CarMax (KMX) Q2 2025 Earnings Call Transcript

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CarMax (KMX 4.99%)
Q2 2025 Earnings Call
Sep 26, 2024, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the second quarter fiscal-year 2025 CarMax earnings release conference call. [Operator instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, David Lowenstein, AVP, investor relations.

Please go ahead.

David L. Lowenstein — Assistant Vice President, Investor Relations

Thank you, Todd. Good morning, everyone. Thank you for joining our fiscal 2025 second quarter earnings conference call. I’m here today with Bill Nash, our president and CEO; Enrique Mayor-Mora, our executive vice president and CFO; and Jon Daniels, our senior vice president, CarMax Auto Finance operations.

Let me remind you our statements today that are not statements of historical fact, including statements regarding the company’s future business plans, prospects, and financial performance, are forward-looking statements we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our current knowledge, expectations, and assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, we disclaim any intent or obligation to update them. For additional information on important factors and risks that could affect these expectations, please see our Form 8-K filed with the SEC this morning, our annual report on Form 10-K for fiscal-year 2024, and our quarterly results on Form 10-Q previously filed with the SEC.

Should you have any follow-up questions after the call, please feel free to contact our investor relations department at (804) 747-0422 extension 7865. Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow-ups. Bill?

William D. Nash — President and Chief Executive Officer

Great. Thank you, David. Good morning, everyone, and thanks for joining us. We’re pleased with our team’s execution in the second quarter as we achieved positive sales trends, strong margins, cost efficiencies, and EPS growth while managing through industrywide auto loan-loss pressure.

Beyond great execution, our results also reflect the positive impact of delivering associate customer experience enhancements, alongside declining prices, in a more stable environment for vehicle valuations. In the second quarter, we grew retail unit volume year over year. We delivered strong retail and wholesale GPUs and expanded EPP and service gross profit. We bought more vehicles from dealers, achieving a second quarter record.

We maintained stable CAF net interest margin and began to test our new full-spectrum underwriting model. We materially levered SG&A as a percent of gross profit, and we achieved double-digit EPS growth. For the second quarter of FY ’25, our diversified business model delivered total sales of $7 billion, down 1% compared to last year, reflecting lower retail and wholesale prices, partially offset by higher retail volume. In our retail business, total unit sales increased 5.1%, and used unit comps were up 4.3%.

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’s $2,251. Also, unit sales were down 0.3% versus the second quarter last year and improved sequentially from being down 8.3% in the first quarter of this year. Average selling prices declined approximately $1,150 per unit or 13% year over year.

Second quarter wholesale gross profit per unit was $975, in line with $963 a year ago. We bought approximately 300,000 vehicles during the quarter, up 3% from last year. We purchased approximately 269,000 vehicles from consumers with more than half of those buys coming through our online instant appraisal experience. With the support of our Edmond sales team, we sourced the remaining approximately 31,000 vehicles through dealers up 60% from last year.

We continue to see increased adoption of our omnichannel retail experience. For our second quarter online metrics, approximately 15% of retail unit sales were online, up from 14% last year. Approximately 57% of retail unit sales were omni sales this quarter, up from 55% in the prior year. Total revenue from online transactions was approximately 29%, slightly down from last year due to wholesale pricing coming down.

All of our second quarter wholesale auctions and sales were virtual and are considered online transactions which represented 17% of total revenue for the quarter. CarMax Auto Finance, or CAF, delivered income of $116 million, down 14% from the same period last year. CAF results were pressured by an uptick in losses that are being experienced industry wide. In a few minutes, Jon will provide more detail on customer financing, the loan loss provision, CAP contribution, and our progress in becoming a full-credit spectrum lender.

But at this point, I’d like to turn the call over to Enrique, who will share more information on our second quarter financial performance. Enrique?

Enrique Mayor-Mora — Executive Vice President, Chief Financial Officer

Thanks, Bill, and good morning, everyone. As Bill noted, we delivered on multiple fronts in the quarter. Positive retail unit comps robust vehicle margins, material growth, and other gross profit per retail unit, maintaining CAF net interest margin and strong flow-through to the bottom line. Second quarter net earnings per diluted share was $0.85, up 13% versus a year ago.

This was despite the increase in our loan loss provision. Total gross profit was $760 million, up 9% from last year’s second quarter. Used retail margin of $479 million increased by 6% with higher volume and relatively flat per-unit margins. Wholesale vehicle margin of $138 million grew by 1% with margins offsetting a slight decrease in volume.

Other gross profit was $144 million, up 33% from a year ago. This was driven primarily by a combination of EPP and service. EPP increased by $20 million as we continue to benefit from the higher MaxCare margins per contract that we previously rolled out. Service delivered $3 million in margin, up $17 million from last year’s second quarter.

This performance reflected the combined impact of successful efficiency and cost coverage measures and positive sales growth. We expect continued year-over-year improvement for the balance of the year as governed by sales performance given the leverage deleverage nature of service. On the SG&A front, expenses for the second quarter were $611 million, up 4% or $25 million from the prior year’s quarter, but leveraged 4 percentage points, supported by our continued discipline in spend and investment levels. This SG&A leverage would have been even stronger if not for two main factors that impacted the second quarter.

First, total compensation and benefits increased by $16 million. This was primarily driven by our corporate bonus accrual, which was lowered in last year’s second quarter. Second, occupancy costs rose by $7 million, a higher increase in recent trends, driven by the timing of store maintenance-related spend. I also want to point out two noteworthy items.

First, our omnichannel selling model, which includes commissions plus the cost of operating our CECs, continues to be more efficient as we further strengthen our digital progression tools and the optimal use of CEC labor. This quarter, we were more efficient year over year and versus pre-omni in the three key metrics for retail unit, for total unit, and for gross margin dollar. Second, as Bill will discuss further, we continue to evaluate all aspects of our logistics operations to drive efficiencies. This includes equipment and leasing arrangements.

As part of this evaluation, we may incur charges that we estimate will be less than $10 million in the near term that would likely hit other income expense line. These charges will be more than offset by the efficiencies gained in our logistics operations over time. Regarding capital allocation. During the second quarter, we repurchased approximately 1.4 million shares for a total spend of $106 million.

As of the end of the quarter, we had approximately $2.15 billion of repurchase authorization remaining. Now I’d like to turn the call over to Jon.

Jon Daniels — Senior Vice President, CarMax Auto Finance

Thanks, Enrique, and good morning, everyone. During the second quarter, CarMax Auto Finance originated approximately $2.2 billion, resulting in sales penetration of 42%, net of three-day payoffs, as compared to 42.8% during last year’s second quarter. The weighted average contract rate charged to new customers was 11.5%, an increase of 40 basis points from a year ago. Third-party tier 2 penetration in the quarter was 17.7%, down slightly from 18.1% a year ago.

third-party tier 3 volume accounted for 6.7% of sales, compared to the 6.4% seen in last year’s second quarter. The combined third-party penetration of 24.4% remains in line with Q2 FY ’24. CAF income for the quarter was $116 million, down $19 million from the same period last year, predominantly impacted by a year-over-year provision increase of $23 million. Net interest margin for the quarter was 6.1% and in line with last year.

The provision for loan losses for the quarter was $113 million and resulted in a reserve balance of $501 million. This compares to a provision of $90 million in last year’s second quarter. Included in the $113 million provision is a $52 million or roughly 11% increase in our estimate of lifetime losses on existing loans, which we believe reflects industrywide credit challenges. Also included in the provision is $61 million for expected losses on current quarter originations.

The resulting reserve to receivables ratio was 2.82% as compared to 2.79% at the end of Q1 and 3.8% from a year ago. Despite the growth in year-over-year provision, the reserve to receivables percentage only increased 3 basis points which is a result of credit tightening measures we deployed over the course of the last two years and their growing impact on the near $18 billion portfolio. Regarding the broader credit industry, it has been well cited that a number of auto loan consumers are struggling in this inflationary environment, especially those borrowers who originated contracts in 2022 and in 2023 when elevated prices were coupled with high interest rates. To combat these results, lenders have generally tightened underwriting where necessary and have adjusted lifetime loss expectations based on weakening performance.

CAF has, to some degree, experienced similar challenges emerging within the industry, but our customers have largely shown an ability to navigate this added inflationary burden. During this last quarter, we observed additional pressure on the consumer. And as a result, we added to our provision accordingly. Despite the adjustment, these higher ASP originations from 2022 and 2023 remains significantly profitable for CarMax, and it is clear that the material tightening deployed in early 2023 has had a meaningful impact on our vintage-level loss rates.

In addition, we observed a pocket of customers generally concentrated at the lower end of the tier 1 credit spectrum that were of noticeably higher risk which we addressed through the further tightening of our underwriting strategy for cautionary reasons beginning in April 2024. While the loss allowance was previously adjusted for this pocket in the first quarter as a part of our standard loan loss modeling process, during the second quarter, we observed further deterioration which necessitated an additional adjustment on the preexisting receivables. We believe this quarter’s provision adequately captures the performance within the quarter, and the resulting reserve is our best estimate of the remaining lifetime loss for the portfolio. As always, CAF will continue to balance credit risk, driving CarMax sales and capturing its optimal share of highly profitable finance contracts.

Now I will share an update on CAF securitization program and full-spectrum lending initiative. During the month of June, we successfully executed our first non-prime ABS transaction and followed in July with our first higher prime ABS deal. The success of these transactions reaffirms our belief that these complementary programs will provide significant additional funding capacity to support CarMax’s growth while giving us the flexibility to capture a larger piece of the tier 2 and tier 3 landscape. Also, during the second quarter, CAF successfully began testing its new full-spectrum credit scoring models and corresponding strategies across both the tier 1 and tier 2 spaces, and we expect our tier 3 testing of the new model to begin during the third quarter.

Now I’ll turn the call back over to Bill.

William D. Nash — President and Chief Executive Officer

Thank you

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