CarMax Earnings: Loan-Loss Charge Masks Improvement in Retail Business

We are not changing our CarMax fair value estimate after the firm reported a decent fiscal 2025 second quarter for its retail business, considering poor used-vehicle affordability. Results were held back by an extra $52.2 million of loan-loss provision expense on loans issued prior to the quarter to reflect worsening credit quality industrywide. We are not worried about CarMax Auto Finance’s loan income collapsing because subprime is not the majority of its loan book. Comparable-store unit sales increased 4.3% year over year, the highest rate for any quarter since the third quarter of fiscal 2022, and average selling price fell 4.6% to $26,245. As new-vehicle inventories rise, we expect further ASP declines, which along with US interest-rate cuts should yield further consumer affordability improvement. Rate decreases tend to be favorable for CAF income as well, because there typically is a lag between CAF’s funding costs declining and those lower rates being passed on to consumers.