Carmax: Now is the Time to Load Up On This Used Car Stock

Key Points

• Carmax had a lousy quarter and is not expecting improvement soon, a factor that will weigh on its stock price in Q4 2025.
• Analysts are optimistic, but the sentiment trend is bearish, adding pressure to the market. 
• Cash flow remains ample, providing safety for the capital return outlook.

Carmax's NYSE: KMX share price fell 25% following the Q2 earnings release, hitting rock bottom in the process. Rock bottom aligns with the COVID-19-induced lows of 2020, a launchpad for share prices five years ago and one that will pay off again in the not-too-distant future. 

The question is how long the stock price slump will last, and it could last for a few more quarters. The company reported a “challenging quarter” and did not indicate that the headwinds will cease.

The likely scenario is that consumers will continue to avoid large-ticket discretionary items, such as cars, for at least another quarter or two, setting this company up for underperformance and tepid results until sometime in 2026. 

The catalysts for higher share prices will be signs of improving consumer demand. With the FOMC on track to reduce rates by another 75 basis points by mid-2026, improvement could begin early in the year.

The risk is that the Fed will act too late; tariffs and policy changes have put the US on track for a recession, but as of late September, there is little evidence of a downturn. 

The latest data shows some weakening, specifically in the labor markets, but it is relative to the post-COVID strength, and indications align with historically strong economic conditions.

Consumer Weaknesses Offset Carmax’s Strengths  in Q2

Carmax had a tough quarter in Q2 with consumer weakness offsetting its strengths. The company reported a 6% contraction in revenue, falling short of the consensus by 600 basis points, due to weak unit sales and contracting sales prices.

Internally, retail units declined by 5.4%, as an increase in store count offset a 6.3% decline in comparable store sales (comps). Digital, a pillar of the omni-channel strategy, accounted for 80% of sales. 

Margin is the weakest link in the report. The company improved its gross margin and reduced SG&A spending; however, revenue deleveraging offset these improvements.

The net result is a reduction in earnings quality and GAAP EPS of $0.64, down 21% compared to last year and about 4000 basis points short of the consensus. 

The good news is that cost reductions are expected to stick and increase over the next eighteen months, providing a path to accelerated earnings once the consumer rebound is underway. 

Analysts' Optimism for KMX Share Price Fades 

MarketBeat’s data reveals optimism among analysts, who have pegged the stock as a Moderate Buy and forecast an 80% upside from the critical support level. However, the trends include numerous price target reductions, and the initial response aligns with that trend, which is putting downward pressure on the stock price.

The first revision tracked since the release is a downgrade to Hold-equivalent from Wedbush, and more are expected. The stock presents a deep value at $45.50, well below the low-end target, but investors should not expect a robust price rebound or for the rebound to hold until the sentiment trend improves. 

Institutional activity will decide whether or not KMX’s stock price will hold above the critical support target. The balance of activity is bullish for 2025, with buying outpacing selling in Q1 and Q3.

The risk is that institutions, which own approximately 96% of the stock, will start trimming their position, but this seems unlikely, given the outlook for cash flow, the resumption of growth, and capital returns. 

Although Carmax does not pay dividends, it repurchases shares and has accelerated activity in 2025. The Q2 F2026 results include a 4.4% YOY share reduction and fostered an optimistic outlook for buybacks to continue robustly.