CarMax’s SWOT analysis: used car giant navigates market shifts

CarMax, Inc. (NYSE:KMX), the leading retailer in the used car market, finds itself at a critical juncture as it navigates through a shifting automotive landscape. Recent analyst reports paint a picture of a company facing both significant challenges and potential opportunities in the coming years. This comprehensive analysis delves into CarMax’s current position, future prospects, and the factors that could shape its trajectory in the used car market.

Company Overview

CarMax operates as a prominent player in the autos and auto parts sector, with a primary focus on used car sales across the United States. The company has built its reputation on providing a wide selection of quality used vehicles through its extensive network of dealerships and its growing omnichannel presence. With annual revenue of $28.7 billion and a market capitalization of $8.6 billion, CarMax maintains strong liquidity with a healthy current ratio of 2.39, according to InvestingPro data.

Recent Performance

CarMax’s recent performance has shown mixed results. The company reported strong fourth-quarter results for fiscal year 2025, demonstrating positive momentum with four consecutive quarters of mid-single to high-single-digit year-over-year same-store growth. While revenue grew 3.54% over the last twelve months, InvestingPro analysis indicates the company faces challenges with relatively weak gross profit margins of 12.47%. This performance has been accompanied by robust gross profit per unit (GPU) and improvements in operational leverage.

However, the company’s stock experienced a sell-off following the release of its fourth-quarter results. Some analysts attribute this to management’s expectation of higher loan loss provisions in the first quarter of fiscal year 2026 and broader macroeconomic concerns.

Market Position and Competition

As a leading retailer in the used car market, CarMax faces increasing competition, particularly from digital-first competitors like Carvana (NYSE:CVNA). The company’s established brand and extensive physical presence provide certain advantages, but it must continue to innovate to maintain its market position.

CarMax has been investing heavily in its omnichannel development, aiming to offer consumers a seamless experience across online and in-store platforms. This strategic move is seen as crucial for competing in an increasingly digital marketplace.

Financial Outlook

Analysts have provided varied projections for CarMax’s financial performance in the coming years. Morgan Stanley forecasts earnings per share (EPS) of $3.69 for fiscal year 2026, $4.39 for fiscal year 2027, and $5.26 for fiscal year 2028. These projections represent an upward revision from previous estimates, reflecting a more optimistic outlook. Currently trading at a P/E ratio of 15.93x, InvestingPro analysis suggests the stock is trading at an attractive valuation relative to its near-term earnings growth potential. The platform offers 9 additional exclusive insights about KMX’s valuation and growth prospects.

Revenue growth is projected at 1.2% for fiscal year 2026 and 1.7% for fiscal year 2027, according to J.P. Morgan’s analysis. The company’s EBITDA margin is expected to show slight improvements over the next few years.

Strategic Initiatives

CarMax is pursuing several strategic initiatives to drive growth and improve its competitive position. The company is transitioning from a period of heavy investment in omnichannel development to monetizing profitable growth. This includes expanding reconditioning capacity, developing more profitable sourcing channels, increasing CarMax Auto Finance (CAF) financing penetration, and enhancing omnichannel options for consumers.

Another key strategy involves focusing on older vehicles, particularly in the sub-$20,000 segment where margins are strongest. This aligns with current consumer demand trends, especially as tariffs and supply constraints are driving up new vehicle prices.

Challenges and Risks

Despite its strong market position, CarMax faces several challenges. Execution risks remain a concern, particularly in older car sourcing and the implementation of omnichannel investments. The company must also contend with competitive pressure from peers like Carvana , which has shown significant growth in recent years.

Economic uncertainties pose additional risks. Affordability pressures from higher interest rates may slow industry demand in the latter half of 2025, and middle-income consumers are showing signs of pulling back due to affordability constraints and inflation.

Bear Case

Can CarMax overcome execution challenges and regain market share?

CarMax faces significant execution challenges, particularly in its strategic pivots towards older car sourcing and omnichannel investments. The company’s ability to effectively implement these initiatives while maintaining operational efficiency is crucial. Additionally, competitive pressure from digital-first competitors like Carvana has intensified, potentially eroding CarMax’s market share. If the company fails to execute its strategies effectively or loses ground to competitors, it could struggle to regain its market position and meet growth expectations.

How will economic uncertainties impact CarMax’s growth prospects?

The used car market is sensitive to broader economic conditions, and CarMax is not immune to these pressures. Affordability concerns, driven by higher interest rates and inflationary pressures, may dampen consumer demand for used vehicles. Middle-income consumers, a key demographic for CarMax, are already showing signs of pulling back on spending. If economic headwinds persist or intensify, CarMax could face challenges in maintaining its sales growth and profitability, potentially leading to missed earnings targets and a reevaluation of its market value.

Bull Case

How might the potential recovery in used car supply benefit CarMax?

Analysts anticipate a potential recovery in the used car supply starting in the first half of 2026. This could provide a significant tailwind for CarMax, as increased inventory availability may lead to better pricing and selection for consumers. With its established market presence and robust reconditioning capabilities, CarMax is well-positioned to capitalize on this recovery. An improved supply situation could drive higher sales volumes, potentially boosting revenues and margins, and supporting the company’s growth trajectory.

Can CarMax’s strategic initiatives drive significant EPS growth?

CarMax’s focus on operational execution and strategic initiatives presents a compelling case for future earnings growth. The company’s efforts to maintain mid-single-digit same-store sales growth while leveraging SG&A towards a mid-70s percentage of Gross Profit target could significantly improve profitability. Additionally, the expansion of CarMax Auto Finance and the company’s focus on the high-margin sub-$20,000 vehicle segment align well with current market trends. If these initiatives prove successful, CarMax could see substantial EPS growth, potentially exceeding analyst expectations and driving stock appreciation.

SWOT Analysis

Strengths:

• Leading position in the used car retail market
• Strong same-store sales growth momentum
• Improvements in operational leverage
• Extensive physical presence and growing omnichannel capabilities

Weaknesses:

• Execution challenges in older car sourcing strategies
• Pressure on SG&A as a percentage of Gross Profit
• Potential vulnerabilities in market share against digital competitors

Opportunities:

• Anticipated recovery in used car supply by 2026
• Expansion of omnichannel options to capture evolving consumer preferences
• Focus on older vehicles aligning with current consumer demand trends
• Potential for significant EPS growth through strategic initiatives

Threats:

• Increasing competitive pressure from digital-first peers like Carvana
• Economic uncertainties and affordability pressures affecting consumer demand
• Potential industry-wide slowdown in demand due to macroeconomic factors
• Risks associated with higher loan loss provisions in CarMax Auto Finance

Analysts Targets

• J.P. Morgan: $58.00 (August 6th, 2025)
• Morgan Stanley: $80.00 (June 30th, 2025)
• Evercore ISI: $80.00 (June 18th, 2025)
• RBC Capital Markets: $80.00 (April 11th, 2025)

This analysis is based on information available up to August 14, 2025, and reflects the market conditions and analyst opinions as of that date. For the most comprehensive analysis of CarMax’s investment potential, including Fair Value estimates, financial health scores, and exclusive ProTips, visit InvestingPro. The platform’s detailed Pro Research Report provides deep-dive analysis and actionable insights, making it an essential tool for investors considering a position in KMX.

InvestingPro: Smarter Decisions, Better Returns

Gain an edge in your investment decisions with InvestingPro’s in-depth analysis and exclusive insights on KMX. Our Pro platform offers fair value estimates, performance predictions, and risk assessments, along with additional tips and expert analysis. Explore KMX’s full potential at InvestingPro.

Should you invest in KMX right now? Consider this first:

Investing.com’s ProPicks, an AI-driven service trusted by over 130,000 paying members globally, provides easy-to-follow model portfolios designed for wealth accumulation. Curious if KMX is one of these AI-selected gems? Check out our ProPicks platform to find out and take your investment strategy to the next level.

To evaluate KMX further, use InvestingPro’s Fair Value tool for a comprehensive valuation based on various factors. You can also see if KMX appears on our undervalued or overvalued stock lists.

These tools provide a clearer picture of investment opportunities, enabling more informed decisions about where to allocate your funds.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.