William Blair Reaffirms Outperform on CarMax, Projects Significant Growth

Analyst firm William Blair has reiterated its 'Outperform' rating on CarMax (NYSE: KMX), citing strong sales momentum and a clear pathway to substantial profitability acceleration in 2025. The firm anticipates CarMax's business could effectively double in the coming years, driven by enhanced operating efficiency and strategic market share gains.

Strong Fundamentals and Market Share Expansion

William Blair's optimistic outlook for CarMax is rooted in the company's robust sales performance and its significant opportunity to expand market share within the used vehicle segment. CarMax currently holds approximately 3.7% of the national market for used vehicles aged 0 to 10 years. Analysts at William Blair believe there is considerable room for this share to grow, potentially approaching the double-digit penetration rates CarMax has achieved in its most mature and established markets.

This expansion is expected to be a key driver of future profitability. As CarMax scales its operations and captures a larger slice of the market, the firm projects that profit growth will outpace sales growth. This anticipated leverage is primarily attributed to two factors:

• Improved Selling, General, and Administrative (SG&A) Leverage: As sales volumes increase, fixed SG&A costs will be spread across a larger revenue base, leading to higher operating margins.
• More Lucrative Finance Division: CarMax's in-house financing arm is expected to contribute increasingly to overall profitability, benefiting from scale and potentially optimized lending practices.

Path to Doubling the Business

The 'Outperform' rating underscores William Blair's conviction that CarMax is well-positioned for meaningful business scaling. The firm's analysis suggests that the combination of market share gains, operational efficiencies, and a strong finance division creates a compelling scenario for CarMax to significantly increase its business volume and profitability in the medium to long term.

Identified Risks and Mitigating Factors

While highly bullish on CarMax's long-term trajectory, William Blair also highlighted several key risks that could impact the company's performance:

• Inventory Management Complexity: Managing a high volume of depreciating inventory, particularly used vehicles, presents inherent complexities and risks related to valuation and turnover.
• Dependence on Asset-Backed Securitizations (ABS): CarMax's financing arm relies on asset-backed securitizations to fund its lending activities. Disruptions in the ABS market or changes in investor appetite could impact its ability to provide financing.
• Macroeconomic Sensitivity: As a retailer of big-ticket consumer purchases, CarMax's business is sensitive to broader macroeconomic conditions, including consumer confidence, interest rates, and employment levels.

Despite these acknowledged risks, William Blair maintains that CarMax's strategic positioning and operational strengths enable it to navigate these challenges effectively. The firm concludes that CarMax is fundamentally well-equipped to scale its business significantly in the years ahead, justifying its continued 'Outperform' rating.

Conclusion

William Blair's reaffirmation of its 'Outperform' rating on CarMax reflects a strong belief in the company's growth prospects. The analyst firm foresees substantial market share expansion and improved profitability driven by operational efficiencies and a robust finance division, projecting a path for CarMax to potentially double its business. While acknowledging inherent risks, the overall sentiment remains highly positive regarding CarMax's long-term potential in the used vehicle market.