CarMax (KMX)

Used automotive vehicle retailer Carmax (NYSE:KMX) missed Wall Street’s revenue expectations in Q3 CY2025, with sales falling 6% year on year to $6.59 billion. Its GAAP profit of $0.64 per share was 38.1% below analysts’ consensus estimates.

Company Overview

Known for its transparent, customer-centric approach and wide selection of vehicles, Carmax (NYSE:KMX) is the largest automotive retailer in the United States.

Buying a vehicle is a big decision and usually the second-largest purchase behind a home for many people, so retailers that sell new and used cars try to offer selection, convenience, and customer service to shoppers. While there is online competition, especially for research and discovery, the vehicle sales market is still very fragmented and localized given the magnitude of the purchase and the logistical costs associated with moving cars over long distances. At the end of the day, a large swath of the population relies on cars to get from point A to point B, and vehicle sellers are acutely aware of this need.

Competitors in the auto retail space include AutoNation (NYSE:AN), Carvana (NYSE:CVNA), Group 1 Automotive (NYSE:GPI), and Lithia Motors (NYSE:LAD).

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $26.37 billion in revenue over the past 12 months, CarMax is one of the larger companies in the consumer retail industry and benefits from a well-known brand that influences purchasing decisions. However, its scale is a double-edged sword because it’s harder to find incremental growth when you’ve penetrated most of the market. To expand meaningfully, CarMax likely needs to tweak its prices or enter new markets.

As you can see below, CarMax grew its sales at a tepid 5.4% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts).

This quarter, CarMax missed Wall Street’s estimates and reported a rather uninspiring 6% year-on-year revenue decline, generating $6.59 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 5.2% over the next 12 months, similar to its six-year rate. This projection is particularly noteworthy for a company of its scale and implies the market is baking in success for its products.

Number of Stores

The number of stores a retailer operates is a critical driver of how quickly company-level sales can grow.

CarMax sported 250 locations in the latest quarter. Over the last two years, it has opened new stores quickly, averaging 2.4% annual growth. This was faster than the broader consumer retail sector.

When a retailer opens new stores, it usually means it’s investing for growth because demand is greater than supply, especially in areas where consumers may not have a store within reasonable driving distance.

Same-Store Sales

A company's store base only paints one part of the picture. When demand is high, it makes sense to open more. But when demand is low, it’s prudent to close some locations and use the money in other ways. Same-store sales gives us insight into this topic because it measures organic growth for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year.

CarMax’s demand has been shrinking over the last two years as its same-store sales have averaged 1.3% annual declines. This performance is concerning - it shows CarMax artificially boosts its revenue by building new stores. We’d like to see a company’s same-store sales rise before it takes on the costly, capital-intensive endeavor of expanding its store base.

In the latest quarter, CarMax’s same-store sales fell by 7.1% year on year. This decrease represents a further deceleration from its historical levels. We hope the business can get back on track.

Gross profit margins are an important measure of a retailer’s pricing power, product differentiation, and negotiating leverage.

CarMax has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 10.9% gross margin over the last two years. That means CarMax paid its suppliers a lot of money ($89.08 for every $100 in revenue) to run its business.

This quarter, CarMax’s gross profit margin was 10.9%, in line with the same quarter last year but missing analysts’ estimates by 4.1%. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

Operating margin is a key profitability metric because it accounts for all expenses necessary to run a store, including wages, inventory, rent, advertising, and other administrative costs.

CarMax’s operating margin might fluctuated slightly over the last 12 months but has generally stayed the same, averaging 2.8% over the last two years. This profitability was lousy for a consumer retail business and caused by its suboptimal cost structureand low gross margin.

Looking at the trend in its profitability, CarMax’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, CarMax generated an operating margin profit margin of 1.8%, down 1.1 percentage points year on year. Since CarMax’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, and administrative overhead increased.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

CarMax has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 2.4% over the last two years, slightly better than the broader consumer retail sector.

CarMax’s free cash flow clocked in at $654 million in Q3, equivalent to a 9.9% margin. This result was good as its margin was 2.6 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

CarMax historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 3.4%, lower than the typical cost of capital (how much it costs to raise money) for consumer retail companies.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

CarMax’s $19.14 billion of debt exceeds the $540.4 million of cash on its balance sheet. Furthermore, its 17× net-debt-to-EBITDA ratio (based on its EBITDA of $1.12 billion over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. CarMax could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope CarMax can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

We struggled to find many positives in these results. Its revenue missed and its EBITDA fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 11.7% to $50.38 immediately following the results.

Updated: December 4, 2025 at 9:39 PM EST

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own CarMax, you should also grasp the company’s longer-term business quality and valuation.

CarMax doesn’t pass our quality test. To kick things off, its revenue has declined over the last three years. And while its popular brand gives it meaningful influence over consumers’ purchasing decisions, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its gross margins make it more challenging to reach positive operating profits compared to other consumer retail businesses.

CarMax’s P/E ratio based on the next 12 months is 16.9x. This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $40 on the company (compared to the current share price of $38.66).