CarMax Just Gave Investors a Better Reason to Believe in the Turnaround

Key Points

• CarMax delivered a strong fiscal second quarter as vehicle sales accelerated and earnings improved sharply from a year earlier.
• CarMax plans to resume share repurchases in the third quarter, providing another sign that management sees progress in the turnaround.
• CarMax still faces pressure from vehicle affordability, interest rates and lower per-unit margins, making continued execution important.

CarMax's NYSE: KMX latest results suggest its turnaround strategy is gaining traction. Its Shift into GEAR strategy is built around four pillars: Great Offering, Easy Experience, Add Value on Each Transaction and Run Lean. Together, they focus on improving pricing and inventory, simplifying the customer experience, increasing transaction profitability and reducing operating costs. The planned resumption of share buybacks this quarter is an important signal that management believes those improvements are durable. How much CarMax buys back remains unclear, but the move adds to the evidence that the company has turned a corner, is on track to sustain improvement, and can drive a full stock price recovery over time.

The potential stock price recovery is substantial if CarMax can sustain the recent improvement. CarMax trades more than 50% below its existing highs, setting the stage for more than 100% upside over time. The recovery will not happen quickly or in a straight line, so investors should expect volatility and periodic corrections, with resistance targets near $62 and $87.

CarMax Q2 Results Show the Turnaround Gaining Traction

In its Q2 fiscal year 2027 (FY2027) earnings report, CarMax delivered 19.5% revenue growth, with sales comfortably beating consensus. The strength came from higher units and pricing, with units up 14.7% systemwide.

Wholesale led, up nearly 16%, but Retail was also strong, up by 14.7%, and both contributed to bottom-line strength. Within the Retail segment, same-store comps rose 13%, driving a 19.7% segment revenue gain, supported by a 6.3% increase in average pricing. Digital, among the pillars, influenced 81% of net sales, with omnichannel at 68%, and online retail accounting for 13% of retail unit sales.

CarMax accepted some gross margin pressure to support stronger sales, but better cost control helped offset the impact. SG&A grew far more slowly than revenue, showing that higher volume is beginning to create meaningful operating leverage.

That leverage carried through to earnings. GAAP earnings per share rose more than 80% year over year to $1.16, well ahead of the pace of revenue growth. CarMax did not issue formal guidance, but management said margins should continue improving and plans to resume share repurchases in fiscal Q3.

Analysts See Improvement, But Targets Still Lag the Rally

Initial analyst responses are constructive, highlighting improved operating efficiency and sizable revenue and earnings beats. While no revisions were released immediately after the report, the initial responses align with the trend, reflecting a bottoming after sustained downward pressure. The consensus rating remains Reduce, with a strong and strengthening Hold bias. The consensus price targets remain less encouraging, indicating more than 10% downside as of late September, but recent revisions point to the $75 region, representing a 25% upside from current levels.

Inflation and interest rates remain important variables for CarMax. While high prices and costs may keep some consumers out of the market, there is always a market for used cars, and others will trade down from buying new. In this environment, car owners may hold onto their cars longer, but will stick to lower-priced used cars over time. Other hurdles include execution and valuation, with the market pricing in a flawless turnaround, which has so far been the case. The main risks are weaker demand, execution missteps and a loss of momentum in the turnaround.

Stock price action is favorable following the release, but reflects the inherent risks. KMX surged more than 5% following the release, showing support at a key level while also facing resistance at higher prices. KMX could remain range-bound until investors see more evidence that the turnaround can hold. Strong support targets near $55 and $50 could produce a robust response. Retail traders will be the deciding factor, as institutions own nearly 100% of the floating shares. If retail traders don’t get on board the turnaround train, the stock price recovery is dead in the water.

The gross margin contraction needs context. Some of the pressure reflects deliberate pricing actions intended to support stronger sales. Lower gross profit per vehicle is the trade-off, but higher volume can create meaningful SG&A leverage. In addition, CarMax Auto Finance is core to profitability, underpinned by robust unit sales growth. The next major catalyst will be Q3 FY2027 results, which should provide more evidence of whether the sales momentum and operating leverage can continue as CarMax resumes share repurchases.