CarMax Impresses Wall Street But I’m Not Buying
The used car giant turned some heads but I see trouble ahead.
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On Wednesday morning, CarMax (KMX) released the firm’s fiscal first quarter financial results. For the three-month period ended May 31, CarMax posted a GAAP EPS of $1.31 on revenue of $8.014 billion.
While the sales print was good for year-over-year growth of 6.1%, these top- and bottom-line results both easily beat Wall Street’s expectations.
President and CEO Keith Barr commented in the press release:
“I came to CarMax because I saw a strong foundation, an award-winning, people-first culture, and significant potential to unlock growth. Three months in, I am more convinced than ever that this is a business with everything it needs to thrive”
He added: “We are entering this fiscal year with a clear strategy that is driving early results.”
He continued: “We have identified four strategic pillars that will meaningfully improve how we operate at scale and support strong performance. Our goal is clear: deliver strong unit sales and earnings growth that enables us to consistently reward our shareholders.”
Operations
We already know that revenue for the period grew 6.1% to $8.014 billion. Within that total, used vehicle sales were up 4.7% to $6.391 billion, wholesale vehicle sales were up 14% to $1.428 billion and other sales were up small to $194.6 million. Total cost of those sales increased 7.6% to $7.159 billion. This left a gross profit of $854.4 million (+4.4%) as gross margin dropped from 11.8% to 10.7%.
After accounting for auto financing income, operating expenses, other income and expenses, interest and taxes, GAAP net income printed at $185.627 million (-11.8%). This works out to a GAAP EPS of $1.31, fully diluted versus $1.38 for the year-ago comparison.
Sales Performance
Used Vehicles: Up small to 230,293 units as average selling price increased 4.5% to $27,288. Used vehicle gross profit dropped from 9.1% to 7.8%.
Wholesale Vehicles: Up 8.4% to 162,064 units as average selling price increased 5.1% to $8,364. Wholesale vehicle gross profit dropped from 12.5% to 11.9%.
Fundamentals
For the period reported, CarMax generated operating cash flow of $17.589 million, down huge from the year-ago comp. Capex spending dropped 24% to $103.335 million, leaving a “free” cash flow of -$85.746 million, down from last year’s $162.807 million.
Moving on to the balance sheet, the firm’s available cash position dropped almost in half from last year to $132.223M. This does not include $595.1M in restricted cash on auto loans held for investment. That number is in line with last year’s total. Inventories are up to $4.063B. This puts current assets at $5.834B. Current liabilities add up to $2.157B, which includes normal short-term debt of just $17.234M, but current non-recourse notes payable of $554.081M. This leaves the firm’s current and quick ratios at 2.70 and 0.82 respectively. While the current ratio is fine, the quick ratio is a little on the dicey side. The short-term debt situation is frightening.
Total assets amount to $26.627 billion. Nothing is labeled as either “goodwill” nor as intangible, which we appreciate. Total liabilities less equity comes to $20.508 billion. This does include normal long-term debt of $2.061 billion and non-recourse notes payable of $15.499 billion. This debt load, though down from last year at this time, is terrifying.
Opinion
Color me unimpressed. CarMax might have beaten expectations, but the stock is trading lower and it’s not hard to see why. The firm did not provide specific numerical guidance, cash flows are negative, the debt load is out of control, leaving the balance sheet in a very tough place. Fundamentally, I cannot buy these shares.
Readers will see that KMX, over the course of 2026, has broken to the upside out of two consecutive rising-wedge patterns of bullish reversal.
Will the stock now sell off hard as it did in early April? A test possibly looms later at the stock’s 21-day EMA. Relative strength has just fallen out of a technically overbought place but is still probably too robust. The daily MACD is still set up bullishly though all three components have made bearish trend on Wednesday morning. I believe that KMX can be shorted above its 21-day EMA. If the swing crowd rescues the stock at that line, get flat the shares. If not, the place to cover would be just above the 50-day SMA, in my opinion.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
