CarMax (KMX)

Used automotive vehicle retailer Carmax (NYSE:KMX) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 6.7% year on year to $6.00 billion. Its GAAP profit of $0.58 per share was 11.9% 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).

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

With $26.35 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 there is only so much real estate to build new stores, placing a ceiling on its growth. To expand meaningfully, CarMax likely needs to tweak its prices or enter new markets.

As you can see below, CarMax’s sales grew at a tepid 6.4% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts).

This quarter, CarMax grew its revenue by 6.7% year on year, and its $6.00 billion of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 4.9% over the next 12 months, a slight deceleration versus the last six years. We still think its growth trajectory is attractive given its scale and suggests the market is forecasting 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 operated 250 locations in the latest quarter. It has opened new stores quickly over the last two years, averaging 2.9% annual growth, 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 is an industry measure of whether revenue is growing at those existing stores and is driven by customer visits (often called traffic) and the average spending per customer (ticket).

CarMax’s demand has been shrinking over the last two years as its same-store sales have averaged 4.9% 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 rose 5.9% year on year. This growth was a well-appreciated turnaround from its historical levels, showing the business is regaining momentum.

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 10.6% gross margin over the last two years. Said differently, CarMax had to pay a chunky $89.39 to its suppliers for every $100 in revenue.

In Q1, CarMax produced a 11.1% gross profit margin, in line with the same quarter last year but missing analysts’ estimates by 1.1%. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

CarMax was profitable over the last two years but held back by its large cost base. Its average operating margin of 2.7% was weak for a consumer retail business. This result isn’t too surprising given its low gross margin as a starting point.

Analyzing 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’s breakeven margin was in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

CarMax’s full-year EPS dropped 58.5%, or 9.6% annually, over the last five years. In a mature sector such as consumer retail, we tend to steer our readers away from companies with falling EPS because it could imply changing secular trends and preferences. If the tide turns unexpectedly, CarMax’s low margin of safety could leave its stock price susceptible to large downswings.

In Q1, CarMax reported EPS at $0.58, up from $0.32 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates. Over the next 12 months, Wall Street expects CarMax’s full-year EPS of $3.21 to grow 26.6%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

CarMax broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.

Taking a step back, we can see that CarMax failed to improve its margin over the last year. Its unexciting margin and trend likely have shareholders hoping for a change.

CarMax broke even from a free cash flow perspective in Q1. The company’s cash profitability regressed as it was 3.2 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative 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 3.5%, 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 $19.22 billion of debt exceeds the $247 million of cash on its balance sheet. Furthermore, its 18× net-debt-to-EBITDA ratio (based on its EBITDA of $1.06 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 EBITDA missed significantly and its EPS fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 7.1% to $74.45 immediately after reporting.

Updated: May 22, 2025 at 10:29 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in CarMax.

CarMax isn’t a terrible business, but it isn’t one of our picks. To kick things off, its revenue growth was a little slower over the last six years, and analysts expect its demand to deteriorate over the next 12 months. And while its projected EPS for the next year implies the company’s fundamentals will improve, 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 15.5x. Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $84.19 on the company (compared to the current share price of $63.46).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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