CarMax Had a Tough Quarter: Why I’m Still Betting on Its Business Over Carvana

CarMax (KMX 1.80%) is a giant in the used car market, but the industry remains highly fragmented with around 18,000 dealers. This has left a gap for Caravan (CVNA 7.05%) quickly build a business that relies heavily on online sales. Carvana has made headlines for its rapid growth, but CarMax is a better company. Here’s why.

CarMax Had a Tough Start to the New Fiscal Year

In the first quarter of fiscal 2025, CarMax reported earnings of $0.97 per share, down 34% year over year, although last year’s figure benefited from a one-time legal settlement of $0.28 per share. On an adjusted basis, earnings fell 16% as the company sold 5.3% fewer vehicles. On the retail side, same-store sales fell 3.8%.

Image source: Getty Images.

On the expense side, CarMax saw a 3.1% increase in selling, general and administrative expenses (excluding the legal settlement). Inflation is a continuing concern and a drag on profitability. That said, it wasn’t all bad, as CarMax achieved gross profit per retail unit sold of $2,347, unchanged year over year, and record extended protection plan sales of $563 per unit.

In short, CarMax is weathering significant headwinds and coping as best it can. That’s not a shocking result, given that the used-car industry is cyclical. Higher interest rates, while allowing the company to benefit by increasing the rates charged in its finance unit, also put pressure on consumers’ ability to purchase a new vehicle.

Here’s what we can conclude from this: despite the difficulties it faces, CarMax is a well-known, large, and profitable company.

Carvana makes bold claims

Carvana, meanwhile, boasted that it earned $0.23 per share in the first quarter of 2024, compared with a loss of $1.51 per share a year earlier. And it earned $0.75 per share in 2023, reversing a significant loss of $15.74 per share from the previous year. Carvana is a newcomer building its online business — losses are to be expected. Still, if we take the company’s reported earnings at face value, it looks like the company has turned a major corner. Or has it?

In late February, Carvana noted that “net income for fiscal year 2023 totaled $150 million and benefited from an $878 million gain on debt extinguishment from our corporate debt exchange.” Without that one-time gain, the company is still deep in the red. And the debt exchange was a deal that could have saved Carvana from filing for bankruptcy. That’s not something an investor wants to see, because it means the company is operating from a position of weakness.

In the first quarter, Carvana highlighted in its earnings report: “Net income totaled $49 million and included a gain of ~$75 million on the fair value of our warrants to purchase Source common shares.” Once again, without a one-time gain, the company is not profitable.

Carvana is making progress in trying to put its business on more solid ground, including dramatically reducing its cost structure and working to improve its balance sheet. But ultimately, CarMax is the healthier company here.

Carvana is still in development

I tend to be a conservative investor, so I avoid businesses that carry too much uncertainty. Carvana is still rebuilding its business after overgrowing during the pandemic. I’m much more impressed with an established company that has proven itself in a variety of economic conditions, and in the used car space, that’s CarMax.