KMX Q1 Earnings: CarMax Matches Revenue Expectations, Misses Profit Targets Amid Shifting Market Dynamics
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 billion. Its non-GAAP profit of $0.60 per share was 8.6% below analysts' consensus estimates.
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Revenue: $6 billion vs analyst estimates of $5.99 billion (6.7% year-on-year growth, in line)
Adjusted EPS: $0.60 vs analyst expectations of $0.66 (8.6% miss)
Adjusted EBITDA: $234.2 million vs analyst estimates of $228.7 million (3.9% margin, 2.4% beat)
Operating Margin: 2.5%, in line with the same quarter last year
Free Cash Flow Margin: 0.3%, down from 3.6% in the same quarter last year
Locations: 250 at quarter end, up from 245 in the same quarter last year
Same-Store Sales rose 5.9% year on year (-2% in the same quarter last year)
Market Capitalization: $9.93 billion
CarMax's first quarter results reflected steady growth in unit sales and improved operational efficiency, driven by investments in technology and a broader product mix. Management attributed the year-on-year sales increase to enhanced digital capabilities, a more efficient sourcing process from both consumers and dealers, and ongoing cost savings across logistics and reconditioning operations. CEO Bill Nash cited the company's ability to offer a seamless online and in-store experience as a key differentiator in the highly competitive used car market.
Looking forward, CarMax's leadership emphasized the potential impact of new tariffs and rising parts costs, which could influence both demand and profitability. They highlighted ongoing efforts to mitigate these risks through cost control and expanded financing offerings, while also noting that macroeconomic uncertainty and shifting consumer preferences continue to shape the company's outlook. Management was cautious in its forward guidance, focusing on sustaining recent momentum and adapting to changing market conditions.
CarMax's management provided a comprehensive update on the factors driving the quarter's performance and the company's evolving strategy. They highlighted improvements in unit volumes, digital engagement, and operational efficiencies, while also addressing near-term challenges around profitability and external cost pressures. The discussion underscored CarMax's commitment to balancing growth initiatives with prudent cost management in a volatile economic environment.
Digital Sales Integration: CarMax saw a growing proportion of retail transactions supported by digital tools, with 67% of sales classified as 'omni-channel' under the updated definition. Management expects continued growth in digitally assisted sales as online tools and customer adoption improve.
Supply Chain and Sourcing: The company achieved record vehicle sourcing from both consumers and dealers, driven by enhancements to its online appraisal platform and dealer-facing solutions. These initiatives are designed to broaden inventory and better meet shifting consumer demand.
Financing Model Expansion: CarMax Auto Finance (CAF) expanded its lending across more segments of the credit spectrum. By retaining a greater share of profitable loan originations previously allocated to third parties, management expects to increase CAF's penetration and drive long-term income growth, despite higher near-term provisions for loan losses.
Operational Efficiency Gains: The company reported meaningful cost savings in logistics and reconditioning, exceeding initial targets with $125 per unit in annual efficiency improvements. These savings are expected to help offset rising parts costs and support affordability for customers.
Market Share and Product Mix: CarMax experienced notable growth in sales of late-model (zero to four-year-old) vehicles, while maintaining its presence in the six- to ten-year-old segment. Management emphasized a flexible approach to inventory mix, based on evolving consumer preferences and market dynamics.
Management's outlook for the coming quarters is shaped by ongoing investments in digital capabilities, efficiency initiatives, and expanded financing options, all set against a backdrop of macroeconomic uncertainty and possible cost inflation. No explicit revenue or profit guidance was provided for the next quarter or the full year.
Tariffs and Cost Pressures: New tariffs on automotive imports and rising parts prices could increase costs for both new and used vehicles. Management plans to mitigate these impacts through ongoing efficiency gains and pricing strategies, but acknowledged uncertainty around the ultimate effect on demand and margins.
Financing Penetration: CarMax's strategy to broaden its credit spectrum and recapture more loan originations is expected to drive future income growth in CarMax Auto Finance, albeit with temporarily higher provisions for loan losses as the mix shifts.
Digital Experience Enhancements: Continued investment in online tools and customer-facing technology is aimed at increasing conversion rates, improving the shopping experience, and supporting sales growth, especially as consumer preferences evolve toward more digital interactions.
Sharon Zackfia (William Blair): Asked about the drivers behind the company's market share recovery and lessons learned from earlier periods of share loss; management cited improved execution, expanded sourcing, and adaptability to changing consumer preferences.
Seth Basham (Wedbush Securities): Inquired about the impact of new car tariffs on used vehicle demand and CarMax's share gains; CEO Bill Nash explained that higher new car prices could drive more consumers to the used market, especially for late-model vehicles.
John Murphy (Bank of America): Questioned the sustainability of operational cost savings and the company's ability to maintain margins amid changing reconditioning and supply chain dynamics; management highlighted ongoing efficiency efforts and the benefits of additional reconditioning capacity.
Rajat Gupta (JPMorgan): Sought details on how CarMax is managing inventory acquisition amid tariff uncertainty and auction market volatility; management emphasized long-standing expertise in inventory management and reliance on data-driven sourcing.
Chris Bottiglieri (BNP Paribas): Asked if CarMax has remaining cost levers to pull in the event of an economic downturn; CFO Enrique Mayor-Mora responded that further efficiency improvements are planned and the company retains the ability to adjust costs as needed.
In upcoming quarters, our analysts will watch (1) the company's ability to manage cost inflation and pass along efficiency gains to offset tariff-related headwinds, (2) the pace of growth in digitally supported and omni-channel sales as technology initiatives mature, and (3) continued expansion of CarMax Auto Finance's penetration across the credit spectrum. Execution on these fronts, along with adaptability to macroeconomic and industry shifts, will be critical indicators of CarMax's ability to sustain growth and profitability.
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