KMX 10-K & 10-Q changes, risk factors and insider trading

We are subject to a variety of risks, the most significant of which are described below. Our business, sales, results of operations and financial condition could be materially adversely affected by any of these risks. These disclosures reflect the company’s beliefs and opinions as to factors that could materially and adversely affect the company and its securities in the future. References to past events are provided by way of example only and are not intended to be a complete listing or a representation as to whether or not such factors have occurred in the past or their likelihood of occurring in the future.

We operate in a highly competitive industry. Failure to develop and execute strategies to remaincompete in the nation’s largest retailer of used vehiclesvehicle marketplace and to adapt to the increasing use of digital and online tools to market, buy, sell and finance used vehicles could adversely affect our business, sales and results of operations.

Automotive retailing is a highly competitive and highly fragmented business. Our competition includes publicly and privately owned new and used car dealers and online and mobile sales platforms, as well as millions of private individuals. Competitors buy and sell the same or similar makes of vehicles that we offer in the same or similar markets at competitive prices. New car dealers leverage their franchise relationships with automotive manufacturers to brand certain used cars as “certified pre-owned,” which could provide those competitors with an advantage over CarMax.

Retail Competition. Some of our competitors have replicated or attempted to replicate portions of theour consumer offer that we pioneered when we opened our first used car store in 1993,offer, including our use of competitive, no-haggle prices and our commitment to buy a customer’s vehicle even if they do not purchase one from us.

Competitors using online focused business models, both for direct sales and consumer-to-consumer facilitation, have and could continue to materially impact our business model.model, sales and results of operations. Increased online used vehicle offerings and the growing consumer trend of buying vehicles online adds new competition in a segment that is growing and could result in lower-than-expected retail margins, and could have a material adverse effect on our business, sales and results of operations. Further, existing e-commerce businesses have and could continue to enter the online new and used vehicle markets, including companies with significantly more resources than CarMax that might be able to provide customers access to a greater inventory of vehicles while delivering a superior online experience. If we fail to respond effectively to our existing and potentialnew retail competitors, it could have a material adverse effect on our business, sales and results of operations.

The increasingwidespread useadoption of digital and online tools to facilitate consumers’ sales or trade-ins of their current vehicles could have a material adverse effect on our ability to source vehicles through our appraisal process, which in turn could have a material adverse effect on our vehicle acquisition costs and results of operations. For example, online appraisal tools are available to consumers that generate offers and facilitate purchases by dealers other than CarMax.

In addition, there are companies that sell software and data solutions to new and used car dealers to enable those dealers to, among other things, more efficiently source and price inventory. The increasingincreased use of such products by dealers who compete with CarMax couldmay reduce the relative competitive advantage of CarMax’s internally developed proprietary systems.

Evolving Marketplace. The marketplace for used vehicles may be impacted by the significant, and likely accelerating, changes to the broader automotive industry. Increasing demandDemand for EVs is driving the need to adapt our business to source, recondition and service EVs. Technological changes, including the development of autonomous vehicles, new products and services, new business models, including subscription models,models and new methods of travel could reduce automotive retail demand or disrupt our current business model. In addition, technology related to generative AI is advancing rapidly, and its future impact on the automotive ecosystem, including online shopping behavior, is unknown. If we fail to respond effectively to the evolving marketplace, it could have a material adverse effect on our business, sales and results of operations.

We are subject to national and regional U.S. economic conditions. These conditions include, but are not limited to, economic downturn, recession, inflation, interest rates, unemployment levels, the state of the housing market, gasoline prices, consumer credit availability, consumer credit delinquency and loss rates, tariffs or the imposition and enforceability of new tariffs, trade wars, barriers or restrictions, or threats of such actions,actions and related uncertainties, personal discretionary spending levels, and consumer sentiment about the economy in general. These conditions and the economy in general have been, and in the future may be, affected by significant national or international events such as a global health crisis or current geopolitical conditions. When these economic conditions worsen or stagnate,stagnate (as, for example, the current conflict in the Middle East and the resulting increase in the price of gasoline in the U.S.), it can have a material adverse effect on consumer demand for vehicles generally, demand from particular consumer categoriessegments or demand for particular vehicle types. It can also negatively impact availability of credit to finance vehicle purchases for all or certain categories of consumers. This could result in challenges to vehicle affordability, lower sales, decreased margins on units sold, and decreased profits for our CAF segment. For example, tariffs impacting the availability and price of automotive parts, vehicles, or steel used in constructing new locationslocations, and uncertainties regarding the ability to obtain refunds for previously paid tariffs that have subsequently been invalidated could also adversely impact our business. Economic conditions can also have a material adverse effect on the supply of late-model used vehicles, as automotive manufacturers produce fewer new vehicles and consumers retain their current vehicles for longer periods of time. This could result in increased costs to acquire used vehicle inventory and decreased margins on units sold.

Changes in the availability or cost of the long-term financing to support the origination of auto loans receivable through CAF could adversely affect sales and results of operations. We use a securitization program to fund the majority of the auto loans receivable originated by CAF. Changes in the condition of the asset-backed securitization market could lead us to incur higher costs to access funds in this market or require us to seek alternative means to finance CAF’s loan originations. If this market ceased to exist and there were no immediate alternative funding sources available, we might be forced to curtail our lending practices for some period of time. The impact of reducing or curtailing CAF’s loan originations could have a material adverse effect on our business, sales and results of operations.

Any significant changes in retail prices for new and used vehicles could have a material adverse effect on our sales and results of operations. ForAn example,overall increase in prices or monthly payments for used vehicles, including the impacts of increased interest rates customers face when financing a vehicle, makes it difficult for certain customers to afford to purchase a vehicle. Similarly, when retail prices for used vehicles rise relative to retail prices for new vehicles, it can make buying a new vehicle more attractive to our customers than buying a used vehicle, which can have a material adverse effect on sales and results of operations and can result in decreased used margins. Manufacturer incentives could contribute to narrowing this price gap. In addition, any significant changes in retail or wholesale prices for used vehicles could have a material adverse effect on our results of operations by reducing margins.

We source a significant percentage of our vehicles through our appraisal process, which includes our online instant appraisal offers, and these vehicles are generally more profitable for CarMax. Accordingly, if we fail to adjust appraisal offers to stay in line with broader market trade-in offer trends, or fail to recognize those trends, it could adversely affect our ability to acquire inventory. Acquiring inventory from third-party auctions or from other dealers through our MaxOffer channel is generally less profitable than acquiring it from our in-store and online appraisal products. Our ability to source vehicles through our appraisal process could also be affected by competition, both from new and used car dealers directly and through third parties driving appraisal traffic to those dealers. See the risk factor above titled “We operate in a highly competitive industry” for discussion of this risk. Our ability to source vehicles from third-party auctions could be affected by an increase in the number of closed auctions that are open only to new car dealers who have franchise relationships with automotive manufacturers.

We have made aand may continue to make considerable investmentinvestments in our omni-channel platform, as well as investments in initiatives designed to leverage evolving technologies, including AI. A failure to capture the benefits that we expect from the platform or these initiatives and our continued investments in enhancements to the platform or in these initiatives could have a material adverse effect on our business, sales and results of operations. We must anticipate and meet our customers’ expectations in an evolving retail marketplace. Our business, sales and results of operations may be negatively affected if we fail to provide a high quality and consistent customer experience, regardless of sales channel, if our omni-channel platform or other initiatives do not meet customer expectations, or if we are unable to attract, retain and manage the personnel at various levels who have the necessary skills and experience we need to implement our initiatives.

Our growth is dependent on the success of our omni-channel platform, opening stores in new and existing markets, continued sales growth andgrowth, the build-out of our offsite production and auction facilities.facilities and offering additional complementary products and services. These enhancements and expansions place significant demands on our management team, our associates and our information systems. If we fail to effectively or efficiently manage our growth, it could have a material adverse effect on our business, sales and results of operations. Sales growth requires that we continue to effectively execute our business strategies and implement new and ongoing initiatives to elevate the experience of our customers. See the risk factor above titled “Our failure to realize the benefits associated with our omni-channel platform or initiatives designed to leverage evolving technologies, including AI, could have a material adverse effect on our business, sales and results of operations” for more discussion of this risk. The expansion of our store base, addition of offsite production and auction facilities and implementation of new initiatives also requires us to recruit and retain the associates necessary to support that expansion. See the risk factor below titled “Our success depends upon the continued contributions of our associates” for discussion of this risk. The expansion of our business also requires real estate. Our inability to acquire or lease suitable real estate at favorable terms could limit our expansion and could have a material adverse effect on our business and results of operations.

Our associates are thecritical drivingto our success, and our culture is an important differentiator. Cost-reduction initiatives, workforce reductions and changes to our workplace model may affect our ability to attract and retain qualified personnel, result in loss of institutional knowledge and expertise, cause attrition beyond our intended reduction in force behindor our success. We believe that one of the key factors that distinguishes CarMax is a culture centered on valuing our associates. We provide flexible, hybrid and remote work arrangements for certain associates, which maynegatively impact associate engagement,morale. integrationInternal ofrestructurings newmay associatesalso divert management attention from our business and overallmay companynegatively impact our culture. A failure to maintain our culture could have a material adverse effect on our business, sales and results of operations.

Our ongoing success also depends upon the continued contributions of our store, CEC, regionregional and corporate management teams. Consequently, the loss of the services of any of these associates could have a material adverse effect on our business, sales and results of operations. In addition, an inability to build our management bench strength to support store growth could have a material adverse effect on our business, sales and results of operations.

We may experience greater credit losses in CAF’s portfolio of auto loans receivable than anticipated.

We make various assumptions and judgments about CAF’s portfolio of auto loans receivableheld for investment and provide an allowance for loan losses based on a number of factors. Although management will establish an allowance for loan losses it believes is appropriate, this allowance may not be adequate. For example, when economic conditions deteriorate unexpectedly, additional loan losses not incorporated in the existing allowance for loan losses may occur. Losses in excess of the existing allowance for loan losses could have a material adverse effect on our business, results of operations and financial condition.

Additionally, under U.S. generally accepted accounting principles (“GAAP”), if any investment’s fair value declines below its carrying value, we will need to record an impairment loss in the applicable fiscal period. As a result, we have incurred, and we may incurin the future incur, expenses related to the impairment of existing or future equity investments. Any such impairment charge could have a material adverse effect on our business, financial condition and results of operations.

Many components of our business, including data management, key operational and technology processes and critical customer systems, are provided by third parties. We carefully select our third-party vendors, but we do not control their actions. If our vendors fail to perform as we expect or conduct operations that are inconsistent with our values, our operations and reputation could suffer if the failure harms the vendors’ ability to serve us and our customers. One or more of these third-party vendors may experience financial distress, technology challenges, cybersecurity incidents, staffing shortages, liquidity challenges, file for bankruptcy protection, go out of business, suffer disruptions in their business or experience significant increases in the cost of their goods or services sold due to factors beyond their control, including tariffs. The use of third-party vendors represents an inherent risk to our company that could have a material adverse effect on our business, sales and results of operations.

Adverse conditions, such as the 2023 United Auto Workers strike and tariffs impacting the availability and price of vehicles and automotive parts, affecting one or more automotive manufacturers could have a material adverse effect on our sales and results of operations and could impact the supply of vehicles, including the supply of late-model used vehicles. In addition, manufacturer recalls are a common occurrence. Because we do not have manufacturer authorization to complete recall-related repairs, some vehicles we sell may have unrepaired safety recalls. Such recalls, and our lack of authorization to make recall-related repairs, could adversely affect used vehicle sales or valuations, could cause us to temporarily remove vehicles from inventory, could force us to incur increased costs and could expose us to litigation and adverse publicity related to the sale of recalled vehicles, which could have a material adverse effect on our business, sales and results of operations.

The preparation of our financial statements requires us to make estimates and assumptions affecting the reported amounts of CarMax’s assets, liabilities, revenues, expenses and earnings. If these estimates or assumptions are incorrect, it could have a material adverse effect on our results of operations or financial condition. We have identified severalone accounting policiespolicy as being “critical” to the fair presentation of our financial condition and results of operations because theyit involveinvolves major aspects of our business and requirerequires us to make judgments about matters that are inherently uncertain. TheseThis policiespolicy areis described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the notes to consolidated financial statements included in Item 8. Consolidated Financial Statements and Supplementary Data.

We collect, process and retain sensitive and confidential customer information in the normal course of business and may share that information with our third-party service providers. This information includes the information customers provide when purchasing or selling a vehicle and applying for vehicle financing. We also collect, process and retain sensitive and confidential associate information in the normal course of business and may share that information with our third-party service providers. Although we have taken measures designed to safeguard such information and have received assurances from our third-party providers, our facilities and systems, and those of third-party providers, could be vulnerable to external or internal security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors or other similar events.events, any of which could be enhanced or facilitated by AI.

The security measures we have implemented to protect against cybersecurity incidents may not always prevent or mitigate the impact of a cybersecurity incident and there can be no assurance that future efforts to prevent or mitigate a cybersecurity incident will be effective either. Numerous national retailers have disclosed security breaches involving sophisticated cyber-attacks, including ransomware, that were not recognized or detected until after such retailers had been affected, notwithstanding the preventive measures such retailers had in place. Further, the rapid evolution and increased adoption of AI and other evolving technologies may increase our level of cybersecurity risk. We and our third-party service providers face attempts by others to gain unauthorized access to, sabotage, take control of and corrupt our information systems and data. As a result of these types of attempts, both we and our third-party service providers have experienced information security, cybersecurity and data privacy incidents. To date, none of these incidents have had a material impact on our business, sales and results of operations. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer or associate information, whether experienced by us or by our third-party service providers, and whether due to an external cybersecurity incident, a programming error, or other cause, couldmay damage our reputation, expose us to mitigation costs and the risks of private litigation and government enforcement, disrupt our business and otherwise have a material adverse effect on our business, sales and results of operations. In addition, our failure to respond quickly and appropriately to such a security breach could exacerbate the consequences of the breach.

Despite our ongoing efforts to maintain and enhance the integrity and security of these systems, we have been and could be subjected to attacks by hackers, including denial-of-service attacks directed at our websites or other system breaches or malfunctions due to associate error or misconduct or other disruptions. Such incidents could disrupt our business and have a material adverse effect on sales and results of operations. See the risk factor above titled “We collect sensitive confidential information from our customers. A breach of this confidentiality, whether due to a cybersecurity or other incident, could result in harm to our customers and damage our brand” for the risks associated with a breach of confidential customer or associate information.

We are subject to various litigation matters from time to time, which have in the past and could in the future have a material adverse effect on our business, results of operations and financial condition. Claims arising out of actual or alleged violations of the law have been and could in the future be asserted against us by individuals, either individually or through class claims, or by governmental entities in civil or criminal investigations and proceedings. These claims have been and could in the future be asserted under a variety of laws including, but not limited to, consumer finance laws, consumer protection laws, intellectual property laws, privacy laws, labor and employment laws, securities laws, employee benefit laws, tax laws and environmental laws. These actions could expose us to adverse publicity and to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil fines and penalties including, but not limited to, suspension or revocation of licenses to conduct business.

The market price of our common stock has been and may continue to be volatile and could expose us to securities class action litigation.

The price of our common stock has been and may continue to be subject to wide fluctuations based upon our operating results, general economic and market conditions, general trends and prospects for our industry, announcements by our competitors, our ability to achieve any long-term targets or performance metrics and other factors. InWe addition,have theat markettimes pricenot ofmet ouranalysts’ commonexpectations, stockand mayany alsocontinued befailure affected by whether weto meet analysts’ expectations.expectations, Failureor tovariations meetbetween suchour expectationsresults and analysts’ projections, could haveresult ain materialfurther adversevolatility effect onin the price of our common stock. Following periods of volatility in the market price of a company’s securities, securities class action litigation is more likely. If litigation were instituted against us, it could result in substantial costs and a diversion of our attention and resources, which could have a material adverse effect on our business.

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 centriccustomer-centric car buying and selling experience, a key differentiator.differentiator in a large and fragmented market.

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 receivableheld for investment and auto loans held for sale less the interest expense associated with the debt issued to fund these receivables,loans, a provision for estimated loan losses on loans held for investment 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%42.4% of our retail used vehicle unit sales in fiscal 2025.2026. As of February 28, 2025,2026, CAF serviced approximately 1.11.0 million customer accounts in its $17.59$16.37 billion portfolio of managedauto receivables.loans.

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

(54) TheAn definitionomni retail sale is defined as a sale where customers complete at least one, but not all, of anthe omnifour saleactivities haslisted beenin updatednote to(4) includebelow online, or 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.

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 continue to take a disciplined approach to our capital structure, including managing our net leverage to preserve efficient access to the capital markets for both CAF and CarMax overall. With leverage slightly above our targeted range, and as we focus on improving the business during this transitional period, we paused our share buybacks during the fourth quarter of fiscal 2026. 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.

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 carvehicle industry will increasingly prefer tooptionality havethat theseamlessly abilityconnects to shopdigital and transactphysical digitally. Approximately 80% of our customers leveraged some or all of our digital capabilities to complete their transactions during the current fiscal year.experiences.

InWe additionalso to these actions, we areremain 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 20252025. andDue anticipateto thatour werecent willsales achieveperformance, our savings in fiscal 2026 were slightly below our goal of another $125 per unit in fiscal 2026. This exceeds the initial $200 per unit target that we set at the beginning of fiscal 2025.unit. These efficiencies support affordability as we pass savings on to our customers and also support our margins.

In calendar 2024,2025, we estimate we sold approximately 3.7%3.6% of the age 0- to 10-year old vehicles sold on a nationwide basis, consistenta withdecrease from 3.7% in calendar 2023.2024. External title data indicates that while ourwe year-over-yeargained market share came under pressure duringin the first half of thecalendar year,2025, itsales recoveredand asmarket weshare achievedwere acceleratingpressured gains throughin 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:

As of February 28, 2025,2026, we hadoperated 256 used car stores located in 109110 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 2025,2026, 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 asand four stand-alone reconditioning/auction centers. During fiscal 2027, we anticipate opening four stores as well as two stand-alone reconditioning/auction centers and two stand-alone auction facilities. We are utilizing our stand-alone reconditioning and auction locations to balance capacity and drive efficiencies across the network.

The allowance for loan losses represents the net credit losses expected over the remaining contractual life of our managedauto receivables.loans held for investment. 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 managedauto receivablesloans held for investment and historical gross loss and recovery trends. Due to the fact that losses for receivablesloans 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 receivablesloans to-date, along with forward loss curves, in estimating future performance. Once the receivablesloans have 18 months of performance history, the net loss estimate reflects actual loss experience of those receivablesloans to date,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’sloan’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 managedauto receivables.loans held for investment at inception of the loan.

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 NationalBlack AutomobileBook Dealers Associationwholesale used vehicle priceretention 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.

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 held for investment and auto loans held for sale less the interest expense associated with the debt issued to fund these loans, a provision for estimated loan losses on loans held for investment, direct expenses and income related to the sale of auto loans. CAF income does not include any allocation of indirect costs. After the effect of 3-day payoffs and vehicle returns, CAF financed 43.3%42.1% of our retail used vehicle unit sales in the first threesix months of fiscal 2027. As of MayAugust 31, 2026, CAF serviced approximately 1.11.0 million customer accounts, which includes its $16.71$16.30 billion portfolio of auto loans and $700$1.20 millionbillion of auto loans that have previously been sold.

The sources of revenue and gross profit from the CarMax Sales Operations segment for the first threesix months of fiscal 2027 are as follows:

A high-level summary of our financial results for the second quarter and first quartersix months of fiscal 2027 as compared to the second quarter and first quartersix months of fiscal 2026 is as follows (1):

Our current capital allocation strategy is to focus on funding the business to drive unit sales and earnings growth that enables us to consistently reward our shareholders. We continue to take a disciplined approach to our capital structure, including managing our net leverage to preserve efficient access to the capital markets for both CAF and CarMax overall. With leverage slightly above our targeted range, and as we focusfocused on improving the business during this transitional period,business, we paused our share buybacks during the fourth quarter of fiscal 2026. For the first quarterhalf of fiscal 2027, our leverage remainedimproved slightlyto abovethe upper end of our targeted range. WeBased remainon committedour toimproved returningperformance capitalas towell shareholdersas our positive outlook for the remainder of the fiscal year and the progress we have made on our strategic plan, we intend to resume our share repurchasesrepurchase program in the futurethird quarter of fiscal 2027. We expect to begin repurchases at a modest pace, below the appropriateaverage timequarterly dependingpace prior to our pause. The timing and amount of repurchases will depend upon market conditions, our leverage and our capital needs, among other factors. 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 possess an award-winning, people-first culture, an iconic brand, an irreplaceable national footprint and meaningful digital capabilities. When fully harnessed, this combination enhances our competitive advantage and will drive our market share growth and financial returns in one of the largest consumer markets in the nation. Despite these advantages, it is clear that there are some key areas that have impeded our ability to perform to our full potential. Our core operations are not yet fast and efficient enough, retail prices and selection must continue to improve and our costs remain too high. In addition, our digital experience is too complex and not seamlessly connected to the in-person experience. This has put friction in the customer experience, ultimately impacting conversion and preventing us from fully leveraging our unmatched scale and store network.

In order to move forward, weWe have established our strategy for growth, which we have named Shift into GEAR. This strategy is built around four pillars with the objective of delivering strong unit sales and earnings growth that enables CarMax to consistently reward shareholders. The four pillars place the customer at the center of everything we do and are designed to meaningfully improve how we operate at scale and support consistently strong performance. Our four pillars are:

•Add Value On Each Transaction - grow profitability by maximizing value across all aspects of our business. This includes our CAF full spectrum ambitions as well as the extended protection plan redesign initiatives that are already underway.

•Run Lean - continueunlock to reimagine our cost structureefficiencies to enable a great offering. We plan to lower reconditioning costs through technology and operational efficiency while continuing to deliver the high-quality vehicles customers expect from CarMax. We are also working to enhance our logistics network and continuing to reduce our SG&A expenses.

While this work will take time, we are encouraged that the progress we have been making across the four pillars is already translating into improved trends that we expect will continue this fiscal year. For the first quarterhalf of fiscal 2027, on a year-over-year basis and compared to our strongest quarter from fiscal 2026,basis, retail unit sales delivered slightmid-single digit growth, reflecting the near-term steps we have been taking across pricing, marketing and conversion to strengthen the business and drive performance. In addition, we levered SG&A expense on a total unit basis, expanded CAF Tier 2 penetration and increased EPP margin, all while improving our year-over-year EPS trend.

Regarding SG&A expenses, our goal is to achieve $200 million in exit rate savings in SG&A expense by the end of fiscal 2027. However, the year-over-year savings within fiscal 2027 are expected to be offset as we annualize over materially reduced corporate bonusincentive compensation and share-based compensation expense in fiscal 2026, which offsets approximately half of the anticipated savings in fiscal 2027. The savings are also expected to be impacted by variable costs associated with higher sales, inflationary pressures and new location growth. We expect the full impact from these savings to occur in fiscal 2028. For the first quarter of fiscal 2027, the year-over-year decline in SG&A expense was in line with our full year expectations and we remain on track to achieve our $200 million savings target. In addition to offsetting cost pressures, these ongoing savings are expected to enable additional flexibility to reinvest in areas that directly drive sales, while also serving as a tailwind to our earnings. We remain on track to achieve our $200 million savings target.

In fiscal 2027, we plan to take a more dynamic approach to margin management. We expect used margins for the full fiscal year to decline by approximatelyless than $200 per unit, although this may vary as we continue to optimize performance. This outlook reflects our pricing actions and our ongoing efforts to reduce logistics and reconditioning cost of sales in support of more competitive pricing and stronger sales. In the first quarter of fiscal 2027, we lowered margins by less than the $300 per unit guidance we provided last quarter as we balanced demand, margins and efficiency gains in our reconditioning process to support sales.

During fiscal 2026, we tested EPP product enhancements that focused on increasing penetration and margin per unit. We began the nationwide rollout of these products in the first quarter of fiscal 2027 and anticipate the full rollout to be completed in theOctober second quarter.2026. EPP margins increased slightly$27 per unit in the first quarterhalf of fiscal 2027 and we are on track to achieve incremental EPP margin per unit of approximately $35 in fiscal 2027.

As of MayAugust 31, 2026, we operated 256258 used car stores located in 110111 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 the first threesix months of fiscal 2027, we opened two stores as well as one stand-alone reconditioning/auction center located in Locust Grove, Georgia, supporting the Atlanta metro market.market, and one stand-alone auction center in Conroe, Texas. Subsequent to the end of the second quarter, we opened an additional store in Austin, Texas. During the remainder of the fiscal year, we plan to open fourone stores,store twolocation, one stand-alone auction facilitiesfacility and one additional stand-alone reconditioning/auction center. We are utilizing our stand-alone reconditioning and auction locations to balance capacity and drive efficiencies across the network.

The increase in average retail selling price in both the second quarter and first quartersix months of fiscal 2027 primarily reflected an increase in vehicle acquisition costs as well as a shift in the mix of our sales by vehicle age. The shift in mix by vehicle age for the second quarter reflects the growing segment of higher income consumers purchasing later model used vehicles, while demand among lower income consumers for older vehicles remained steady.

The 14.0%18.2% increase in wholesale vehicle revenues in the firstsecond quarter of fiscal 2027 was driven by ana 8.4%15.9% increase in unit sales and a 5.1%1.8% increase in average selling price, or approximately $400.$100. TheFor the first six months of fiscal 2027, wholesale vehicle revenues increased 16.0%, driven by a 12.0% increase in wholesale unit sales as well as a 3.5% increase in average selling priceprice, inor theapproximately first quarter of fiscal 2027 primarily reflected an increase in vehicle acquisition costs.$300.

Used vehicle gross profit decreasedincreased 9.5%8.1% in the firstsecond quarter of fiscal 2027, primarily driven by lowera 13.8% increase in used unit sales, partially offset by a $111 decrease in used vehicle gross profit per unit. For the first six months of fiscal 2027, used vehicle gross profit decreased 1.7%, driven by a $177 decrease in used vehicle gross profit per unit, whichmostly decreasedoffset $230by froma the6.5% record high first quarterincrease in theused priorunit year.sales. The decrease in used vehicle gross profit per unit for both the second quarter and first six months of fiscal 2027 reflects the continuation of pricing actions implemented to drive unit sales.sales growth. In the firstsecond quarter of fiscal 2027, we lowered margins by less than the $300$200 per unit guidanceoutlook we provided last quarter as we balanced demand, margins and efficiency gains in our reconditioning process to support sales. We expect used margins to decline year over year for the remainder of fiscal 2027. For the full fiscal year, we expect used margins to decline by less than $200 per unit, although results may vary as we continue to optimize performance.

Wholesale vehicle gross profit increased 8.3%0.2% in the firstsecond quarter of fiscal 2027, driven by ana 8.4%15.9% increase in wholesale unit sales.sales, Wholesalemostly offset by a $135 decrease in wholesale vehicle gross profit per unitunit. wasFor the first six months of fiscal 2027, wholesale vehicle gross profit increased 4.5%, driven by a 12.0% increase in linewholesale withunit thesales, priorpartially yearoffset period.by a $68 decrease in wholesale vehicle gross profit per unit.

Three Months Ended MayAugust 31, 2026 Six Months Ended August 31, 2026

SG&A expenses decreasedincreased $24.5$27.5 million, or 3.7%,4.6%, in the firstsecond three monthsquarter of fiscal 2027. Factors contributing to the net decreaseincrease include the following:

During the second quarter and first quartersix months of fiscal 2027, we levered SG&A on a total unit basis by $118,$157, or 6.8%.8.8%, and $136, or 7.7%, respectively. In fiscal 2027, we expect to leverage SG&A per total unit when excluding the restructuring charges incurred in fiscal 2026.

OtherInterest Income. Other incomeexpense of $2.1$31.8 million in the firstsecond quarter of fiscal 2027 was relatively consistent with $0.3$28.5 million in the firstsecond quarter of fiscal 2026. For the first six months of fiscal 2027, interest expense increased to $65.6 million compared with $55.5 million in the prior year period, reflecting higher outstanding debt balances.

Income Taxes. The effective income tax rate was 28.2%25.9% and 27.1% in the second quarter and first quartersix months of fiscal 20272027, respectively, versus 25.7%25.0% and 25.5% in the second quarter and first quartersix months of fiscal 2026.2026, respectively. The increase in the effective income tax rate for both periods was primarily driven by the expiration of unexercised stock options as well as the impact of tax credit purchases on the prior year quarter.periods.

As part of our initial plan to increase CAF penetration to 50%, we began a measured expansion in fiscal 2026 by recapturing profitable segments of Tier 1 originations that we had previously shifted to our Tier 2 lenders as well as testing expanded lending with a focus in the top half of the Tier 2 space. We continue to monitor consumer behavior and the broader economy and adjust our origination strategy as needed. We 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, funding strategy, loan sales and the broader macroeconomic and lending environments. In fiscal 2026, CAF targeted originating less than 15% and 5% of the total Tier 2 and Tier 3 loan volume, respectively. In fiscal 2027, we intend to increase the target originations for Tier 2 to approximately 30% of the total volume across the Tier 2 spectrum,spectrum. with a continued focus onDuring the topfirst halfsix months of fiscal 2027, CAF financed approximately 23% of the total Tier 2 space.volume. We do not plan to increase our target originations for Tier 3 in fiscal 2027. 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. Tier 2 and Tier 3 loans have higher loss and delinquency rates than the remainder of the CAF portfolio, which impact the provision for loan losses and allowance for loan losses as a percentage of auto loans held for investment.

Tier 2 and Tier 3 loans have higher loss and delinquency rates than the remainder of the CAF portfolio, as well as higher contract rates, which impact the provision for loan losses and allowance for loan losses as a percentage of auto loans held for investment. An increase in CAF’s net penetration of one percentage point generally corresponds to approximately $50 million to $60 million of originations.originations in a quarter. We estimate that these incremental originations, if consisting of only Tier 1 loans,loans held for investment, would result in an increase to the provision of approximately $1.5 million to $2.0 million. For an incremental percentage point of penetration consisting of only Tier 2 loans,loans held for investment, we estimate that the provision would increase by approximately $10 million to $12 million. These estimates are impacted by the credit mix of originations and the broader macroeconomic environment as well as our ability to execute the sale of certain pools of auto loansenvironment. During the first quartersix months of fiscal 2027, approximately 90% of CAF originations were Tier 1, with the remaining 10% consisting of Tier 2.

◦Total interest margin increased as a percentage of average auto loans outstanding to 6.7% in the first quartersix months of fiscal 2027,2027 compared withfrom 6.5% in the first quartersix months of fiscal 2026. The increase was primarily due to higher margin loans driven by our Tier 2 expansion. We expect that our total interest margin percentage will be approximately 6.5% for the remainder of fiscal 2027.

◦The provision for loan losses resulted in expense of $95.6$113.4 million and $209.0 million in the second quarter and first quartersix months of fiscal 20272027, respectively, compared with expense of $101.7$142.2 million and $243.9 million in the second quarter and first quartersix months of fiscal 2026.2026, respectively.

◦Losses for the second quarter and first quartersix months of fiscal 2027 were in line with expectations and the provision largely reflects our estimate of lifetime losses on new originations for the period, which includes our continued expansion in the Tier 2 credit space. The provision for the prior year periodperiods reflected unfavorable loss performance, primarily within loans originated in 2022 and 2023, when average selling prices were elevated and these customers were later challenged by the inflationary environment.

◦The allowance for loan losses as a percentage of auto loans held for investment was 2.95%3.07% as of MayAugust 31, 2026, compared with 2.76%3.02% as of MayAugust 31, 2025 and 2.78% as of February 28, 2026. The increase in the allowance percentage was primarily driven by our continued expansion in the Tier 2 credit space, along with seasonality as the credit mix of new originations tends to shift down the credit spectrum during tax season.space.

◦The increase in net loan originations in the second quarter of fiscal 2027 primarily resulted from an increase in used unit sales, partially offset by the decline in the net penetration rate. The increase in net loan originations in the first quartersix months of fiscal 2027 primarily resulted from increases in theused netunit penetration ratesales and the average amount financed.

◦CAF net penetration increaseddecreased 150170 basis points in the firstsecond quarter of fiscal 2027 due toas our continued expansion into the Tier 2 credit space.space was more than offset by lower Tier 1 penetration as customers use alternate funding in response to increased rates. For the first six months of fiscal 2027, CAF net penetration was consistent with the prior year period at 42.1%.

During the first threesix months of fiscal 2027, we opened two stores as well as one stand-alone reconditioning/auction center located in Locust Grove, Georgia.Georgia and one stand-alone auction center in Conroe, Texas. Subsequent to the end of the second quarter, we opened an additional store in Austin, Texas. For the remainder of fiscal 2027, we anticipate opening fourone new store locations,location, one additional stand-alone reconditioning/auction center and twoone stand-alone auction facilities.facility. We currently estimate capital expenditures will total approximately $400 million in fiscal 2027. Capital expenditures were $541.0 million in fiscal 2026. Planned capital spending in fiscal 2027 largely consists of spending to support our future long-term growth in offsite reconditioning and auction facilities, as well as our new stores. This spending is expected to be at a reduced rate as compared with the prior year due to significant investments made in fiscal 2026 as well as slowed growth in store openings in the current and upcoming fiscal years.

Our current capital allocation strategy is to focus on funding the business to drive unit sales and earnings growth that enables us to consistently reward our shareholders. We continue to take a disciplined approach to our capital structure, including managing our net leverage to preserve efficient access to the capital markets for both CAF and CarMax overall. With leverage slightly above our targeted range, and as we focusfocused on improving the business during this transitional period,business, we paused our share buybacks during the fourth quarter of fiscal 2026. For the first quarterhalf of fiscal 2027, our leverage remainedimproved slightlyto abovethe upper end of our targeted range. WeBased remainon committedour toimproved returningperformance capitalas towell shareholdersas our positive outlook for the remainder of the fiscal year and progress we have made on our strategic plan, we intend to resume our share repurchasesrepurchase program in the futurethird quarter of fiscal 2027. We expect to begin repurchases at a modest pace, below the appropriateaverage timequarterly dependingpace prior to our pause. The timing and amount of repurchases will depend upon market conditions, our leverage and our capital needs, among other factors. 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.