CarMax opened three new stores and three stand-alone reconditioning/auction centers in the first six months of fiscal 2026, with plans for three additional stores and one reconditioning facility for the remainder of the fiscal year. This expansion supports long-term growth and operational efficiency by balancing capacity across the network.

CarMax Auto Finance (CAF) is expanding its participation across the full credit spectrum, supported by the execution of a non-prime securitization transaction in September 2025, which involved selling approximately $930 million of auto loans. This initiative aims to grow penetration and capture profitable returns, with an expected gain on sale of $25-30 million in Q3 FY26.

The company is leveraging data science and AI to enhance digital experiences, having completed the full roll-out of Skye 2.0, an AI-powered virtual assistant. This, along with the new 'Wanna Drive' brand campaign, aims to improve conversion, efficiency, and customer satisfaction, supporting market share gains.

SG&A expenses decreased 1.6% ($9.5 million) in Q2 FY26, driven by lower share-based compensation, but deleveraged by 350 basis points as a percentage of gross profit due to declining gross profit. For the six months, SG&A increased 0.9% ($11.6 million) but leveraged by 230 basis points, indicating varied performance in cost management.

In response to approximately $1,000 in inventory depreciation during late May and June, management intentionally lowered retail margins in Q2 to drive sell-through and balance inventory with sales. This demonstrates agility in adjusting pricing strategy to market conditions and managing asset values.

Management's strategic deployment of AI technology, including Skye, has led to year-over-year improvements in containment rate, Customer Experience Center (CEC) consultant productivity, and phone and web response rates, all improving by double digits. This indicates effective use of technology to enhance operational efficiency and customer service.

The allowance for loan losses as a percentage of ending auto loans held for investment increased to 3.02% as of August 31, 2025, up from 2.61% at February 28, 2025. This increase is primarily driven by unfavorable loan loss performance, particularly within loans originated in 2022 and 2023, and rising past due accounts (5.63% vs 5.53% YoY).

The company's warehouse facility agreements, which are typically renewed annually, face potential changes in cost, structure, and capacity upon renewal. Although a $2.30 billion facility was recently extended and increased, future renewals could significantly impact funding costs and operational flexibility, posing a risk to CAF's profitability.

The increase in loan loss provisions is linked to the inflationary environment challenging customers, particularly for loans originated when average selling prices were elevated. Management's forward-looking statements acknowledge that broader macroeconomic conditions and partner lender behavior can impact CAF's growth and profitability.

CarMax emphasizes its 'unrivaled customer experience' through its omni-channel platform, enabling customers to buy on their terms online, in-store, or a combination. The company reports its Net Promoter Score is the highest since digital capabilities rolled out, indicating a strong competitive advantage in customer service within a fragmented market.

CarMax Auto Finance (CAF) provides a competitive financing option and, combined with third-party finance providers, offers a 'unique finance platform with a full-spectrum in-house lending operation.' This integrated approach is expected to strengthen CarMax's competitive advantage by managing reliance on third-party providers and leveraging business knowledge.

The company expects to gain market share in calendar 2025, building on its strategy to enhance the customer experience, leverage data analytics, and expand its physical footprint. Additionally, CarMax has a stated objective to become the leading retailer of used EVs, positioning itself for future market trends and competitive leadership.

CarMax achieved $125 per unit savings in cost of sales in fiscal 2025 and anticipates achieving another $125 per unit savings in fiscal 2026. These efficiencies, driven by improvements in the logistics network and reconditioning operations, support affordability for customers and contribute to margins.

Management plans to accelerate SG&A expense reductions, targeting at least $150 million in savings over the next 18 months. While some savings are expected in fiscal 2026, the vast majority are anticipated by the end of fiscal 2027, aiming for an 'omni cost neutral' position for the full year of fiscal 2026.

The opening of three stand-alone reconditioning/auction centers in the first six months of fiscal 2026, with another planned, is a strategic move to balance capacity and drive efficiencies across the network. This supports the company's ability to process vehicles more effectively and manage inventory, reducing waste.

CarMax has fully rolled out Skye 2.0, an AI-powered virtual assistant leveraging agentic AI, which is expected to drive significant efficiency and experience improvements. The company is actively using data science and AI to enhance digital experiences for both associates and consumers, improving conversion and efficiency.

Capital expenditures rose to $268.2 million in the first six months of fiscal 2026 from $213.1 million in the prior year, with investments in technology being a key component. This ongoing investment supports the enhancement of the omni-channel platform and digital capabilities, crucial for future growth.

As part of its strategic initiatives, CarMax plans to modernize the ownership experience on CAF's digital platform. This effort is expected to enhance the customer experience and drive operating efficiencies within its auto finance segment, aligning with broader digital transformation goals.

CarMax accelerated its share repurchase program, repurchasing $384.9 million in stock during the first six months of fiscal 2026, significantly up from $213.3 million in the prior year period. A total of $2.0 billion in board authorizations remains outstanding, with $1.56 billion available, signaling management's confidence in the company's valuation.

Capital expenditures rose to $268.2 million in the first six months of fiscal 2026, compared to $213.1 million in the prior year. The estimated full-year capital spending of $575 million is primarily directed towards supporting long-term growth in offsite reconditioning and auction facilities, as well as new store openings.

CarMax utilizes non-recourse funding vehicles, including warehouse facilities and asset-backed term funding transactions, to finance its auto loan portfolio. The recent execution of a non-prime securitization transaction for $930 million of auto loans provides an additional funding lever, offering flexibility and risk mitigation for CAF operations.

The 10-Q filing primarily focuses on financial and operational performance. While the 'Risk Factors' section acknowledges the 'effect of evolving regulations, disclosure requirements, standards and expectations relating to environmental, social and governance matters,' specific initiatives, targets, or performance metrics for ESG were not detailed in this interim report.

The inclusion of 'evolving regulations, disclosure requirements, standards and expectations relating to environmental, social and governance matters' in the risk factors indicates management's awareness of the importance of ESG. However, the report does not provide details on how these are being addressed beyond general compliance.

The company states that there have been no material changes to the risk factors discussed in its Form 10-K for the fiscal year ended February 28, 2025, which would typically include comprehensive ESG-related disclosures if material. This suggests a consistent, but not necessarily expanded, approach to ESG reporting in this interim period.

The filing notes that unfavorable loan loss performance, particularly for loans originated in 2022 and 2023, was exacerbated by the 'inflationary environment' challenging customers. Additionally, Q2 sales were negatively impacted by a pull-forward of demand into Q1 due to 'speculation about tariffs,' indicating sensitivity to external economic factors.

The company observed approximately $1,000 in depreciation across its inventory during late May and June, indicating volatility in used vehicle values. Wholesale vehicle gross profit and recovery rates are directly affected by trends in the general wholesale market, necessitating agile inventory and pricing adjustments.

The 'One Big Beautiful Bill Act' (OBBBA) was enacted in July 2025, making 100% bonus depreciation permanent, allowing expensing of domestic research costs, and modifying interest expense limitation. While these are generally positive for businesses, CarMax does not expect a material impact on its fiscal 2026 effective tax rate.