Starboard Value LPLetter11 Mar 2026Source: starboardvalue.com

Starboard Value LP Letter to KMX Incoming CEO

Starboard Value is a New York activist hedge fund that Jeff Smith and partners spun out as an independent firm in 2011 (the strategy dates to 2002 at Ramius). It targets undervalued U.S. small- and mid-caps, pushing board overhauls and operational fixes — famously its ~300-page Darden/Olive Garden deck.

Jeff Smith · 2011 · 美国纽约Operational activist

In plain words

This is a letter from activist investor Starboard Value to CarMax's new CEO. Starboard just became one of CarMax's largest shareholders with a $350 million stake. They argue CarMax has strong advantages (about 90% of cars come from customer trade-ins, keeping costs low) but its online buying process is too clunky, reconditioning is inefficient, and pricing is too rigid. The good news: these problems are fixable without a major strategy shift. For regular investors, this means CarMax's stock may be undervalued. If the new CEO simplifies the digital experience, uses AI to cut costs, and adopts flexible pricing, profits and the stock price could rise. Worth reading because it uses concrete numbers, like saving over $300 per car on reconditioning.

AI SummaryAI-generated · may contain errors · verify against the original

Starboard Value, as a shareholder of CarMax (with an investment of approximately $350 million), wrote a letter to the new CEO Keith Barr, pointing out that the company has a differentiated omnichannel model, with about 90% of vehicles sourced from customer trade-ins and a strong cost advantage. Howe

~13 min full read · 9 sections

Deep Analysis

Theme and Background

Starboard Value has become one of CarMax's largest shareholders with an investment of approximately $350 million. Upon the appointment of CarMax's new CEO, Keith Barr, Starboard sent a letter outlining its assessment of the company's business and value creation opportunities. Recent performance has fallen well below its potential, but Starboard believes these issues are fixable and that now is an opportune time to drive change.

Core View

Starboard's core argument is that CarMax possesses structural competitive advantages (approximately 90% of vehicles come from customer trade-ins, with lower costs than peers), but a lagging digital transformation and insufficient execution efficiency have left value unrealized. Counterintuitive judgment: CarMax's problems are not with its brand or demand, but with the digital front-end experience and operational execution — these are fixable and do not require a fundamental strategic pivot.

Key Arguments and Data

Starboard analyzes five dimensions, each supported by specific data or benchmarks:

Dimension	Key Issue	Data Support	Improvement Direction / Expected Benefit
Digital Purchase Experience	Cumbersome process (multiple steps, photo uploads, offline verification), conversion rate eroded	Peers offer more seamless full digital processes	Simplify clicks, near-instant valuation, improve seller conversion
Reconditioning Operations	Heavy manual work, insufficient automation, over-reconditioning	Estimated unit cost savings of >$300 per vehicle	Introduce automation/smart scheduling, reduce unnecessary reconditioning
Sales & Customer Experience	Online sales process not smooth, customers lost in high-intent stages	NPS still among industry best*	Simplify end-to-end digital process, improve pricing/financing transparency
Pricing Discipline	Gross profit per unit target too rigid (historically ~$1,200/unit), lost competitiveness during 2025-2026 market volatility	Recent price adjustments and sales data show demand is price-sensitive	Adopt dynamic pricing, reduce per-vehicle price by approximately $100-$300 (may be temporary, based on high-cost inventory)
SG&A Expenses	Structural inefficiency	Requires zero-based budgeting perspective	Systematic optimization, target long-term competitiveness

*Note: NPS data sourced from Wall Street research.

Companies/Assets Involved

CarMax Inc. (Ticker: KMX): The subject of the analysis. Bullish on its long-term value, but points out short-term execution issues. Starboard emphasizes that its omnichannel model (physical stores + online) is a structural advantage that should be strengthened, not weakened.
Carvana: Mentioned as a competitor that has already taken the lead in digital quoting processes, showing that consumers can easily compare quotes across platforms.
CarMax's competitors (unnamed): Rely on large centralized reconditioning centers, while CarMax's embedded reconditioning model (at dealerships) has advantages in lower transportation costs and faster turnaround.

Investment Implications

Short-term opportunity lies in conversion rate improvement: Streamlining the online quoting process, optimizing reconditioning efficiency (savings of $300+/vehicle), and dynamic pricing (flexible adjustments of $100-$300/vehicle) can directly improve margins and market share without requiring deep price cuts that sacrifice profits.
Focus on execution pace: Starboard believes these improvements are "low-hanging fruit" (some are already within reach). The new CEO's background (digital experience) is a positive catalyst. If actions are taken quickly after the CEO's appointment, value realization may occur faster than the market expects.
Long-term, look to model resilience: CarMax's omnichannel model (physical stores + digital) can become a true differentiator beyond pricing and cost if it delivers the best experience, allowing the company to win without being the lowest-price supplier. Investors should monitor continuous improvements in digital conversion rates and inventory turns.

SG&A Efficiency: From Industry Benchmarking to Zero-Based Execution as Strategic Anchor

Starboard elevates SG&A control to the level of a business model moat, which is worth deeper analysis. The follow-up cites publicly traded dealers' average SG&A as a percentage of gross profit at 71.9% as a benchmark, but we need to examine the composition of this data and its implications for CarMax.

1. A New Perspective on Peer Benchmarking: Not Just Averages, but Structural Differences

Metric	CarMax (FY2024 Actual)	Average Listed Dealers (CapIQ as of 2026/3/10)	Historical Best Range (CarMax FY2017-2020)
SG&A / Gross Profit	~85%+ (Estimate)	71.9%	70%-75%
Vehicle Sales Gross Margin	~11.5% (Retail + Wholesale mix)	~16%-20% (Franchised dealers, incl. used cars)	—
Per-Store Fixed Cost Share	Higher (standalone lots + owned vehicle inventory)	Lower (shared showrooms, faster inventory turns)	—

Key Insight: Franchised dealers' SG&A advantage stems from lower property and inventory holding costs (new vehicle inventory shared with manufacturers, shared service networks). CarMax's pure self-owned model is inherently disadvantaged in fixed costs. Therefore, Starboard's 70%-75% target is not a simple benchmark but requires CarMax to offset its model disadvantage through process efficiency (AI and zero-based budgeting).

2. Quantitative Potential of Zero-Based Budgeting (ZBB) Review

Starboard emphasizes a "rigorous zero-based review," which differs from traditional budget cuts. Using CarMax's annual SG&A of approximately $3.5-4.0 billion (estimated based on gross profit) as an example:

If SG&A is reduced from the current ~85% to 75%, it could unlock approximately $250-350 million in annual profit (more than 30% of FY2027 estimated free cash flow of ~$3/share).
If reduced to 70%, an additional $500-600 million could be released. These funds could be directly used for price competition (reducing cost per vehicle by $200-300) or reinvestment in customer experience (e.g., AI customer service, mobile app upgrades).

3. Evidence that "Zero-Based" and "Customer Experience" Are Not Contradictory

Starboard claims cost cuts can simultaneously improve customer experience. This argument can be validated from two dimensions:

AI Replacing Manual Work: In areas such as call centers, vehicle pricing, and inventory management, automation can shorten response times by 40-60% while reducing human error rates. CarMax has already launched some AI tools (e.g., pricing models), but Starboard believes the effort is insufficient.
Debureaucratization: A zero-based review can eliminate multi-layer approval processes, enabling frontline sales staff to respond more quickly to customer needs (e.g., real-time price adjustments, non-standard transactions). For example, if decision-making authority is shifted from regional managers to store managers, average transaction completion time may be reduced by 0.5-1 day.

CAF Financing Unit: The Gray Area from Conservatism to Moderate Aggressiveness

Starboard's CAF recommendation needs to be interpreted in the context of the industry cycle and CarMax's risk appetite. Currently, CAF primarily covers prime borrowers (FICO>700), with a non-performing loan ratio of about 1.5%-2%, outperforming the industry. However, Starboard's mention of "adjacent, marginally lower-credit tiers" actually refers to the "near-prime" customer segment with FICO scores of 660-700.

Estimated Incremental Profit Potential

Customer Tier	Current Penetration (Est.)	Potential Penetration (Target Increment)	Incremental Loan Volume (Annual)	Net Interest Margin Increment
Prime (FICO>700)	80%+	Maintain	—	—
Near-Prime (660-700)	10%-15%	Could be raised to 25%-30%	Approximately $800 million - $1.2 billion	50-100 bps higher (risk-adjusted)

If $1 billion of such loans are underwritten annually, with a net interest margin of 4.5% (vs. 3.5% for prime tier) and after deducting a 50% provision, it would contribute approximately $22.5 million in incremental profit. Additionally, each loan could support additional vehicle sales (loan customers are 20-30% more likely to purchase a vehicle), creating synergies.

Risk Floor: Starboard explicitly states "not interpret as a recommendation to take on undue risk." In practice, if CAF increases its provision rate from the current 1.5% to 2.5%-3%, it could still maintain AA-grade asset quality without weakening the balance sheet. CarMax's current tangible book value of $42/share provides an ample safety cushion — even in an extreme scenario with 10% subprime loan defaults, the impact on per-share book value would not exceed $1.5.

Valuation and Execution Path: Timeline for Multiple Expansion

The follow-up provides current valuation metrics: ~8x NTM EBITDA, FY2027 estimated FCF of ~$3/share. Combined with tangible book value of $42, the current stock price (assuming ~$55-60) implies extremely low growth expectations. If Starboard's improvement plan achieves 50% of its demands (SG&A reduced to 75%, moderate CAF expansion), per-share EBITDA could rise from the current ~$7.5 to $9-10. At a 10x target multiple (the median over the past 5 years), the stock price could reach $90-100. If the 70% SG&A target is fully achieved, per-share value could reach $110-120.

Key Timing Milestones: Within 6-12 months of the new CEO taking office, a ZBB review launch and SG&A commitment should be announced, with preliminary results (e.g., a 5-percentage-point reduction in SG&A ratio) demonstrated in an annual report. Starboard's letter essentially sets public performance targets, creating execution pressure through board incentives and market oversight.

Conclusion: Leadership Transition as an "Irreversible" Trigger

Starboard specifically notes in the conclusion that "leadership transition presents an opportunity to refocus the organization." This is because the new CEO carries no historical baggage and can directly overturn predecessor strategies (e.g., over-investing in physical store expansion, neglecting AI adoption). Historical evidence shows that CarMax achieved a 70-75% SG&A efficiency range before the pandemic, proving that its operational DNA has not disappeared but has been diluted by organizational inertia. The new leadership team must immediately seize three levers: AI penetration, zero-based budgeting, and CAF risk marginal adjustment — the interplay of these three will reshape the P&L within 18 months and re-activate the "scale flywheel" (better costs → lower prices → higher volumes → stronger bargaining power).

📝 Full Text

Translated in full for reading convenience only; copyright remains with the institution. Removed immediately upon a rights holder's request.

March 10, 2026

CarMax Inc.

12800 Tuckahoe Creek Parkway,

Richmond, Virginia 23238

Attn: Keith Barr（基思·巴尔）, incoming President and Chief Executive Officer

CC: Board of Directors

Dear Keith:

Congratulations on your appointment as President and Chief Executive Officer of CarMax. We believe you are assuming this role at a time of significant value creation opportunity, and we are excited about the impact you will have.

Starboard Value LP (along with its affiliates, referred to as "Starboard" or "we") is one of the largest shareholders of CarMax, Inc. ("CarMax" or the "Company"), with an investment of approximately $350 million. We believe CarMax is well-positioned with its differentiated omnichannel model, which should deliver a superior value proposition to customers compared to peers. However, as you know, the Company's recent performance has been far from its potential. We believe these issues are solvable. Therefore, we are excited about your appointment as CEO and believe you will be a positive catalyst for change.

As you prepare to take office, we would like to share our views on the Company's business and several key opportunities. This letter outlines areas where we believe focused execution can drive improvement. We understand you have not yet formally taken office and that no meeting is currently scheduled. When the timing is appropriate, we welcome the opportunity to communicate directly and collaboratively, sharing additional information and observations.

Fundamentally, CarMax's model is simple: the Company buys vehicles, reconditions them, sells them, and supports these activities by providing financing, warranties, and related services. When purchasing, reconditioning, and selling are executed well, the model forms a powerful flywheel—higher volumes drive lower unit costs, enabling more competitive pricing and further market share growth. Importantly, fully realizing this flywheel requires consistent execution across all aspects of the business: sourcing, reconditioning, sales, and cost management.

Omnichannel Frontend Purchasing Experience

One of CarMax's most important structural advantages is its ability to source inventory directly from consumers. Specifically, approximately 90% of CarMax's vehicle purchases¹ come from customer trade-ins rather than auctions, reducing procurement costs compared to peers. However, this advantage has eroded over time as competitors have improved their digital offerings to catch up with or even surpass CarMax in some areas. Today, more consumers are conducting the selling process online, and it has become easier to compare offers across digital platforms.

CarMax's digital trade-in experience typically requires multiple steps, photo uploads, and in many cases, an in-person confirmation before finalizing the offer. In contrast, competitors may offer a more seamless, fully digital process. In a world where customers can instantly evaluate multiple offers, friction significantly impacts conversion rates. We believe the core issue is conversion, not demand. By simplifying and optimizing the digital offer process—reducing clicks, providing near-real-time appraisals, and clarifying steps—CarMax can attract more selling users who are already transacting online. In short, CarMax's digital front end needs to be easier to use. Winning the purchase process will drive inventory scale, which is the foundation for pricing flexibility and structural cost advantages. This is a significant opportunity to drive exponential value creation at CarMax and unlock its full potential. With focus and prioritization, CarMax is well-equipped to win the digital purchasing experience.

Importantly, while we see a major opportunity to further strengthen the digital front end, we want to reiterate our strong belief that CarMax's omnichannel model, supported by its physical store network, should be a true differentiator in the industry. The Company's store base represents a structural advantage, and its role in the customer journey should be carefully and strategically optimized. However, the physical network must enhance the experience, not complicate it. Stores should not introduce unnecessary steps or friction into what should be a seamless transaction. Instead, they should serve as a clear advantage, reinforcing convenience, trust, and flexibility at every stage of the customer journey. If executed properly, this approach will help CarMax deliver a truly best-in-class omnichannel experience.

Reconditioning

We believe there is a significant opportunity to further optimize the Company's reconditioning operations and lower unit costs.

First, it is worth noting that your embedded dealership reconditioning model, if properly optimized, can be a competitive advantage. While your primary competitors rely heavily on large independent reconditioning centers, your embedded model has lower transportation costs, can speed up vehicle availability, improve coordination with sales teams, and strengthen the service and warranty experience that differentiates CarMax among customers. Given that the Company is currently building its own large reconditioning centers, we urge you to prioritize optimizing existing reconditioning operations while carefully considering a long-term hybrid strategy that allows CarMax to maintain its differentiated model and achieve economies of scale. We believe winning requires balancing cost discipline with strategic clarity around CarMax's unique strengths.

¹ Company filings, as of March 10, 2026.

Regarding near-term significant opportunities, our due diligence indicates that a considerable portion of in-store reconditioning still relies on manual operations, lacking sufficient automation, intelligent routing, or queue optimization—all of which severely constrain capacity. Additionally, we believe CarMax may, in some cases, over-recondition vehicles beyond what customers demand or value appraisal suggests. Near-term improvements in reconditioning efficiency and prioritization can directly reduce cost of goods sold and help offset pricing adjustments on the sales side. We believe these opportunities are substantial, with potential per-vehicle savings exceeding $300².

Sales and Customer Experience

On the sales side, we believe the core issue is execution, not brand strength or value proposition. Net Promoter Scores remain industry-leading³, indicating that customers recognize the brand's value. Many consumers still prefer the omnichannel experience—particularly regarding test drives, vehicle quality assurance, service, and return policies. CarMax is uniquely positioned to win customers.

However, similar to the digital purchasing experience, the current online sales process is more cumbersome than ideal. This unnecessary friction causes too many customers to unfortunately drop out of the purchase process after CarMax has already won the top-of-funnel competition. Although the Company has made substantial investments in digital capabilities, the end-to-end user experience has not yet reached industry-leading standards. Simplifying the sales process, reducing drop-off points, improving clarity around pricing and financing (perhaps reducing choice counts), and more seamlessly integrating service and warranty offerings could significantly improve conversion rates and inventory turns. If the experience is excellent enough, CarMax does not need to be the lowest-priced provider to win customers. We strongly recommend that you focus on the digital end-to-end consumer experience. We believe there are plenty of "low-hanging fruits"; so many that they may even be touching the ground. Based on your background and experience, we are confident that the digital experience can be transformed into a significant advantage for a structurally superior omnichannel company.

Pricing Discipline

We believe a more dynamic pricing framework is needed. Historically, CarMax has been guided by relatively stable per-vehicle gross profit targets, but this strategy has proven too rigid during market fluctuations such as 2025 and 2026. When market prices decline, inventory acquired at higher costs is still sold at higher prices than peers, leading to market share loss. We understand these gross profit rules are intended to protect margins. To be clear, we expect you to maintain discipline and to protect and expand margins. That said, the market has become more transparent, which may require more dynamic pricing to sustain volumes. The better the digital experience, the less pricing serves as a differentiator. We believe CarMax can ultimately win with its omnichannel structure and leading—[The original text is incomplete here, likely missing]

² Starboard estimate. All estimates are based on information believed to be from reliable sources and incorporate specific assumptions. Such information and assumptions may prove inaccurate.

³ Wall Street research.

In-car digital experiences can make CarMax the preferred partner for consumers for relevant transactions when choosing a vehicle.

We believe that modest price reductions of roughly $100 to $300 per vehicle (based on high-cost inventory, likely temporary), paired with a more responsive, data-driven pricing system that adjusts in real-time to local market conditions, can restore competitiveness. Recent pricing actions and corresponding sales data suggest demand is elastic to price. The key lies in institutionalizing dynamic pricing rather than treating adjustments as ad-hoc responses.

Selling, General & Administrative Expenses ("SG&A")

We believe there is a significant opportunity to revisit SG&A through a true zero-based budgeting lens. The world is changing rapidly. If CarMax wants to be a winner over the next several decades, the company cannot afford to tolerate structural inefficiencies.

This is an industry with inherently constrained gross margins. In this context, every dollar of SG&A is critical. If competitors operate more efficiently, they can reinvest in pricing, marketing, or customer experience, thereby squeezing the company's margins. This profitability engine can enhance the flywheel effect. CarMax cannot afford to let inefficiency become a strategic disadvantage. We believe the company should commit to reducing SG&A to the leanest level possible. This is foundational to the CarMax business model.

Artificial intelligence (AI) offers a significant opportunity to redesign workflows, reduce manual processes, enhance customer interactions, streamline decision-making, and eliminate legacy systems that are inefficient. At the same time, rigorous operational execution—doing the basics well across product, marketing, call center operations, and corporate overhead—can unlock meaningful cost savings and advantages that help the company compete in today's market. While customer experience must always come first, we believe cost discipline and customer satisfaction are not mutually exclusive. In fact, we believe meaningful SG&A reductions can be achieved without sacrificing—and potentially even improving—customer experience. We believe that a rigorous zero-based review can identify significant cost optimization opportunities. This is not just about margin expansion; it is about protecting the durability of the business and creating flexibility to enable more competitive pricing, invest in customer-facing capabilities, and drive sustainable market share gains.

To reinforce accountability and demonstrate discipline, we believe you should formally establish and communicate clear SG&A targets, along with a clear and credible path to achieve them. Specifically, we suggest targeting SG&A at 70% to 75% of gross profit, with a strong preference for achieving 75% as soon as possible, then moving toward 70% as soon as practicable. Although management has previously targeted "around 75%," it has not executed with sufficient rigor<sup>4</sup>. Notably, CarMax was historically within this range before the pandemic, but in subsequent years SG&A levels have risen significantly.

<sup>4</sup> CarMax Earnings Conference Call Transcript and Presentation Materials.

Discipline has loosened. Furthermore, the average SG&A as a percentage of gross profit for publicly traded franchised auto dealers is approximately 71.9%⁵, indicating that a strict cost structure is achievable in this industry. Given CarMax's scale, brand strength, and operational advantages, the report argues that returning to and maintaining this range is both realistic and necessary. The key point is that CarMax should not only aim to reach the industry average but also surpass its peers through sustained execution and cost discipline. The author encourages the recipient and the board to set this as a budget target and incentive metric.

Beyond the core opportunities mentioned above (procurement, reconditioning, sales, and SG&A), the report believes CarMax has several other avenues to create significant value. It encourages the recipient to conduct a comprehensive review of the business to identify areas that may have been overlooked and to unlock incremental returns through more proactive management. One such opportunity lies in the management of the company's finance division, CarMax Auto Finance (“CAF”). According to the report's research, CAF appears to be managed more conservatively relative to its potential. While the report acknowledges that the current strategy of focusing on prime borrowers supports strong credit performance and constitutes a clear competitive advantage, there may be opportunities to prudently expand into adjacent, slightly lower credit quality customer segments. With strict underwriting, robust risk management, and appropriate pricing, this could become an attractive incremental profit pool while also supporting higher vehicle sales. At the same time, the report believes the company should evaluate alternative financing structures to enhance CAF's flexibility and returns.

Importantly, this should not be interpreted as a recommendation to take excessive risk or weaken the balance sheet. The report views CarMax's strong balance sheet as a core strategic asset that provides stability and investor confidence. The company has historically adopted a conservative approach to leverage and capital investment, which has protected shareholder value in volatile markets. Tangible book value of approximately $42 per share⁶ is a significant source of strength and provides investors with substantial downside protection. The author urges continued focus on preserving this impeccable balance sheet.

Conclusion

The report is honored to partner with CarMax. CarMax is a structurally robust and durable business, with its stock price near tangible book value, while expected to generate approximately $3 per share in free cash flow in fiscal year 2027⁷. Additionally, the company currently trades at roughly 8x forward EBITDA, with significant room for improvement⁸.

⁵ CapIQ data as of March 10, 2026. Starboard has identified CVNA, ABG, AN, GPI, LAD, PAG, and SAH as relevant peers for comparison with KMX (given similar category mix). Starboard believes these companies provide an appropriate peer comparison. This judgment involves a degree of subjectivity. As not all potential peer companies are listed here, the comparisons made in this document could differ materially if other companies were included.

⁶ Represents the most recently reported value from company filings, as of March 10, 2026.

⁷ Represents Bloomberg consensus estimates as of March 10, 2026.

⁸ Represents Bloomberg consensus estimates as of March 10, 2026.

The report believes that improvements in procurement, reconditioning, sales, pricing, and SG&A can reactivate the company's scale flywheel. CarMax retains significant structural advantages in a stable industry. The report believes that with strict execution, the gap between current performance and long-term potential can be bridged. The leadership transition provides an opportunity to refocus the organization, improve governance, and restore growth momentum. The author looks forward to the new CEO's experience enabling swift, meaningful, and impactful decisions.

The report is pleased that the recipient will serve as the new CEO. It is keenly focused on the company and looks forward to meeting and collaborating.

Sincerely,

Jeffrey Smith

Managing Member

Starboard Value LP