KMX Q3 Deep Dive: Margin Pressures and Demand Headwinds Dominate Management's Focus

Used automotive vehicle retailer Carmax (NYSE:KMX) fell short of the market’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.

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StockStory’s Take

CarMax’s third quarter results were met with a significant negative market reaction, reflecting both top-line and bottom-line misses relative to Wall Street’s expectations. Management attributed the underperformance to inventory and pricing missteps following a demand pull-forward caused by tariff speculation earlier in the year, as well as ongoing consumer caution. CEO Bill Nash explained that the company “fell into a spot where we weren’t as competitive” on pricing, which impacted sales volumes and required rapid adjustments to inventory and price strategy. Management’s commentary was notably cautious as they described softening demand and heightened competitive pressure in the used car retail market.

Looking ahead, CarMax’s management is prioritizing operational efficiency, technology-driven cost reductions, and dynamic pricing to navigate a challenging retail environment. CFO Enrique Mayor-Mora outlined a plan to achieve at least $150 million in selling, general, and administrative expense reductions over the next eighteen months, driven by automation, AI-powered tools, and streamlined processes. At the same time, management plans to reinvest some of these savings into marketing and pricing strategies to support market share growth and maintain competitiveness. Nash emphasized, “We want to be as nimble as possible to ensure we’re as competitive as possible,” highlighting the company’s intent to swiftly respond to shifting market dynamics.

Key Insights from Management’s Remarks

Management identified demand volatility, inventory strategy missteps, credit performance, cost-saving initiatives, and marketing investments as the primary factors shaping the quarter’s results and future actions.

• Inventory and pricing adjustments: CarMax’s decision to build inventory in anticipation of higher demand—driven by tariff speculation—led to accelerated depreciation and reduced price competitiveness, forcing the company to lower retail margins to clear excess stock.
• Shift in customer demand: Management noted a pronounced decline in sales of newer vehicles, with increased consumer interest in older, higher-mileage, lower-priced cars. This shift required changes in sourcing and merchandising strategy to better match evolving customer preferences.
• Credit portfolio recalibration: CarMax Auto Finance saw elevated loss provisions from 2022 and 2023 loan vintages, a result of inflationary pressures on borrowers and higher payment burdens. However, management indicated that newer loan vintages are performing in line with expectations, and recent adjustments are expected to stabilize credit trends.
• SG&A reduction strategy: The company outlined a broad-based plan to reduce selling, general, and administrative expenses by at least $150 million, leveraging automation, technology modernization, and renegotiation of third-party contracts to rationalize spending without constraining growth initiatives.
• Brand and marketing investments: A new “Wanna Drive” omnichannel marketing campaign was launched to raise consumer awareness and drive conversion, with management increasing advertising spend to support this initiative and improve sales funnel performance.

Drivers of Future Performance

CarMax’s outlook is anchored by aggressive cost control, digital investments, and flexibility in pricing to defend market share amid persistent consumer and competitive pressures.

• Technology-enabled operational efficiencies: Management aims to unlock $150 million or more in cost savings through automation, AI-powered customer support, and retiring legacy IT systems, which will help offset inflation and create room for targeted investments in sales and marketing.
• Dynamic pricing and market responsiveness: The company plans to use cost savings to maintain competitive pricing and adapt quickly to fluctuating demand, balancing sales growth with profit protection. Management stressed the need to respond to ongoing “aggressive” industry pricing, especially as consumers remain price-sensitive.
• Credit risk management: While legacy loan vintages from inflationary periods continue to require elevated loss provisions, CarMax expects new underwriting standards and a focus on higher-quality borrowers to gradually improve credit performance and reduce risk to future profitability.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will be closely watching (1) the pace and impact of CarMax’s SG&A cost reductions and whether these translate into sustained margin improvement, (2) early results from the “Wanna Drive” campaign and any lift in conversion rates and traffic, and (3) stabilization in credit performance as new loan vintages replace riskier past cohorts. The effectiveness of dynamic pricing and inventory management will also be critical signposts for recovery.

CarMax currently trades at $46.30, down from $57.06 just before the earnings. Is the company at an inflection point that warrants a buy or sell? Find out in our full research report (it’s free).

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