CarMax Earnings: Improving Affordability and Cost Controls Yield a Good Quarter

CarMax’s fiscal 2025 third quarter showed improving affordability for both consumers and inventory procurement. We are leaving our fair value estimate in place, as our thesis that the used-vehicle market will eventually recover from the chip shortage is playing out. Comparable-store retail revenue also increased for the first time since second-quarter fiscal 2023, though only by 0.5%. Diluted earnings per share rose 55.8% year over year to $0.81 and beat the $0.61 LSEG consensus. About 30% of retail units sold priced under $20,000 compared with 25% in the prior year’s quarter, enabling retail average selling prices to fall 3.9% to $26,153. Comparable-store unit volume grew 4.3%, which is a level that drives overhead cost leverage. Overhead as a percent of gross profit lowered by 640 basis points to 85% on cost management and 10.6% gross profit growth. More automated technology to interact with customers while they shop online is increasing the amount of the process a customer can do themselves while keeping labor costs in check. Management’s longer-term overhead costs as a percentage of gross profit target is in the mid-70% range. Much of the heavy spending on technology and other initiatives is complete, so less gross profit growth is needed to drive the overhead cost ratio down further than in recent years.