Exchange: NYSE | Sector: Consumer Cyclical | Industry: Auto Dealerships
Q2 2025
Published: Sep 27, 2024
Earnings Highlights
Revenue of $7.01B down 0.9% year-over-year
EPS of $0.85 increased by 13.3% from previous year
Gross margin of 10.8%
Net income of 132.81M
""We're pleased with our team's execution in the second quarter, as we achieve positive sales trends, strong margins, cost efficiencies, and EPS growth, while managing through industry-wide auto loan loss pressure."" - Bill Nash
CarMax Inc (KMX) Q2 FY2025 Results Analysis: Omnichannel Momentum and Full-Spectrum Lending Strategy Across a Challenging Auto Credit Cycle
Executive Summary
CarMax reported Q2 FY2025 total sales of $7.0 billion, down 1% year over year, as softer average selling prices offset higher retail unit volumes. The quarter showcased resilience in the core used-vehicle business with retail unit volume up 5.1% YoY and used unit comps up 4.3%, while ASP declined roughly 5% (about $1,250 per unit). Gross profit rose 9% YoY to $760 million, supported by higher EPP and stronger service margins, even as the company faced industry-wide auto loan loss pressure. Net income was $132.8 million and diluted EPS was $0.85, up 13% YoY despite higher provisions in CAF, underscoring the leverage in the blended CarMax model. Management emphasized ongoing cost discipline, SG&A leverage (4 percentage points), and a sharper focus on omni-channel efficiency, logistics optimization, and sourcing improvements.
The company advanced a multi-year growth plan anchored in (1) expanding full-spectrum lending with Tier 2/3 underwriting pilots, (2) funding growth through securitizations, (3) accelerating omnichannel capabilities (order processing, customer shopping accounts, AI-assisted CECs), and (4) optimizing logistics and reconditioning to protect margins. The CAF loan-loss provision rose in the quarter owing to industry-wide credit tightening and a specific uptick in lifetime losses on existing loans, but the reserve build is viewed as a prudent response to evolving credit dynamics. CarMax remains financially robust on a cash-flow basis, generating $619 million of operating cash flow and about $510 million in free cash flow, with a strong balance sheet position and substantial buyback activity ($106 million in Q2). Looking ahead, management indicated confidence in the second-half sales trajectory under current conditions, while continuing to test and refine credit models and operating efficiencies.
Key questions for investors center on: (i) the trajectory of auto-loan losses and the pace of CAF profitability as rate environments evolve; (ii) the degree and speed at which Tier 2/3 lending expands and contributes to earnings; (iii) the sustainability of margin gains from logistics reengineering and omni-channel investments; and (iv) the sensitivity of cash-flow to working-capital dynamics in a slower auto-cycle backdrop. Overall, CarMax’s strategic pivot toward full-spectrum lending, combined with meaningful operating efficiencies and a robust cash-generating engine, supports a cautious but constructive longer-term investment thesis, contingent on credit-cycle normalization and execution of its cost-structure initiatives.
CAF and financing:
- CAF income: $116.0M, YoY -14%.
- Net interest margin (CAF): 6.1% (stable vs prior year).
- Loan-loss provision: $113.0M in the quarter; reserve balance $501.0M; reserve/receivables 2.82% (up modestly QoQ).
- Source of originations: ~ $2.2B CAF Originations, ~42% penetration net of three-day payoffs; Tier 2 penetration 17.7%, Tier 3 6.7%.
Cash flow and balance sheet:
- Net cash from operating activities: $619.1M; capex: -$109.2M; free cash flow: $509.9M.
- Cash and cash equivalents: $524.7M; total debt: $19.208B; net debt: $18.684B.
- Total assets: $27.296B; total liabilities: $21.116B; total stockholders’ equity: $6.180B.
- Cash from operations to debt: 0.0322x; interest coverage: 0.63x; debt ratio: 0.704; debt-to-capitalization: 0.757.
Capital allocation and liquidity:
- Share repurchases: ~$106M spent on ~1.4M shares; remaining repurchase authorization ~ $2.15B.
- Cash conversion cycle: ~51.8 days; inventory turnover: 1.84x; days inventory outstanding around 48.9 days.
Operational cadence and channel mix:
- Online retail share: ~15% of retail unit sales; omni-channel share: ~57%; online revenue contribution ~29% of quarter total revenue; online wholesale transactions were 17% of total revenue; 2Q wholesale auctions all-virtual.
- Management commentary highlights ongoing omni-channel efficiency improvements and centralized logistics initiatives.
Income Statement
Metric
Value
YoY Change
QoQ Change
Revenue
7.01B
-0.85%
-1.40%
Gross Profit
760.47M
9.14%
4.77%
Operating Income
149.91M
34.96%
1 362.77%
Net Income
132.81M
11.95%
-12.88%
EPS
0.85
13.33%
-12.37%
Key Financial Ratios
currentRatio
2.25
grossProfitMargin
10.8%
operatingProfitMargin
2.14%
netProfitMargin
1.89%
returnOnAssets
0.49%
returnOnEquity
2.15%
debtEquityRatio
3.11
operatingCashFlowPerShare
$3.97
freeCashFlowPerShare
$3.27
priceToBookRatio
2.13
priceEarningsRatio
24.81
Net Income vs. Revenue
Expense Breakdown
Management Commentary
Key takeaways from management discussions and Q2 call:
- Strategy and outlook: CarMax reiterated a commitment to full-spectrum lending and omni-channel innovation, including Tier 2/3 testing and securitization as funding catalysts. Bill Nash emphasized, “assessing all aspects of our logistics operations to drive efficiencies” and noted centralization of home delivery, appraisal pickup, and Max offer moves to improve throughput and costs.
- Financial performance and drivers: Enrique Mayor-Mora highlighted the robust gross profit growth and the continued leverage in SG&A, with SG&A leverage of 4 percentage points. Jon Daniels discussed CAF performance amid industry-wide credit tightening, noting a $113M loan-loss provision and a reserve-to-receivables ratio of 2.82%, framed as prudent given vintage-level loss dynamics. He also stressed that Tier 2/3 testing is “in learning mode” with Tier 3 expected in Q3.
- Cash flow and capital allocation: The company generated $619M operating cash flow and $510M free cash flow, enabling a $106M buyback in Q2 and a large remaining authorization (~$2.15B). Roadmap items include investments in order-processing system, AI-enabled knowledge management for CECs, and an EV hub to educate and convert EV-focused demand.
- Market environment and risk: The transcript underscores continued consumer pressure and elevated loan-loss expectations in CAF, with an emphasis on tightening pockets within Tier 1 near the lower end of credit, and the potential for further adjustments if delinquency trends worsen. Management also flagged potential short-term charges related to logistics optimization that could be offset by long-term efficiency gains.
- Management quotes:
- “We’re pleased with our team’s execution in the second quarter, as we achieve positive sales trends, strong margins, cost efficiencies, and EPS growth, while managing through industry-wide auto loan loss pressure.” (Bill Nash)
- “We’re in learning mode and we’re really excited about the full spectrum lending… we deployed our Tier 2 underwriting model and strategies… we’re looking to get into the Tier 3 in probably the back portion of Q3.” (Jon Daniels)
"We're pleased with our team's execution in the second quarter, as we achieve positive sales trends, strong margins, cost efficiencies, and EPS growth, while managing through industry-wide auto loan loss pressure."
— Bill Nash
"We're in learning mode and we're really excited about the full spectrum lending. We deployed our Tier 2 underwriting model and strategies in the back portion of Q2. We're looking to get into the Tier 3 in probably the back portion of Q3. We're excited to learn and we're going to continue to learn throughout probably the fiscal quarter."
— Jon Daniels
Forward Guidance
Outlook and management commentary:
- The leadership signaled confidence in the second-half revenue trajectory assuming current market conditions persist, stating, “assuming current market conditions continue, we feel good about our sales in the second-half of the year.” They emphasized ongoing testing and potential expansion of full-spectrum lending (Tier 2 now, Tier 3 later in Q3) to broaden the addressable market and optimize profitability across credit tiers.
- Catalysts and risks: Securitization programs (non-prime and higher-prime ABS deals) are expected to enhance funding capacity to support growth, while continued credit-tightening could pressure CAF earnings if delinquencies persist. Management also noted ongoing cost-reduction initiatives in logistics and reconditioning, which should translate into margins as volume stabilizes. Key monitoring points for investors include CAF loss provisions (lifetime losses, current-quarter originations), delinquencies and vintage performance, and the progression of Tier 2/3 underwriting across the year.
- View on volatility: The company remains disciplined, indicating that changes to underwriting will be “prudent” and that they will move in the Tier 2/3 space only as they see fit, balancing credit risk with sales growth opportunities.
Competitive Position
Company
Gross Margin
Operating Margin
Return on Equity
P/E Ratio
KMX Focus
10.84%
2.14%
2.15%
24.81%
AN
17.90%
4.24%
5.96%
12.56%
ORLY
50.70%
20.20%
-39.30%
23.94%
AZO
53.90%
17.90%
-10.90%
30.56%
AAP
41.50%
2.67%
1.73%
20.85%
Gross Profit Margin
Operating Profit Margin
Return on Equity
P/E Ratio Comparison
Investment Outlook
Positive longer-term earnings potential for CarMax hinges on disciplined expansion of full-spectrum lending, continued funding diversification via securitizations, and ongoing efficiency gains from omni-channel and logistics initiatives. The Q2 results underscore a resilient core retail operation with improving gross margins and strong cash generation, even as lending reserves and credit-cycle risks surface. Near-term catalysts include Tier 2/3 underwriting deployment, securitization-driven liquidity expansion, and ongoing cost discipline in logistics and reconditioning. Risks include higher loan losses in CAF and potential multiple compression if used-vehicle pricing volatility worsens or macro conditions deteriorate. Overall, the stock presents a cautiously constructive default stance—preferable for investors seeking exposure to a large, scalable used-vehicle retailer with a built-in financing ecosystem, provided they tolerate moderate leverage and credit-cycle sensitivity. Recommended stance: Hold to Accumulate, with close monitoring of CAF delinquencies, Tier 2/3 rollouts, and the efficacy of logistics and reconditioning efficiency programs as the year progresses.
Key Investment Factors
Growth Potential
Expanding into full-spectrum lending (Tier 2 now, Tier 3 later) and securing funding via securitizations should broaden CarMax’s attractive financing mix and growth runway. The omni-channel and logistics enhancements (order processing, AI-assisted CECs, centralized logistics) are expected to lift unit economics and margins, while the EV hub and MaxCare initiatives enhance cross-sell opportunities and customer lifetime value.
Profitability Risk
Credit-cycle risk remains elevated. CAF provisioning rose to $113M with a reserve ratio of 2.82%, reflecting industry-wide stress and pockets of higher-risk borrowers. High leverage (debt to capitalization ~0.757; net debt ~$18.68B) and modest interest coverage (~0.63x) pose near-term earnings volatility if delinquencies worsen. Economic shocks, rate declines influencing NIM, and competitive financing could pressure margins and funding costs.
Financial Position
Solid cash generation with $619M operating cash flow and $510M free cash flow in Q2; cash balance of $524.7M; substantial remaining debt-financing capacity through securitizations and repurchase authorization (~$2.15B). Balance sheet remains debt-heavy, with total debt of $19.21B and debt-to-capitalization of 0.757, but liquidity and cash conversion cycle are positive (CCC ~51.8 days; current ratio 2.25).
SWOT Analysis
Strengths
Strong omnichannel execution and customer experience enhancements (order processing, CECs, and My CarMax account elements) driving higher efficiency per unit and per margin dollar.
Diversified revenue mix with CAF as a scalable financing arm; stable net interest margin in a higher-rate environment (CAF NIM ~6.1%).
Vehicle sourcing capabilities with Edmunds partnership and online instant appraisal growth; 31k dealer-sourced vehicles, 50%+ incremental dealer activation year-over-year.
Strategic capital allocation including $106M buybacks and substantial repurchase authorization remaining; strong free cash flow generation ($509.9M in FIFO).
Securitization program progress (non-prime and higher-prime ABS) expanding funding capacity and financing flexibility.
Weaknesses
Significant leverage and relatively tight interest-coverage metrics (net debt ~ $18.68B; interest coverage ~0.63x) heightening sensitivity to credit-market stress.
CAF provisioning remains elevated in the near term due to industry-wide delinquency pressures and pockets of higher-risk borrowers.
Reliance on used-vehicle pricing and valuation stability; ASP declines continued (down ~5% YoY) pressuring gross margins when volumes are not fully offset.
High working-capital intensity (inventory turnover ~1.84x) and substantial inventory levels amid a slower growth backdrop.
Opportunities
Accelerated Tier 2/3 underwriting and securitization funding to capture larger share of Tier 2/3 lending and expand CAF originations.
Further logistics centralization and reconditioning efficiency improvements to sustain gross margin gains and reduce COGS.
EV ecosystem expansion (EV Hub) and MaxCare cross-sell to lift average revenue per unit and customer lifetime value.
Continued increase in omni-channel penetration and online sales to improve conversion and reduce selling costs per unit.
Threats
Macroeconomic and consumer credit cycles could worsen delinquencies and increase loan-loss reserves beyond current expectations.
Competition from banks, credit unions, and other fintech lenders expanding consumer finance capabilities.
Used-vehicle supply constraints and pricing volatility could compress gross margins if demand softens.
Regulatory and compliance considerations around lending practices and securitization activities.