CarMax (KMX) Q3 FY26: Negative Leverage and the Financing Cushion

As the largest used car retailer in the United States, CarMax (KMX) often serves as a bellwether for the broader American consumer economy. When people stop buying cars, or trade down to cheaper models, it usually signals tightening budgets and macroeconomic headwinds. By digging into the income statement from their latest 10-Q filing, we can move beyond the stock price and understand exactly how the machinery of the business is performing during a challenging fiscal quarter.

To visualize how money moves through CarMax—from vehicle sales down to the bottom line—we have generated the following flow diagram for the quarter ended November 30, 2025:

The Top-Line Squeeze

The most immediate takeaway from this quarter is a notable contraction in volume. Total revenue for the quarter came in at $5.79 billion, a decrease of 6.9% compared to the same period last year.

This decline was broad-based across CarMax’s two primary sales channels:

• Used Vehicle Sales: This is the core retail business—selling cars directly to consumers. Revenue here dropped 7.0% to $4.55 billion. More tellingly, unit volume fell by 8.0%, and comparable store used unit sales declined by 9.0%.
• Wholesale Vehicle Sales: These are vehicles CarMax buys (often via trade-ins) but chooses not to sell on their retail lots, instead sending them to dealer auctions. Revenue fell 6.3% to $1.10 billion.

For general readers, it is important to note that a drop in wholesale revenue often indicates that the company is buying fewer cars from consumers or that the auction prices for older vehicles are softening.

Profitability Under Pressure

While a revenue drop is concerning, the impact on profitability was more severe due to margin compression and sticky expenses. Gross Profit fell by 12.9% to $590 million.

CarMax experienced a decline in "Gross Profit per Unit"—a key metric in auto retail. Used vehicle gross profit per unit slipped to $2,235, down slightly from the prior year. However, the real pain came from operating expenses. Despite selling fewer cars and generating less revenue, Selling, General, and Administrative expenses (SG&A) actually increased by 1.0% to $581.4 million.

This is a classic example of negative operating leverage. When sales fall but fixed costs (like store rent, salaries, and advertising) remain flat or rise, profit margins get squeezed from both sides. Consequently, Net Earnings were cut nearly in half, falling to $62.2 million ($0.43 per share) compared to $125.4 million ($0.81 per share) a year ago.

The Financing Cushion

One bright spot in the filing was CarMax Auto Finance (CAF). Unlike traditional dealerships that rely solely on third-party banks, CarMax has its own financing arm that captures interest income from loans originated in-store.

Despite the difficult retail environment, CAF income rose 9.3% to $174.7 million. This segment provided a crucial buffer for the company's operating income. Without this financing arm, the consolidated operating income would have been significantly lower. The filing attributes this resilience to a stable net interest margin and a gain on the sale of auto loans, which helped offset the broader decline in vehicle sales.

Conclusion

The used car market is currently navigating a difficult period characterized by affordability challenges and high interest rates. CarMax's latest filing reflects these macroeconomic realities: consumers are buying fewer cars, and the costs to run the business are not falling as fast as sales volumes.

While the company maintains a dominant position in a highly fragmented market—competing with everything from local independent lots to digital-first players like Carvana—the current quarter highlights the difficulty of maintaining profitability when volume slows down. The resilience of the auto finance division proved vital this quarter, but getting retail unit growth back on track will likely be the primary focus for investors watching the road ahead.