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SEC filingCarMax faces sales pressure, lowers margins, and targets $150M SG&A savings by FY27; near-term earnings pressure expected.
For the third quarter of fiscal 2026, CarMax reported net sales and operating revenues of $5,793.9 million, a decrease of 6.9% year-over-year. Gross profit fell 12.9% to $590.0 million, with gross profit per used unit declining $71 to $2,235. Net earnings dropped 50.4% to $62.2 million, and diluted EPS decreased 46.9% to $0.43. The decline was driven by an 8.0% decrease in used unit sales and a 9.0% decrease in comparable store used unit sales, partially offset by a slight increase in average selling price. Wholesale vehicle revenues also decreased 6.3% on 6.2% fewer units. SG&A expenses increased 1.0% to $581.4 million, driven by a $19.6 million increase in advertising for a new brand campaign, partially offset by lower share-based compensation. As a result, SG&A as a percentage of gross profit deleveraged to 98.5% from 85.0%.
For the first nine months, revenues declined 2.0% to $19,935.2 million, gross profit fell 1.3% to $2,201.3 million, and net earnings decreased 10.4% to $368.0 million. Used unit sales were down 1.1%, and comparable store used units decreased 2.1%. Wholesale unit sales declined 2.3%.
The CarMax Sales Operations segment saw revenue decline 2.0% to $19.94B for the nine months, with used gross profit per unit down 0.5% to $2,295. Wholesale gross profit per unit decreased 3.4% to $984. The CAF segment reported income of $419.0 million, a decrease of 0.8%, as a $50.9 million increase in the provision for loan losses offset a 0.2% improvement in total interest margin. CAF income for the third quarter increased 9.3% to $174.7 million due to a $27.0 million gain on sale of auto loans from a non-prime securitization. Net loan originations decreased 3.9% to $6.12B for the nine months, with CAF penetration declining 50 basis points to 42.3%. Credit quality metrics weakened, with annualized net credit losses rising to 2.54% from 2.13% in Q3, and the allowance for loan losses increased to 2.87% of ending loans held for investment (vs. 2.70% a year ago).
Management outlined several strategic initiatives to address sales pressure. They plan to meaningfully lower used vehicle margins to reduce the price gap with the marketplace and increase marketing spend to drive traffic. A comprehensive cost review is underway, targeting at least $150 million in SG&A exit rate savings by the end of fiscal 2027. The first step was a 30% reduction in Customer Experience Center workforce, expected to save ~$35 million annually. For the near term, these actions are expected to pressure earnings, but over the longer term, they anticipate unit growth, expanded CAF and ancillary product profitability, and SG&A leverage. The initial goal is to achieve SG&A as a percentage of gross profit in the mid-70% range on an annual basis. Capital expenditures for fiscal 2026 are estimated at $575 million. The company also expects CAF penetration to eventually reach 50%, with each percentage point generating $10–12 million in lifetime pre-tax income per year of origination. They plan to continue store expansion, opening one more store and one reconditioning center in the remainder of the fiscal year.
Cash and cash equivalents totaled $204.9M, down from $246.9M at February 28, 2025. Total debt decreased $1.35B year-to-date to $17.35B, driven by net repayments of non-recourse notes payable ($1.15B) and long-term debt ($212M). Inventory fell to $3.13B from $3.93B, reflecting improved supply chain management. Shareholders' equity was $6.06B, down $178M due to share repurchases and lower retained earnings.
No material purchase commitments were disclosed in the Notes. A $2.0B share repurchase authorization remains outstanding with $1.36B unused. The company has $2.0B undrawn on its revolving credit facility, providing ample liquidity.
During Q3 2025, CarMax repurchased 4.6M shares for $203.7M at an average price of $43.71. For the nine-month period, total buybacks were $588.4M. No dividends were paid. Capital expenditures totaled $408M for the nine months, primarily for store expansion and technology. The company amended its term loan in November 2025, reducing outstanding principal by $200M to $500M and extending maturity to 2030.
CarMax operates two reportable segments: CarMax Sales Operations (auto merchandising and services) and CarMax Auto Finance (CAF). Sales Operations generated $5.79B in revenue with a gross profit of $590M (10.2% margin), down 6.9% YoY. CAF reported $448M in interest and fee revenue, $174.7M in income (39% margin), up 9.3% YoY, driven by a gain on sale of auto loans ($27M) and lower provisions. CAF's auto loan portfolio decreased to $16.53B from $17.59B, with credit quality stable.
Operating cash flow (CFO) was $2,338M, significantly exceeding net income of $368M, a CFO-to-NI ratio of 6.4x, indicating strong cash generation beyond earnings. The primary drivers were a $909M gain from sale of auto loans and a $807M reduction in inventory, alongside non-cash adjustments like depreciation ($252M) and share-based compensation ($87M). Working capital changes were favorable, with a large inventory drawdown and increased accounts payable? (Actually accounts payable decreased $321M, which is a use of cash, but overall net working capital contributed positively due to inventory reduction).
Capital expenditures of $408M grew 20% YoY, reflecting continued investment. Free cash flow (CFO minus capex) would be approximately $1,930M, but not explicitly stated. The company returned $588M to shareholders via stock repurchases, which is well-covered by operating cash flow.
Anomalies: The $909M proceeds from sale of auto loans is a significant non-recurring item? It's part of operating activities as a gain? Actually it's a line item 'Proceeds from sale of auto loans' listed as an adjustment. It boosted CFO substantially. Without it, CFO would have been $1,429M, still strong but lower. The inventory reduction of $807M is also notable, possibly a one-time working capital benefit. Overall, cash flow quality is solid but includes some non-recurring items that may not persist.