Carmax Inc: Form 10-Q for the period ended Aug 31, 2025

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements, the accompanying notes and the MD&A included in our Annual Report on Form 10-K for the fiscal year ended February 28, 2025 (“fiscal 2025”), as well as our unaudited interim consolidated financial statements and the accompanying notes included in Item 1 of this Form 10-Q. Note references are to the notes to unaudited interim consolidated financial statements included in Item 1. All references to net earnings per share are to diluted net earnings per share. Certain prior year amounts have been reclassified to conform to the current year’s presentation. Amounts and percentages may not total due to rounding.

OVERVIEW

CarMax is the nation’s largest retailer of used vehicles. We operate in two reportable segments: CarMax Sales Operations and CarMax Auto Finance (“CAF”). Our CarMax Sales Operations segment consists of all aspects of our auto merchandising and service operations, excluding financing provided by CAF. Our CAF segment consists solely of our own finance operation that provides financing to customers buying retail vehicles from CarMax.

CarMax Sales Operations

Our sales operations segment consists of retail sales of used vehicles and related products and services, such as wholesale vehicle sales; the sale of extended protection plan (“EPP”) products, which include extended service plans (“ESPs”) and guaranteed asset protection (“GAP”); advertising and subscription revenues; and vehicle repair service. We offer competitive, no-haggle prices; a broad selection of CarMax Quality Certified used vehicles; value-added EPP products; and superior customer service. Our omni-channel experience provides a common platform across all of CarMax that leverages our scale, nationwide footprint and infrastructure and empowers our customers to buy a vehicle on their terms, whether online, in-store or through a seamless combination of both. Our associates, stores, technology and digital capabilities seamlessly tied together enable us to provide the most customer-centric car buying and selling experience, a key differentiator in a very large and fragmented market.

Our customers finance the majority of the retail vehicles purchased from us, and availability of on-the-spot financing is a critical component of the sales process. We provide financing to qualified retail customers through CAF and our arrangements with industry-leading third-party finance providers. All of the finance offers, whether by CAF or our third-party providers, are backed by a 3-day payoff option.

CarMax Auto Finance

In addition to third-party finance providers, we provide vehicle financing through CAF, which offers financing solely to customers buying retail vehicles from CarMax. CAF allows us to manage our reliance on third-party finance providers and to leverage knowledge of our business to provide qualifying customers a competitive financing option. As a result, we believe CAF enables us to capture additional profits, cash flows and sales. CAF income primarily reflects the interest and fee income generated by the auto loans held for investment and auto loans held for sale less the interest expense associated with the debt issued to fund these loans, a provision for estimated loan losses on loans held for investment and direct expenses. CAF income does not include any allocation of indirect costs. After the effect of 3-day payoffs and vehicle returns, CAF financed 42.1% of our retail used vehicle unit sales in the first six months of fiscal 2026. As of August 31, 2025, CAF serviced approximately 1.1 million customer accounts in its $17.69 billion portfolio of auto loans.

Management regularly analyzes CAF’s operating results by assessing the competitiveness of our consumer offer, profitability, the performance of its auto loans, including trends in credit losses and delinquencies, and CAF direct expenses.

Revenues and Profitability

The sources of revenue and gross profit from the CarMax Sales Operations segment for the first six months of fiscal 2026 are as follows:

Net Sales and Operating Revenues Gross Profit

A high-level summary of our financial results for the second quarter and first six months of fiscal 2026 as compared to the second quarter and first six months of fiscal 2025 is as follows (1):

(Dollars in millions except per share or per unit data)

(1) Where applicable, amounts are net of intercompany eliminations.

(2) A digitally enabled transaction is defined as either an omni retail sale or an online retail sale, as defined below.

(3) An omni retail sale is defined as a sale where customers complete at least one, but not all, of the four activities listed in note (4) below online, or additional steps that can be completed online, including pre-qualifying for financing, setting appointments and signing up for notifications of cars coming soon.

(4) An online retail sale is defined as a sale where the customer completes all four of the following activities online: reserving the vehicle; financing the vehicle, if needed; trading-in or opting out of a trade-in; and creating an online sales order.

Liquidity

Our primary ongoing sources of liquidity include funds provided by operations, proceeds from non-recourse funding vehicles and borrowings under our revolving credit facility or through other financing sources. In addition to funding our operations, this liquidity has been used to fund our capital expenditures and the repurchase of common stock under our share repurchase program.

Our current capital allocation strategy is to focus on our core business including investing in digital capabilities and the strategic expansion of our store and capacity footprint, pursue CAF’s expansion into the full credit spectrum, pursue new growth opportunities through investments, partnerships and acquisitions and return excess capital to shareholders. For fiscal 2026, we have and intend to continue to accelerate the pace of our share repurchases as compared to the prior year. We may increase this pace based on valuation and cash flow dynamics, as well as macroeconomic conditions, as we did in the first half of fiscal 2026. We believe we have the appropriate liquidity, access to capital and financial strength to support our operations and continue investing in our business for the next 12 months and thereafter for the foreseeable future.

Strategic Update and Future Outlook

Our omni-channel experience provides a common platform across all of CarMax that leverages our scale, nationwide footprint and infrastructure and empowers our customers to buy a vehicle on their terms, whether online, in-store or through a seamless combination of both experiences. While we expect our online and omni sales to grow over time, our goal is to provide the best experience whether in-store, online or a combination of the two. As a result, online, omni and in-person sales can vary from quarter to quarter depending on consumer preferences and how they choose to interact with us. We believe consumers in the used car industry will increasingly prefer optionality that seamlessly connects digital and physical experiences.

We believe that our diversified business model, combined with our exceptional associates, stores, technology and digital capabilities seamlessly tied together, is a key differentiator in a very large and fragmented market that positions us to continue to drive sales, gain market share and deliver significant year-over-year earnings growth for years to come. According to Cox Automotive research, as well as our own, the majority of customers shopping for used cars intend to transact via an omni experience. Our net promoter score is the highest it has been since we rolled out our digital capabilities nationwide, driven by record-high satisfaction among customers purchasing online as well as those using our omni-channel experience. In fiscal 2026, we plan to leverage and enhance our capabilities to drive growth through better execution, innovative efforts and upleveled experiences. Examples of our initiatives for fiscal 2026 include the following:

• For retail, we plan to continue leveraging data science and AI to offer even better digital experiences for associates and consumers, driving conversion and efficiency. We plan to improve our online vehicle transfer experience and expand the functionality of Skye, our AI-powered virtual assistant, with additional data and new architecture. We recently completed the full roll-out of Skye 2.0, which leverages agentic AI, and we expect this release will drive even more efficiency and experience improvements.
• We recently launched our new “Wanna Drive” brand positioning campaign, which brings our best-in-class omni-channel experience to life and emphasizes that our customers are empowered to buy their way, with clarity, confidence and control.
• For supply, we plan to continue to streamline the online appraisal checkout process, expand appraisal pick-up availability to new markets and further enhance MaxOffer to attract new dealers, expanding our access to directly sourced vehicles.
• For credit, we plan to continue expanding CAF’s participation across the credit spectrum to grow penetration and capture profitable returns. As part of that strategy, we plan to execute the programmatic sale of the financial interest in a non-prime securitization once per year, the first of which was completed in September 2025. We expect this additional funding lever, as well as other off-balance sheet funding vehicles under consideration, will provide us with significant flexibility and allow us to mitigate risk while focusing on our growth plan. Additionally, we plan to modernize the ownership experience on CAF’s digital platform, which is expected to enhance the customer experience and drive operating efficiencies.

We are also focused on driving down our cost of sales by pursuing incremental efficiency opportunities that we have identified across our logistics network and reconditioning operations. We achieved savings of approximately $125 per unit in fiscal 2025 and anticipate that we will achieve another $125 per unit in fiscal 2026. These efficiencies support affordability as we pass savings on to our customers and also support our margins.

While SG&A as a percent of gross profit can fluctuate from quarter to quarter depending on variability in gross profit and the timing of SG&A spending, our initial goal on the path to strengthening our SG&A to gross profit leverage over time is to achieve a rate in the mid-70% range on an annual basis. Achieving this annual rate will require continued efficiency gains in our operating model, gross profit growth and healthier consumer demand. In fiscal 2026, we expect to require low-single-digit gross profit growth to lever SG&A. This will be supported by our goal of becoming omni cost neutral for the first time for the full year of fiscal 2026. Omni-channel costs include commissions and the cost of operating our Customer Experience Centers (“CECs”). We expect our omni-channel costs per used unit, per total unit and as a percentage of gross profit for the full year of fiscal 2026 to be more efficient than before our omni-channel roll-out.

We also plan to accelerate our pace of SG&A expense reduction. Our goal of at least $150 million in SG&A expense reductions over the next 18 months represents a material improvement in our cost profile and reflects the execution of a plan that we have been developing with outside support. While we plan to realize some of these savings in fiscal 2026, we expect the vast majority will be realized in our exit rate by the end of fiscal 2027. In addition to offsetting inflationary pressures, these ongoing savings will provide additional flexibility to reinvest in areas that directly drive sales, while also serving as a tailwind to our already robust earnings model, as discussed below.

For the second quarter of fiscal 2026, we were more efficient compared to both before our omni-channel roll-out and the prior year across all three metrics noted above. A key driver of these efficiency gains has been our strategic deployment of AI technology. For example, Skye continued to deliver year-over-year improvements, with containment rate, CEC consultant productivity and phone and web response rate metrics all improving by double digits. We believe there are significant opportunities to continue expanding AI applications across our business to drive both top-line growth and operational excellence.

Our earnings model is designed to deliver an earnings per share compound annual growth rate (“CAGR”) in the high teens when used unit growth is in the mid-single digits. This earnings growth will be driven primarily by used and wholesale unit growth, strength in other gross profit, CAF’s credit spectrum expansion, continued operational efficiencies, ongoing SG&A leverage and our share repurchase program.

In calendar 2024, we estimate we sold approximately 3.7% of the age 0- to 10-year old vehicles sold on a nationwide basis, consistent with calendar 2023. We expect to gain market share in calendar 2025. Our strategy to increase our market share includes focusing on:

• Delivering a customer-driven, omni-channel buying and selling experience that is a unique and powerful seamless integration of our in-store and online capabilities.
• Utilizing advertising to drive customer growth, educate customers about our omni-channel platform and to differentiate and elevate our brand.
• Hiring, developing and retaining an engaged and skilled workforce.
• Leveraging data and advanced analytics to continuously improve the customer experience as well as our processes and systems.
• Improving efficiency in our stores and CECs as well as our logistics and reconditioning operations to reduce waste.
• Opening stores in new markets and expanding our presence in existing markets.
• Becoming the leading retailer of used EVs in the market.

As of August 31, 2025, we operated 253 used car stores located in 109 U.S. television markets, which covered approximately 85% of the U.S. population. The format and operating models utilized in our stores are continuously evaluated and may change or evolve over time based upon market and consumer expectations. During the first six months of fiscal 2026, we opened three stores located in Tuscaloosa, Alabama, El Cajon, California and Hagerstown, Maryland. In addition, we opened three stand-alone reconditioning/auction centers located in El Mirage, Arizona, supporting the Phoenix metro market, Midlothian, Texas, supporting the Dallas metro market, and New Kent, Virginia, supporting the Richmond metro market. During the remainder of the fiscal year, we plan to open three additional stores and one additional stand-alone reconditioning/auction facility. We are utilizing our stand-alone reconditioning and auction locations to balance capacity and drive efficiencies across the network.

While we execute both our short- and long-term strategy, there are trends and factors that could impact our strategic approach or our results in the short and medium term. For additional information about risks and uncertainties facing our company, see “Risk Factors,” included in Part I. Item 1A of the Annual Report on Form 10-K for the fiscal year ended February 28, 2025.

CRITICAL ACCOUNTING ESTIMATES

For information on critical accounting policies, see “Critical Accounting Estimates” in the MD&A included in Item 7 of the Annual Report on Form 10-K for the fiscal year ended February 28, 2025.

RESULTS OF OPERATIONS – CARMAX SALES OPERATIONS

NET SALES AND OPERATING REVENUES

(In millions)

(1) Excludes intercompany sales and operating revenues that have been eliminated in consolidation.

UNIT SALES

AVERAGE SELLING PRICES

COMPARABLE STORE USED VEHICLE SALES CHANGES

(1) Stores are added to the comparable store base beginning in their fourteenth full month of operation. We do not remove renovated stores from our comparable store base. Comparable store calculations include results for a set of stores that were included in our comparable store base in both the current and corresponding prior year periods.

VEHICLE SALES CHANGES

USED VEHICLE FINANCING PENETRATION BY CHANNEL (BEFORE THE IMPACT OF 3-DAY PAYOFFS)

(1) Calculated as used vehicle units financed for respective channel as a percentage of total used units sold.

(2) Includes CAF’s Tier 2 and Tier 3 loan originations, which represent approximately 2% of total used units sold.

(3) Third-party finance providers who generally pay us a fee or to whom no fee is paid.

(4) Third-party finance providers to whom we pay a fee.

(5) Represents customers arranging their own financing and customers that do not require financing.

CHANGE IN USED CAR STORE BASE

During the first six months of fiscal 2026, we opened three stores in existing television markets (Tuscaloosa, AL; El Cajon, CA; and Hagerstown, MD).

Used Vehicle Sales. The 7.2% decrease in used vehicle revenues in the second quarter of fiscal 2026 was driven by a 5.4% decrease in used unit sales as well as a 1.0% decrease in average retail selling price, or approximately $250. The decrease in used units included a 6.3% decrease in comparable store used unit sales. Pressured performance across our inventory aged 0-5 years was partially offset by increased sales of older, higher mileage vehicles. In response to the increase in sales volume in March and April due to tariff speculation, we ramped up inventory ahead of the second quarter in support of this growth. During the back half of May and through the end of June, we saw approximately $1,000 in depreciation across our inventory, which negatively impacted our price competitiveness and sales. In response, we lowered our used margin in the second quarter to drive the sell-through of inventory. As a result, price competitiveness has improved and we believe we are better positioned for the third quarter. In addition, we believe our second quarter sales were negatively impacted by a pull forward of demand into the first quarter in response to speculation about tariffs. The 0.2% increase in used vehicle revenues in the first six months of fiscal 2026 was driven by a 1.8% increase in used unit sales, partially offset by a 1.2% decrease in average retail selling price, or approximately $300. The increase in used units included a 0.9% increase in comparable store used unit sales. Comparable store used unit sales for September are currently stronger than our second quarter results but down slightly year-over-year.

The decrease in average retail selling price in the second quarter and first six months of fiscal 2026 primarily reflected shifts in the mix of our sales by vehicle age and class, partially offset by an increase in vehicle acquisition costs.

Wholesale Vehicle Sales. Vehicles sold at our wholesale auctions are, on average, more than 10 years old with more than 100,000 miles and are primarily comprised of vehicles purchased through our appraisal process that do not meet our retail standards. Our wholesale auction prices usually reflect trends in the general wholesale market for the types of vehicles we sell, although they can also be affected by changes in vehicle mix or the average age, mileage or condition of the vehicles being sold.

The 0.4% decrease in wholesale vehicle revenues in the second quarter of fiscal 2026 was driven by a 2.2% decrease in unit sales, partially offset by a 1.6% increase in average selling price, or approximately $125. During the second quarter of fiscal 2026, wholesale unit sales were impacted by our decision to lower buys in order to balance our inventory with sales. We are no longer intentionally lowering buys and anticipate year-over-year improvement for the third quarter of fiscal 2026. For the first six months of fiscal 2026, wholesale vehicle revenues decreased 0.4%, driven by a 0.5% decrease in unit sales.

The increase in average selling price during the second quarter of fiscal 2026 was primarily due to increased acquisition costs.

Other Sales and Revenues. Other sales and revenues include revenue from the sale of ESPs and GAP (collectively reported in EPP revenues, net of a reserve for estimated contract cancellations), net third-party finance (fees)/income, advertising and subscription revenues earned by our Edmunds business, and other revenues, which are predominantly comprised of service department sales. The fees we pay to the Tier 3 providers are reflected as an offset to finance fee revenues received from the Tier 2 providers. The mix of our retail vehicles financed by CAF, Tier 2 and Tier 3 providers, or customers that arrange their own financing, may vary from quarter to quarter depending on several factors, including the credit quality of applicants, changes in providers’ credit decisioning and external market conditions. Changes in originations by one tier of credit providers may also affect the originations made by providers in other tiers.

Other sales and revenues decreased 4.2% in the second quarter of fiscal 2026, reflecting a 5.2% decrease in EPP revenues. The decrease in EPP revenues was driven by the decline in retail unit sales. For the first six months of fiscal 2026, other sales and revenues increased 0.9%, reflecting a 2.7% increase in EPP revenues. The increase in EPP revenues reflected favorable reserve adjustments and increased margins, partially offset by decreased penetration.

GROSS PROFIT

(In millions)

(1) Amounts are net of intercompany eliminations.

GROSS PROFIT PER UNIT

(1) Amounts are net of intercompany eliminations.

(2) Calculated as category gross profit divided by its respective units sold, except the other category, which is divided by total used units sold.

(3) Calculated as a percentage of its respective sales or revenue.

Used Vehicle Gross Profit. We target a dollar range of gross profit per used unit sold. The gross profit dollar target for an individual vehicle is based on a variety of factors, including its probability of sale and its mileage relative to its age; however, it is not primarily based on the vehicle’s selling price. Our ability to quickly adjust appraisal offers to be consistent with trends in the broader trade-in market and the pace of our inventory turns reduce our exposure to the inherent continual fluctuation in used vehicle values and contribute to our ability to manage gross profit dollars per unit. Gross profit per used unit is consistent across our omni-channel platform.

We systematically adjust individual vehicle prices based on proprietary pricing algorithms in order to appropriately balance sales trends, inventory turns and gross profit achievement. Other factors that may influence gross profit include the wholesale and retail vehicle pricing environments, vehicle reconditioning and logistics costs, and the percentage of vehicles sourced directly from consumers and dealers through our appraisal process. Vehicles purchased directly from consumers and dealers generally have a lower cost per unit compared with vehicles purchased at auction or through other channels, which may generate more gross profit per unit. In any given period, our gross profit may also be impacted by the age mix of vehicles sold, as older vehicles are generally more profitable. We monitor macroeconomic factors and pricing elasticity and adjust our pricing accordingly to optimize unit sales and profitability while also maintaining competitively priced inventory.

Used vehicle gross profit decreased 7.6% in the second quarter of fiscal 2026, primarily driven by the 5.4% decrease in total used unit sales and a $53 decrease in used vehicle gross profit per unit. While used vehicle gross profit per unit was relatively in line with the prior year period, it was down approximately $200 from the first quarter of fiscal 2026. As noted above, we intentionally lowered retail margin in the second quarter to drive the sell-through of inventory in response to depreciation, negatively impacting our used vehicle gross profit per unit. Used vehicle gross profit increased 2.3% in the first six months of fiscal 2026, primarily driven by the 1.8% increase in total used unit sales and a $10 increase in used vehicle gross profit per unit. For the third quarter of fiscal 2026, we expect used vehicle gross profit per unit to be consistent with our historical average but down from the record high in the prior year. We continue to focus on striking the right balance between managing changes in vehicle costs, maintaining margin and passing along efficiencies to consumers to support vehicle affordability.

Wholesale Vehicle Gross Profit. Our wholesale gross profit per unit reflects the demand for older, higher mileage vehicles, which are the mainstay of our auctions, as well as strong dealer attendance and resulting high dealer-to-car ratios at our auctions. The frequency of our auctions, which are generally held weekly or bi-weekly, minimizes the depreciation risk on these vehicles. Our ability to adjust appraisal offers in response to the wholesale pricing environment is a key factor that influences wholesale gross profit.

Wholesale vehicle gross profit decreased 0.4% in the second quarter of fiscal 2026, driven by a 2.2% decrease in wholesale unit sales, partially offset by an $18 increase in wholesale vehicle gross profit per unit. Wholesale vehicle gross profit decreased 0.4% in the first six months of fiscal 2026, driven by a 0.5% decrease in wholesale unit sales. Wholesale vehicle gross profit per unit for the first six months was in line with the prior year period. For the third quarter of fiscal 2026, we expect wholesale vehicle gross profit per unit to be consistent with our historical average but down from the prior year, which was historically strong.

Other Gross Profit. Other gross profit includes profits related to EPP revenues, net third-party finance (fees)/income, advertising and subscription profits earned by our Edmunds business, and other revenues. Other revenues are predominantly comprised of service department operations, including used vehicle reconditioning. We have no cost of sales related to EPP revenues or net third-party finance (fees)/income, as these represent revenues paid to us by certain third-party providers. Third-party finance income is reported net of the fees we pay to third-party Tier 3 finance providers. Accordingly, changes in the relative mix of the components of other gross profit can affect the composition and amount of other gross profit.

Other gross profit decreased 4.2% in the second quarter of fiscal 2026, primarily driven by the decline in EPP revenues, as discussed above. Other gross profit increased 13.2% in the first six months of fiscal 2026, primarily driven by increases in service department margins as well as EPP revenues, as discussed above. The increase in service department margins was driven by cost coverage measures that we have implemented, the increase in used unit sales and increased efficiencies. In fiscal 2026, we are testing EPP product enhancements that will focus on increasing penetration and margin per unit. We expect this will result in a slight year-over-year increase in EPP margin per unit during fiscal 2026, with the potential for more expansion in fiscal 2027. In addition, we expect service margin to face pressure in the back half of fiscal 2026 due to seasonal sales volumes. We continue to expect to deliver a positive profit contribution for the full fiscal year, as governed by sales performance given the leverage/deleverage nature of service. We expect service will continue to serve as a slight profit lever beyond fiscal 2026.

SG&A Expenses

COMPONENTS OF SG&A EXPENSES AS A PERCENTAGE OF TOTAL SG&A EXPENSES

Three Months Ended August 31, 2025 Six Months Ended August 31, 2025

COMPONENTS OF SG&A EXPENSES COMPARED WITH PRIOR PERIOD (1)

(In millions except per unit data)

(1) Amounts are net of intercompany eliminations.

(2) Excludes compensation and benefits related to reconditioning and vehicle repair service, which are included in cost of sales. See Note 10 for details of share-based compensation expense by grant type.

(3) Includes IT expenses, non-CAF bad debt, insurance, preopening and relocation costs, travel, charitable contributions and other administrative expenses.

SG&A expenses decreased $9.5 million, or 1.6%, in the second quarter of fiscal 2026, primarily driven by a $9.7 million decrease in share-based compensation expense. This decrease was primarily related to cash-settled restricted stock units, as the expense associated with these units was primarily driven by the change in the company's stock price during the relevant periods. The continued realization of expense efficiencies were offset by cost pressures during the quarter.

SG&A expenses increased $11.6 million, or 0.9%, in the first six months of fiscal 2026. The increase was driven by a $23.0 million increase in compensation and benefits, excluding share-based compensation expense, primarily due to costs related to unit volume growth as well as cost pressures. This increase was partially offset by an $11.2 million decrease in share-based compensation expense primarily related to cash-settled restricted stock units, as the expense associated with these units was primarily driven by the change in the company's stock price during the relevant periods.

SG&A deleveraged by 350 basis points during the second quarter of fiscal 2026, driven by the decline in gross profit. SG&A leveraged by 230 basis points during the first six months of fiscal 2026, driven by the growth in gross profit and ongoing cost management efforts in the stores and CECs.

For the remainder fiscal 2026, we expect an increase in marketing spend on a per total unit basis, particularly in the third quarter, as we support our new brand positioning launch. We expect that marketing spend on a per total unit basis for the full year of fiscal 2026 will be in line with, or slightly above, fiscal 2025.

Interest Expense. Interest expense includes the interest related to short- and long-term debt, financing obligations and finance lease obligations. It does not include interest on the non-recourse notes payable, which is reflected within CAF income.

Interest expense of $28.5 million and $55.5 million in the second quarter and first six months of fiscal 2026, respectively, was relatively consistent with $27.0 million and $58.4 million in the second quarter and first six months of fiscal 2025, respectively.

Other Income. Other income of $3.6 million and $3.9 million in the second quarter and first six months of fiscal 2026, respectively, was relatively consistent with $3.3 million and $2.9 million in the second quarter and first six months of fiscal 2025, respectively.

Income Taxes. The effective income tax rate was 25.0% in the second quarter of fiscal 2026 and 25.5% in the first six months of fiscal 2026 versus 25.3% in the second quarter of fiscal 2025 and 25.8% in the first six months of fiscal 2025.

RESULTS OF OPERATIONS – CARMAX AUTO FINANCE

CAF income primarily reflects interest and fee income generated by auto loans held for investment and auto loans held for sale less the interest expense associated with the debt issued to fund these loans, a provision for estimated loan losses on loans held for investment and direct CAF expenses. Total interest margin reflects the spread between interest and fees charged to consumers and our funding costs. Changes in the interest margin on new originations generally affect CAF income over time. Increases in interest rates, which affect CAF’s funding costs, competitive pressures on rates charged to customers or reducing higher risk accounts in our origination strategy, could result in compression in the interest margin on new originations.

The provision for loan losses reflects changes in the allowance for loan losses. Changes to the allowance are primarily driven by loss and delinquency experience, economic factors on our outlook for net losses expected to occur over the remaining contractual life of the loans held for investment as well as changes in the mix of credit quality of originations.

CAF’s portfolio is composed primarily of auto loans originated over the past several years. Trends in auto loan growth and interest margins primarily reflect the cumulative effect of changes in the business over a multi-year period. Current period originations reflect current trends in both our retail sales and the CAF business, including the volume and credit mix of loans originated, current interest rates charged to consumers and loan terms. Loans originated in a given fiscal period generally impact CAF income over time, as we recognize income over the life of the underlying auto loan or upon sale of the loan.

We typically use securitizations or other funding arrangements to fund loans originated by CAF. Certain pools of loans may be sold in such a way that CAF relinquishes all, or nearly all, of its continuing financial interests in the loans. These loans are classified as held for sale on our consolidated balance sheet. As of August 31, 2025, we have identified $921.9 million of auto loans from our non-prime portfolio as held for sale, a portion of which were originated prior to fiscal 2026. This loan pool is intended to be fully sold off our balance sheet as a part of a non-prime securitization transaction. In the period in which the securitization transaction closes, CAF will record any gain realized by selling the residual interest in the loans. In addition, the risk of any financial impact from this loan pool due to future deterioration is removed once sold. We expect this additional funding lever, as well as other off-balance sheet funding vehicles under consideration, will provide us with significant flexibility and allow us to mitigate risk while focusing on our growth plan.

On September 24, 2025, we executed the non-prime securitization transaction, as discussed above. This was upsized to $900 million in total notes and for the first time included the sale of most of the residual financial interest in the transaction to third party investors, thus resulting in off-balance sheet treatment. We expect to recognize a gain on sale of approximately $25 million to $30 million from the transaction, net of transaction expenses, in the third quarter of fiscal 2026. We also expect to receive approximately $40 million to $45 million in additional CAF income related to servicing fees and the retained beneficial interest over the life of the transaction. There will be no loss allowance or provision for this pool of loans.

During fiscal 2025, CAF began testing its new full-spectrum credit scoring models and corresponding strategies across the Tier 1, Tier 2 and Tier 3 spaces. During the first half of fiscal 2026, CAF began a measured expansion by recapturing profitable portions of Tier 1 originations that we had shifted to our Tier 2 lenders as we tightened lending standards as well as testing expanded lending in the top half of the Tier 2 space. We expect this expansion will grow our penetration by 100 to 200 basis points in the near-term, which is enabled by our non-prime securitization program, allowing us to efficiently fund these non-prime loans. The full realization of this growth may be impacted by non-controllable factors such as customer credit mix and partner lender behavior. This is a first step on the path towards our initial goal of increasing CAF penetration to 50%. We continue to learn from our new underwriting models and corresponding tests currently in place and anticipate capturing additional volume beyond Tier 1 during the back half of fiscal 2026. We will continue to monitor consumer behavior and the broader economy and will adjust our origination strategy as needed. We would expect each additional percentage point of CAF penetration to generate $10 million to $12 million in lifetime pre-tax income per year of origination, net of the impact to finance partner participation fees. Our pre-tax income expectations will be impacted by the volume of loans originated, interest rates charged to customers, loan terms, loss rates, average credit scores, funding strategy, loan sales and the broader macroeconomic and lending environments. We believe our unique finance platform with a full-spectrum in-house lending operation, coupled with a robust network of partner lenders, will strengthen our competitive advantage.

Historically, CAF has originated a small portion of auto loans to customers who typically would be financed by our Tier 2 and Tier 3 finance providers, in order to better understand the performance of these loans, mitigate risk and add incremental profits. The targeted percentage of Tier 2 and Tier 3 originations has fluctuated over the past several years. With the testing of the new full-spectrum credit scoring models, we intend to continue our investment in this space, but remain within the target of originating less than 15% and 5% of the total Tier 2 and Tier 3 loan volume, respectively. Any future adjustments in Tier 2 and Tier 3 will consider the broader lending environment, which includes funding availability, along with the long-term sustainability of the change. These loans have higher loss and delinquency rates than the remainder of the CAF portfolio, as well as higher contract rates.

CAF income does not include any allocation of indirect costs. Although CAF benefits from certain indirect overhead expenditures, we have not allocated indirect costs to CAF to avoid making subjective allocation decisions. Examples of indirect costs not allocated to CAF include retail store expenses and corporate expenses.

See Note 3 for additional information on CAF income and Note 4 for information on auto loans held for investment, including credit quality.

SELECTED CAF FINANCIAL INFORMATION

(In millions)

(1) Includes auto loans held for investment and auto loans held for sale.

CAF ORIGINATION INFORMATION (AFTER THE IMPACT OF 3-DAY PAYOFFS) (1)

(1) Includes auto loans held for investment and auto loans held for sale.

(2) Vehicle units financed as a percentage of total used units sold.

(3) The credit scores represent FICO® scores and reflect only loans with obligors that have a FICO® score at the time of application. The FICO® score with respect to any loans with co-obligors is calculated as the average of each obligor’s FICO® score at the time of application. FICO® scores are not a significant factor in our primary scoring model, which relies on information from credit bureaus and other application information as discussed in Note 4. FICO® is a federally registered servicemark of Fair Isaac Corporation.

(4) LTV represents the ratio of the amount financed to the total collateral value, which is measured as the vehicle selling price plus applicable taxes, title and fees.

AUTO LOANS HELD FOR INVESTMENT PERFORMANCE INFORMATION

(In millions)

(1) The average recovery rate represents the average percentage of the outstanding principal balance we receive when a vehicle is repossessed and liquidated, generally at our wholesale auctions. While in any individual period conditions may vary, over the past 10 fiscal years, the annual recovery rate has ranged from a low of 46% to a high of 71%, and it is primarily affected by the wholesale market environment.

• CAF Income (Decreases of $12.9 million, or 11.2%, and $18.3 million, or 7.0%, in the second quarter and first six months of fiscal 2026, respectively)
• The decrease in CAF income for both the second quarter and first six months of fiscal 2026 reflects an increase in the provision for loan losses, partially offset by an increase in the interest margin percentage.
• For fiscal 2026, we expect CAF income to be down slightly year-over-year.
• Total Interest Margin (Increased to 6.6% and 6.5% in the second quarter and first six months of fiscal 2026, respectively, from 6.1% in both the second quarter and first six months of fiscal 2025)
• The increase in total interest margin for both the second quarter and first six months of fiscal 2026 was driven by higher customer rates, partially offset by higher funding costs.
• Provision for Loan Losses
• The provision for loan losses resulted in expense of $142.2 million and $243.9 million in the second quarter and first six months of fiscal 2026, respectively, compared with expense of $112.6 million and $193.8 million in the second quarter and first six months of fiscal 2025, respectively.
• The provision for loan losses for the second quarter and first six months of fiscal 2026 consisted of $70.9 million and $135.0 million, respectively, representing our estimate of lifetime losses on new originations for the respective period, while the remaining $71.3 million and $108.9 million, respectively, represented the adjustment to our loss expectations on existing originations.
• The increase in the provision for loan losses for both periods was primarily driven by unfavorable loss performance, primarily within loans originated in 2022 and 2023, when average selling prices were elevated and these customers were later challenged by the inflationary environment. As a result of the previously disclosed tightening of CAF's underwriting standards, loans originated after April 2024 are performing in line with expectations.
• There was also a reduction in the provision in the second quarter and first six months of fiscal 2026 due to the release of $15.7 million and $42.2 million, respectively, for the allowance previously recorded for loans that are now classified as held for sale.
• For the third quarter of fiscal 2026, we expect the provision for loan losses to be less than $100 million. This estimate could be impacted by the volume of loans originated, the credit mix of originations and the broader macroeconomic and lending environments.
• The allowance for loan losses as a percentage of auto loans held for investment was 3.02% as of August 31, 2025, compared with 2.82% as of August 31, 2024 and 2.61% as of February 28, 2025. The allowance percentage increased from February primarily due to unfavorable loss performance, partially offset by the release of a portion of the allowance previously recognized on auto loans held for sale.
• Loan Performance
• The decrease in net loan originations in the second quarter of fiscal 2026 primarily resulted from a decrease in used unit sales. The decrease in net loan originations in the first six months of fiscal 2026 resulted from decreases in the average amount financed and net penetration rate, partially offset by an increase in used unit sales.
• CAF net penetration increased 60 basis points in the second quarter of fiscal 2026 and decreased 50 basis points in the first six months of fiscal 2026. During the first half of fiscal 2026, we made underwriting adjustments that translated to approximately 100 to 200 basis points of growth, but the full realization of this growth was impacted by non-controllable factors such as customer credit mix and partner lender behavior. We believe the pull forward of sales into the first quarter in response to speculation about tariffs negatively impacted CAF's share during the early part of the second quarter of fiscal 2026, resulting in a more modest increase in penetration.

PLANNED FUTURE ACTIVITIES

During the first six months of fiscal 2026, we opened three new stores and three stand-alone reconditioning/auction centers. For the remainder of fiscal 2026, we anticipate opening three additional store locations and one additional stand-alone reconditioning/auction center. We currently estimate capital expenditures will total approximately $575 million in fiscal 2026. Capital expenditures were $467.9 million in fiscal 2025. Planned capital spending in fiscal 2026 largely consists of spending to support our future long-term growth in offsite reconditioning and auction facilities, as well as our new stores.

FINANCIAL CONDITION

Liquidity and Capital Resources

Our primary ongoing cash requirements are to fund our existing operations, store and capacity expansion, store improvement, CAF, strategic growth initiatives and our share repurchase program. Our primary ongoing sources of liquidity include funds provided by operations, proceeds from non-recourse funding vehicles and borrowings under our revolving credit facility or through other financing sources.

Our current capital allocation strategy is to focus on our core business including investing in digital capabilities and the strategic expansion of our store and capacity footprint, pursue CAF’s expansion into the full credit spectrum, pursue new growth opportunities through investments, partnerships and acquisitions and return excess capital to shareholders. For fiscal 2026, we have and intend to continue to accelerate the pace of our share repurchases as compared to the prior year. We may increase this pace based on valuation and cash flow dynamics, as well as macroeconomic conditions, as we did in the first half of fiscal 2026. We believe we have the appropriate liquidity, access to capital and financial strength to support our operations and continue investing in our business for the next 12 months and thereafter for the foreseeable future.

We have historically managed leverage based on a number of factors, including internal financial forecasts, consideration of CAF’s operational and capital needs, external peer benchmarking, requirements of our debt agreements and macroeconomic conditions. Generally, we expect to use our revolving credit facility and other financing sources, together with stock repurchases, to maintain a leverage profile that ensures operating flexibility while supporting continued investment in the business.

Operating Activities. During the first six months of fiscal 2026, net cash provided by operating activities totaled $1.09 billion compared with $501.4 million in the prior year period.

As of August 31, 2025, total inventory was $3.15 billion, representing a decrease of $785.1 million compared with the balance as of the start of the fiscal year. The decrease was primarily driven by a decrease in volume due to a strategic reduction of inventory in response to lower consumer demand. Given the acceleration in sales we experienced in the first quarter of fiscal 2026, we ramped up our inventory ahead of the second quarter in support of growth. During the back half of May and through the end of June, we saw approximately $1,000 in depreciation across our inventory. In response, during the second quarter, we lowered retail margin and intentionally slowed buys to balance our inventory with sales.

Our operating cash flows are significantly impacted by the net change in auto loans held for investment and auto loans held for sale, which increased $309.3 million in the current year period compared with $595.5 million in the prior year period. A significant portion of the changes in auto loans held for investment and auto loans held for sale are accompanied by changes in non-recourse notes payable, which are issued to fund auto loans originated by CAF. Net payments on non-recourse notes payable were $62.8 million in the current year period compared with net issuances of $228.3 million in the prior year period and are separately reflected as cash from financing activities. Due to the presentation differences between auto loans held for investment, auto loans held for sale and non-recourse notes payable on the consolidated statements of cash flows, fluctuations in these amounts can impact our operating and financing cash flows without affecting our overall liquidity, working capital or cash flows.

The increase in net cash provided by operating activities for the first six months of the current fiscal year compared with the prior year period primarily reflected the change in inventory and net change in auto loans held for investment and auto loans held for sale, as discussed above, partially offset by the impact of volume and timing-related changes in accounts payable.

Investing Activities. During the first six months of fiscal 2026, net cash used in investing activities totaled $272.5 million compared with $215.5 million in fiscal 2025. Capital expenditures were $268.2 million in the current year period versus $213.1 million in the prior year period. Capital expenditures primarily included construction costs to support our growth capacity initiatives and new store openings as well as investments in technology. We maintain a multi-year pipeline of sites to support our store and capacity growth, so portions of capital spending in one year may relate to locations that we open in subsequent fiscal years.

As of August 31, 2025, 169 of our 253 used car stores were located on owned sites and 84 were located on leased sites, including 28 land-only leases and 56 land and building leases.

Financing Activities. During the first six months of fiscal 2026, net cash used in financing activities totaled $467.7 million compared with $283.1 million in the prior year period. Included in these amounts were net payments on non-recourse notes payable of $62.8 million compared with net issuances of $228.3 million in the prior year period. Non-recourse notes payable are typically used to fund changes in auto loans held for investment and auto loans held for sale (see “Operating Activities”).

During the first six months of fiscal 2026, cash used in financing activities was impacted by net payments on our long-term debt of $8.0 million as well as stock repurchases of $384.9 million. During the first six months of fiscal 2025, cash used in financing activities was impacted by net payments on our long-term debt of $306.3 million as well as stock repurchases of $213.3 million.

TOTAL DEBT AND CASH AND CASH EQUIVALENTS

(In thousands)

(1) Interest is payable monthly, with the exception of our senior notes, which are payable semi-annually.

(2) Borrowings accrue interest at variable rates based on SOFR, the federal funds rate, or the prime rate, depending on the type of borrowing.

(3) Total debt excludes unamortized debt issuance costs. See Note 9 for additional information.

Borrowings under our $2.00 billion unsecured revolving credit facility are available for working capital and general corporate purposes, and the unused portion is fully available to us. The credit facility, term loan and senior note agreements contain representations and warranties, conditions and covenants. If these requirements are not met, all amounts outstanding or otherwise owed could become due and payable immediately and other limitations could be placed on our ability to use any available borrowing capacity. As of August 31, 2025, we were in compliance with these financial covenants.

See Note 9 for additional information on our revolving credit facility, term loan, senior notes and financing obligations.

CAF auto loans held for investment and auto loans held for sale are primarily funded through our warehouse facilities and asset-backed term funding transactions. These non-recourse funding vehicles are structured to legally isolate the auto loans, and we would not expect to be able to access the assets of our non-recourse funding vehicles, even in insolvency, receivership or conservatorship proceedings. Similarly, the investors in the non-recourse notes payable have no recourse to our assets beyond the related loans, the amounts on deposit in reserve accounts and the restricted cash from collections on auto loans held for investment. We do, however, continue to have the rights associated with the interest we retain in these non-recourse funding vehicles.

As of August 31, 2025, $13.49 billion and $3.57 billion of non-recourse notes payable were outstanding related to asset-backed term funding transactions and our warehouse facilities, respectively. During the first six months of fiscal 2026, we funded a total of $3.93 billion in asset-backed term funding transactions. As of August 31, 2025, we had $2.53 billion of unused capacity in our warehouse facilities.

We have periodically increased our warehouse facility limit over time, as our store base, sales and CAF loan originations have grown. See Note 9 for additional information on the warehouse facilities.

We generally repurchase the loans funded through our warehouse facilities when we enter into an asset-backed term funding transaction. If our counterparties were to refuse to permit these repurchases it could impact our ability to execute on our funding program. Additionally, the agreements related to the warehouse facilities include various representations and warranties, as well as covenants and performance triggers related to events of default. If these requirements are not met, we could be unable to continue to fund loans through the warehouse facilities. In addition, warehouse facility investors could charge us a higher rate of interest and could have us replaced as servicer. Further, we could be required to deposit collections on the related loans with the warehouse facility agents on a daily basis and deliver executed lockbox agreements to the warehouse facility agents.

The timing and amount of stock repurchases are determined based on stock price, market conditions, legal requirements and other factors. Shares repurchased are deemed authorized but unissued shares of common stock. As of August 31, 2025, a total of $2 billion of board authorizations for repurchases was outstanding, with no expiration date, of which $1.56 billion remained available for repurchase. See Note 10 for more information on share repurchase activity.

Fair Value Measurements

We recognize money market securities, mutual fund investments, certain equity investments and derivative instruments at fair value. See Note 6 for more information on fair value measurements.

FORWARD-LOOKING STATEMENTS

We caution readers that the statements contained in this report that are not statements of historical fact, including statements about our future business plans, operations, challenges, opportunities or prospects, including without limitation any statements or factors regarding expected operating capacity, sales, inventory, market share, financial and operational targets and goals, revenue, margins, expenses, liquidity, loan originations, capital expenditures, share repurchase plans, debt obligations or earnings, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by the use of words such as “anticipate,” “believe,” “could,” “enable,” “encouraged,” “estimate,” “expect,” “focused on,” “intend,” “may,” “outlook,” “plan,” “positioned,” “predict,” “should,” “target,” “will” and other similar expressions, whether in the negative or affirmative. Such forward-looking statements are based upon management’s current knowledge, expectations and assumptions and involve risks and uncertainties that could cause actual results to differ materially from anticipated results. We disclaim any intent or obligation to update these statements. Among the factors that could cause actual results and outcomes to differ materially from those contained in the forward-looking statements are the following:

• Changes in the competitive landscape and/or our failure to successfully adjust to such changes.
• Changes in general or regional U.S. economic conditions, including economic downturns, inflationary pressures, fluctuating interest rates, tariffs or the effect of trade policies and the potential impact of international events.
• Changes in the availability or cost of capital and working capital financing, including changes related to the asset-backed securitization market.
• Events that damage our reputation or harm the perception of the quality of our brand.
• Significant changes in prices of new and used vehicles.
• A reduction in the availability of or access to sources of inventory or a failure to expeditiously liquidate inventory.
• Our inability to realize the benefits associated with our omni-channel platform or initiatives designed to leverage evolving technologies, including AI.
• Factors related to geographic and sales growth, including the inability to effectively manage our growth.
• Our inability to recruit, develop and retain associates and maintain positive associate relations.
• The loss of key associates from our store, regional or corporate management teams or a significant increase in labor costs.
• Changes in economic conditions or other factors that result in greater credit losses for CAF’s portfolio of auto loans than anticipated.
• The failure or inability to realize the benefits associated with our strategic investments.
• Changes in consumer credit availability provided by our third-party finance providers.
• Changes in the availability of extended protection plan products from third-party providers.
• The performance of the third-party vendors we rely on for key components of our business.
• Adverse conditions affecting one or more automotive manufacturers.
• The inaccuracy of estimates and assumptions used in the preparation of our financial statements, or the effect of new accounting requirements or changes to U.S. generally accepted accounting principles.
• The failure or inability to adequately protect our intellectual property.
• The occurrence of severe weather events.
• The failure or inability to meet our environmental goals or satisfy related disclosure requirements.
• Factors related to the geographic concentration of our stores.
• Security breaches or other events that result in the misappropriation, loss or other unauthorized disclosure of confidential customer, associate or corporate information.
• The failure of or inability to sufficiently enhance key information systems.
• Factors related to the regulatory and legislative environment in which we operate.
• The effect of evolving regulations, disclosure requirements, standards and expectations relating to environmental, social and governance matters.
• The effect of various litigation matters.
• The volatility in the market price for our common stock.

For more details on factors that could affect expectations, see Part II, Item 1A, “Risk Factors” on Page 44 of this report, our Annual Report on Form 10-K for the fiscal year ended February 28, 2025, and our quarterly or current reports as filed with or furnished to the U.S. Securities and Exchange Commission (“SEC”). Our filings are publicly available on our investor information home page at investors.carmax.com. Requests for information may also be made to our Investor Relations Department by email to investor_relations@carmax.com (mailto:relations@carmax.com) or by calling 1-804-747-0422, ext. 7865. We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.

There have been no material changes to our market risk since February 28, 2025. For information on our exposure to market risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” contained in our Annual Report on Form 10-K for the fiscal year ended February 28, 2025.

Disclosure. We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are also designed to ensure that this information is accumulated and communicated to management, including the chief executive officer (“CEO”) and the chief financial officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, with the participation of the CEO and CFO, we evaluated the effectiveness of our disclosure controls and procedures. Based upon that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period.

Internal Control over Financial Reporting. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended August 31, 2025, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

In connection with information set forth in this Form 10-Q, the factors discussed under “Risk Factors” in our Form 10-K for fiscal year ended February 28, 2025, should be considered. These risks could materially and adversely affect our business, financial condition, and results of operations. There have been no material changes to the factors discussed in our Form 10‑K.