CarMax delivered the quarter turnaround believers had been waiting for. Fiscal second-quarter earnings of $1.16 per share beat the $0.68 consensus by 43.2% and cleared the $0.81 Earnings Whisper number. Revenue of $7.878 billion topped the $7.09 billion consensus by 11.1%. Earnings grew 81.3% year over year and revenue rose 19.5%, a sharp acceleration from a first quarter in which sales grew about 6% and EPS slipped to $1.31 from $1.38. The engine was volume. Comparable-store used unit sales rose 13.0% after readings of -9%, -1.9% and -0.8% over the prior three quarters. That is the most decisive inflection in CarMax's comps in years. The central tension is how much of it is durable. Management attributed roughly half the comp to self-help and half to FTC enforcement of all-in advertised pricing, a tailwind that laps around May.
The quality of the beat deserves scrutiny. Volume was bought partly with price. Retail gross profit per used unit fell $111 to $2,105, and wholesale GPU dropped $135 to $858, compared with a roughly flat wholesale result in the first quarter. Total gross margin compressed to 10.1% from 10.9%. The comparison base was also soft: last year's quarter featured a 6.3% comp decline and elevated loan-loss provisioning. Several below-the-line items flattered the result:
- CAF income jumped 32.1% to $135.6 million, driven by a $28.8 million smaller loan-loss provision and a $16.6 million gain on the sale of auto loans.
- Other income rose to $18.6 million from $3.6 million on unrealized gains on equity investments.
- A 4.8% lower diluted share count added further lift.
Taken together, the loan-sale gain and the jump in other income account for roughly a third of the $96 million increase in pretax earnings. The operating improvement is real, but the EPS growth rate overstates it.
There is genuine operating progress underneath. Other gross profit rose 33.1% to $183.3 million. EPP margin per unit gained $46, and service margin improved $22 million on efficiency gains. SG&A rose only 4.6% in dollars while falling 8.8% per total unit to $1,621, and management reiterated its $200 million exit-rate savings target. It also improved its full-year retail GPU outlook to a decline of less than $200 per unit. That compares with about $200 reaffirmed last quarter and roughly $300 implied two quarters ago. Dealer-sourced buys surged 53.7% through the Edmunds channel, and management described consumer demand as resilient across income cohorts. Pricing algorithms, digital conversion and a doubling of CarMax listings rated 'great deals' on cars.com back up the self-help half of the story.
The weak spot is CAF, and bears have legitimate ammunition there. Management provided its first explicit CAF income outlook, guiding fiscal 2027 slightly below fiscal 2026 despite the strong quarter. Higher funding costs forced Tier 1 rate increases, and penetration after 3-day payoffs slid to 40.9% from 42.6% a year ago as customers leaked to cash and credit unions. The expansion into Tier 2, where CAF now finances 22% of volume versus 10%, adds provisioning. The allowance ratio also rose to 3.07% from 2.95% in May. Other risks cloud the next two quarters:
- Retail GPU is still expected to decline year over year in the third and fourth quarters.
- Web traffic is down a couple of points.
- Roughly $50 million in non-cash pension settlement charges and about $6 million of severance will weigh on GAAP results.
On the positive side, management will resume buybacks at a modest pace in the third quarter, with $1.31 billion authorized. The November 3 Strategic Update offers another catalyst for detailing milestones under the Shift into GEAR plan.
Investor expectations had already moved. Earnings Whispers sentiment rose to 0.32 from 0.04 at the June report, a meaningful shift from neutral to moderately positive. Shares closed at $56.55 ahead of the release, up 13.2% from the post-June opening price and 18.2% above the 200-day moving average. They were still 13.4% below the $65.28 52-week high set August 26. The stock ran hard off its June low and then surrendered a chunk of those gains into the print. That pattern suggests investors were already debating how sustainable the comp recovery is. The trend readings are mostly constructive, with momentum and AVWAP positive, though sequential growth remains negative.
The bottom line is that CarMax proved it can grow units again, and the beat against both consensus and the whisper was emphatic. The next leg is harder. The company must hold volume as the FTC tailwind and its price cuts lap, stabilize unit margins, and keep CAF from becoming a drag. The November strategy update and third-quarter GPU trends will show whether this quarter marks a sustained recovery or a regulatory-assisted spike.