BofA Securities resumes CarMax stock coverage with underperform rating By Investing.com

BofA resumed coverage of CarMax with an Underperform rating and a $40 price target, citing continued comparable unit declines and market share loss. Fiscal Q4 2026 revenue was $5.96B, down 1% year over year but ahead of the $5.74B consensus, while GAAP EPS was -$0.85 versus +$0.23 expected. Comparable used-unit sales fell 1.9% and gross profit per unit declined $207, partly reflecting intentional price cuts and restructuring/goodwill charges.

Analysis

The important read-through is not simply that margins are under pressure, but that management is choosing to sacrifice gross profit per unit to defend volume in a market where used-car demand is still soft and financing friction is elevated. That is usually a late-cycle tactic: it can stabilize traffic for a quarter or two, but it tends to pull forward demand rather than create durable share gains unless the cost structure is reset faster than pricing. The goodwill impairment is also a signal that prior acquisition-era assumptions are being marked closer to reality, which raises the odds of more conservative capital allocation and lower headline earnings power over the next 12-18 months.

The second-order impact is on competitors and upstream partners. If CarMax keeps leaning into lower sticker prices and tighter financing, independents and smaller regional dealers with weaker balance sheets will likely be forced to follow, compressing industry-wide gross margins before unit growth meaningfully improves. That creates a more difficult backdrop for automotive lenders and securitization markets as loan losses rise; the pressure is not just cyclical demand softness, but a potential tightening in credit availability that could keep transaction volumes subdued into several quarters.

The setup into earnings is asymmetric because the market is likely to reward any evidence that volume is stabilizing, even if margins remain under pressure. But if the company cannot show that lower pricing is translating into sustained same-store unit acceleration, the stock can de-rate quickly because the bull case depends on operating leverage that may not arrive until late FY27 or FY28. The key risk is that current actions improve top-line optics while structurally lowering per-unit economics, leaving equity holders with a slower-growth, lower-margin business that still trades on a multiple of normalized earnings.

Contrarian view: the consensus may be underestimating how much of the bad news is already embedded after multiple target cuts and the impairment. If management can hold unit declines to low single digits while stripping SG&A faster than expected, the equity could be less impaired than the headline earnings suggests. The more interesting catalyst is not the next print itself, but whether the new CEO can prove a sustained cadence of volume recovery without additional gross profit compression over the next 2-3 quarters.

Key Decisions for Investors

• Avoid initiating fresh long KMX ahead of earnings; risk/reward is poor if management reiterates pricing discipline without clear unit inflection. Use a 1-3 month horizon and wait for evidence of sequential comp improvement before considering entry.
• Short KMX rallies into the print or on any post-earnings relief bounce; downside is best expressed over 2-6 weeks if guidance implies continued margin sacrifice with no near-term volume leverage. Risk is a sharp squeeze if same-store units surprise positively.
• Pair trade: long high-quality auto retail/service exposure vs short KMX for 1-2 quarters. The thesis is that the market will continue paying for models with cleaner margin stability while penalizing firms needing deeper discounting to protect traffic.
• Buy KMX downside via put spreads into earnings if implied volatility is still reasonable. This gives defined risk for a scenario where restructuring and impairment charges are treated as recurring rather than one-time cleanup.
• Monitor automotive lenders and ABS-related names for spillover; if KMX commentary signals rising loss severity or tighter approvals, reduce exposure to consumer credit-sensitive retail names over the next 1-2 quarters.