12:50 PM EDT, 10/06/2025 (MT Newswires) -- The degree to which CarMax's ( KMX ) most recent earnings figures missed analyst estimates stunned Wall Street and raised significant concerns among industry experts that the company has ceded market share and has no clear return path to growth.

The used-car retailer on Sept. 25 reported fiscal Q2 net earnings of $0.64 per diluted share, down from $0.85 a year earlier and well below the FactSet consensus analyst estimate of $1.01. CarMax also reported total net sales and operating revenue of $6.59 billion, down from $7.01 billion a year ago and below the FactSet consensus of $7.01 billion.

CarMax shares dropped 20% on the day of the release and have crept up only slightly -- around 1.8% -- in the intervening period.

"The numbers were well below [estimates], so the magnitude of it was jarring, shocking, and inside that earnings report, there were also some concerning numbers, like same-store sales and the loss writedowns," Seaport Research Partners Senior Analyst Glenn Chin said in an interview with MT Newswires.

For the most recent quarter, CarMax reported same-store sales growth of negative 6.3%. Same-store sales measures the change in revenue generated by existing stores compared to the previous year.

Registration data, which is used to determine market share, is not yet available for the quarter, but Chin said early signs seem to link the poor same-store data to market-share loss for the former "800-pound gorilla" of the industry. Cox Automotive forecast that total used retail units sales were up 3.6% in the quarter, while the National Automobile Dealers Association's preliminary estimates indicate used-car sales at all dealerships were down just 1.9% in the period. Both figures imply the company's market share is falling, the analyst said.

CarMax is still the largest used-auto retailer, but it is no longer the only game in town.

Carvana (CVNA) has emerged as a formidable competitor, while franchise dealers like AutoNation (AN) and Group 1 Automotive (GPI), which once treated the used-car space as an afterthought, have shifted their focus due in large part to the two great economic shocks of the 21st century to date: the Great Financial Crisis and the Covid-19 pandemic, Chin said.

During the GFC and its immediate aftermath, consumers began purchasing used vehicles over new ones in significant numbers, clueing the dealers in to the profitability of the space. That trend returned in the post-pandemic period, exacerbated by the well-documented supply shortage for new vehicles.

"[Franchise dealers] very much focused on used, and margins are higher there," Chin said. "It's very easy to cross-shop for a [new Toyota] Camry from one dealer to the next, but it's much different to cross-shop that used Camry from one dealer to the next because there's differences in color, condition, smell. Because of that they're much less commodity-like and carry higher margins."

CarMax also reported a higher-than-expected $71.3 million increase to its estimate of lifetime losses on existing loans, which compounded investor concerns and helped fuel the selloff of the company's stock. The company credited the high provision to the worsening performance of 2022 and 2023 vintages, an issue related to the post-pandemic period that is not unique to CarMax, Chin and other analysts said.

During that period, consumers were flush with stimulus cash, which helped inflate FICO scores, making customers appear more credit-worthy than they actually were, Chin said. That coincided with the peak shortage of vehicles, which drove car prices to record highs.

"So you had these consumers who were flush with cash and higher-than-expected FICO scores buying vehicles at over [Manufacturer's Suggested Retail Price], so that's not a great recipe for loan performance," Chin said. "And lo and behold, we subsequently had very high inflation, and those consumers were hit very hard by inflation, so now those vintages are performing very poorly."

Analysts at Morgan Stanley said in a note the losses appear to be confined to that time period, while Chin said the provision seems to now be sufficient given that just one-third of the balance of those vintages remain in the company's portfolio. Still, the $71.3 million addition marks the company's second straight quarterly increase to the loss provision for the vintages, which likely worsened investor sentiment on CarMax relative to its peers, Chin said.

Looking ahead, the poor earnings report has caused analysts to question whether CarMax can return to growth and, if so, how long it will take to get there.

"Results have amplified concern around management's ability to sustain market share gains and drive growth through financing penetration and expansion in low-tier lending," analysts at Wedbush Securities said in a note.

In the near-term, same-store sales may get worse. In the most-recent quarter, when CarMax reported -6.3% comparable store growth, it was up against a prior-year comparison of plus-4.3%. For the next three quarters, the used-car retailer faces comps of 4.3%, 5.1% and 8.1%, respectively, making for an even more dauting challenge.

Still, there are reasons to believe CarMax can return to growth, though it may take longer than previously expected, the Morgan Stanley analysts said.

"We believe that CarMax is equipped with the right strategy and tools to return to retail volume growth via expanded production capacity, expanding [CarMax Auto Finance] financing penetration, and omni-channel optionality for consumers," the analysts said. "Additionally, our high-frequency data aggregated across brands reveal a distinct improvement in CarMax's ( KMX ) brand affinity metrics over the past few months, reflecting the merit of CarMax's ( KMX ) omni-channel offering increasingly gaining traction with its customer."

Several industry observers have speculated about an upcoming inflection in used vehicle supply due primarily to an expected increase in off-lease return volumes that should help CarMax in its effort to return to growth. But off-lease returns are only expected to increase by 400,000 units next year, Chin said, citing data from Cox Automotive.

Franchise dealers, who will receive the returned vehicles, get the first crack at these units. Whatever vehicles they do not want then go to the broader network of dealers before heading to auction where CarMax can bid on them.

"The problem is, because these vehicles are in such tight supply, my guess is that none of those are going to make it to auction because there's a shortage of used car supply, and dealers are very aggressively going after the used car business, so they're very hungry for units," Chin said. "So, my guess is that they're going to take every one of them, and, if nothing else, they're going to cherry-pick the profitable ones, and the only ones that are left are going to be the undesirable ones."

Price: 46.44, Change: +0.02, Percent Change: +0.03