CarMax (KMX) shares have declined by 10% over the last month, reaching $57.21 on Friday, in anticipation of its fiscal second-quarter earnings report. Analysts widely expect the company to miss revenue projections, with a consensus estimate of $6.94 billion, representing a 5.3% year-over-year increase. This potential miss comes amid concerns about a stretched 37x trailing price-to-earnings (P/E) valuation for CarMax, significantly higher than its peers' range of 8x to 34x.
Several economic indicators point to faltering consumer demand for large purchases. Regional Federal Reserve manufacturing surveys have shown deceleration, with the Richmond Fed composite turning negative at -2 and the Empire State index dropping 13 points to 7.6. These figures suggest that high borrowing costs are impacting consumers' ability and willingness to buy big-ticket goods like used cars. In the previous quarter, CarMax beat estimates, but its gross profit per vehicle still slid to $2,177 from $2,407 a year earlier.
As the largest used-car retailer, CarMax's performance is a key gauge of American consumer health, particularly concerning high car prices and rising auto-loan rates. A revenue miss on September 29 could confirm widespread consumer stress due to high interest rates, potentially leading to a broader selloff in retail and bank stocks. Historically, a significant miss, such as the one in Q2 fiscal 2026, has resulted in substantial stock value declines, with the stock losing about a third of its value in the subsequent quarter.
CarMax's business model is doubly exposed to this downturn because it finances 43% of its sales. The affordability crisis manifests not only in shrinking retail margins but also in rising loan-loss reserves on its own lending book. Its gross profit per retail unit fell approximately $230 to $2,177, with overall gross margin decreasing from 11.8% to 10.7%. The allowance for loan losses increased to $475 million, or 2.95% of loans held, up from 2.78% the prior quarter, indicating increased risk in its loan portfolio.
The current market valuation of CarMax, with a 48% year-to-date stock rally, reflects an optimistic bet on an affordability recovery that recent data does not yet confirm. Wholesale used-vehicle prices declined 0.4% year-over-year in mid-September, marking the first negative reading for 2026, and days' supply of wholesale inventory is up. These trends suggest weakening demand and depreciating inventory, further challenging CarMax's turnaround efforts.
