CarMax (KMX) Risk Analysis

Our associates are critical to our success, and our culture is an important differentiator.  Cost-reduction initiatives, workforce reductions and changes to our workplace model may affect our ability to attract and retain qualified personnel, result in loss of institutional knowledge and expertise, cause attrition beyond our intended reduction in force or negatively impact associate morale. Internal restructurings may also divert management attention from our business and may negatively impact our culture. A failure to maintain our culture could have a material adverse effect on our business, sales and results of operations. Our future success also depends in substantial part on our ability to attract, recruit, hire, motivate, develop and retain talented personnel possessing the qualifications, experiences, capabilities and skills we need for all areas of our organization, including senior leadership. As our new chief executive officer leads our company in its next chapter, there could be uncertainty among investors, customers, third parties and employees. Failure to successfully execute our succession plans or disruptions associated with leadership transitions could have a material adverse effect on our business, sales and results of operations. In addition, managing our response to a changing economic environment, evolving technologies and our strategic initiatives require management, employees and contractors to adapt and learn new skills and capabilities. A failure to maintain an adaptable and responsive culture or to continue developing and retaining the associates that drive our success could have a material adverse effect on our business, sales and results of operations. We have experienced, and could experience in the future, a shortage of associates for retail and operational positions, which could have an impact on our ability to conduct our business and maintain qualified talent in key areas. Further, there has been a general increase in domestic workers organizing to form or join a union. If we are unable to maintain positive associate relations, or if, despite our efforts, we become subject to successful unionization efforts, it could increase costs, limit our ability to respond to competitive threats and have a material adverse effect on our business, sales and results of operations. Our ongoing success also depends upon the continued contributions of our store, CEC, regional and corporate management teams.  Consequently, the loss of the services of any of these associates could have a material adverse effect on our business, sales and results of operations.  In addition, an inability to build our management bench strength to support store growth could have a material adverse effect on our business, sales and results of operations.

We have made and may continue to make considerable investments in our omni-channel platform, as well as investments in initiatives designed to leverage evolving technologies, including AI. A failure to capture the benefits that we expect from the platform or these initiatives and our continued investments in enhancements to the platform or in these initiatives could have a material adverse effect on our business, sales and results of operations. We must anticipate and meet our customers' expectations in an evolving retail marketplace. Our business, sales and results of operations may be negatively affected if we fail to provide a high quality and consistent customer experience, regardless of sales channel, if our omni-channel platform or other initiatives do not meet customer expectations, or if we are unable to attract, retain and manage the personnel at various levels who have the necessary skills and experience we need to implement our initiatives.

Protecting our intellectual property (including patents, trademarks, copyrights, confidential information and trade secrets) is integral to our business. The failure to protect our intellectual property, including from unauthorized uses, can erode consumer trust and our brand value and have a material adverse effect on our business.

We collect, process and retain sensitive and confidential customer information in the normal course of business and may share that information with our third-party service providers.  This information includes the information customers provide when purchasing or selling a vehicle and applying for vehicle financing.  We also collect, process and retain sensitive and confidential associate information in the normal course of business and may share that information with our third-party service providers.  Although we have taken measures designed to safeguard such information and have received assurances from our third-party providers, our facilities and systems, and those of third-party providers, could be vulnerable to external or internal security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors or other similar events, any of which could be enhanced or facilitated by AI. The security measures we have implemented to protect against cybersecurity incidents may not always prevent or mitigate the impact of a cybersecurity incident and there can be no assurance that future efforts to prevent or mitigate a cybersecurity incident will be effective either. Numerous national retailers have disclosed security breaches involving sophisticated cyber-attacks, including ransomware, that were not recognized or detected until after such retailers had been affected, notwithstanding the preventive measures such retailers had in place.  Further, the rapid evolution and increased adoption of AI and other evolving technologies may increase our level of cybersecurity risk. We and our third-party service providers face attempts by others to gain unauthorized access to, sabotage, take control of and corrupt our information systems and data. As a result of these types of attempts, both we and our third-party service providers have experienced information security, cybersecurity and data privacy incidents. To date, none of these incidents have had a material impact on our business, sales and results of operations. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer or associate information, whether experienced by us or by our third-party service providers, and whether due to an external cybersecurity incident, a programming error, or other cause, may damage our reputation, expose us to mitigation costs and the risks of private litigation and government enforcement, disrupt our business and otherwise have a material adverse effect on our business, sales and results of operations.  In addition, our failure to respond quickly and appropriately to such a security breach could exacerbate the consequences of the breach. We are subject to numerous and rapidly changing federal, state, and local laws and regulations regarding privacy, cybersecurity, and the collection, use, and disclosure of sensitive confidential information. If we fail to comply with these laws and regulations or future applicable laws and regulations, we could suffer reputational harm and disruption to our business, and be subject to significant litigation, monetary damages, regulatory enforcement actions, or fines. See the risk factor below titled "We operate in a highly regulated industry and are subject to a wide range of federal, state and local laws and regulations. Changes in these laws and regulations, or our failure to comply, could have a material adverse effect on our business, sales, results of operations and financial condition" for the risks associated with failure to comply with these laws and regulations.

Our business is dependent upon the integrity and efficient operation of our information systems.  We rely on our information systems to manage sales, inventory, our customer-facing websites and applications (carmax.com, carmaxautofinance.com, the CarMax mobile app, and carmaxauctions.com), consumer financing, customer information and other data.  The failure of these systems to perform as designed, the failure to maintain or invest in and update these systems as necessary, or the inability to enhance our data management and information technology capabilities, could disrupt our business operations and have a material adverse effect on our sales and results of operations. Despite our ongoing efforts to maintain and enhance the integrity and security of these systems, we have been and could be subjected to attacks by hackers, including denial-of-service attacks directed at our websites or other system breaches or malfunctions due to associate error or misconduct or other disruptions.  Such incidents could disrupt our business and have a material adverse effect on sales and results of operations.  See the risk factor above titled "We collect sensitive confidential information from our customers. A breach of this confidentiality, whether due to a cybersecurity or other incident, could result in harm to our customers and damage our brand" for the risks associated with a breach of confidential customer or associate information.

We are subject to various litigation matters from time to time, which have in the past and could in the future have a material adverse effect on our business, results of operations and financial condition.  Claims arising out of actual or alleged violations of the law have been and could in the future be asserted against us by individuals, either individually or through class claims, or by governmental entities in civil or criminal investigations and proceedings.  These claims have been and could in the future be asserted under a variety of laws including, but not limited to, consumer finance laws, consumer protection laws, intellectual property laws, privacy laws, labor and employment laws, securities laws, employee benefit laws, tax laws and environmental laws.  These actions could expose us to adverse publicity and to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil fines and penalties including, but not limited to, suspension or revocation of licenses to conduct business.

We have communicated certain environmental goals in our public disclosures which may be difficult to achieve. The accuracy, adequacy or completeness of the disclosures may subject us to scrutiny. Further, statements about our environmental goals, and progress toward those goals, may be based on standards for measuring progress that are still developing, and such statements may be subject to evolving, forthcoming and altogether new disclosure requirements. If we are unable to achieve progress with respect to our environmental goals, accomplish our environmental goals or satisfy evolving shareholder expectations or regulatory or industry standards, we could suffer reputational harm. Our environmental data, processes, and disclosure may be incomplete or inaccurate, which may result in civil penalties and have a material adverse effect on our business, sales and results of operations.

The occurrence of severe weather events, such as rain, flooding, hail, snow, wind, storms, hurricanes, extended periods of unusually cold weather or natural disasters, including wildfires, could cause store closures or affect the timing of consumer demand, either of which could adversely affect consumer traffic and could have a material adverse effect on our sales and results of operations in a given period. Further, as the Earth's climate changes, extreme weather events have become more frequent or more intense, which could have a material adverse effect on our sales and results of operations.

Automotive retailing is a highly competitive and fragmented business.  Our competition includes publicly and privately owned new and used car dealers and online and mobile sales platforms, as well as millions of private individuals.  Competitors buy and sell the same or similar makes of vehicles that we offer in the same or similar markets at competitive prices.  New car dealers leverage their franchise relationships with automotive manufacturers to brand certain used cars as "certified pre-owned," which could provide those competitors with an advantage over CarMax. Retail Competition.  Some of our competitors have replicated or attempted to replicate portions of our consumer offer, including our use of competitive, no-haggle prices and our commitment to buy a customer's vehicle even if they do not purchase one from us. Competitors using online focused business models, both for direct sales and consumer-to-consumer facilitation, have and could continue to materially impact our business model, sales and results of operations. Increased online used vehicle offerings and the growing consumer trend of buying vehicles online adds competition in a segment that is growing and could result in lower-than-expected retail margins, and could have a material adverse effect on our business, sales and results of operations. Further, existing e-commerce businesses have and could continue to enter the online new and used vehicle markets, including companies with significantly more resources than CarMax that might be able to provide customers access to a greater inventory of vehicles while delivering a superior online experience. If we fail to respond effectively to our existing and new retail competitors, it could have a material adverse effect on our business, sales and results of operations. Online Facilitation. In addition, our competitive standing is affected by companies, including search engines and online car marketplaces, that are not direct competitors but that may direct online traffic to the websites of competing automotive retailers.  The increasing activities of these companies could make it more difficult for carmax.com to attract traffic.  These companies could also make it more difficult for CarMax to otherwise market its vehicles online. The widespread adoption of digital and online tools to facilitate consumers' sales or trade-ins of their current vehicles could have a material adverse effect on our ability to source vehicles through our appraisal process, which in turn could have a material adverse effect on our vehicle acquisition costs and results of operations.  For example, online appraisal tools are available to consumers that generate offers and facilitate purchases by dealers other than CarMax. In addition, there are companies that sell software and data solutions to new and used car dealers to enable those dealers to, among other things, more efficiently source and price inventory.  The increased use of such products by dealers who compete with CarMax may reduce the relative competitive advantage of CarMax's internally developed proprietary systems. If we fail to respond effectively to competitive pressures or to changes in the used vehicle marketplace, it could have a material adverse effect on our business, sales and results of operations. CAF Competition.  Our CAF segment is subject to competition from various financial institutions, including banks and credit unions, which provide vehicle financing to consumers.  If we were unable to continue providing competitive finance offers to our customers through CAF, it could result in a greater percentage of sales financed through our third-party finance providers, which are generally less profitable to CarMax, or through other outside financing sources.  Moreover, if CAF competitors are able to attract potential customers before they visit CarMax, whether through competitive finance offers or ease of customer experience, they may be directed to retail options other than CarMax.  Accordingly, if CAF was unable to continue making competitive finance offers to our customers, or our finance competitors are able to successfully attract and redirect a disproportionate number of our potential customers, it could have a material adverse effect on our business, sales and results of operations. Evolving Marketplace.  The marketplace for used vehicles may be impacted by the significant, and likely accelerating, changes to the broader automotive industry. Demand for EVs is driving the need to adapt our business to source, recondition and service EVs. Technological changes, including the development of autonomous vehicles, new products and services, new business models and new methods of travel could reduce automotive retail demand or disrupt our current business model. In addition, technology related to generative AI is advancing rapidly, and its future impact on the automotive ecosystem, including online shopping behavior, is unknown. If we fail to respond effectively to the evolving marketplace, it could have a material adverse effect on our business, sales and results of operations.

Integrity is a critical component of the CarMax brand and foundational to the trust our customers place in us. Our reputation for integrity, together with transparent, no-haggle pricing, vehicle quality, customer service and a seamless omni-channel experience, is important to our ability to attract and retain customers. While consumers consider a range of factors when choosing where to buy or sell a vehicle, a perceived failure to act with integrity, or a loss of trust in our brand for any reason, could significantly undermine customer confidence and have a material adverse effect on our business, sales and results of operations. Our brand and reputation could be harmed by actual or perceived failures to maintain high standards of integrity, quality or customer experience, including isolated incidents at a single store or broader issues, particularly if they result in adverse publicity, governmental investigations or litigation. These events could relate to, among other things, our sales or financing practices, vehicle reconditioning or quality, treatment of customers or associates, use of AI or other technologies, cultural brand positioning or real or perceived safety issues or injuries. The widespread use of social media and other digital platforms has increased the speed and scale with which information and misinformation can be disseminated, and we may not be successful in correcting or mitigating negative perceptions. Any resulting damage to our reputation or brand could have a material adverse effect on our business, sales and results of operations.