Is CarMax Stock Oversold?

Shares of CarMax (NYSE: KMX) took a significant hit recently, dropping sharply following the company's latest quarterly earnings report. The decline added to an already tough backdrop for the stock. Shares are now down 37% over the last 12 months and 69% over the past five years.

With the stock price taking a beating, investors may be wondering if the used-car retailer is finally trading at a bargain. After all, beneath the headline losses, the company did see sequential improvements in its sales volume.

But a closer look at the company's financial health, management's decision to pause share repurchases, and the stock's valuation suggests investors may want to exercise some caution.

Image source: Getty Images.

A transition period

For its fiscal fourth quarter of 2026 (the period ended Feb. 28, 2026), CarMax reported net sales and operating revenues of roughly $5.95 billion. This represented a 1% decline from the year-ago period.

While a decline isn't exactly what investors want to see, it actually marked a meaningful improvement from the fiscal third quarter, when revenue fell 7% year over year.

The underlying unit volume tells a similar story. Retail used unit sales slipped 0.8% year over year in fiscal Q4 -- a significant improvement compared to the 8% decline the company saw in fiscal Q3.

Management pointed out that it achieved this improvement in sales trends by lowering prices and increasing its marketing spend.

"We felt like, lower the prices, get sales moving in the right direction, and then pay for it by taking cost out of the business," explained interim executive chair Tom Folliard during the company's fiscal fourth-quarter earnings call.

When asked about the exact drivers of the improved volume, CarMax chief financial officer Enrique Mayor-Mora added: "I would tell you, out of those three things, pricing certainly we believe had the biggest impact, although we think all of those levers impacted our trend positively."

But these price cuts seem to have come at a cost to the company's profitability.

CarMax's gross profit margin contracted, with its total gross profit falling 9% year over year to $605 million during the quarter. And the bottom line was even uglier. The company reported a net loss of $121 million, or $0.85 per share -- though this was heavily weighed down by a $141 million non-cash goodwill impairment charge and restructuring costs. When excluding these items, adjusted earnings per share came in at $0.34 -- a sharp decline from the $0.64 it reported in the same quarter last year.

A paused buyback program

In addition to margin pressure, another issue could be keeping investors on the sidelines: CarMax paused its share repurchases.

During the fourth quarter, the company repurchased only about $50 million of its stock before halting the program (it repurchased $632 million for the full fiscal year).

Mayor-Mora noted that the decision was made because the company's leverage is currently "slightly above the targeted range."

For a company that has historically used share buybacks to return capital to shareholders and support earnings-per-share growth, this pause is notable.

And this cautious capital allocation approach comes during a broader leadership transition, as newly appointed chief executive officer Keith Barr, who took the helm in March, is leading efforts to improve execution and drive efficiencies.

Time to buy?

With the business clearly in a transition period, what should investors make of the stock's valuation?

Even after the recent sell-off, CarMax stock arguably isn't cheap enough to make it a compelling buy. Based on its trailing 12-month adjusted earnings, shares trade at a price-to-earnings ratio of about 14.

While that multiple may not seem overly expensive on the surface, it leaves very little room for error, given the company's soft sales, contracting margins, and elevated debt levels.

Further, the used-car market remains highly sensitive to interest rates and consumer affordability challenges -- somewhat unpredictable macroeconomic factors.

Ultimately, while the company's slight improvement in retail unit sales volume is encouraging, the overall picture remains murky -- and the stock looks closer to fairly valued than clearly undervalued. CarMax's combination of soft top-line growth, a paused share repurchase program, and a leadership transition introduces a level of uncertainty that makes the stock worth avoiding unless it falls to a price at which it is trading as a clear bargain.

Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CarMax. The Motley Fool has a disclosure policy.