Carmax Inc: Form 10-Q for the period ended Aug 31, 2026

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, 2026 (“fiscal 2026”), 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 sales platform 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 combination of both. Our associates, stores, technology and digital capabilities tied together enable us to provide the most customer-centric car buying and selling experience, a key differentiator in a 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, direct expenses and income related to the sale of auto loans. 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 2027. As of August 31, 2026, CAF serviced approximately 1.0 million customer accounts, which includes its $16.30 billion portfolio of auto loans and $1.20 billion of auto loans that have previously been sold.

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 2027 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 2027 as compared to the second quarter and first six months of fiscal 2026 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 funding the business to drive unit sales and earnings growth that enables us to consistently reward our shareholders. We continue to take a disciplined approach to our capital structure, including managing our net leverage to preserve efficient access to the capital markets for both CAF and CarMax overall. With leverage slightly above our targeted range, and as we focused on improving the business, we paused our share buybacks during the fourth quarter of fiscal 2026. For the first half of fiscal 2027, our leverage improved to the upper end of our targeted range. Based on our improved performance as well as our positive outlook for the remainder of the fiscal year and the progress we have made on our strategic plan, we intend to resume our share repurchase program in the third quarter of fiscal 2027. We expect to begin repurchases at a modest pace, below the average quarterly pace prior to our pause. The timing and amount of repurchases will depend upon market conditions, our leverage and our capital needs, among other factors. 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

We possess an award-winning, people-first culture, an iconic brand, an irreplaceable national footprint and meaningful digital capabilities. When fully harnessed, this combination enhances our competitive advantage and will drive our market share growth and financial returns in one of the largest consumer markets in the nation.

We have established our strategy for growth, which we have named Shift into GEAR. This strategy is built around four pillars with the objective of delivering strong unit sales and earnings growth that enables CarMax to consistently reward shareholders. The four pillars place the customer at the center of everything we do and are designed to meaningfully improve how we operate at scale and support consistently strong performance. Our four pillars are:

• Great Offering - give customers every reason to choose CarMax. We plan to ensure our pricing remains competitive across demand cycles while we both grow our saleable inventory and provide customers faster access to our vehicles.
• Easy Experience - make it easy to do business with us through a seamless experience. We plan to better connect digital capabilities with in-store experiences to improve conversion and customer satisfaction.
• Add Value - grow profitability by maximizing value across all aspects of our business. This includes our CAF full spectrum ambitions as well as the extended protection plan redesign initiatives that are already underway.
• Run Lean - unlock efficiencies to enable a great offering. We plan to lower reconditioning costs through technology and operational efficiency while continuing to deliver the high-quality vehicles customers expect from CarMax. We are also working to enhance our logistics network and continuing to reduce our SG&A expenses.

During the second quarter of fiscal 2027, we made progress in each of these pillars. We further strengthened our price competitiveness by continuing to drive efficiencies in reconditioning, dynamically managing gross profit per unit and passing savings on to our customers. In addition, we continued to improve our pricing algorithms to ensure we remain more competitive across demand cycles. We scaled AI voice technology to all of our inbound store and customer experience center calls, enabling customers to self-resolve their inquiries through our agentic AI tools or directly connect to the right associate for help. Additionally, we improved our digital experience by redesigning our car detail page to make it easier for customers to find and buy the right car for them. We increased our CAF Tier 2 penetration and recognized a gain on sale related to our non-prime securitization. We also grew our EPP margins year-over-year as we continued to launch our redesigned offering in additional markets. We continued to take costs out of our reconditioning operations and maintained our approach of passing savings on to customers to support sales. We also took additional steps to solidify achieving our commitment of $200 million in fiscal 2027 exit rate savings in SG&A expense, which will result in approximately $6 million of severance expense in the third quarter of fiscal 2027.

To support and advance Shift into GEAR, we are strengthening our leadership team. Effective in October 2026, Elizabeth Dirgins will join CarMax as Executive Vice President, Chief Digital and Customer Officer. Ms. Dirgins will own and unify the end-to-end customer experience, from customer acquisition through vehicle transaction. In this capacity, she will oversee our marketing, product and Edmunds teams. In addition, Jeff Campbell, a current CarMax employee for over a decade, joined the senior leadership team in August as Senior Vice President, Strategy. Mr. Campbell is leading a newly centralized function designed to accelerate key decisions by bringing together all of our strategy, data science, AI and pricing teams.

While this work will take time, we are encouraged that the progress we have been making across the four pillars is already translating into improved trends that we expect will continue this fiscal year. For the first half of fiscal 2027, on a year-over-year basis, retail unit sales delivered mid-single digit growth, reflecting the near-term steps we have been taking across pricing, marketing and conversion to strengthen the business and drive performance. In addition, we levered SG&A expense on a total unit basis, expanded CAF Tier 2 penetration and increased EPP margin, all while improving our year-over-year EPS trend.

We plan to provide additional details about Shift into GEAR, including key initiatives and milestones, during our fall strategic update, which will take place virtually on November 3, 2026.

Regarding SG&A expenses, our goal is to achieve $200 million in exit rate savings in SG&A expense by the end of fiscal 2027. However, the year-over-year savings within fiscal 2027 are expected to be offset as we annualize over materially reduced corporate incentive compensation and share-based compensation expense in fiscal 2026, which offsets approximately half of the anticipated savings in fiscal 2027. The savings are also expected to be impacted by variable costs associated with higher sales, inflationary pressures and new location growth. We expect the full impact from these savings to occur in fiscal 2028. In addition to offsetting cost pressures, these ongoing savings are expected to enable additional flexibility to reinvest in areas that directly drive sales, while also serving as a tailwind to our earnings. We remain on track to achieve our $200 million savings target.

In fiscal 2027, we plan to take a more dynamic approach to margin management. We expect used margins for the full fiscal year to decline by less than $200 per unit, although this may vary as we continue to optimize performance. This outlook reflects our pricing actions and our ongoing efforts to reduce logistics and reconditioning cost of sales in support of more competitive pricing and stronger sales.

During fiscal 2026, we tested EPP product enhancements that focused on increasing penetration and margin per unit. We began the nationwide rollout of these products in the first quarter of fiscal 2027 and anticipate the full rollout to be completed in October 2026. EPP margins increased $27 per unit in the first half of fiscal 2027 and we are on track to achieve incremental EPP margin per unit of approximately $35 in fiscal 2027.

As previously disclosed, we are currently in the process of terminating our pension plan and expect it to be materially complete by the end of fiscal 2027. As part of this process, we estimate a total settlement charge of approximately $50 million will be recorded in Other expense in fiscal 2027, with relatively similar amounts expected to be recognized in the third and fourth quarters of fiscal 2027.

In calendar 2025, we estimate we sold approximately 3.6% of the age 0- to 10-year old vehicles sold on a nationwide basis, a decrease from 3.7% in calendar 2024. External title data indicates that while we gained market share in the first half of calendar 2025, sales and market share were pressured in the second half of the year. Notwithstanding the prior pressure, we believe we will grow our market share on a sustainable basis going forward.

As of August 31, 2026, we operated 258 used car stores located in 111 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 2027, we opened two stores as well as one stand-alone reconditioning/auction center located in Locust Grove, Georgia, supporting the Atlanta metro market, and one stand-alone auction center in Conroe, Texas. Subsequent to the end of the second quarter, we opened an additional store in Austin, Texas. During the remainder of the fiscal year, we plan to open one store location, one stand-alone auction facility and one stand-alone reconditioning/auction center. 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, 2026, and Part II, Item 1A of this report.

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, 2026.

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 less than 5% 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 2027, we opened one store in a new television market (Richland, WA) and one store in an existing television market (Houston, TX).

Used Vehicle Sales. The 19.7% increase in used vehicle revenues in the second quarter of fiscal 2027 was driven by a 13.8% increase in used unit sales as well as a 6.3% increase in average retail selling price, or approximately $1,600. The increase in used units included a 13.0% increase in comparable store used unit sales. For the first six months of fiscal 2027, used vehicle revenues increased 11.7%, driven by a 6.5% increase in used unit sales as well as a 5.3% increase in average retail selling price, or approximately $1,400. The increase in used units included a 5.6% increase in comparable store used unit sales. Sales performance in the second quarter and first half of fiscal 2027 was supported by more competitive vehicle pricing. This includes actions we have taken to enhance our pricing capabilities as well as passing along efficiency gains to our customers. In addition, we benefited from enhanced FTC regulatory focus that brought greater transparency to advertised vehicle pricing industry-wide by requiring fees to be included in the price. Given our longstanding commitment to transparent, no-haggle pricing, this brings more clarity to the strength of our offer by enabling customers to make more direct pricing comparisons and is a tailwind to our business. We believe our sales performance was impacted equally by our actions noted above and the enhanced FTC regulatory focus.

The increase in average retail selling price in both the second quarter and first six months of fiscal 2027 primarily reflected an increase in vehicle acquisition costs as well as a shift in the mix of our sales by vehicle age. The shift in mix by vehicle age for the second quarter reflects the growing segment of higher income consumers purchasing later model used vehicles, while demand among lower income consumers for older vehicles remained steady.

Wholesale Vehicle Sales. Vehicles sold at our wholesale auctions are, on average, more than 11 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 18.2% increase in wholesale vehicle revenues in the second quarter of fiscal 2027 was driven by a 15.9% increase in unit sales and a 1.8% increase in average selling price, or approximately $100. For the first six months of fiscal 2027, wholesale vehicle revenues increased 16.0%, driven by a 12.0% increase in wholesale unit sales as well as a 3.5% increase in average selling price, or approximately $300.

The increase in average selling price in both the second quarter and first six months of fiscal 2027 primarily reflected an increase in vehicle 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, 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 increased 19.5% and 10.5% in the second quarter and first six months of fiscal 2027, respectively, reflecting increases in EPP revenues. EPP revenues increased 23.0% and 11.5% in the second quarter and first six months of fiscal 2027, respectively, driven by the increase in retail unit sales as well as increased margins.

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, using a dynamic approach. 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 sales 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 strike the right balance between optimizing unit sales and profitability while also maintaining competitively priced inventory.

Used vehicle gross profit increased 8.1% in the second quarter of fiscal 2027, primarily driven by a 13.8% increase in used unit sales, partially offset by a $111 decrease in used vehicle gross profit per unit. For the first six months of fiscal 2027, used vehicle gross profit decreased 1.7%, driven by a $177 decrease in used vehicle gross profit per unit, mostly offset by a 6.5% increase in used unit sales. The decrease in used vehicle gross profit per unit for both the second quarter and first six months of fiscal 2027 reflects the continuation of pricing actions implemented to drive unit sales growth. In the second quarter of fiscal 2027, we lowered margins by less than the $200 per unit outlook we provided last quarter as we balanced demand, margins and efficiency gains in our reconditioning process to support sales. We expect used margins to decline year over year for the remainder of fiscal 2027. For the full fiscal year, we expect used margins to decline by less than $200 per unit, although results may vary as we continue to optimize performance.

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 and quickly move vehicles to our stand-alone auctions in response to the wholesale pricing environment are key factors that influence wholesale gross profit.

Wholesale vehicle gross profit increased 0.2% in the second quarter of fiscal 2027, driven by a 15.9% increase in wholesale unit sales, mostly offset by a $135 decrease in wholesale vehicle gross profit per unit. For the first six months of fiscal 2027, wholesale vehicle gross profit increased 4.5%, driven by a 12.0% increase in wholesale unit sales, partially offset by a $68 decrease in wholesale vehicle gross profit per unit.

Other Gross Profit. Other gross profit includes profits related to EPP revenues, net third-party finance fees, 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, 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 increased 33.1% and 14.4% in the second quarter and first six months of fiscal 2027, respectively, primarily driven by increases in EPP revenues, as discussed above, as well as improvements in service department margins. The increase in service department profits for both the second quarter and first six months of fiscal 2027 was driven by the increase in used unit sales as well as efficiency gains in cost of sales.

SG&A Expenses

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

Three Months Ended August 31, 2026 Six Months Ended August 31, 2026

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 increased $27.5 million, or 4.6%, in the second quarter of fiscal 2027. Factors contributing to the net increase include the following:

• $10.9 million increase in compensation and benefits, excluding share-based compensation expense, driven by significantly lower corporate incentive compensation in the prior year and strong performance in the current year. Excluding this dynamic, compensation and benefits, excluding share-based compensation expense, would have decreased $14.2 million, primarily reflecting lower field and corporate payroll, partially offset by increased variable costs associated with increased sales.
• $6.7 million increase 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 expenses were relatively flat in the first six months of fiscal 2027, increasing $3.0 million, or 0.2%. Increased variable costs associated with increased unit sales, as well as increased corporate incentive compensation driven by the dynamic discussed above, were mostly offset by reduced payroll expense as we make tangible progress toward our targeted cost reductions. We expect the year-over-year corporate incentive compensation dynamic to be similar for the third quarter of fiscal 2027 and to moderate for the fourth quarter.

During the second quarter and first six months of fiscal 2027, we levered SG&A on a total unit basis by $157, or 8.8%, and $136, or 7.7%, respectively. In fiscal 2027, we expect to leverage SG&A per total unit when excluding the restructuring charges incurred in fiscal 2026.

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 $31.8 million in the second quarter of fiscal 2027 was relatively consistent with $28.5 million in the second quarter of fiscal 2026. For the first six months of fiscal 2027, interest expense increased to $65.6 million compared with $55.5 million in the prior year period, reflecting higher outstanding debt balances.

Other Income. Other income increased to $18.6 million and $20.7 million in the second quarter and first six months of fiscal 2027, respectively, compared with $3.6 million and $3.9 million in the second quarter and first six months of fiscal 2026, respectively. The increase for both periods was driven by unrealized gains recognized on equity investments during the second quarter of fiscal 2027.

Income Taxes. The effective income tax rate was 25.9% and 27.1% in the second quarter and first six months of fiscal 2027, respectively, versus 25.0% and 25.5% in the second quarter and first six months of fiscal 2026, respectively. The increase in the effective income tax rate for both periods was primarily driven by the expiration of unexercised stock options as well as the impact of tax credit purchases on the prior year periods.

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, direct CAF expenses and income related to the sale of auto loans. Total interest margin primarily 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 the estimated lifetime loan losses on new originations as well as changes in the estimated allowance for remaining loan losses on the existing portfolio. Changes to the allowance are primarily driven by loss and delinquency experience as well as economic factors related to our outlook for net losses expected to occur over the remaining contractual life of the loans held for investment.

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 until they are sold, at which point a gain on sale is recognized. As servicer, CAF continues to be responsible for managing collections and performing other servicing activities for the sold auto loans and earns servicing income as compensation for these activities.

As part of our initial plan to increase CAF penetration to 50%, we began a measured expansion in fiscal 2026 by recapturing profitable segments of Tier 1 originations that we had previously shifted to our Tier 2 lenders as well as testing expanded lending in the Tier 2 space. We continue to monitor consumer behavior and the broader economy and adjust our origination strategy as needed. We 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. In fiscal 2026, CAF targeted originating less than 15% and 5% of the total Tier 2 and Tier 3 loan volume, respectively. In fiscal 2027, we intend to increase the target originations for Tier 2 to approximately 30% of the total volume across the Tier 2 spectrum. During the first six months of fiscal 2027, CAF financed approximately 23% of the total Tier 2 volume. We do not plan to increase our target originations for Tier 3 in fiscal 2027. 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. Tier 2 and Tier 3 loans have higher loss and delinquency rates than the remainder of the CAF portfolio, which impact the provision for loan losses and allowance for loan losses as a percentage of auto loans held for investment.

An increase in CAF’s net penetration of one percentage point generally corresponds to approximately $50 million to $60 million of originations in a quarter. We estimate that these incremental originations, if consisting of only Tier 1 loans held for investment, would result in an increase to the provision of approximately $1.5 million to $2.0 million. For an incremental percentage point of penetration consisting of only Tier 2 loans held for investment, we estimate that the provision would increase by approximately $10 million to $12 million. These estimates are impacted by the credit mix of originations and the broader macroeconomic environment. During the first six months of fiscal 2027, approximately 90% of CAF originations were Tier 1, with the remaining 10% consisting of Tier 2.

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.

LOAN 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 45% to a high of 71%, and it is primarily affected by the wholesale market environment.

• CAF Income (Increases of $32.9 million, or 32.1%, and $31.5 million, or 12.9%, in the second quarter and first six months of fiscal 2027, respectively)
• The increase in CAF income for both the second quarter and first six months of fiscal 2027 was primarily driven by a decrease in the provision for loan losses as well as the $16.6 million gain recognized on the sale of auto loans. This was partially offset by the impacts of the year-over-year reduction in average auto loans outstanding, which decreased $1.24 billion and $1.21 billion for the second quarter and first six months of fiscal 2027, respectively, due to the sale of auto loans in both the current quarter and third quarter of the prior year as well as lower sales in fiscal 2026.
• For the full year of fiscal 2027, we expect CAF income to be slightly lower than fiscal 2026.
• Total Interest Margin
• Total interest margin was 6.6% in the second quarter of fiscal 2027, consistent with the prior year quarter.
• Total interest margin increased to 6.7% in the first six months of fiscal 2027 from 6.5% in the first six months of fiscal 2026. The increase was primarily due to higher margin loans driven by our Tier 2 expansion. We expect that our total interest margin percentage will be approximately 6.5% for the remainder of fiscal 2027.
• Provision for Loan Losses
• The provision for loan losses resulted in expense of $113.4 million and $209.0 million in the second quarter and first six months of fiscal 2027, respectively, compared with expense of $142.2 million and $243.9 million in the second quarter and first six months of fiscal 2026, respectively.
• Losses for the second quarter and first six months of fiscal 2027 were in line with expectations and the provision largely reflects our estimate of lifetime losses on new originations for the period, which includes our continued expansion in the Tier 2 credit space. The provision for the prior year periods reflected 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.
• The provision included reductions of $12.5 million and $37.6 million for the second quarter and first six months of fiscal 2027, respectively, related to the release of the allowance previously recorded for loans that were reclassified as held for sale, compared with $15.7 million and $42.2 million for the second quarter and first six months of fiscal 2026, respectively.
• The allowance for loan losses as a percentage of auto loans held for investment was 3.07% as of August 31, 2026, compared with 3.02% as of August 31, 2025 and 2.78% as of February 28, 2026. The increase in the allowance percentage was primarily driven by our continued expansion in the Tier 2 credit space.
• Loan Performance
• The increase in net loan originations in the second quarter of fiscal 2027 primarily resulted from an increase in used unit sales, partially offset by the decline in the net penetration rate. The increase in net loan originations in the first six months of fiscal 2027 primarily resulted from increases in used unit sales and the average amount financed.
• CAF net penetration decreased 170 basis points in the second quarter of fiscal 2027 as our continued expansion into the Tier 2 credit space was more than offset by lower Tier 1 penetration as customers use alternate funding in response to increased rates. For the first six months of fiscal 2027, CAF net penetration was consistent with the prior year period at 42.1%.
• The weighted average contract rate increased to 11.8% and 11.6% in the second quarter and first six months of fiscal 2027 compared with 11.2% and 11.3% in the second quarter and first six months of fiscal 2026. The increase for both periods was primarily due to shifts in customer mix as a result of our continued Tier 2 expansion.

PLANNED FUTURE ACTIVITIES

During the first six months of fiscal 2027, we opened two stores as well as one stand-alone reconditioning/auction center located in Locust Grove, Georgia and one stand-alone auction center in Conroe, Texas. Subsequent to the end of the second quarter, we opened an additional store in Austin, Texas. For the remainder of fiscal 2027, we anticipate opening one new store location, one stand-alone reconditioning/auction center and one stand-alone auction facility. We currently estimate capital expenditures will total approximately $400 million in fiscal 2027. Capital expenditures were $541.0 million in fiscal 2026. Planned capital spending in fiscal 2027 largely consists of spending to support our future long-term growth in offsite reconditioning and auction facilities, as well as our new stores. This spending is expected to be at a reduced rate as compared with the prior year due to significant investments made in fiscal 2026 as well as slowed growth in store openings in the current and upcoming fiscal years.

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 funding the business to drive unit sales and earnings growth that enables us to consistently reward our shareholders. We continue to take a disciplined approach to our capital structure, including managing our net leverage to preserve efficient access to the capital markets for both CAF and CarMax overall. With leverage slightly above our targeted range, and as we focused on improving the business, we paused our share buybacks during the fourth quarter of fiscal 2026. For the first half of fiscal 2027, our leverage improved to the upper end of our targeted range. Based on our improved performance as well as our positive outlook for the remainder of the fiscal year and progress we have made on our strategic plan, we intend to resume our share repurchase program in the third quarter of fiscal 2027. We expect to begin repurchases at a modest pace, below the average quarterly pace prior to our pause. The timing and amount of repurchases will depend upon market conditions, our leverage and our capital needs, among other factors. 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 2027, net cash provided by operating activities totaled $900.5 million compared with $1.09 billion in the prior year period.

As of August 31, 2026, total inventory was $3.85 billion, representing a decrease of $282.2 million, or 6.8%, compared with the balance as of the start of the fiscal year. The decrease was primarily due to a decrease in volume driven by seasonality as well as strong sales demand.

Our operating cash flows are significantly impacted by changes in auto loans held for investment and auto loans held for sale, which combined increased $671.0 million in the current year period compared with $309.3 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 $106.3 million in the current year period compared with $62.8 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 significantly affecting our overall liquidity, working capital or cash flows. In addition, operating cash flows for the first six months of fiscal 2027 were impacted by proceeds of $579.9 million resulting from the sale of auto loans in connection with our non-prime securitization transaction completed in the second quarter.

The decrease 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 changes in inventory and the net change in auto loans held for investment and auto loans held for sale, as discussed above, partially offset by the proceeds from the sale of auto loans and the impact of volume and timing-related changes in accounts receivable, accounts payable, accrued expenses and other current liabilities and accrued income taxes.

Investing Activities. During the first six months of fiscal 2027, net cash used in investing activities totaled $170.3 million compared with $272.5 million in fiscal 2026. Capital expenditures were $180.4 million in the current year period versus $268.2 million in the prior year period. Capital expenditures primarily included construction costs to support our growth in offsite reconditioning and auction facilities as well as our new stores. 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, 2026, 173 of our 258 used car stores were located on owned sites and 85 were located on leased sites, including 29 land-only leases and 56 land and building leases.

Financing Activities. During the first six months of fiscal 2027, net cash used in financing activities totaled $677.3 million compared with $467.7 million in the prior year period. Included in these amounts were net payments on non-recourse notes payable of $106.3 million compared with $62.8 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 2027, cash used in financing activities was impacted by net payments on our long-term debt of $548.9 million. During the first six months of fiscal 2026, cash used in financing activities was impacted by stock repurchases of $384.9 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 loans 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, 2026, we were in compliance with these financial covenants.

See Note 9 for additional information on our revolving credit facility, term loans, 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, 2026, $12.70 billion and $3.02 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 2027, we funded a total of $2.87 billion in asset-backed term funding transactions. As of August 31, 2026, we had $3.33 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, cash flow dynamics and other factors. Shares repurchased are deemed authorized but unissued shares of common stock. As of August 31, 2026, a total of $2 billion of board authorizations for repurchases was outstanding, with no expiration date, of which $1.31 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, beneficial interests in non-consolidated securitizations 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 our recent leadership transition, strategy for growth, 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,” “commit,” “could,” “enable,” “encourage,” “estimate,” “expect,” “focus on,” “intend,” “may,” “on track,” “outlook,” “plan,” “position,” “predict,” “should,” “target,” “will” and other variations of these words or 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, the effect of trade policies or related uncertainties and the potential impact of international events (including the conflict in the Middle East).
• 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.
• The failure or inability to realize the expected benefits and objectives associated with our strategy for growth.
• Our inability to realize the benefits associated with our sales platform or initiatives designed to leverage evolving technologies, including AI.
• Our ability to repurchase shares of common stock at planned levels.
• 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, the failure to effectively execute key executive succession plans, disruptions associated with leadership transitions 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.
• The impact of shareholder activism.

For more details on factors that could affect expectations, see Part II, Item 1A, “Risk Factors” on Page 45 of this report, our Annual Report on Form 10-K for the fiscal year ended February 28, 2026, 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, 2026. 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, 2026.

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, 2026, 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, 2026, 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.