing SG&A savings while expanding CAF across the credit spectrum.

Key facts & statistics
- Net sales and operating revenues (three months): $6,594,684. Six months: $14,141,225.
- Gross profit (three months): $717,666. Six months: $1,611,289 (11.4% of revenues for six months).
- CarMax Auto Finance income (three months): $102,638. Six months: $244,288.
- Selling, general & administrative (SG&A) (three months): $601,093. Six months: $1,260,736.
- Net earnings (three months): $95,378. Six months: $305,759.
- Diluted net earnings per share (three months): $0.64. Six months: $2.02.
- Provision for loan losses (quarter): $142.2 million; six months: $243.9 million (pressuring CAF income).
- Allowance for loan losses (end of period): $507,286 (up from $458,730). Allowance as % of auto loans held for investment: 3.02%.
- Auto loans held for investment, net: $16,386,236. Auto loans held for sale (new): $921,928.
- Inventory (Aug 31, 2025): $3,149,570 (was $3,934,622 at Feb 28, 2025).
- Cash and cash equivalents: $540,374; Cash, cash equivalents and restricted cash: $1,305,175.
- Total assets: $27,079,644. Total liabilities: $20,879,122. Shareholders' equity: $6,200,522.
- Total debt: $18,643,782; Non‑recourse notes payable: $17,056,916.
- Shares outstanding as of Sept 24, 2025: 146,845,043 (reported outstanding as of Sept 24). Shares issued & outstanding as of Aug 31, 2025: 147,673,338.
- Store count: 253 used car stores (as of Aug 31, 2025).
- Operating cash flow (six months): $1,085,037 (vs $501,414 prior year).
- Share repurchases in the quarter: 2,920,959 shares; $1.557 billion remaining authorized for repurchase.

What's happening inside the company
- CAF is executing a strategic expansion into broader credit tiers and used a non‑prime securitization (Sept 24, 2025) to sell ~ $930M of loans and expects a gain of ~$25-30M (Q3). Management plans to use these funding levers to grow CAF penetration toward a 50% long‑term target.
- Management accelerated share repurchases in H1 fiscal 2026 and reduced share count materially versus prior year.
- Active margin and inventory management: lowered retail margins in Q2 to accelerate sell‑through after mid‑May inventory depreciation; inventory declined materially from Feb 28 to Aug 31.
- Cost program underway: target of at least $150M SG&A reductions over next 18 months; continued AI rollouts (Skye 2.0) and omni-channel optimization to drive efficiency.

Income statement - positives
- Six‑month gross profit grew to $1,611,289 (up 3.8% YoY) and gross margin improved to 11.4% of revenues for the six months.
- Operating cash flow surged to $1,085,037 (six months), more than double prior year period - strong cash generation.
- Six‑month net earnings rose to $305,759 (+7.2% YoY) and diluted EPS increased to $2.02 (+11.0% YoY).
- CAF interest margin improved: total interest margin of 6.6% (quarter) and 6.5% (six months) of average loans outstanding - customer rates helped margin despite funding cost pressure.
- Advertising & subscription revenues and "other" revenue trends show pockets of growth (Edmunds ad/subscriptions up; other gross profit +13.2% for six months).

Income statement - negatives / risks
- Q2 profitability weakened: net earnings for the three months fell to $95,378 (down 28.2% YoY); earnings before tax fell to $127,097 from $177,844.
- CAF income declined (quarter: down 11.2%; six months: down 7.0%), driven by a materially higher provision for loan losses: $142.2M (Q) and $243.9M (YTD).
- Credit performance deterioration: net credit losses and past‑due loans have increased (past due accounts 5.63% of loans) and the allowance rose to 3.02% of loans - lender risk remains elevated for vintages 2022-2023.
- Used vehicle revenues and units softened: used vehicle sales down (three months) - used units 199,729 (down 5.4% YoY) and used vehicle revenues down 7.2% in the quarter; average selling price declined 1.0% (quarter).
- SG&A deleveraged in the quarter: SG&A was 83.8% of gross profit (vs 80.3% prior), pressuring operating leverage.
- Non‑recourse funding concentration: $17.06B of non‑recourse notes finance CAF; funding market or warehouse disruptions could affect funding costs or availability.

Near‑term catalysts & watch items
- Securitization close (Sept 24, 2025): expected gain ~$25-30M and ~ $40-45M servicing/CAF income over life - immediate earnings catalyst and off‑balance funding relief.
- Management expects Q3 provision for loan losses to be < $100M (guidance caveated by origination mix & macro).
- Execution of $150M+ SG&A savings and the pace of share repurchases will materially influence EPS trajectory and free cash flow.
- Watch credit vintages (2022-2023), recovery rates, delinquency trends and funding spreads - these drive CAF earnings volatility.
- Inventory turns and used vehicle pricing: management actions on pricing and buys will determine retail unit recovery and gross profit per unit in coming quarters.

Bottom line: CarMax shows solid cash generation, improving six‑month profitability and active capital return, but the quarter exposes execution and credit pressure in CAF. If management can stabilize credit trends, deliver the SG&A savings and monetize non‑prime funding as planned, the company has a clear path to re‑leverage margins and EPS growth; conversely, rising credit losses or funding stress would meaningfully compress CAF income and overall profitability.