CarMax FY2027 Q2: $1.16 EPS on Cars Sold Cheaper

CarMax just posted the strongest earnings growth of any large retailer this quarter — diluted EPS up 81% to $1.16 on revenue up 19.5% to $7.9 billion — and it did so by making less money on every car it sold. Gross profit per retail used unit fell $111 to $2,105, the price of the pricing actions that pushed unit sales up 13.8%. This is a turnaround bought with price, and a second engine made it work: CarMax Auto Finance income rose 32% to $135.6 million. CarMax's Q2 release

The Headline Numbers​

The quarter ended August 31, 2026. Financial amounts below are millions of US dollars, except per-share and per-unit data.

Revenue grew almost twice as fast as gross profit, which is the whole quarter in one comparison: volume did the work that pricing gave away. Earnings before tax grew 75.5% because three separate levers all pushed the same way — higher unit volume, SG&A growing far slower than sales, and a finance arm whose provision headwind finally turned into a tailwind. The per-share number outran net income because the share count kept shrinking under past buybacks: diluted shares fell 4.8% to 142.450 million even though CarMax bought back zero shares this quarter. Quarterly earnings statement

The operating picture in units tells the same story with sharper edges:

Every unit count accelerated while every per-unit profit on metal shrank. Comparable-store growth of 13.0% rules out the easy explanation that new stores did it — the same stores sold many more cars at thinner margins. The one per-unit line that improved, EPP margin, is where CarMax sells protection plans rather than steel.

Revenue Deep Dive: Every Line Grew Near 20%​

Used vehicles. Retail revenue grew 19.7% on 13.8% more units plus an average selling price roughly $1,600 higher (+6.3%). The 10-Q pins the price increase on higher vehicle acquisition costs and a mix shift toward later-model vehicles bought by higher-income consumers, "while demand among lower income consumers for older vehicles remained steady." That sentence matters: CarMax is not reporting robust demand anywhere in this release — no theme in our demand/supply scan appears — and the volume surge came from being cheaper than the alternative, not from a rising market. Digital did the heavy lifting on conversion: the release says digital capabilities supported 81% of retail unit sales, with omni sales at 68% and fully online sales at 13%. Q2 10-Q

Wholesale. Units up 15.9% with average price up just $145 (+1.8%), so this was nearly pure volume. CarMax bought 310,107 vehicles from consumers and dealers (+5.9%), but the mix underneath shifted hard: consumer buys were flat at 262,570 while dealer buys jumped 53.7% to 47,537. The auction business is increasingly fed by dealers, not driveways.

Other revenues. Up 19.5% ($34.0 million), "primarily reflecting an increase in EPP revenues." Protection plans are the highest-margin line in the building, and their growth is doing quiet work in the gross-profit mix.

The Margin Story: Volume Up, Margin Rate Down, Dollars Up Anyway​

Gross margin compressed 80 basis points while SG&A leveraged 110 basis points — the quarter's central trade, executed deliberately. Start with the gross-profit split:

Retail gross-profit dollars rose 8.1% because 13.8% more units overwhelmed the $111 per-unit decline — the release attributes the decline to "the continuation of pricing actions to support an improved sales trend," and CEO Keith Barr's commentary names "strengthened price competitiveness" first among the quarter's drivers. Wholesale margin was flat at $137.6 million: 15.9% more units exactly offset by $135 less profit on each. The real margin hero is the smallest line — other gross profit up 33.1%, with EPP margin dollars up $26.5 million on both volume and the $46 per-unit gain, plus a $22.0 million service-margin increase "driven primarily by efficiency gains in cost of sales and leverage from unit volume growth."

Then SG&A turned a good gross-profit quarter into a great earnings quarter. Expenses rose just 4.6% to $628.6 million while units rose 14.7%, so SG&A per total unit fell $157 (8.8%) to $1,621. Management says cost cuts were partly masked by annualizing over "materially reduced incentive-based compensation" — last year's bonuses were depressed, so the comparison flatters less than it looks — plus variable costs tied to the unit surge. The structural commitment sits underneath: field and corporate payroll actions toward "$200 million in exit rate savings by the end of fiscal 2027."

Two smaller lines deserve a glance. Other income of $18.6 million versus $3.6 million came "primarily" from unrealized gains on equity investments — a mark, not an operation, worth about 10 cents of pretax EPS. And the effective tax rate ticked up to 25.9% from 24.9%.

The One Big Question: Is the Second Engine Worth More Than the First?​

CarMax reports two segments, and the 10-Q's segment note draws the line cleanly: CarMax Sales Operations is "all aspects of our auto merchandising and service operations, excluding financing provided by CAF," reviewed by the CEO at the gross-profit level; CAF "consists solely of our own finance operation." Put them side by side for the quarter:

CAF's $135.6 million is 61% of pretax earnings on a top line one-seventeenth the size of retail's. Its improvement this quarter came mostly from credit normalization, not growth: the provision fell $28.8 million because last year's quarter carried extra reserves "due to the worsening performance of older vintages," while this year's performance ran "in line with expectations." Add a $16.6 million gain on loan sales and $6.1 million more in servicing fees, and more than the entire $33 million CAF increase is explained by items that are not recurring spread income. Meanwhile the book shrank: average loans outstanding fell $1.2 billion year over year after CarMax sold the residual interest in two non-prime securitizations, and the interest margin dollars fell 5.7% even as the 6.6% margin rate held flat.

The bull case for CAF is the Tier 2 push. CAF financed 22% of Tier 2 volume versus 10% a year ago and "was the largest lender in this space," and the 10-Q discloses the prize: each additional point of CAF penetration generates $10–12 million in lifetime pretax income per origination year. The bear case sits two lines lower in the release: the allowance rose to 3.07% of loans held for investment from 2.95% in May, and overall penetration actually fell to 40.9% from 42.6% as third-party lenders took share. CarMax is going down-credit to grow the book while the reserve ratio climbs. Which vintages perform "in line with expectations" a year from now decides whether CAF is a $135-million quarter or a $100-million one with a provision catch-up.

The balance sheet shows the lender clearly. Auto loans held for investment of $15,812.1 million are 61% of total assets, funded by $15,694.2 million of non-recourse notes payable — a matched book where the loans and the funding move together. Corporate debt outside that structure fell roughly $542 million in six months to $1,681.0 million, and inventory dropped $282.2 million to $3,854.8 million as units turned. That deleveraging is what let management promise to resume buybacks — "at a modest level" in Q3, with $1.31 billion still authorized — after buying back zero shares in the first half. The November 3 Strategic Update, where management will detail the Shift into GEAR growth strategy and its milestones, is the next scheduled moment this story gets quantified.

Tracking a $7.9 Billion Quarter in Plain Text​

A quarter with two businesses inside it is exactly where double-entry earns its keep: every dollar of the retailer's sales and the lender's spread must reconcile to the same net income, or the ledger refuses to balance. Our modeling follows how we model every company. CarMax's filing presents CAF income net of its funding costs and provision, so the ledger keeps it on its own line — Income:CarMaxAutoFinance — instead of folding a lending book into a retailer's revenue. Income postings are negative (credits), expenses positive (debits), and Equity:Adjustments absorbs net income so the transaction sums to zero:

; FY2027Q2 Income Statement
; Check: (-7877.910) + 7078.446 + (-135.560) + 628.576 + 70.105 + 31.831 + (-18.554) + 57.779 + 165.287 = 0
 
2026-08-31 * "CarMax, Inc." "FY2027Q2 Income Statement"
  Income:Revenue                                  -7877.910 MUSD  ; net sales, excluding CAF income as filed
  Expenses:CostOfRevenue                           7078.446 MUSD
  Income:CarMaxAutoFinance                         -135.560 MUSD  ; CAF income as filed; loan-sale gain and provision included
  Expenses:SellingGeneralAdministrative             628.576 MUSD
  Expenses:DepreciationAndAmortization               70.105 MUSD
  Expenses:Interest                                  31.831 MUSD  ; non-CAF interest expense as filed
  Income:OtherNet                                   -18.554 MUSD  ; other income / expense as filed
  Expenses:IncomeTax                                 57.779 MUSD
  Equity:Adjustments                                165.287 MUSD  ; net income offset; retained earnings set by balance assertion

The one balance-sheet number that tells the narrative is the loan book against its funding: $15,812.1 million of auto loans held for investment against $15,694.2 million of non-recourse notes payable. CarMax the retailer owns $4,078.5 million of property and equipment; CarMax the lender owns a $15.8 billion loan portfolio that is 61% of everything the company holds. Any analysis that treats this as a car dealer with a finance department has the proportions backwards.

The Multi-Year Arc: Five Years of Shrink, One Quarter of Proof​

Revenue fell four years running from FY2022's $31.9 billion peak to FY2026's $25.9 billion, and net income collapsed further — FY2026's $247.3 million was less than a quarter of FY2022's, weighed down by a $141.3 million goodwill impairment on Edmunds. Against that slope, this quarter's 2.1% net margin is the first print above 2% since FY2022. Annualize nothing from a single quarter, but note the shape: the last time CarMax earned a 2%-plus margin, revenue was growing, not shrinking. The ledger now holds all six periods, so every claim in this post traces to a filed number.

The Verdict: Bull vs. Bear​

Bull Case

• Unit growth of 13.8% retail and 13.0% comps proves price elasticity works: CarMax can buy volume whenever it chooses, and gross-profit dollars still rose 8.1%.
• SG&A leverage is structural, not cyclical — $157 less per unit with $200 million of exit-rate savings targeted by fiscal year-end.
• CAF's Tier 2 expansion (22% share, largest lender) opens a growth vector where each penetration point is worth $10–12 million of lifetime pretax income.
• The balance sheet deleveraged fast: corporate debt down $542 million in six months, funding a buyback restart with $1.31 billion authorized.
• EPP and service margins (other gross profit +33.1%) compound the value of every unit sold, cushioning thinner metal margins.

Bear Case

• The turnaround is explicitly bought: $111 less gross profit per retail unit, and no release language about strong demand to suggest pricing power returns — our signal scan found zero demand/supply themes.
• CAF's $33 million improvement is mostly non-recurring — a $28.8 million provision swing, a $16.6 million loan-sale gain — while the book shrank $1.2 billion and the allowance ratio rose to 3.07%.
• Down-credit expansion into Tier 2 while reserves climb is the trade that produced last year's vintage problems; the release admits Tier 2 provisioning partly offset this quarter's benefit.
• Other income's $15 million jump is unrealized equity gains — roughly 10 cents of pretax EPS that can reverse next quarter.
• FY2026 earned $1.68 for the full year; one good quarter against four shrinking years needs a second data point before it is a trend.

Our Take: Buy the execution, watch the vintages. CarMax proved it can move metal at will and run lean doing it, and the SG&A trajectory plus the buyback restart give shareholders two ways to win even if units cool. But 61% of pretax earnings now flows through a lending book that is shrinking, going down-credit, and reserving more — so the November 3 Strategic Update matters less for its strategy slides than for whatever management says about Tier 2 loss expectations. If the allowance stabilizes while penetration climbs toward the 50% target, this quarter is the turn. If provisions chase originations, the retailer bought growth the lender will pay for.