CarMax (KMX) Q3 2026: $150M SG&A Reduction Target Signals Cost Discipline Amid Sales Slide
CarMax’s leadership overhaul and a $150 million SG&A reduction target headline a quarter marked by falling sales and urgent strategic resets. Management is prioritizing pricing, cost, and digital simplification to restore competitiveness, but near-term earnings will be pressured as these levers are deployed. Investors should watch for traction in unit growth and margin stabilization as execution on these new priorities unfolds into FY27.
Summary
- Cost Structure Overhaul: Leadership is targeting at least $150 million in SG&A reductions off a $2.5 billion baseline.
- Pricing and Digital Reset: CarMax is lowering margins and revamping digital experience to regain customer traction.
- Leadership Transition: Board is actively searching for a CEO to drive omnichannel and operational improvements.
Performance Analysis
CarMax’s third quarter underscored persistent volume and margin pressure with total sales falling 6.9% year over year, driven by an 8% drop in retail units and a 9% decline in used unit comps. The shift toward older, higher mileage vehicles—now over 40% of sales—helped offset some of the impact from softer demand in newer inventory, but gross profit contracted 13% as average selling price inched up to $26,400. Wholesale volumes and margins were hit by sharp depreciation, with average wholesale selling price down and gross profit per unit falling by approximately $120 year over year.
SG&A expenses grew 1% as marketing investments and restructuring costs offset bonus accrual reductions. CarMax Auto Finance (CAF) income rose 9% year over year, supported by expanded funding options and a $27 million gain on sale from a securitization transaction. However, net earnings per share fell to $0.43 from $0.81, reflecting restructuring costs and operational deleverage. The company repurchased 4.6 million shares for $202 million, maintaining $1.36 billion in remaining authorization.
- Inventory Mix Shift: Older vehicles now comprise over 40% of sales, up five points year over year.
- Wholesale Margin Compression: Sharp depreciation and lower volumes weighed on wholesale profits.
- Marketing Investment: Increased spend supported a new brand campaign and pricing actions.
Management expects near-term earnings pressure as margin reductions and higher marketing spend are deployed, but sees these levers as necessary to reignite unit growth and improve long-term profitability.
Executive Commentary
"Despite these advantages, and after decades of industry leadership, based on recent results, it is clear CarMax needs change. ... We are lowering margins and supporting this action with marketing spend, while also building out more effective ways to communicate our value to the consumer."
David McCreight, Interim President and CEO
"We are on track to achieve at least $150 million in exit rate savings by the end of fiscal year 27. We took our first significant step toward these savings this quarter with an approximately 30% reduction in our CEC workforce."
Enrique Mayor Mora, Executive Vice President and CFO
Strategic Positioning
1. Pricing Reset and Margin Flexibility
Leadership is aggressively narrowing the price gap versus competitors, reducing average selling margins and backing these moves with increased marketing. This marks a departure from prior years, where price cuts were limited by concerns over profit dilution. The current approach integrates cost cuts and diversified profit levers, such as expanded finance and protection products, to offset margin pressure and drive volume recovery.
2. Digital Platform Simplification
CarMax is refocusing its digital experience from information-rich to sales-driven, aiming to replicate the high-conversion environment of its stores online. Leadership acknowledged that the digital journey remains cumbersome, and efforts are underway to streamline navigation, messaging, and conversion tools. The goal is to make car buying easier, improve customer satisfaction, and ultimately boost digital sales conversion rates.
3. SG&A and COGS Discipline
A $150 million SG&A reduction is underway, anchored by a 30% workforce reduction in customer experience centers and ongoing process automation. The company is also targeting cost of goods sold (COGS) through regional reconditioning centers and new parts selection tools, with the aim of improving both speed and efficiency in inventory turn and vehicle preparation.
4. Financing and Ancillary Product Expansion
CarMax Auto Finance continues to expand its full-spectrum lending capabilities, with over 10% of Tier 2 volume now captured by CAF. New MaxCare protection plans are entering pilot phases, with a near-nationwide rollout expected in Q1 FY27. These products are seen as key to enhancing profitability and customer retention, especially as traditional retail margins come under pressure.
5. Leadership and Culture Realignment
The board’s CEO search prioritizes candidates with digital transformation and complex asset management experience, reflecting an urgency to realign culture, operational discipline, and omnichannel strategy. Interim leadership is focused on breaking legacy silos and fostering a customer-first, fact-based decision culture to accelerate the turnaround.
Key Considerations
This quarter marks a strategic inflection point for CarMax, with leadership signaling a willingness to accept near-term earnings volatility to restore long-term growth and competitiveness. The following issues will shape the company’s trajectory through FY27:
Key Considerations:
- Margin Reset Impact: The effectiveness of pricing cuts and marketing in reversing negative comps remains unproven, with management pledging to update investors on early trends next quarter.
- Digital Execution Risk: Streamlining the online journey is a complex task, and success will depend on integrating digital and physical assets without alienating core customer segments.
- Cost Reduction Sustainability: Achieving and sustaining $150 million in SG&A savings will require ongoing process innovation and disciplined execution, especially as volume recovers.
- Financing and Protection Upside: Growth in CAF and ancillary products is essential to offsetting retail margin pressure, but success hinges on credit quality, product rollout, and customer adoption.
Risks
CarMax faces execution risk in balancing margin reductions with volume recovery, as well as potential missteps in digital transformation that could impact customer experience. Macroeconomic headwinds, competitive pricing pressure, and used vehicle depreciation volatility remain persistent challenges. The outcome of the CEO search and the pace of cultural realignment will be critical to sustaining the turnaround.
Forward Outlook
For Q4, CarMax guided to:
- Continued margin compression as pricing actions and higher marketing spend are deployed.
- Service margin pressure due to seasonality and cost coverage headwinds from last year’s actions.
For full-year FY26, management maintained its focus on:
- Achieving at least $150 million in SG&A exit rate savings by end of FY27.
Management cited several factors influencing the outlook:
- Dynamic pricing and marketing levers to drive sales trend improvement.
- Ongoing cost structure and digital enhancements to support profitability and customer conversion.
Takeaways
Investors should monitor the interplay between margin resets, cost discipline, and digital execution over the next several quarters.
- Turnaround Hinges on Execution: Success depends on CarMax’s ability to drive unit growth and customer engagement while maintaining cost discipline and expanding high-margin finance and protection products.
- CEO Search Is a Catalyst: The new CEO’s background and early moves will signal the company’s commitment to operational and digital transformation.
- Watch for Early Signs of Volume Recovery: Management’s willingness to accept near-term earnings pressure for long-term health sets a new tone, but tangible sales and margin gains will be the key validation points for investors.
Conclusion
CarMax’s Q3 2026 results reflect a business in transition, with leadership prioritizing cost discipline, digital simplification, and pricing resets to restore competitiveness. The next several quarters will test whether these strategic levers can reverse negative comps and lay a foundation for sustainable growth under new leadership.
Industry Read-Through
CarMax’s aggressive pricing and cost actions highlight intensifying competition and margin pressure across the used vehicle retail sector. The shift toward older, higher mileage inventory and dynamic pricing models will likely ripple through peers, pressuring both independent dealers and franchise networks. The renewed focus on digital sales conversion and product upselling signals that omnichannel capabilities are now table stakes, and operators unable to streamline the customer journey or control costs may see further share loss. Watch for similar SG&A and COGS initiatives among other large-format auto retailers as macro and competitive headwinds persist into 2026.