Barclays reiterates Underweight rating on CarMax stock at $31

Barclays maintained an Underweight rating on CarMax with a $31 price target, well below the $48.10 share price, citing uneven execution and weak 12% gross margins. CarMax’s fiscal Q1 2027 results beat expectations, with EPS of $1.31 vs. $0.96 consensus and revenue of $8.0B vs. $7.39B expected, and the company said sales improved despite a tough market. The mixed signal between strong quarterly results and a cautious long-term outlook should keep the stock in focus, though the overall market impact is likely limited to CarMax and peers such as Carvana.

Analysis

KMX is becoming a classic “show-me” setup where the market is paying today for a potential operating inflection that likely sits several quarters out. The key second-order issue is that a successful strategy reset in used cars usually shows up first in unit mix and gross profit per unit, not headline revenue; if management is genuinely improving execution, the P&L leverage can be abrupt because the current margin base is thin. That means the stock can continue to re-rate even before consensus fully lifts, but only if upcoming quarters show gross margin stabilization and inventory discipline rather than just top-line strength.

The competitive read-through for CVNA is more interesting than the headline reaction suggests. If KMX is improving, it raises the hurdle for CVNA’s premium multiple because investors will start underwriting a more efficient incumbent, not a structurally inferior one; that compresses the narrative gap CVNA has enjoyed. In that sense, CVNA is less exposed to current quarter numbers than to the prospect that KMX’s operational reset reduces the “winner-take-most” framing in used-car retail over the next 6-12 months.

The contrarian angle is that the market may be over-penalizing KMX’s execution risk relative to the optionality in its turnaround. With the stock already repriced higher year-to-date, the easy money is gone, but the asymmetry remains if management can string together 2-3 clean quarters of margin and conversion improvement. Conversely, if the next print is simply another beat without better forward indicators, the move likely fades fast because this is still a credibility story, not a secular growth story.

Key Decisions for Investors

• Long KMX / short CVNA as a 3-6 month pair: express the view that operational improvement at the incumbent narrows CVNA’s relative premium; target 15-25% spread compression, stop if KMX fails to show margin progression in the next quarter.
• Buy KMX call spreads into the next earnings window (3-6 months out): use upside participation on a re-rating while capping premium paid; best if entered on a post-rally consolidation rather than strength.
• Avoid adding to CVNA longs until KMX demonstrates at least one additional quarter of gross margin stability: the risk/reward worsens if the market starts to price a credible incumbent turnaround.
• For event-driven accounts, consider a small tactical long KMX only on confirmation of improved forward metrics (gross profit per unit, inventory turns, same-store trend): this is a catalyst trade, not a blind momentum trade.