Have the Wheels come off CarMax?

CarMax’s (NASDAQ: KMX) fundamentals have shown increasing signs of strain, particularly over the past several quarters, and this has translated into significant stock weakness. Shares have been under heavy pressure due to slowing demand, structural profitability challenges, and deteriorating credit conditions in its auto finance arm. 

One of the most glaring concerns is the company’s declining revenue and sales trends. Over the past three years, CarMax’s revenues have contracted at an average annual rate of around -7.4%, sharply lagging broader market growth and signaling structural challenges in sustaining top-line expansion. 

Even its most recent twelve-month period saw only marginal revenue gains, while overall market benchmarks like the S&P 500 have been growing at several times that pace. A shrinking or stagnant sales base weakens operating leverage and puts pressure on profitability, particularly for a business with high fixed costs tied to its extensive physical dealership network.

The company’s profitability is under pressure. CarMax’s ROIC falls below its cost of capital, which means it hasn’t generated returns above its capital costs - a potential red flag for long-term investors. Additionally, CarMax posted operating losses and extremely thin margins compared to competitors in retail and automotive sectors. Its operating margin has swung into negative territory, a stark contrast to much higher averages in the broader market. Weak margins reduce the company’s ability to absorb shocks and reinvest in growth initiatives.

CarMax Auto Finance (CAF), once seen as a growth catalyst, has become a source of risk. The finance segment’s income has declined materially, driven by increased provisions for loan losses and rising delinquency rates among borrowers. In its recent fiscal quarter, provisions jumped more than 25% year-over-year, clearly signaling elevated credit risk in its loan portfolio. As consumers face broader economic pressures — including high interest rates and elevated living costs — defaults and delinquencies could continue to rise, further hurting CarMax’s earnings and capital position.

CarMax’s leverage and financial structure also raise red flags. The company carries tens of billions in debt relative to a market cap in the low single-digit billions, resulting in an exceptionally high debt-to-equity ratio. The company currently carries a debt-to-equity ratio of ~2.87, indicating heavy reliance on debt relative to equity. Against this high debt load, the company’s cash relative to debt is low, putting pressure on financial flexibility.

Liquidity is limited, with only a small fraction of assets held in cash, leaving CarMax vulnerable to tightening credit markets or downturns in its core retail business. High leverage not only limits strategic flexibility but also amplifies downside risk when margins erode or sales falter.

Another key issue is competitive pressure. Digital-first rivals like Carvana have gained market share with lower cost structures and stronger online purchasing experiences. CarMax’s omni-channel strategy has yet to fully offset this threat, and analysts note ongoing difficulties in pricing competitively without eroding gross profit per unit. This competitive squeeze comes at a time when used-car prices are volatile, and shifts in consumer preferences make it harder for traditional retailers to maintain volume and pricing power.

Leadership instability adds further uncertainty. A long-time CEO’s departure amid financial challenges underscores the need for strategic change and may cause execution risks as new leadership attempts to navigate a difficult environment. 

Taken together, these factors — weak sales growth, margin pressure, rising credit risk, heavy debt, competitive headwinds, and strategic uncertainty — form a compelling bearish case for CarMax. Investors should weigh these substantial risks against any potential recovery narrative, as the company’s fundamentals suggest the stock remains vulnerable until structural issues are demonstrably resolved.

Using a discounted cash flow (DCF) analysis based on earnings, we put fair value for the stock at $39 – a 16% discount to the stock’s recent price of $46. 

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