CARMAX INC (KMX) FY 2025 MD&A

Item 7.  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 and the accompanying notes presented in Item 8. Consolidated Financial Statements and Supplementary Data.  Note references are to the notes to consolidated financial statements included in Item 8.  Certain prior year amounts have been reclassified to conform to the current year’s presentation.  All references to net earnings per share are to diluted net earnings per share.  Amounts and percentages may not total due to rounding.

OVERVIEW

See Part I, Item 1 for a detailed description and discussion of the company’s business.

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.

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.

As of February 28, 2025, we operated 250 used car stores in 109 U.S. television markets.

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 receivable less the interest expense associated with the debt issued to fund these receivables, a provision for estimated loan losses 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 42.7% of our retail used vehicle unit sales in fiscal 2025.  As of February 28, 2025, CAF serviced approximately 1.1 million customer accounts in its $17.59 billion portfolio of managed receivables.

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

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Revenues and Profitability

The sources of revenue and gross profit from the CarMax Sales Operations segment for fiscal 2025 are as follows:

A high-level summary of our financial results for fiscal 2025 as compared to fiscal 2024 is as follows (1):

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

(2)    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.

(3)    An omni sale is defined as a sale where customers complete at least one, but not all, of the four activities listed above online.

(4)    Revenue from online transactions is defined as revenue from retail sales that qualify as an online retail sale, as well as any related EPP and third-party finance contribution, wholesale sales where the winning bid was taken from an online bid and all revenue earned by Edmunds.

(5)    The definition of an omni sale has been updated to include additional steps that can be completed online, including pre-qualifying for financing, setting appointments and signing up for notifications of cars coming soon. See discussion below for fiscal 2025 results by quarter under this new definition.

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SG&A during fiscal 2024 included a $67.2 million benefit in connection with the receipt of settlement proceeds in a class action lawsuit related to the economic loss associated with vehicles containing Takata airbags. Excluding these proceeds, SG&A leveraged by 270 basis points, driven by the growth in gross profit and continued expense efficiency actions.

Net earnings per diluted share during fiscal 2025 included a negative impact of $0.06 resulting from an Edmunds lease impairment charge. Net earnings per diluted share during fiscal 2024 included a benefit of $0.32 in connection with the Takata proceeds. Net earnings per diluted share excluding both of these impacts increased 21.1% in fiscal 2025.

As noted in the table above, our omni sales definition incorporates customers who complete some, but not all, of the listed activities online. To better reflect the ways customers are utilizing our digital capabilities to buy a car, going forward we are updating the definition to also include customers who complete any of the following steps online: pre-qualifying for financing, setting appointments and signing up for notifications on cars coming soon. Based on the updated definition, approximately 66% of retail units sales were omni sales in fiscal 2025, up from 63% in the prior year. This change has no impact on the definition for online sales. The following table presents quarterly omni sales under the new definition:

Refer to “Results of Operations” for further details on our revenues and profitability. A discussion regarding Results of Operations and Financial Condition for fiscal 2024 as compared to fiscal 2023 is included in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended February 29, 2024, filed with the SEC on April 15, 2024.

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. 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 to have the ability to shop and transact digitally. Approximately 80% of our customers leveraged some or all of our digital capabilities to complete their transactions during the current fiscal year.

Our diversified business model, combined with our exceptional associates, stores, technology and digital capabilities seamlessly tied together, is a key differentiator that strengthens our competitive advantage and we believe will be increasingly important to win customers going forward. We expect the impact of our omni-channel capabilities will continue to grow as consumers demand a more personalized car-buying experience. The associate and customer facing tools we launched during fiscal 2025 are supporting our results and enable us to provide the most customer centric car buying and selling experience. Some examples of the steps we took to further differentiate our offering and drive incremental operational efficiencies during fiscal 2025 include:

•For retail, we rolled out several new systems including order processing in our stores, customer accounts online, AI-driven knowledge management in our Customer Experience Centers (“CECs”) and EV research and shopping tools on the Edmunds and CarMax websites. These systems enhance consumers’ shopping experiences while also supporting conversion and enabling our associates to be more efficient.

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•Our digital tools and enhancements have made it easier for customers to self-progress in their shopping journey. Skye, our AI-powered virtual assistant, is now able to independently answer over half of the questions our customers ask it, reflecting a more than 20% year-over-year improvement. Additionally, the rate of fully self-progressed online sales grew by 25% in fiscal 2025. Fully self-progressed online sales, which are a subset of our online retail sales, are completed without the help of a CEC or store associate.

•For supply, we enhanced our industry-leading consumer and dealer-facing online appraisal experiences and are now able to give digital offers to approximately 99% of the customers who visit carmax.com for an appraisal. We also made MaxOffer even easier to use, which has attracted more dealers to the offering and has driven record sourcing volume each quarter.

•For finance, we began testing of our new credit scoring models and the corresponding strategies across the full credit spectrum, which positions us to grow CAF income modestly in the near-term and more materially over time. We also released an update to our finance-based shopping experience that seamlessly incorporates existing instant appraisal offers into our prequalification offering, giving customers more precise credit terms.

In addition to these actions, we are 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. This exceeds the initial $200 per unit target that we set at the beginning of fiscal 2025. These efficiencies support affordability as we pass savings on to our customers and also support our margins.

In fiscal 2026, we will 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 will 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 Skye’s functionality with additional data and new architecture.

•We will launch a new marketing campaign that will bring our best-in-class omni-channel experience to the forefront for the consumer.

•For supply, we plan 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. Additionally, we plan to modernize the ownership experience on CAF’s digital platform, which will enhance the customer experience and drive operating efficiencies.

As noted above, during fiscal 2025, we focused on MaxOffer improvements, attracting more dealers and increasing our purchases through the program. We leverage the Edmunds sales team to open new markets and sign up new dealers for MaxOffer. During fiscal 2025, our MaxOffer active dealers increased approximately 47% from the prior year. We purchased approximately 269,000 vehicles from consumers and dealers during the fourth quarter of fiscal 2025, up 15.3% from the prior year quarter. Approximately 46,000 vehicles were purchased from dealers, including through MaxOffer, up 114.2% from the prior year quarter. Of the approximately 223,000 vehicles purchased from consumers, more than half were purchased through our online instant appraisal experience.

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 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. This reinforces our pathway back to a lower SG&A leverage ratio, as noted above.

We have positioned the company to achieve gains in retail and wholesale unit sales and market share, with double-digit EPS growth for years to come. 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.

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Regarding our long-term goals, we are focused on growing the business and we continue to make progress toward our long-term goals; however, we are removing the timeframes associated with them given the potential impact of broader macroeconomic factors.

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. External title data indicates that while our year-over-year market share came under pressure during the first half of the year, it recovered as we achieved accelerating gains through the second half of the year, with particular strength in vehicles aged 0 to 4 years, which grew for the entire year. The data indicates that our market share continued to grow year-over-year during January 2025, the latest period for which information is available. 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. In support of this goal, Edmunds has launched several research and buying tools.

As of February 28, 2025, we had 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 fiscal 2025, we opened five stores, one stand-alone auction facility in Chino, California and our second stand-alone reconditioning center in Richland, Mississippi. During fiscal 2026, we anticipate opening six stores as well as four stand-alone reconditioning/auction centers. 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 this Form 10-K.

CRITICAL ACCOUNTING ESTIMATES

Our results of operations and financial condition as reflected in the consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles.  Preparation of financial statements requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues, expenses and the disclosures of contingent assets and liabilities.  We use our historical experience and other relevant factors when developing our estimates and assumptions.  We regularly evaluate these estimates and assumptions.  Note 1 includes a discussion of significant accounting policies.  The accounting policy discussed below is the one we consider critical to an understanding of our consolidated financial statements because its application places the most significant demands on our judgment.  Our financial results might have been different if different assumptions had been used or other conditions had prevailed.

Allowance for Loan Losses

The allowance for loan losses represents the net credit losses expected over the remaining contractual life of our managed receivables.  Because net loss performance can vary substantially over time, estimating net losses requires assumptions about matters that are uncertain.

The allowance for loan losses is determined using a net loss timing curve method (“method”), primarily based on the composition of the portfolio of managed receivables and historical gross loss and recovery trends. Due to the fact that losses for receivables with less than 18 months of performance history can be volatile, our net loss estimate weights both historical losses by credit grade at origination and actual loss data on the receivables to-date, along with forward loss curves, in estimating future performance. Once the receivables have 18 months of performance history, the net loss estimate reflects actual loss experience of those receivables to date, along with forward loss curves, to predict future performance. The forward loss curves are constructed using historical performance data and show the average timing of losses over the course of a receivable’s life. The net loss estimate is calculated by applying the loss rates developed using the methods described above to the amortized cost basis of the managed receivables.

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The output of the method is adjusted to take into account reasonable and supportable forecasts about the future. Specifically, the change in U.S. unemployment rates and the National Automobile Dealers Association used vehicle price index are used to predict changes in gross loss and recovery rate, respectively. An economic adjustment factor, based upon a single macroeconomic scenario, is developed to capture the relationship between changes in these indices and changes in gross loss and recovery rates. This factor is applied to the output of the method for the reasonable and supportable forecast period of two years. After the end of this two-year period, we revert to historical experience on a straightline basis over a period of 12 months.  We periodically consider whether the use of alternative metrics would result in improved model performance and revise the model when appropriate.  We also consider whether qualitative adjustments are necessary for factors that are not reflected in the quantitative methods but impact the measurement of estimated credit losses. Such adjustments include the uncertainty of the impacts of recent economic trends on customer behavior. The change in the allowance for loan losses is recognized through an adjustment to the provision for loan losses.

Determining the appropriateness of the allowance for loan losses requires management to exercise judgment about matters that are inherently uncertain, including the timing and distribution of net losses that could materially affect the allowance for loan losses and, therefore, net earnings. To the extent that actual performance differs from our estimates, additional provision for credit losses may be required that would reduce net earnings. To demonstrate the sensitivity of credit loss assumptions and macroeconomic scenarios used in our estimated allowance for loan losses, we compared our February 28, 2025, modeled allowance base case scenario to a downside scenario. Relative to the base case, the downside scenario assumed 10% worsening in loss performance, U.S. unemployment rates and the NADA used vehicle price index. This sensitivity analysis resulted in a hypothetical increase in the allowance for loan losses of approximately $42.7 million.

While this analysis may be useful in considering how changes in certain macroeconomic assumptions could impact our estimated credit losses, it should not be relied upon as a forecast of how our allowance for loan losses is expected to change in a different macroeconomic scenario. The analysis does not reflect changes in other adjustments to the quantitative calculation, which would be influenced by the qualitative judgment management applies to reflect the uncertainty and imprecision of estimated lifetime credit losses based on then-current circumstances and conditions.

See Notes 1(H) and 4 for additional information on the allowance for loan losses.

RESULTS OF OPERATIONS – CARMAX SALES OPERATIONS

NET SALES AND OPERATING REVENUES

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

UNIT SALES

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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 fiscal 2025, we opened 5 stores in existing television markets (El Paso, TX; Gainesville, GA; Alliance, TX; Mays Landing, NJ; and Visalia, CA).

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Used Vehicle Sales

Fiscal 2025 Versus Fiscal 2024.  The 0.8% increase in used vehicle revenues in fiscal 2025 was primarily driven by a 3.1% increase in used unit sales, partially offset by a 2.8% decrease in average retail selling price, or approximately $800. The increase in used units included a 2.2% increase in comparable store used unit sales. Online retail sales, as defined previously, accounted for 15% of used unit sales in fiscal 2025, compared with 14% in fiscal 2024. During fiscal 2025, we experienced a decline in comparable store used unit sales in the first quarter, which was more than offset by gains in the second, third and fourth quarters. Comparable store used unit sales in March 2025 were higher than our fourth quarter fiscal 2025 results and further accelerated into the beginning of April. For the first quarter of fiscal 2026, through the beginning of April, comparable store used unit sales were in the high single-digits.

The decrease in average retail selling price in fiscal 2025 reflected lower vehicle acquisition costs, partially offset by shifts in the mix of our sales by vehicle age and class.

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.

Fiscal 2025 Versus Fiscal 2024.  The 7.8% decrease in wholesale vehicle revenues in fiscal 2025 was primarily driven by a 7.9% decrease in average selling price, or approximately $700, and a 0.4% decrease in unit sales. During fiscal 2025, we experienced a decline in wholesale unit sales in the first quarter, which was mostly offset by gains in the back half of the year.

The decrease in average selling price in fiscal 2025 was primarily due to decreased acquisition costs and shifts in the mix of our sales by vehicle age.

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.

Fiscal 2025 Versus Fiscal 2024.  Other sales and revenues increased 7.6% in fiscal 2025, reflecting an increase in EPP revenues. EPP revenues increased 12.4%, largely reflecting increased margins and an increase in retail unit sales, partially offset by decreased penetration.

GROSS PROFIT

(1)Amounts are net of intercompany eliminations.

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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.

Fiscal 2025 Versus Fiscal 2024.  Used vehicle gross profit increased 4.1% in fiscal 2025, primarily driven by the 3.1% increase in total used unit sales. Used vehicle gross profit per unit in fiscal 2025 was in line with the prior fiscal 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.

Fiscal 2025 Versus Fiscal 2024.  Wholesale vehicle gross profit increased 0.1% in fiscal 2025.

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.

Fiscal 2025 Versus Fiscal 2024.  Other gross profit increased 27.9% in fiscal 2025, primarily driven by a $70.7 million improvement in service department margins as well as an increase in EPP revenues, as discussed above. The increase in service department profits was driven by cost coverage measures that we have implemented, increased efficiencies and the increase in used unit sales. In fiscal 2026, we plan to test 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 grow year-over-year in fiscal 2026,

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predominantly in the first half of the year, and to deliver a slightly positive profit contribution for the full 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.

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

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

(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 13 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.

Fiscal 2025 Versus Fiscal 2024 (Increase of $149.0 million or 6.5%). Factors contributing to the increase include the following:

•$63.1 million increase in other overhead costs driven by the $67.2 million benefit in the prior year in connection with the receipt of settlement proceeds in a class action lawsuit related to the economic loss associated with vehicles containing Takata airbags.

•$62.9 million increase in compensation and benefits, excluding share-based compensation expense, driven by an increase in the corporate bonus accrual.

Excluding the legal settlement in the prior year, SG&A expenses in fiscal 2025 increased 3.5%, or $81.8 million. SG&A leveraged by 30 basis points during fiscal 2025. Excluding the legal settlement in the prior year, SG&A leveraged by 270 basis points, driven by the growth in gross profit and continued expense efficiency actions.

Advertising spend in fiscal 2025 was consistent with fiscal 2024 at approximately $200 per total unit. For fiscal 2026, we expect that full year marketing spend on a per total unit basis will be in line with fiscal 2025.

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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.

Fiscal 2025 Versus Fiscal 2024.  Interest expense decreased to $107.9 million in fiscal 2025 compared with $124.8 million in fiscal 2024. The decrease primarily reflected lower outstanding debt balances in the current fiscal year resulting from the payoff of the $300 million term loan in May 2024.

Other Expense (Income)

Other expense was $11.6 million in fiscal 2025 compared with income of $10.3 million in fiscal 2024. The change was primarily driven by expenses of $12.3 million related to an Edmunds lease impairment and $4.2 million related to equipment and leasing arrangements in our logistics operations.

Income Taxes

The effective income tax rate was 25.2% in fiscal 2025 compared with 25.3% in fiscal 2024.

RESULTS OF OPERATIONS – CARMAX AUTO FINANCE

CAF income primarily reflects interest and fee income generated by CAF’s portfolio of auto loans receivable less the interest expense associated with the debt issued to fund these receivables, a provision for estimated loan losses 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 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 receivable as well as changes in the mix of credit quality of originations.

CAF’s managed portfolio is composed primarily of loans originated over the past several years.  Trends in receivable 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 impact CAF income over time, as we recognize income over the life of the underlying auto loan.

During the second quarter of fiscal 2025, CAF began testing its new full-spectrum credit scoring models and corresponding strategies across both the Tier 1 and Tier 2 spaces. CAF began its testing of the new model in the Tier 3 space during the third quarter of fiscal 2025. During March 2025, 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. We expect this expansion will grow our penetration by 100 to 150 basis points in the near-term, which is enabled by our non-prime securitization program, allowing us to efficiently fund these non-prime receivables while retaining the full economic value of the contracts. We continue to learn from our new underwriting models and corresponding tests currently in place and anticipate capturing additional volume across Tier 2 and Tier 3 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 and the broader macroeconomic and lending environments. While this income is earned over time, the provision for lifetime losses is recognized at the time of origination. 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 during fiscal 2026, 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.

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CAF expanded its asset-backed securitization program to allow for distinct higher prime and non-prime issuances, with higher prime generally representing FICO scores greater than 650 and non-prime generally representing FICO scores below 650. We believe this strategy will enable CAF to efficiently fund incremental originations and support future CAF growth across the credit spectrum by creating additional funding capacity, driving additional finance income for the business over time. In June 2024, CAF closed on its first non-prime securitization deal. CAF closed on three higher prime securitization deals under this expanded funding strategy during the remainder of fiscal 2025.

We are continuously exploring opportunities to help our customers through adjustments in our account servicing strategies. One such example is with payment extensions, which have historically impacted less than 1% of our portfolio on an account basis in any given month and been below industry levels. We believe this tool has proven successful in helping customers navigate temporary challenges. During the third quarter of fiscal 2025, we began testing an enhancement to our policy that further empowers delinquent customers to take advantage of a payment extension and more aligns with industry levels. This testing has brought payment extensions to slightly above 1% of our portfolio on an account basis in a given month. While early performance results are encouraging, we recognize that some customers will eventually return to delinquency and result in a charge-off. We believe our estimate of the allowance for loan losses appropriately incorporates the impact of our enhanced extension policy. We will continue to evaluate the performance results and make further adjustments to our account servicing strategies as needed.

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 receivable, including credit quality.

SELECTED CAF FINANCIAL INFORMATION

(1)Percent of total average managed receivables.

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

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

(2)The credit scores represent FICO® scores and reflect only receivables with obligors that have a FICO® score at the time of application.  The FICO® score with respect to any receivable 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.

(3)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

(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.

Fiscal 2025 Versus Fiscal 2024.

•CAF income increased $13.5 million, or 2.4%, reflecting increases in the net interest margin percentage and average managed receivables, partially offset by an increase in the provision for loan losses.

•Total interest margin increased as a percentage of average managed receivables to 6.2% in fiscal 2025 compared with 6.0% in fiscal 2024. The increase was primarily driven by higher customer rates, partially offset by higher funding costs.

•Provision for Loan Losses

◦The current year provision of $334.7 million increased from $310.5 million in the prior fiscal year.

◦The increase in the provision for loan losses in fiscal 2025 was primarily driven by unfavorable loss performance. We experienced higher losses for receivables originated in 2022 and 2023, when average selling prices were elevated and these customers were later challenged with the macro-inflationary environment. In addition, we experienced higher losses pertaining to a segment of customers generally concentrated at the lower end of Tier 1, which we addressed through further tightening in April 2024. While the loan loss reserve was adjusted for these receivables during the first quarter of fiscal 2025, further deterioration was observed during the second quarter, resulting in an additional adjustment to the reserve. In the third and fourth quarters, losses were in line with our expectations.

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◦The allowance for loan losses as a percentage of ending managed receivables was 2.61% as of February 28, 2025 compared with 2.78% as of February 29, 2024. The allowance percentage decreased from the prior year primarily due to the previously implemented tightened underwriting standards, partially offset by unfavorable loss performance in CAF’s portfolio of Tier 1 receivables as well as expanded investment in Tier 2.

◦We anticipate a sequential increase in the provision for the first quarter of fiscal 2026 over the $68 million observed in the fourth quarter of fiscal 2025 given the seasonal nature of the first quarter in terms of higher sales volume and a larger mix of lower credit quality purchasers. In addition, our recapture of profitable portions of Tier 1 originations, as discussed above, will require additional loss provision. We estimate the combined effect from these items will increase our provision by approximately 45% to 50% as compared to the fourth quarter of fiscal 2025. For the remainder of fiscal 2026, we anticipate the quarterly provision to decrease slightly from the seasonal peak in the first quarter but remain elevated relative to our fourth quarter fiscal 2025 provision. Despite the anticipated increase in our provision, we expect CAF income to increase in fiscal 2026.

•Loan Performance

◦The decline in net loan originations in fiscal 2025 resulted from decreases in the average amount financed and the net penetration rate, partially offset by an increase in used unit sales.

◦The weighted average contract rate increased to 11.3% in fiscal 2025, compared with 11.2% in the prior year. The increase was primarily due to our expansion of Tier 2 originations within CAF’s portfolio, partially offset by a reduction in Tier 3 originations.

◦The decrease in past due accounts as a percentage of ending managed receivables for fiscal 2025 primarily reflects the impact of enhancements to our payment extension policy, as discussed above.

PLANNED FUTURE ACTIVITIES

We anticipate opening a total of ten locations in fiscal 2026, including six stores and four stand-alone reconditioning/auction centers. We currently estimate capital expenditures will total approximately $575 million in fiscal 2026. Capital expenditures were $467.9 million in fiscal 2025. The year-over-year increase in planned spending is primarily driven by timing related to land purchases. 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.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1(X) to the consolidated financial statements for information on recent accounting pronouncements applicable to CarMax.

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. 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.

We are party to contractual obligations involving commitments to make payments to third parties. These obligations impact our liquidity and capital resource needs. Our contractual obligations primarily consist of long-term debt and related interest payments, leases, purchase obligations and commitments, income taxes and defined benefit retirement plans. See Notes 12 and 16 for amounts outstanding as of February 28, 2025 related to debt and leases, respectively.

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Our contractual obligations related to income taxes represent the net unrecognized tax benefits related to uncertain tax positions. See Note 10 for information related to income taxes. Our contractual obligations related to defined benefit retirement plans represent the funded status recognized as of February 28, 2025. See Note 11 for information related to these plans.

Purchase obligations and commitments consist of certain enforceable and legally binding obligations related to real estate purchases, third-party outsourcing services and advertising. As of February 28, 2025, our purchase obligations and commitments were approximately $371.9 million, of which $163.9 million are due in fiscal 2026. The majority of the remaining purchase obligations and commitments are due within the next three years.

Operating Activities.  During fiscal 2025, net cash provided by operating activities totaled $624.4 million compared with $458.6 million in fiscal 2024.

As of February 28, 2025, total inventory was $3.93 billion, representing an increase of $256.6 million, or 7.0%, compared with the balance as of the start of the fiscal year.  The increase was primarily due to an increase in vehicle units reflecting higher sales volume and our inventory build in anticipation of tax refund season, which typically has higher demand. The increase in inventory was also driven by an increase in average cost resulting from shifts in the mix of vehicles by class.

Our operating cash flows are significantly impacted by changes in auto loans receivable, which increased $565.6 million in fiscal 2025 compared with $980.6 million in fiscal 2024.  A significant portion of the changes in auto loans receivable are accompanied by changes in non-recourse notes payable, which are issued to fund auto loans originated by CAF. Net issuances of non-recourse notes payable were $252.8 million in fiscal 2025 compared with $506.9 million in fiscal 2024 and are separately reflected as cash from financing activities. Due to the presentation differences between auto loans receivable 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.

The increase in net cash provided by operating activities for fiscal 2025 compared with fiscal 2024 primarily reflected the change in auto loans receivable, as discussed above, and an increase in net earnings when excluding non-cash expenses, which include depreciation and amortization, share-based compensation expense and the provisions for loan losses and cancellation reserves. This increase was partially offset by the change in inventory, as discussed above, as well as the net impact of volume and timing-related changes in accounts receivable and accounts payable.

Investing Activities.  Net cash used in investing activities totaled $461.0 million in fiscal 2025 compared with $467.0 million in fiscal 2024.  Capital expenditures were $467.9 million in fiscal 2025 versus $465.3 million in fiscal 2024. Capital expenditures primarily included land purchases and construction costs to support our growth capacity initiatives and new store openings.  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.

Financing Activities.  Net cash used in financing activities was $453.5 million in fiscal 2025, compared with net cash provided by financing activities of $307.8 million in fiscal 2024.  Included in these amounts were net issuances of non-recourse notes payable of $252.8 million in fiscal 2025 compared with $506.9 million in the prior year. Non-recourse notes payable are typically used to fund changes in auto loans receivable (see “Operating Activities”).

During fiscal 2025, cash used in financing activities was impacted by net payments on our long-term debt of $313.8 million as well as stock repurchases of $428.5 million. During fiscal 2024, cash provided by financing activities was impacted by net payments on our long-term debt of $111.5 million as well as stock repurchases of $94.1 million.

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TOTAL DEBT AND CASH AND CASH EQUIVALENTS

(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 12 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 February 28, 2025, we were in compliance with these financial covenants.

See Note 12 for additional information on our revolving credit facility, term loan, senior notes and financing obligations.

CAF auto loans receivable 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 receivable, 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 receivables, the amounts on deposit in reserve accounts and the restricted cash from collections on auto loans receivable.  We do, however, continue to have the rights associated with the interest we retain in these non-recourse funding vehicles.

As of February 28, 2025, $13.24 billion and $3.88 billion of non-recourse notes payable were outstanding related to asset-backed term funding transactions and our warehouse facilities, respectively.  During fiscal 2025, we funded a total of $6.82 billion in asset-backed term funding transactions. As of February 28, 2025, we had $2.22 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 Notes 1(F) and 12 for additional information on the warehouse facilities.

We generally repurchase the receivables 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 receivables 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 receivables 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 February 28, 2025, a total of $2 billion of board authorizations for repurchases was outstanding, with no expiration date, of which $1.94 billion remained available for repurchase. See Note 13 for more information on share repurchase activity.

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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.