CARMAX INC Q2 FY2025 earnings call

• Team execution in the second quarter was strong with positive sales trends, strong margins, cost efficiencies, and EPS growth while managing industry-wide auto loan loss pressure.
• Completed nationwide rollout of new order processing system across stores and customer experience centers, and testing new knowledge management system leveraging generative AI in CECs.
• Launched EV Hub on carmax.com, and made enhancements in finance-based shopping.
• Optimized logistics network by centralizing home delivery, appraisal pickup, and Max offer moves by market, and continuing to evaluate logistics operations for efficiencies.
• Omnichannel selling model continues to be more efficient with progress in digital progression tools.

For the second quarter of FY ‘25, CarMax's diversified business model had total sales of $7 billion, down 1% year-over-year. In retail business, total unit sales increased 5.1% with used unit comps up 4.3%, but average selling price declined approximately $1,250 per unit or 5% year-over-year. Second quarter retail gross profit per used unit was $2,269, consistent with last year. Unit sales in wholesale business were down 0.3% year-over-year, but average selling price declined approximately $1,150 per unit or 13% year-over-year. Second quarter wholesale gross profit per unit was $975, in line with last year. CarMax bought approximately 300,000 vehicles during the quarter, up 3% from last year. CarMax Auto Finance (CAF) delivered income of $116 million, down 14% from the same period last year, pressured by industry-wide loss uptick.

Management feels good about sales in the second-half of the year assuming current market conditions continue. Continuing to test the new full spectrum underwriting model.

• Industry-wide auto loan loss pressure. - Credit risk with some customers facing challenges and need for continued monitoring and tightening of underwriting strategy.

Q: Seth Basham asked about how unit comps are trending quarter-to-date?

A: Bill Nash said comp cadence for the quarter sequentially got better, with September trending positive for the quarter in line with the second quarter but a little bit softer, noting day of week headwinds.

Q: Sharon Zackfia asked about the profitability of CAF and when it can start to grow again?

A: Jon Daniels said NIM has been managed well, and provision is a function of origination mix and performance, hoping for tailwinds from rate trends and better provision in future quarters.

Q: John Murphy asked about sourcing from dealers and what changed?

A: Bill Nash said the shortage of late model vehicles has bottomed out, and Edmunds team has done a great job with more dealers active on instant appraisal offers and better access to leases.

Q: Brian Nagel asked about underpins in improving used car unit comps and the loan loss provision?

A: Bill Nash said it's a combination of internal execution, price declines, and stable pricing environment; Jon Daniels said loan loss provision adjustments are based on portfolio performance and industry trends.

Q: Rajat Gupta asked about September comms and advertising spending?

A: Bill Nash said September sales trend is positive; Enrique Mayor-Mora said marketing spend is in line with expectations for the year with quarter-to-quarter variation.

Q: David Bellinger asked about contingencies for potential downshift in volumes and digital progression tools?

A: Jon Daniels said industry tightening and consumer affordability issues are factors; Bill Nash said digital progression tools rolled out everywhere and improve customer experience.

Q: Craig Kennison asked about online sales percentage and unit profitability?

A: Bill Nash said 15% online sales with more focus on omni-channel, and Enrique Mayor-Mora said omni-selling model is more efficient and should continue to accelerate.

Q: Scot Ciccarelli asked about provision change and subprime pockets?

A: Jon Daniels said provision is a function of origination mix and performance, with Tier 1 having lower loss range and Tier 3 having higher loss level.

Q: Chris Pierce asked about CDK impact and other gross margins?

A: Bill Nash said CDK had no material impact; Enrique Mayor-Mora said other gross margins are expected to continue improving with potential $10 million impact from logistics optimization.

Q: Ian Davis asked about credit penetration constraints and non-procuring finance customers?

A: Jon Daniels said CAF aims to be a full spectrum lender, with non-procuring finance customers being rate-sensitive and cash-conscious, and penetration expected to grow over time.

Q: John Healy asked about reconditioning and ad expense?

A: Bill Nash said reconditioning is a focus with ongoing improvements; Enrique Mayor-Mora said ad expense was purely timing with first half in line with expectations.

Q: David Whiston asked about financing channel consumers and capital allocation?

A: Jon Daniels said higher-end consumers are rate-sensitive and cash buyers; Enrique Mayor-Mora said buybacks are on the pace communicated for the balance of the year