CarMax Inc (KMX): CarMax’s F2Q27 beat supports UBS’s view that its turnaround is taking hold

Overview

UBS reviews CarMax’s F2Q27 results, concluding that the earnings beat provides evidence that its turnaround is progressing. Strong used-vehicle volumes and SG&A performance offset concerns around per-unit gross profit and consumer/rate sensitivity, while UBS keeps its Neutral rating and US$57 target price.

Core views

UBS expects KMX stock to trade higher on the results, despite investor expectations having been somewhat elevated. The central evidence was retail used-vehicle unit growth of 13.8% year on year, including 13.0% comparable-store growth, broadly consistent with buy-side expectations for a low-double-digit increase and well above the 5.1% consensus comparable-store estimate. Retail used units totaled 227,391 vehicles, versus 199,729 a year earlier and 210.7 thousand expected. Used-vehicle sales reached about US$6.31 billion, up 19.7% year on year and above the roughly US$5.58 billion consensus; wholesale vehicle sales were about US$1.36 billion, up 18.2% and above the US$1.19 billion consensus. Total net sales and operating revenue were approximately US$7.9 billion, up 19.5% year on year, versus roughly US$6.9 billion expected. The report argues that gross profit per unit did not undermine the positive volume signal. Retail GPU was US$2,105, compared with US$2,041 consensus, although it was US$111 per unit lower year on year. UBS views this as sufficiently in line to ease concerns that volume reacceleration and possible price cuts would cause a larger miss. Used-vehicle gross profit was US$478.6 million, up 8.1% year on year and above US$429.9 million consensus. Wholesale GPU of US$858 was below US$974 consensus, and wholesale gross profit of US$137.6 million was roughly flat year on year and below the US$140.6 million estimate. Cost execution was the most notable upside driver. SG&A rose only 4.6% to US$628.6 million while unit growth was strong, producing SG&A-to-gross-profit of 78.6% versus 86.2% consensus. SG&A per total unit improved US$157 year on year, or 8.8%, to US$1,621. UBS notes that ongoing cost reductions were partly offset by the annualization of lower incentive-based compensation and variable costs associated with higher volumes, but management remains on track for US$200 million of exit-rate SG&A savings by the end of FY2027. The resulting profitability beat was substantial: EPS was US$1.16 versus US$0.64 a year earlier and US$0.73 consensus. CarMax Auto Finance also exceeded expectations modestly: CAF income was US$135.6 million, up 32.1% year on year, versus US$131.6 million consensus. UBS flags that the result was helped by a US$16.6 million gain on a loan sale that it believes was not embedded in consensus. Management also intends to resume share repurchases in F3Q26, though at a modest level, and will host an investor update on its turnaround plan on 3 November. UBS identifies investor appetite for consumer- and rate-sensitive names as a continuing stock overhang and seeks management commentary on market conditions and the consumer.

Analysis framework

UBS compares reported F2Q27 operating and financial metrics with year-ago results, consensus expectations and buy-side expectations. It then assesses the turnaround through unit growth, gross profit per unit, SG&A leverage and CAF earnings, while using P/E to value KMX and considering the planned investor update and repurchases as relevant catalysts.

Methodology notes

• Valuation methodsP/E and PEG Valuation

  P/E valuation

  UBS states that it values KMX using P/E, relating the share valuation to expected earnings per share.

• Industry AnalysisVolume-price decomposition

  Unit volumes, average selling prices and gross profit per unit

  The report separates used- and wholesale-vehicle sales into units, pricing and GPU to judge whether higher revenue reflects healthier demand and whether margins are holding up.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• CarMax Inc (KMX.US)

  Primary covered company; UBS sees the F2Q27 earnings beat as supportive of its progressing turnaround.

  Strengths

  Retail comparable-store used-unit growth of 13.0%, SG&A leverage, a planned US$200m FY2027 exit-rate cost reduction, and modest resumption of repurchases.

  Weaknesses

  Retail GPU was US$111 per unit lower year on year, while wholesale GPU of US$858 was below consensus.

  Comparison

  EPS of US$1.16 versus US$0.73 consensus; retail GPU of US$2,105 versus US$2,041 consensus.

  Risks

  Cyclical vehicle demand, competitive pressure, weaker-than-expected pricing, negative equity, weak consumer demand and rising oil prices.

Key data

• Total revenueUS$7.878bnUp 19.5% year on year; 13.4% above US$6.947bn consensus.
• Retail used-vehicle units227,391 vehiclesUp 13.8% year on year versus 210.7k consensus; comparable-store used-unit sales rose 13.0% versus 5.1% consensus.
• Retail used GPUUS$2,105Above US$2,041 consensus but US$111 per unit below the prior year.
• SG&A to gross profit78.6%Versus 86.2% consensus, reflecting stronger cost leverage.
• EPSUS$1.16Versus US$0.64 a year earlier and US$0.73 consensus.
• CAF incomeUS$135.6mUp 32.1% year on year versus US$131.6m consensus; aided by a US$16.6m loan-sale gain.

Impact & implications

UBS views the combination of stronger used-unit growth, adequate retail GPU and better SG&A leverage as evidence that CarMax’s turnaround is becoming established. However, the Neutral rating reflects the limited forecast return to the US$57 target and the possibility that consumer and interest-rate sensitivity remains an overhang.

Risks

• The automotive industry is cyclical, and economic conditions could reduce vehicle demand.
• Competition and share losses at key customers could hurt results.
• New- and used-vehicle pricing could be worse than UBS expects, pressuring sales and GPU.
• Rising negative equity could weigh on vehicle financing and consumer demand.
• A weak consumer could defer purchases of durable goods, while higher oil prices could reduce automotive demand.

What to watch

• Management commentary on market conditions and consumer demand during the earnings call.
• CarMax’s investor update on its turnaround plan on 3 November.
• Progress toward US$200 million of exit-rate SG&A savings by the end of FY2027.
• The planned modest resumption of share repurchases in F3Q26.