Group 1 - The average cost of a new light vehicle has reached $48,000, indicating a significant increase in automobile prices in recent years [1] - The introduction of tariffs is expected to further drive up new car prices, providing potential tailwinds for the automotive market [1] - Observing megatrends can yield insights into societal advancements and investment opportunities, although identifying the right companies to capitalize on these trends is challenging [1] Group 2 - The focus on fundamentals, quality of leadership, and product pipeline is essential for uncovering investment opportunities, especially in medium-sized companies and startups [1] - The analyst has experience in evaluating startups and emerging industries, which can provide valuable insights into market dynamics [1]

PART I. FINANCIAL INFORMATION [Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements for the three months ended May 31, 2025, and 2024, including Statements of Earnings, Comprehensive Income, Balance Sheets, Cash Flows, and Shareholders' Equity, reporting net sales of $7,546,541 thousand and net earnings of $210,381 thousand for the quarter ended May 31, 2025, with total assets of $27,386,405 thousand Consolidated Statements of Earnings Highlights | Indicator | Three Months Ended May 31, 2025 | Three Months Ended May 31, 2024 | | :--- | :--- | :--- | | Net Sales and Operating Revenues | $7,546,541 thousand | $7,113,397 thousand | | Gross Profit | $893,623 thousand | $791,895 thousand | | Net Earnings | $210,381 thousand | $152,440 thousand | | Diluted Net Earnings Per Share | $1.38 | $0.97 | Consolidated Balance Sheets Highlights | Indicator | As of May 31, 2025 | As of February 28, 2025 | | :--- | :--- | :--- | | Total Current Assets | $5,452,591 thousand | $5,077,636 thousand | | Total Assets | $27,386,405 thousand | $27,404,206 thousand | | Total Current Liabilities | $2,277,352 thousand | $2,197,971 thousand | | Total Liabilities | $21,099,496 thousand | $21,161,218 thousand | | Total Shareholders' Equity | $6,286,909 thousand | $6,242,988 thousand | Consolidated Statements of Cash Flows Highlights | Indicator | Three Months Ended May 31, 2025 | Three Months Ended May 31, 2024 | | :--- | :--- | :--- | | Net Cash Provided By (Used In) Operating Activities | $299,543 thousand | ($117,689) thousand | | Net Cash Used In Investing Activities | ($141,189) thousand | ($105,870) thousand | | Net Cash Used In Financing Activities | ($129,425) thousand | ($112,384) thousand | [Notes to Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes provide detailed information on the company's accounting policies and financial data, covering revenue recognition, CarMax Auto Finance (CAF) operations, auto loan portfolio composition and credit quality, debt structure, and share-based compensation, with the allowance for loan losses at **2.76%** of auto loans held for investment and total debt at **$18,786,084 thousand** as of May 31, 2025 - CarMax operates two reportable segments: CarMax Sales Operations (auto merchandising and service) and CarMax Auto Finance (CAF), which provides financing to customers[22](index=22&type=chunk) Disaggregation of Revenue (In millions) | Revenue Source | Q1 FY2026 | Q1 FY2025 | | :--- | :--- | :--- | | Used vehicle sales | $6,103.4 | $5,677.5 | | Wholesale vehicle sales | $1,252.7 | $1,256.4 | | Extended protection plan revenues | $131.7 | $118.8 | | **Total net sales and operating revenues** | **$7,546.5** | **$7,113.4** | CarMax Auto Finance Income (In millions) | Component | Q1 FY2026 | Q1 FY2025 | | :--- | :--- | :--- | | Total interest margin | $287.9 | $270.2 | | Provision for loan losses | ($101.7) | ($81.2) | | Total direct expenses | ($44.5) | ($42.0) | | **CarMax Auto Finance income** | **$141.7** | **$147.0** | - The allowance for loan losses increased to **$474.2 million** (**2.76%** of loans held for investment) as of May 31, 2025, up from **$458.7 million** (**2.61%**) at the end of the prior fiscal year, driven by unfavorable loan loss performance, particularly from 2022 and 2023 originations, partially offset by the release of allowance for loans reclassified to held for sale[50](index=50&type=chunk) Debt Composition as of May 31, 2025 (In thousands) | Debt Description | Amount | | :--- | :--- | | Term loan | $699,808 | | Senior notes | $400,000 | | Financing obligations | $483,977 | | Non-recourse notes payable | $17,202,299 | | **Total debt** | **$18,786,084** | - During Q1 FY2026, CarMax repurchased **2,952,500 shares** of its common stock at an average cost of **$67.66 per share**[84](index=84&type=chunk) - As of May 31, 2025, **$1.74 billion** remained available for repurchase under the board's authorization[84](index=84&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=32&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the financial results for Q1 FY2026, highlighting a **6.1%** increase in net sales and a **38.0%** rise in net earnings year-over-year, driven by a **9.0%** increase in used unit sales, covering performance of CarMax Sales Operations and CarMax Auto Finance (CAF) segments, strategic updates, cost efficiencies, and future outlook Q1 FY2026 Financial Highlights vs. Q1 FY2025 | Metric | Q1 FY2026 | Change from Q1 FY2025 | | :--- | :--- | :--- | | Net sales and operating revenues | $7,546.5 million | 6.1% | | Gross profit | $893.6 million | 12.8% | | Net earnings | $210.4 million | 38.0% | | Net earnings per diluted share | $1.38 | 42.3% | | Used unit sales | 230,210 | 9.0% | | Wholesale unit sales | 149,517 | 1.2% | - Strategic initiatives for fiscal 2026 include leveraging data science and AI for better digital experiences, launching a new marketing campaign, streamlining the online appraisal process, and expanding CAF's participation across the credit spectrum[144](index=144&type=chunk) - The company anticipates achieving approximately **$125 per unit** in cost of sales efficiencies in fiscal 2026, matching the savings achieved in fiscal 2025[142](index=142&type=chunk) - Management's goal is to achieve an SG&A to gross profit leverage rate in the **mid-70% range** on an annual basis, requiring low-single-digit gross profit growth in fiscal 2026[143](index=143&type=chunk)[145](index=145&type=chunk) [Results of Operations – CarMax Sales Operations](index=36&type=section&id=Results%20of%20Operations%20%E2%80%93%20CarMax%20Sales%20Operations) For Q1 FY2026, used vehicle revenue increased **7.5%** due to a **9.0%** rise in unit sales, partially offset by a **1.5%** decrease in average selling price, while total gross profit grew **12.8%** to **$893.6 million**, with SG&A expenses leveraged by **680 basis points** as a percentage of gross profit - Used vehicle unit sales increased **9.0%** YoY, with comparable store used unit sales up **8.1%**, driven by strong sales of vehicles priced under **$20,000**[153](index=153&type=chunk)[158](index=158&type=chunk) Gross Profit Per Unit (GPU) | Category | Q1 FY2026 | Q1 FY2025 | | :--- | :--- | :--- | | Used vehicle GPU | $2,407 | $2,347 | | Wholesale vehicle GPU | $1,047 | $1,064 | - Other gross profit increased **31.3%**, primarily due to higher service department margins from cost coverage measures and increased efficiencies, as well as a **10.8%** increase in EPP revenues[163](index=163&type=chunk)[171](index=171&type=chunk) - SG&A as a percentage of gross profit improved to **73.8%** from **80.6%** in the prior year, a leverage of **680 basis points**, driven by gross profit growth and cost management[173](index=173&type=chunk)[175](index=175&type=chunk) [Results of Operations – CarMax Auto Finance](index=40&type=section&id=Results%20of%20Operations%20%E2%80%93%20CarMax%20Auto%20Finance) CAF income decreased by **3.6%** to **$141.7 million** in Q1 FY2026, primarily due to a higher provision for loan losses (**$101.7 million** vs. **$81.2 million** YoY), partially offset by an increased total interest margin (**6.5%** vs. **6.2%** YoY), with the net loan penetration rate declining to **41.8%** - CAF income decreased by **$5.3 million** (**3.6%**) due to a **$20.5 million** increase in the provision for loan losses, partially offset by a **$17.7 million** increase in total interest margin[186](index=186&type=chunk)[188](index=188&type=chunk) - The provision for loan losses increased primarily due to unfavorable performance of loans originated in 2022 and 2023, partially offset by a **$26.5 million** release of allowance for loans reclassified as held for sale[188](index=188&type=chunk)[195](index=195&type=chunk) CAF Origination and Performance | Metric | Q1 FY2026 | Q1 FY2024 | | :--- | :--- | :--- | | Net penetration rate | 41.8% | 43.3% | | Weighted average contract rate | 11.4% | 11.4% | | Allowance for loan losses % | 2.76% | 2.79% | | Past due accounts % | 5.48% | 5.38% | - CarMax plans to execute a programmatic sale of a non-prime securitization once per year to provide funding flexibility and mitigate risk while pursuing growth[144](index=144&type=chunk)[181](index=181&type=chunk) [Financial Condition, Liquidity and Capital Resources](index=44&type=section&id=Financial%20Condition%2C%20Liquidity%20and%20Capital%20Resources) The company's primary liquidity sources are cash from operations, non-recourse funding, and its revolving credit facility, with net cash from operating activities at **$299.5 million** in Q1 FY2026, a significant improvement from a **$117.7 million** use of cash in the prior year, and total debt at **$18.79 billion** with full availability on its **$2.0 billion** credit facility - Net cash provided by operating activities was **$299.5 million**, compared to a use of **$117.7 million** in the prior year, primarily reflecting changes in inventory and auto loans held for investment/sale[193](index=193&type=chunk)[197](index=197&type=chunk) - Capital expenditures are estimated to be approximately **$575 million** for fiscal 2026, up from **$467.9 million** in fiscal 2025, to support growth in reconditioning facilities and new stores[189](index=189&type=chunk) - The company repurchased **$204.0 million** of common stock in Q1 FY2026 and intends to modestly accelerate the pace of share repurchases for the full fiscal year[191](index=191&type=chunk)[201](index=201&type=chunk) - As of May 31, 2025, the company had **$2.0 billion** of unused capacity under its revolving credit facility and was in compliance with all financial covenants[75](index=75&type=chunk)[204](index=204&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=47&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company reports no material changes to its market risk since the end of the previous fiscal year, February 28, 2025, referring readers to its Annual Report on Form 10-K for detailed discussion - There have been no material changes to the company's market risk since February 28, 2025[214](index=214&type=chunk) [Controls and Procedures](index=48&type=section&id=Item%204.%20Controls%20and%20Procedures) Based on management's evaluation, including the CEO and CFO, the company's disclosure controls and procedures were effective as of May 31, 2025, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the quarter[217](index=217&type=chunk) - There were no material changes in the company's internal control over financial reporting during the quarter ended May 31, 2025[218](index=218&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=49&type=section&id=Item%201.%20Legal%20Proceedings) This section refers to Note 15 of the consolidated financial statements for a discussion of the company's legal proceedings - For information on legal proceedings, the report directs readers to Note 15 of the financial statements[220](index=220&type=chunk) [Risk Factors](index=49&type=section&id=Item%201A.%20Risk%20Factors) The company states that there have been no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the fiscal year ended February 28, 2025 - There have been no material changes to the risk factors discussed in the company's most recent Form 10-K[221](index=221&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=49&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details the company's common stock repurchase activity for the first quarter of fiscal 2026, with **2,952,458 shares** repurchased under its **$2 billion** authorization Common Stock Repurchases - Q1 FY2026 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | March 1 - 31, 2025 | 487,700 | $74.22 | | April 1 - 30, 2025 | 1,247,488 | $66.71 | | May 1 - 31, 2025 | 1,217,270 | $66.01 | | **Total** | **2,952,458** | | - As of May 31, 2025, approximately **$1.74 billion** remained available for repurchase under the publicly announced program[224](index=224&type=chunk) [Exhibits](index=50&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including certifications from the Chief Executive Officer and Chief Financial Officer as required by the Sarbanes-Oxley Act, and XBRL data files - The exhibits filed with this report include CEO and CFO certifications pursuant to Rule 13a-14(a) and 18 U.S.C. Section 1350, as well as XBRL data files[226](index=226&type=chunk)

Core Viewpoint - Carvana is experiencing a potential turnaround due to recent tariff changes making new cars more expensive, leading to increased demand for used cars, which the company is well-positioned to capitalize on [2][5][15] Group 1: Tariff Impact - A 25% tariff on imported vehicles has caused average new car prices to rise by 2.5% in April, with expectations of an additional 10% to 15% increase by summer [4][5] - The tariff situation has led to a rush of buyers locking in pre-tariff deals, tightening supply and pushing used car prices up, benefiting Carvana [5][4] Group 2: AI and Profitability - Carvana's AI-driven pricing system is making thousands of real-time pricing adjustments, contributing to a record quarterly net income of $373 million in Q1 2025, with total revenue increasing by 38% year over year and units sold rising by 46% [7][8] - The gross profit per unit reached an all-time high of over $6,900, indicating improved profitability per sale [8] Group 3: Competitive Advantage - Carvana's profit margin of 8.8% significantly exceeds CarMax's 1.5% margin, showcasing superior operational efficiency [10] - With Vroom exiting the online auto retail space, Carvana is now the only national online-only used auto retailer, allowing it to maintain lower costs compared to traditional dealerships [11] - The company has 40 car vending towers nationwide and a robust logistics network, enabling coast-to-coast scale without high overhead costs [12] Group 4: Future Growth Opportunities - Carvana's proprietary pricing software could potentially be licensed to other dealers, creating a new high-margin revenue stream [11] Group 5: Financial Considerations - Carvana's long-term liabilities stand at $5.7 billion, with cash on hand at $1.9 billion, indicating a significant debt load despite a 4.35% year-over-year reduction [13] - The company faces risks related to policy uncertainty, particularly if tariffs are reversed or retaliatory tariffs are imposed [14] Group 6: Investment Outlook - Year-to-date, Carvana shares have increased over 70% and are still trading below their all-time high, suggesting potential for further investment [16]

Group 1 - The previous investment outlook for CarMax (NYSE: KMX) was a sell rating due to a lack of strong growth prospects and anticipated pressure on underlying demand despite digital enhancements [1] - The investment strategy focuses on long-term investments while also incorporating short-term shorts to identify alpha opportunities, emphasizing a bottom-up analysis of individual companies' fundamental strengths and weaknesses [1] - The investment duration is medium to long-term, aiming to identify companies with solid fundamentals, sustainable competitive advantages, and growth potential [1]

Core Viewpoint - Carvana has experienced a significant turnaround, achieving record highs in key metrics after a challenging period in 2022, with a notable increase in stock price and operational efficiency [1][5][6]. Group 1: Company Performance - Carvana's first quarter of 2025 saw revenue of $4.2 billion, a 38% increase year-over-year, and retail units sold reached 133,898, a 46% increase, both setting quarterly records [8]. - The company more than doubled its net income and adjusted EBITDA to $373 million and $488 million, respectively, while selling 14% more vehicles with 30% less inventory and 45% less advertising spend compared to previous highs [9]. - Carvana aims to sell 3 million vehicles annually with an adjusted EBITDA margin of 13.5% within five to ten years, requiring a compound annual growth rate (CAGR) of 20% to 40% [10][11]. Group 2: Market Position and Growth Potential - Carvana estimates it currently holds only 1% of the $1.2 trillion U.S. used-car market, indicating substantial growth potential [12]. - The company has a presence in over 300 markets, with 81% of the U.S. population within its delivery range, positioning it well for future expansion [12]. - Plans for a new auction and reconditioning "megasite" in Phoenix are expected to create approximately 200 jobs, indicating a ramp-up in operational capacity [13]. Group 3: Financial Health and Valuation - As of Q1 2025, Carvana had $5.3 billion in long-term debt, which remains a concern for its financial stability [14]. - The company trades at a price-to-earnings (P/E) ratio of 112, significantly higher than peers like CarMax, which has a P/E of 21, raising questions about its valuation [15]. - Analysts project a 206% increase in earnings per share (EPS) for 2025, reflecting high expectations that may not be sustainable [17].

Core Viewpoint - CarMax reported better-than-expected Q1 results, with revenue rising approximately 6% year-over-year to $7.55 billion and earnings exceeding predictions at $1.38 per share, leading to a nearly 6% surge in stock price [2] Financial Performance - CarMax experienced a 6.6% rise in same-store sales year-over-year during the quarter, indicating a positive shift after a slight decline over the past two years [2] - The company noted an improvement in gross margins, with retail gross profit per used unit nearing an all-time high due to increased demand and cost efficiencies [2] - Quarterly revenues grew 6.7% to $6.0 billion compared to $5.6 billion a year prior, contrasting with a 4.8% improvement for the S&P 500 [6] - CarMax's revenues have decreased 0.7% from $27 billion to $26 billion in the last 12 months, against a 5.5% growth for the S&P 500 [6] Valuation Comparison - CarMax's price-to-sales (P/S) ratio is 0.4 compared to 3.1 for the S&P 500, and its price-to-earnings (P/E) ratio stands at 19.7 versus 26.9 for the benchmark [6] - The current valuation of CarMax appears moderate when compared to its operational performance and financial health over recent years [3] Profitability Metrics - CarMax's operating income for the last four quarters was -$221 million, reflecting an operating margin of -0.8% [7] - The operating cash flow (OCF) for this period was $624 million, indicating an OCF margin of 2.4%, compared to 14.9% for the S&P 500 [7] - Net income for the four-quarter period was $501 million, resulting in a net income margin of 1.9%, against 11.6% for the S&P 500 [7] Financial Stability - CarMax's total debt was $19 billion at the end of the most recent quarter, with a market capitalization of $11 billion, leading to a debt-to-equity ratio of 194.8% compared to 19.4% for the S&P 500 [9] - Cash and cash equivalents amount to $247 million of the $27 billion in total assets, resulting in a cash-to-assets ratio of 0.9% [9] Downturn Resilience - KMX stock has historically performed worse than the S&P 500 during several downturns, indicating lower resilience in adverse market conditions [9] - The stock experienced a significant decline of 64.0% from a peak of $154.85 in November 2021 to $55.69 in October 2022, compared to a 25.4% drop for the S&P 500 [10] - During the COVID pandemic, KMX stock fell 56.6% from a high of $101.90 in February 2020 to $44.27 in March 2020, versus a 33.9% decline for the S&P 500 [11] Overall Assessment - CarMax's performance across key metrics indicates extremely weak operational performance and financial condition, leading to the conclusion that KMX is a very unattractive stock to buy [12][14]

Core Viewpoint - CarMax reported strong first-quarter earnings, exceeding analyst expectations, which led RBC Capital to maintain an Outperform rating and raise the price target from $80 to $81 [1]. Financial Performance - CarMax's first-quarter earnings per share were $1.38, surpassing the consensus estimate of $1.21 [1]. - Quarterly sales reached $7.55 billion, exceeding the analyst consensus estimate of $7.47 billion [1]. - Retail used unit sales increased by 9.0%, while comparable store used unit sales grew by 8.1%, both outperforming expectations [2][3]. Operational Insights - The company experienced a sequential improvement in category demand and market share gains, with each month of the quarter showing positive results, particularly April [3]. - SG&A as a percentage of gross profit improved to 73.8%, a reduction of approximately 680 basis points, attributed to cost management efforts despite rising compensation costs [4]. - CarMax repurchased $200 million in shares during the quarter, a significant increase compared to previous trends [4][5]. Challenges and Risks - CAF income declined by 3.6% to $141.7 million, primarily due to increased loan loss provisions, reflecting seasonal sales patterns and credit quality concerns [6]. - The company anticipates net sales growth of 1.9% and 3.9% for 2025 and 2026, respectively, with adjusted EPS estimates of $3.88 and $4.52 [7].

Financial Performance - CarMax reported earnings per share of $1.38, exceeding the analyst consensus estimate of $1.21 [1] - Quarterly sales reached $7.55 billion, surpassing the analyst consensus estimate of $7.47 billion [1] Business Expansion - The company opened two new stand-alone reconditioning/auction centers in El Mirage, Arizona, and Midlothian, Texas [2] Management Commentary - CEO Bill Nash highlighted the fourth consecutive quarter of positive retail comps and double-digit year-over-year earnings per share growth, emphasizing the strength of the company's earnings growth model [3] - Nash noted the importance of the omni-channel experience and the integration of associates, stores, technology, and digital capabilities in enhancing customer experience [3] Analyst Ratings and Price Targets - Truist Securities maintained a Hold rating and raised the price target from $72 to $74 [6] - RBC Capital maintained an Outperform rating and increased the price target from $80 to $81 [6] - Needham reiterated a Buy rating with a price target of $92 [6]

Core Insights - CarMax Inc. reported adjusted earnings per share of $1.38 for Q1 fiscal 2026, exceeding the Zacks Consensus Estimate of $1.18 and up from $0.97 in the prior year [1][9] - The company's revenues reached $7.55 billion, surpassing the Zacks Consensus Estimate of $7.52 billion and reflecting a 6% year-over-year increase [1] Segmental Performance - Used-vehicle net sales amounted to $6.1 billion, a 7.5% increase year-over-year, driven by a 9% rise in unit sales to 230,210 vehicles, exceeding the forecast of 207,124 units [2] - The average selling price (ASP) of used vehicles decreased by 1.5% to $26,120, which was below the projected ASP of $28,279 [2] - Comparable store used-vehicle units increased by 8.1%, with revenues rising by 6.6% year-over-year; gross profit per unit (GPU) was $2,407, up from $2,347 in the prior year but below the estimate of $2,376.8 [3] Wholesale Vehicle Performance - Wholesale vehicle revenues decreased by 0.3% year-over-year to $1.25 billion, falling short of the projection of $1.27 billion due to lower-than-expected ASP [4] - Units sold in the wholesale segment rose by 1.2% to 149,517, exceeding the forecast of 145,645; however, the ASP fell by 1.7% to $7,959, below the estimate of $8,717 [4] - Wholesale GPU was $1,047, down from $1,064 in the prior year but above the estimate of $1,033.3 [4] Other Revenues and Expenses - Other sales and revenues increased by 6.1% year-over-year to $190.4 million, missing the estimate of $196.2 million [5] - CarMax Auto Finance's income fell by 3.6% year-over-year to $141.7 million [5] - Selling, general, and administrative expenses rose by 3.3% to $659.6 million [5] Share Repurchase Activity - During the fiscal first quarter, CarMax repurchased shares worth $199.8 million and had $1.74 billion remaining under its share repurchase authorization as of May 31, 2025 [6]

Core Viewpoint - CarMax, Inc. has experienced a decline in share value, losing approximately 10% and nearing a 52-week low due to challenges related to higher prices impacting its performance [1] Company Performance - The quarterly earnings report is anticipated amidst the company's struggles with pricing pressures [1] Market Context - The company has been identified as a poor performer in the current market environment, reflecting broader challenges within the industry [1]