CarMax, Inc. Q1 FY2026 earnings call

Management Statement and Operational Highlights

• Earnings Growth: Fourth consecutive quarter of positive retail unit comps and double-digit EPS growth. Achieved 42% EPS growth in Q1.
• Volume and Sourcing: Grew retail and wholesale unit volume; bought ~336,000 vehicles (7% year-over-year), with a record dealer volume through Max Offer.
• Digital Capabilities: 80% of retail unit sales digitally supported, Net Promoter Score highest since digital rollout; AI applications improved containment rate (30% improvement), consultant productivity (24% improvement), and response rates.
• SG&A Leverage: SG&A as a percent of gross profit leveraged by 180 basis points; expenses up 3% but driven by volume growth; moving towards omni cost neutrality in fiscal year 2026.
• CAF Performance: Net interest margin increased, continued credit spectrum expansion; held-for-sale loan pool mitigates risk from non-prime receivables.

Segment Performance

• Retail Business: Total unit sales increased 9%, used unit comps up 8.1%, average selling price $26,100 (down ~$400 year-over-year), retail gross profit per used unit a record. Revenue contribution: Substantial as it's the core retail segment.
• Wholesale Business: Unit sales up 1.2%, average selling price down ~$150 to $8,000, gross profit per unit historically strong.
• CarMax Auto Finance (CAF): Originated over $2.3 billion, net interest margin 6.5% (up 30+ basis points year-over-year), loan loss provision $102 million, earmarked a held-for-sale pool of loans ($632 million principal balance) to mitigate risk.

Guidance

• Service Margin: Expected to grow year-over-year, with positive profit contribution for the full year, particularly strong in the first half.
• Marketing Spend: Total unit basis spend flat year-over-year.
• CAF Funding: Plan to execute non-prime securitization, assess additional off-balance sheet funding levers to accelerate penetration.
• Share Repurchases: Doubled share repurchase pace in Q1, with approximately $1.74 billion repurchase authorization remaining.

Risks

• Economic Uncertainty: Impact on credit quality, requiring provisioning for vintages (2022-2023) and economic outlook.
• Tariffs: Influx of self-funded higher credit purchasers affected cash reduction in penetration.
• Non-prime Risk: Seasonal sales and credit quality in Q1 necessitated a larger loan loss provision; need to manage risk from higher profit, higher loss receivables.

Question and Answer

• Q: Nice quarter. Congratulations. Really nice quarter. So I guess the question I want to ask, we've seen a nice acceleration here in your used car business. I know you don't typically talk much about intra-quarter trends or into the following quarter. But I would love to the question I ask is, I mean, how are you viewing sustainability here? You look at this, is it the business coming back? Is there anything unique to this reacceleration? And then a, you know, follow-up to that is, and you showed again in this quarter nice SG&A leverage, but as we're thinking about sales continuing to restrain in here, how should we consider expenses coming back into the model? To what degree expenses need to come back to the model to support those sales?
• A: Sure, Brian. I'll take the first one. Then Enrique, you want to talk about the expenses. As far as, you know, acceleration, look, Brian, we feel really good. I mean, first of just back up a second. We're really pleased that this is the fourth consecutive quarter of comp growth. Obviously, this quarter, we're pleased with the comps. Especially, you know, all three months were positive. As I think about the acceleration and we talked a little bit about this last quarter. I know, I think this month's quarter's performance is driven some by the macro factors, but I also think it's driven some by what we have control. And I would go back to some remarks I made in the last quarterly call, which is, you know, the quarter started off strong, and then we saw an uptick at the end of the quarter when there was speculation about the tariffs. And then I talked about that uptick towards the latter part of March, and then rolling into April, we saw another little uptick. And so April ended up being the strongest month for us. But would just go back to even before we saw that the initial uptick, the business was growing, was doing well. And I think that's a reflection of a lot of the work that we've done, you know, internally, whether it's the inventory management, it's our pricing, it's our savings, it's the omnichannel experience, continue to make that better. So I think this performance is both part market-driven. I think it's also driven by us. So, you know, we feel great about the rest of the year. As I said, at the beginning of the end of last year, that we expect to grow sales and gain share this year, and there's nothing that's changed that outlook. Enrique?
• Q: Good morning, guys. So I guess the question I want to ask, we've seen a nice acceleration here in your used car business. I know you don't typically talk about intra-quarter trends or into the following quarter. But I would love to the question I ask is, I mean, how are you viewing sustainability here? You look at this, is it the business coming back? Is there anything unique to this reacceleration? And then a, you know, follow-up to that is, and you showed again in this quarter nice SG&A leverage, but as we're thinking about sales continuing to restrain in here, how should we consider expenses coming back into the model? To what degree expenses need to come back to the model to support those sales?
• A: Yeah. For SG&A, you know, Brian, we spent the past couple of years being able to lever SG&A, and that's really given all the actions we've taken on focusing on efficiency. And, you know, we're committed to continuing to lever the business. I do think this quarter is really illustrative of the power of the model that we built. So strong comps, and we levered SG&A almost 700 basis points this quarter. And when you look at the increase in SG&A for this quarter, primarily, it was driven by variable cost. But, again, with those variable costs, we were able to lever again, by almost 700 basis points, taking us to the mid-70% in the first quarter. So, you know, we're committed to continue doing that, and you can see the power of the model here.
• Q: Good morning, guys. Just wanted to ask, I guess, a two-parter, but the first part was you made a really interesting comment in the prepared remarks about doing a marketing campaign to kind of aware folks to your multichannel capabilities. So I'm just kind of wondering, can you share some basic levels of awareness kind of prior to that campaign and what exactly it is you're doing differently there.
• A: Yeah. I'll hit the marketing, then I'll pass it to Jon to talk about the subprime question. As far as the marketing goes in kind of awareness there, like, we've had we've built up our awareness on both digital capabilities and the fact that we can do an online sale. So that's been increasing through our marketing campaigns in the past. I think I talked about the last call, you know, we've gone with a new ad agency, seventy-two and Sunny, and we're really pleased with how the relationship is going. And you know, I cited some Cox information, and I did that purposeful because if you look at how customers want to buy, they intend to buy omni. But if you look at how the vast majority of them still buy today, it's all in-store. And I think what happens is consumers they want to buy a certain way, but then they settle. They go into a dealership and they're forced to buy a certain way. And what we want to make sure that we educate the consumers on is that, look, you don't have to settle. You don't have to go for the one way a deal has. You have optionality. So I think the campaign build-out is, like, don't settle. Like, you know, CarMax has the best no matter how you want to buy. And I think that is really gonna start to resonate folks as they're looking for options in the future. Jon, I'll turn over to you on the subprime.
• Q: Hey, guys. Thanks for taking the question. So first off, congrats on the mental agility around the subprime funding. I think it's an interesting structure. Just have one clarifying question on that, but just a broader question on credit. What percentage of new originations were classified as held for sale? Were those part of the $26 million you cited or would that be incremental? And then my broader question is just, obviously, you elaborate on the, you know, the allowance stepping up and some of the factors that drove that. Much of this is, like, the macro environment with student loan lending? Like, are you seeing, like, as the credit scores have dropped and credit performance in the broader economy has worsened a bit, is that impacting capital? Is that measurable? Like what percentage of your customers have student loan debt? Just curious if that's having an impact at all.
• A: Sure. Yeah. Appreciate the questions, Chris. Sorry. Take them in order. So, you know, how do we think about the provision takedown from the held for sale? How much was it? From new originations versus the fourth quarter or previous originations we had on the books? That were already in the reserve. I'll just tell you the majority of it was from receivables that were already in the reserve. So, yes, certainly, some of it from Q1, but the majority, were already in the reserve. So it handles that one. Second question, give a little more flavor around what we're seeing in the step up in the reserve, the 2.76%. What we're seeing in performance and as it relates to student loans. Yeah. As I said in the prepared remarks, I think, you know, the twenty-two and twenty-three vintages certainly were, ones that performed more unfavorably in the quarter. We think we have appropriately reserved and adjusted accordingly. I did say in our prepared remarks, actually, 2024, we feel real good about. We're kind of on the mark there, you know, a year in on that stuff. A year plus in on that stuff. Regarding student loans, you know, let's give you some statistics there. In the cap portfolio, about 30% of that we can see the credit bureaus. 30% of our customers have student loans. We've been watching them as you might imagine, for, you know, for years now. With the thought of our payment's gonna be made, what forgiveness is done for those perform and how they performed. Ultimately, what I'll tell you is we have not seen a material change in those customers in the recent year as compared to what we've normally seen. So we're watching this very, very closely as payments are expected as it may impact their credit report, etcetera. We would hope that auto still remains top of wallet share for them. But we'll watch them closely, but no change today.