Carmax Inc Q2 2025 Earnings Call Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Seth Basham - Wedbush Securities Inc. - Analyst : Thanks a lot and good morning. Great to see the progress on sales. And my first question is just if you could give us an update on how unit comps are trending, according today.

Question: Seth Basham - Wedbush Securities Inc. - Analyst : That's helpful color. And then secondly, on task, if you can get some color on your view of the market at this juncture, does it make sense to push forward with the full spectrum lending, given the credit headwinds? And do you expect further tightening on your underwriting standards?

Question: Sharon Zackfia - William Blair & Company - Analyst : Hi, good morning. Thanks for taking the call. Our question, I guess another question on the finance business. How do we think about the profitability of CAF, when you've got the higher losses on the one hand, but we also are seeing funding costs, obviously start to come down. Is this kind of the trough in terms of year-over-year decrease that we should expect. I mean, when do you think CAF, can start to grow again and income? Just any kind of perspective around that would be helpful?

Question: John Murphy - BofA Securities - Analyst : Good morning, maybe just to stay on credit here. I mean, as you see the trajectory, get a bit worse, but it's still within the bounds of normal and even the lower end of the normal range. I'm just curious how you gauge sort of absolutely, how you think about this going forward or sort of the rate of change. Other specific, metrics you guys are looking at internally, I mean, you kind of cited tightening in April and then tighten again during the quarter. So it seems like you're moving with this but I mean, how do you gauge where this may ultimately land?

Question: John Murphy - BofA Securities - Analyst : I just want one, just a quick follow up on the sourcing side. I mean, everybody we talked to in the industry is having a tough time finding late model vehicles. It seems like you guys did a really good job in the quarter and actually got the 31,000 out of dealer. So I'm just curious what is changing there? What Edmunds is doing to help you source from dealers who seem like they have a pretty tight hold of these vehicles and don't want to let them go. And what kind of an impact can that have going forward because there is a real shortage and, but you did a good job this quarter. So, just trying to understand what changed.

Question: John Murphy - BofA Securities - Analyst : Got it. Impressive in maintaining grosses. Thank you.

Question: Brian Nagel - Oppenheimer & Co. Inc. - Analyst : Good morning. Thanks for taking my questions. So I have two quick questions, I'll merge them together. Yeah, first off with regard to the improvement use card unit comp so first off, congratulations, but is there anything you could really point to in the core of that sort of say underpinned that strengthen what we've seen in prior quarters. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 26, 2024 / 1:00PM, KMX.N - Q2 2025 Carmax Inc Earnings Call And then the second question I have with regard to finance. As you look at this the higher loan loss provision that you took here in the fiscal second quarter, is that more a reflection of what you're seeing in your portfolio or you the inputs that come as a result of your analysis of the overall environment? All right. So I'll take the first part of that and Jon will tackle the second part. So Brian, on your first part just kind of improvements and comp kind of drivers, II I talked a little bit about this in my opening remarks. I think it's both internal things that we're doing. I also think there's some macro benefits as well. From an internal standpoint, I'm really pleased with the team and the execution across the Board, whether it's finding efficiencies and in areas of cost of goods sold, which allow us to do different things with, better conversion in our CECs and stores. The experience, I highlighted that we got order processing. Last quarter, I talked about the fact that we were testing that we had it in some stores. We plan to get it out everywhere. By the end of the year, we actually got it all out in this -- the very next quarter which we're thrilled about, which really puts all of our stores to CECs and the customer all on the same format. So it makes it much easier and seamless to go back and forth between assistance and help. So I think that's great from a macro standpoint. Look, prices continue to come down and I think Enrique help me out on this, but I think this is the seventh quarter in a row of year-over-year price declines in our ASP, which certainly they're not back to where they were, but every bit helps. And then of course, interest rates. The future of interest rates coming down, I think will help that. We were able to source and half for sale more, less than $25,000 cars and more 0 to 4 cars, which I think is great. And then of course, we also in this much more of a stable pricing environment, we've talked about that many times over the last few quarters about what happens when you see big price swings with, of which we saw two last fiscal year, one year before. We've got up and down depreciation, but it's much more normal. So I think it's a combination of things.

Question: Brian Nagel - Oppenheimer & Co. Inc. - Analyst : Right. I appreciate the color. Thanks guys. Thank you, Brian. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 26, 2024 / 1:00PM, KMX.N - Q2 2025 Carmax Inc Earnings Call

Question: Rajat Gupta - J.P. Morgan Securities LLC - Analyst : Great. Thanks for taking the question. Just have one clarification and another question. On the September comes, just, hear correctly that you're tracking positive? -- on the same string basis so far? Yeah, for the September, well, really, I'm talking about the quarter trend, is tracking positive for the quarter. It's in line with the second quarter. It's a little bit softer, but again, I want to point out Rajat that there is a day of week, headwind there for sure. With the one last Friday, one less Saturday, picking up a Sunday where a bunch of our stores are closed. All that will square away throughout the quarter. So you mean for the quarter, you would expect it to be positive still? That was the comment you were making? That's the current trend of sales, yeah. Okay. Got it. And then just on the advertising spending, I was surprised to see a big drop there. Curious, like is there, what's happening there? I mean, is there like some efficiency you're getting with the advertising spending? I mean, is this the right level of four unit spending we should be expecting. Any sort of thought there, would be helpful. Thanks. Yeah. No, absolutely. I would say that quarter to quarter, there's going to be some variation, right? But if you look at the first half of this year, we're pretty much in line with where I always communicated is our target. And if you take a look at the back half of the year, it's going to be very similar. So I wouldn't read anything into this particular quarter with the marketing spend a year-over-year or on the total unit basis. It's just variances within a quarter. But again, first half of the year, pretty much in line with what our expectations are and the back half of the year is in line with what we've communicated. Understood. Great. Thank you.

Question: David Bellinger - Mizuho Securities USA LLC - Analyst : Hey, thanks for the questions. First one, just on the worst thing, trends in the broader auto loan market. You've already got tier three down to about a 7% penetration today. You've tightened up again. Just what's next year? Are you beginning to plan the business with any type of contingencies or any potential down shift in volumes over the next few quarters. May maybe just help us think through any further offsets or cost pull backs you could have in a weakening credit environment.

Question: David Bellinger - Mizuho Securities USA LLC - Analyst : Got it. If I could just ask one more on the digital progression tools, you mentioned order processing. I think there's a new functionality where consumers can complete a track transaction from home, that sort of in store. So is that something available in every location now? And can you talk about any improvement in conversion that you're seeing early on with this? Yeah. So we just rolled it out everywhere recently. You're exactly right. It makes it more seamless whether you start in the store or you start online. What was happening before is if you started it online and you work with the CECs and you did the whole thing through the CECs online. Great. It because all of our CECs were up on it. But if you started online work with the CECs and then when you, then you went into the store, it wasn't as seamless because we didn't have the stores on the new order processing. Now we have it everywhere. So it doesn't matter where you start. And this is a benefit not only for the customer but for the associate as well because when a store associate is working with a customer that's been doing something online, it's now transparent what they did. The next thing that we're doing, which I talked about is really this shopping cart is what I kind of call it. Where now the consumer -- because you had to get order processing everywhere first. Now when they log into my Carmax account, they see everything they did in the store, they see everything they've done online. So again, it's a nice little continuation and it prompts them on the next step. So it's a little early to talk about what it's generating from a conversion standpoint. Although our conversion was up both in the CECs and the stores. We feel like it's just a better customer experience and it will pay off in dividends in the future because the consumers are going to continue to want more. Very good. Thanks, Bill. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 26, 2024 / 1:00PM, KMX.N - Q2 2025 Carmax Inc Earnings Call Thank you.

Question: Craig Kennison - Robert W. Baird & Co. Incorporated - Analyst : Hey, good morning. Thanks for taking my question. It somewhat of a follow up to the last question. But online sales as a percentage of total sales moved up to 15% from 14%. I think it was stuck around 14% for a while. Where do you think that metric should be in the coming years? And then as you shift to a lower touch process, should we start to see a benefit in unit profitability because of the low touch nature of that transaction? Yeah. So on the 15% -- it's been around 14%, I think for a couple quarters. They did take up a little more. Quite honestly, I'm more excited about the, the 2 point pick up in omni because that's where most of the customers are. There's an only so many folks that just want to do everything online. And I would point out -- the 15% of people that did it online, the vast majority of them still wanted to come into the store to actually do the pickup, talk about the car, that kind of thing. As far as more -- look, the more self-progression customers do that is from an efficiency standpoint. That is a win and I'll let Enrique talk about that. Yeah, as I mentioned in my prepared remarks, we're really excited about the progress that we've made on our omni selling model as compared to their pre omni time period. Not only from a year-over-year basis, but also relevant pre omni. This quarter, we were actually more efficient on those key metrics, right. So this key metrics that we've been talking about consistently here for a while on a per total unit basis, on per gross margin basis. And then also on a per retail unit basis, which uh we were more efficient. So we had committed to making progress on that and being as efficient and even more efficient and we're delivering on that and that should continue to accelerate here in an environment where sales come back and we should continue to see that flow through. So we're really, really pleased. Bill just to push back on your point, customers that wanted in a purely digital experience really only have a couple of choices you and a top competitor. And I would think that your perspective is you should have your fair share of that. Do you think you're getting it? Yeah. The way I think about it is I don't have a target for any -- whether they want to do it all in the store, whether they want to do a combination of the two, which is really what omni is all about it. They want to do everything. We want to have the best process for all three of those. So we're kind of agnostic when it comes to how they want it delivered. I think it's great 15% of them, but we don't force them one way or the other. So yeah, I want my -- I definitely want our fair share of that, but I also don't mind if they think that's what they want to do and they end up coming in or doing everything in the store. That's fair. Thanks, Bill. Thank you, Craig. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 26, 2024 / 1:00PM, KMX.N - Q2 2025 Carmax Inc Earnings Call

Question: Scot Ciccarelli - Truist Securities, Inc. - Analyst : Good morning guys. Apologies in advance for another finance question. Previously, you guys have been lowering provisions despite higher delinquencies and I know Jon, you were talking about a lot of different factors that you guys consider. But was the provision change based primarily on delinquencies increasingly converting into write offs in your book and then relate to that with delinquencies hitting 8% rates on your subprime after about three months. What are your initial loss expectations for the subprime pools? Thanks.

Question: Scot Ciccarelli - Truist Securities, Inc. - Analyst : Great. Thanks a lot guys. Thanks Scott.

Question: Chris Pierce - Needham & Company, LLC - Analyst : Hey, good morning. Just two questions. Do you think CDK helped the comp at all in the quarter given more independent dealers kind of rely on their software suite? And then other gross margins. You called out some -- we've seen headwinds, you called out some tail winds. I just want to know the right way to kind of think what the piece is going forward. Okay. On the CDK, look, I don't think it really had any, any material impact. I think a lot of dealers had some more ground, plus if I just look at our comp cadence through the quarter, it got better each month. So August was over July and I think CDK kind of worked itself out through that point. So that's why I just don't think it had a material impact. And then what, what was your second question? On the gross margins. Yeah, it's trending quite positively and then we have the EPP tailwinds but you called out some equipment headwinds. I just want to know kind of the right way to think about it if I heard that, right. Yeah. No, absolutely. So for other margins, look, we are really pleased with our performance and other gross margin, it rose by $36 million this quarter. That's a 33% year-over-year increase really driven by two components, right? Service continues to see year-over-year improvement which we committed to at the beginning of the year. I expect to continue to see that improvement in the back half of the year. It is somewhat governed by sales, given the leverage to leverage nature, but all things being equal. I would expect to see continued improvement year-over-year. And for EPP, we just again, continue to see improvement. I'd expect to see that because it's really margin that we took earlier periods. And so I'd expect to see that increase in Q3, and then in Q4, we're going to start copying over some of the margin testing that we've done the previous year. But nevertheless, we still expect to see some favorability year-over-year. So we're bullish on our other margin performance. In relation to -- in my prepared remarks, I talked about a potentially, there may be up to $10 million impact. That would not be in gross margin, that would be in other income and expense. So a non-gross margin, non SGN impact. And that's really just taking a potentially taking a charge on as we optimize our logistics network. We took a look at the associate side. We got to take a look at the truck side as well. So we need to make sure that we have the right amount of trucks ourselves, that our dedicated partners also have the right amount of trucks. And we expect that there may be a charge off there, but we're still working through that and that would be a onetime hit. So just wanted to call that out for the third quarter or fourth quarter. Perfect. And then just one last one, we've seen strength in the wholesale market, kind of non-seasonal strength and I don't think, used car retailers have much pricing power right now. So how should we think about GPUs from here? Could there be modest GPUs compression around that? Or am I over reading into a month of strength in the wholesale market? You mean, are we thinking that our GPUs would come under strain going forward? Is that the question? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 26, 2024 / 1:00PM, KMX.N - Q2 2025 Carmax Inc Earnings Call Yeah, it's been -- it's cost to use car dealers more to buy cars in the wholesale market. And pricing power is sort of limited right now based on where we're at as far as affordability. Yeah, look, our self-sufficiency when you look at what we're buying through the appraisal lane and through dealers is well over 70%. I think that plays a lot into our ability to get uh supply. I feel great about our own wholesale business. The team's doing a phenomenal job. If I look at -- and this probably speaks to your point. I look at the how many dealers are for every car that continues to improve, which, obviously helps us continue to manage margin, build off the customer as much as possible for their vehicles. So again, I think some of the concerns on the supply side -- again, we just have not because of our self-sufficiency is so high. We just have not had an issue. Okay, perfect. Thank you. Thank you.

Question: Ian Davis - BNP Paribas Exane - Analyst : Hey guys, this is Ian Davis on for Chris, thanks for taking the question. Another one on credit, but hopefully a little bit more high level. What are your peers, online peers has been able to meaningfully expand their credit for penetration at a level that we would estimate to be in the mid-80s versus your low 70s today? So acknowledging some of the conditions in the current environment that you've alluded to previously, what are the constraints that prevent you from getting to those levels today? And maybe what could you tell us about the make-up of the other 30% of customers that aren't procuring financing from Carmax or your lending partners?

Question: Ian Davis - BNP Paribas Exane - Analyst : Got it. Really appreciate the answer from you.

Question: John Healy - Northcoast Research Partners, LLC - Analyst : Thanks for taking my question. Just wanted to ask just one big picture type question. You guys have talked about doing some things on the logistics side which kind of get you to where you want to be. But I haven't heard a lot of talk about the recon side of things and was just curious if you could address that if you're kind of happy with the state and approach to reconditioning and the ability to get. Solid margin out of the business, or you may be rethinking or retooling some things there in the background. Thanks.

Question: John Healy - Northcoast Research Partners, LLC - Analyst : Got it and, and just one minutia question for me, I think a expense, advertising expense was actually down year-over-year for you guys and the costs were up. So just kind of wondering if there was some timing thing there or if you guys are maybe holding back or changing the way you're thinking about ad spending? Thanks. Yeah. No, it was purely timing. If you look at the first half of the year, we're pretty much on course for what we had communicated with the target for the year. And so the first half of the year I expect is going to be the similar to the back half in terms of the per total unit spend. So it was purely some timing in the second quarter. Great. Thank you.

Question: David Whiston - Morningstar Inc. - Analyst : Thanks. Good morning. Wanted to go back to that explanation on the other financing channel. You said that they're very interest rate sensitive consumers but you also said that they're more able to pay cash. So are most pe uh buyers in that bucket? Are they more budget conscious or are they more wealthy or unable to pay cash? Or in other words, are they borrowing more or they just more ca all cash buyers?

Question: David Whiston - Morningstar Inc. - Analyst : Okay. And on the capital allocation, do you see buybacks continuing? or are you feeling more cautious given the declines in credit quality?

Question: David Whiston - Morningstar Inc. - Analyst : Okay. Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 26, 2024 / 1:00PM, KMX.N - Q2 2025 Carmax Inc Earnings Call