- Decline in Sales and Profitability: Total sales fell to $6.6B (-6% YoY), with used unit sales down 5.4% and average selling price dropping $250, while retail gross profit per used unit decreased $200 sequentially.
- Inventory Depreciation Impact: Earnings were below expectations due to $1B inventory depreciation driven by tariff speculation and demand pull-forward into Q1.
- CAF Performance: CarMax Auto Finance originated $2B in loans (42.6% penetration) but income fell to $103M (-11% YoY), despite a 50 bps net interest margin increase to 6.6%.
- Cost Reductions and Reinvestment: $150M SG&A cuts over 18 months aim to offset inflation, with savings reinvested in pricing competitiveness and marketing ($200/car for pricing)."
- Inventory and Credit Strategy: Shift toward older inventory and cautious expansion into upper-tier second credit segment, avoiding deep subprime, while maintaining healthy inventory levels.
Operational Challenges
The company attributed the challenges to inventory buildup ahead of the second quarter due to tariff speculation, leading to inventory depreciation during the quarter, and a pull-forward of demand into the first quarter. To address these issues, CarMax lowered retail margins and adjusted their inventory management, which has shown positive results in terms of improved price competitiveness and inventory position.
CarMax Auto Finance (CAF) Performance
CAF originated over $2 billion in loans, achieving a penetration rate of 42.6%. CAF income for the quarter was $103 million, down from $116 million last year. Net interest margin on the portfolio was 6.6%, up 50 basis points year-over-year. The company expects CAF income to be slightly down from the previous year for fiscal year 2026.
Future Outlook and Cost Reduction Initiatives
CarMax plans to increase marketing spend in the back half of the year to support the new "Wanna Drive" brand positioning. The company expects to achieve at least $150 million in SG&A reductions over the next 18 months through initiatives such as technology modernization, process automation, and cost optimization. These savings will offset inflationary pressures and provide flexibility for reinvestment. With a P/E Ratio of 12.98 and an ROE of 8.36%, the market is pricing in a certain level of growth and profitability.
Valuation and Growth Prospects
The market is currently pricing in a certain level of growth and profitability, as reflected in the P/E Ratio of 12.98 and an ROE of 8.36%. The company's plans to reinvest some of the savings back into the business while also taking some to the bottom line are expected to drive future growth. Analysts estimate next year's revenue growth at 2.6%, indicating a moderate growth outlook.