KMX Q4 Deep Dive: Margin Reset and Leadership Transition Dominate CarMax's Strategy

Used automotive vehicle retailer Carmax (NYSE:KMX) announced better-than-expected revenue in Q4 CY2025, but sales fell by 6.9% year on year to $5.79 billion. Its non-GAAP profit of $0.51 per share was 66% above analysts’ consensus estimates.

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StockStory’s Take

CarMax’s fourth quarter saw revenue and profit ahead of Wall Street’s expectations, but the company faced continued sales declines and operating margin pressure. Management openly acknowledged disappointing recent performance, attributing the results to higher average selling prices that narrowed CarMax’s competitiveness and to cost structures that have become less efficient. Interim President and CEO David McCraight emphasized the need for urgent changes, stating, “It is clear CarMax needs change,” and outlined immediate actions aimed at regaining sales momentum, such as narrowing price gaps and reducing selling, general, and administrative expenses.

Looking forward, CarMax’s leadership believes that its turnaround will hinge on improving price competitiveness, a sharper focus on customer experience, and making digital shopping simpler to increase sales conversion. McCraight explained that, while short-term earnings may remain pressured due to these changes, the company expects benefits from unit growth, enhanced finance and protection product profitability, and further cost reductions. He noted, “We anticipate that earnings pressure will be offset by unit growth, expanded profitability in CAF, and reductions in SG&A and COGS,” signaling a comprehensive operational overhaul.

Key Insights from Management’s Remarks

Management attributed the quarter’s underperformance to higher-than-market average vehicle prices, cost inefficiencies, and a need for more effective digital sales strategies. Several operational levers and leadership changes were highlighted as key to reversing recent trends.

• Leadership transition underway: Interim President and CEO David McCraight was appointed after the board determined urgent change was needed; a search for a permanent CEO is ongoing, with an emphasis on omnichannel and digital transformation experience.
• Margin reset to drive sales: CarMax is proactively lowering margins and supporting these changes with increased marketing spend, aiming to close the price gap with competitors and stimulate sales volumes.
• Customer experience focus: Management highlighted the need to center decisions on customer insights and to challenge longstanding internal assumptions, with a renewed emphasis on fact-based consumer research to improve conversion rates.
• Digital platform overhaul: CarMax aims to simplify its online shopping process and shift its digital presence from information-heavy to conversion-focused, mirroring the sales effectiveness found in its physical stores.
• SG&A and cost reductions: A commitment to at least $150 million in selling, general, and administrative expense reductions by the end of 2027 is underway, including a 30% reduction in its customer experience center workforce and further leveraging technology to streamline operations.

Drivers of Future Performance

Management expects the company’s turnaround efforts to hinge on restoring competitive pricing, operational discipline, and digital sales effectiveness in the next several quarters.

• Competitive pricing strategy: Leadership is implementing dynamic price reductions and enhanced marketing to regain lost sales momentum. The company expects these changes to drive higher unit volumes, though they may pressure near-term earnings as they are rolled out and tested across markets.
• Operational efficiency focus: The company is targeting significant reductions in selling, general, and administrative expenses, as well as the cost of goods sold, through process improvements, technology investments, and the expansion of regional reconditioning centers. These measures are aimed at offsetting margin pressure and supporting a more profitable growth model.
• CAF and product expansion: Management is prioritizing growth in CarMax Auto Finance (CAF) through full-spectrum lending and the rollout of new protection plans like MaxCare Plus, which are expected to enhance ancillary profitability and diversify revenue streams.

Catalysts in Upcoming Quarters

In future quarters, the StockStory team will closely track (1) the impact of price and margin resets on sales volumes and customer acquisition, (2) progress toward the $150 million in SG&A reductions and broader cost control initiatives, and (3) measurable improvements in digital conversion rates and customer satisfaction. Execution on new finance and protection products, as well as the pace of operational changes, will also be key areas of focus.

CarMax currently trades at $39.39, down from $41.07 just before the earnings. In the wake of this quarter, is it a buy or sell? See for yourself in our full research report (it’s free for active Edge members).

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