KMX: AI Signals Bearish Trend - Time for Puts?

CarMax operates as the largest retailer of used cars, offering a wide selection of 'quality used vehicles' and related products and services at 'competitive, no-haggle prices'. Their business is divided into 'CarMax Sales Operations' and 'CarMax Auto Finance (CAF)'. 'CarMax Sales Operations' focuses on auto merchandising and related services, selling used vehicles and purchasing them from consumers and dealers, while CAF provides financing options. CarMax targets a broad customer base seeking used vehicles, offering an 'omni-channel platform' that allows customers to buy online, in-store, or a combination of both. The company differentiates itself through its 'no-haggle' pricing policy, a customer-friendly sales process, a 'Love Your Car Guarantee', and a large selection of vehicles, including access to a nationwide inventory.

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KMX's technical outlook is decidedly bearish. The stock is currently trading at $40.73, significantly below its 50-day SMA of $51.14 and 200-day SMA which is unavailable for the most recent period, indicating a strong downtrend. The EMA_21 is also trending downward, confirming the bearish sentiment. Momentum indicators further support this view. The RSI_14 is extremely oversold at 31.11, suggesting potential for a short-term bounce, but overall bearish momentum prevails. The MACD is negative and diverging further from its signal line. The STOCHk is at 19.65, which is still low, even with a recent move up. The ADX is elevated at 36.08, signaling a strong trend. Recent price action shows a consistent decline, with the stock failing to sustain any meaningful rallies. The ROC_20 is deeply negative at -11.66, confirming the significant downward momentum. With no immediate signs of reversal, the technical indicators suggest continued downward pressure on KMX over the next 1–3 months.

CarMax's MD&A presents a mixed picture. For the three months ended August 31, 2025, 'net sales and operating revenues' decreased by 6.0% to $6,594.7 million compared to $7,013.5 million in the prior year, while for the six months ended August 31, 2025, 'net sales and operating revenues' increased slightly by 0.1% to $14,141.2 million. 'Gross profit' decreased by 5.6% to $717.7 million for the quarter, but increased by 3.8% to $1,611.3 million for the six-month period. CAF income also decreased by 11.2% for the quarter and 7.0% for the six-month period. The company attributes the decline in used vehicle revenues to a decrease in used unit sales and a decrease in average retail selling price. Regarding liquidity, 'net cash provided by operating activities' totaled $1.09 billion for the first six months of fiscal 2026, compared to $501.4 million in the prior year period. CarMax intends to continue to accelerate the pace of share repurchases, but this may be impacted by 'valuation and cash flow dynamics, as well as macroeconomic conditions'. The company anticipates opening three additional store locations and one additional stand-alone reconditioning/auction center for the remainder of fiscal 2026.

CarMax's Q2 FY25 earnings call projects a moderately bullish outlook, driven by positive sales trends and efficient cost management, despite industry-wide auto loan loss pressures. Bill Nash stated they were 'pleased with our team's execution in the second quarter, as we achieve positive sales trends, strong margins, cost efficiencies, and EPS growth.' Total sales reached $7 billion, a 1% decrease year-over-year, but retail unit sales increased by 5.1%, and used unit comps were up 4.3%. Gross profit was $760 million, up 9% from last year, with significant growth in other gross profit, particularly from EPP and service. SG&A expenses increased by 4%, but leveraged 4 percentage points due to spending discipline. CarMax Auto Finance (CAF) income decreased by 14% to $116 million due to increased loan loss provisions, however, net interest margin remained stable at 6.1%. While there's caution regarding the broader credit industry and inflationary pressures, management expressed confidence in their tightening measures and the profitability of their loan portfolio. They also highlighted the successful execution of their first non-prime and higher prime ABS transactions, which support future growth and flexibility.

KMX's financial performance presents a mixed picture. Revenue has fluctuated, starting at $6,148.5M in Q3 2024 and reaching $6,594.7M in the latest quarter (Q2 2026), indicating some growth but also volatility. The gross profit ratio has remained relatively stable, hovering around 10-11%, suggesting consistent profitability on sales, with a slight dip to 0.1088 in the most recent quarter. Operating cash flow demonstrates significant variability, with a recent high of $785.5M in Q2 2026, after a low of -$117.7M in Q1 2025, indicating inconsistent cash generation. Total debt has decreased from $19,488.5M in Q3 2024 to $17,767.3M in Q2 2026, demonstrating a reduction in leverage. Overall, while revenue has seen some growth and debt has decreased, the inconsistent operating cash flow warrants close monitoring. The stability in gross profit ratio is a positive sign, but the volatility in cash flow and revenue trends create a balanced outlook for KMX's near-term financial health.

The company presents a moderately bullish investment profile based on its key metrics and financial ratios. Revenue has shown positive growth, indicating a healthy demand for its products or services. The gross margin has remained relatively stable, suggesting efficient cost management. The Return on Equity (ROE) indicates a solid return for shareholders. The Price-to-Earnings (P/E) ratio suggests the company is appropriately valued by the market. The debt-to-equity ratio has seen a decrease, showcasing the company's improved financial leverage. The current ratio signifies the company's strong ability to meet its short-term obligations. Overall, the company demonstrates a stable and growing business model with a healthy balance sheet, making it a moderately attractive investment for the next 6-12 months.