Transcript: CarMax Q2 2027 Earnings Conference Call

CarMax (NYSE: KMX ) released second-quarter financial results and hosted an earnings call on Tuesday. Read the complete transcript below. APIs provide real-time access to earnings call transcripts and financial data. Visit to learn more.

Access the full call at Summary CarMax reported strong second-quarter results with used unit comps growing 13% and total units across used and wholesale increasing by 15%. 16. The company introduced its 'Shift into Gear' strategy focused on improving price competitiveness, enhancing customer experience, maximizing value, and operating efficiently. This strategy is yielding positive outcomes across its four strategic pillars.

9 billion, driven by competitive pricing and efficiency gains. The company plans to resume modest share repurchases in the third quarter, reflecting confidence in its strategic direction. The company has made key leadership appointments to drive its strategic initiatives further, including a new Executive Vice President, Chief Digital and Customer Officer, and a Senior Vice President, Strategy. CarMax Auto Finance (CAF) income was up 32% year over year, reflecting a decrease in loan loss provisions and gains from credit spectrum expansion.

Full Transcript OPERATOR Ladies and gentlemen, thank you for standing by. Welcome to the second quarter fiscal year 2027 CarMax earnings release conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session.

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, VP, Investor Relations. Please go ahead. David Lowenstein, VP, Investor Relations Good morning.

Thank you for joining our fiscal 2027 second quarter earnings conference call. I'm here today with Keith Barr, Chief Executive Officer; Enrique Maymora, Executive Vice President and CFO; and Jon Daniels, Executive Vice President, CarMax Auto Finance. Let me remind you our statements today that are not statements of historical fact, including, but not limited to, 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 2026, and our quarterly reports on Form 10-Q previously filed with the SEC.

Please note, in addition to our earnings release, we have also prepared a quarterly investor presentation, and both documents are available on the Investor Relations section of our website. Our commentary today may include non-GAAP financial measures. Reconciliations of these measures to the comparable GAAP measures are available in the Investor Presentation. 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. Keith Barr, Chief Executive Officer Thank you, David. Good morning everyone and thanks for joining us. As I reflect on my first six months at CarMax, I am proud of the progress we have made in strengthening the business.

Last quarter I introduced our strategy for growth built around four pillars that place the customer at the center of everything we do and that are designed to meaningfully improve how we operate at scale and support consistently strong performance. Our strong second quarter results reflect solid execution and the initial benefits we are seeing as we deliver on the strategy. Used unit comps grew 13% driven largely by improved price competitiveness, with total units across used and wholesale growing 15%.

16 supported by robust comp growth, other gross profit expansion through the performance of our Extended Protection Plan products, an increase in CAF contribution, and continued SG&A leverage. I want to thank all of our associates for their hard work which has underpinned these results. Enrique and Jon will speak to our second quarter performance in more detail in a few moments. Our improving performance has been driven by the speed and focus our teams have put into delivering our strategy.

We have named our strategy for growth Shift into Gear and have rolled it out across our corporate offices and entire field organization. Our associates are highly engaged with the steps we are taking to strengthen our core operations, which are designed to deliver robust financial results over the years to come. We have a lot to be proud of and I want to highlight a few examples of the progress we made across each of our four pillars this quarter. While we speak to the pillars individually, like many aspects of our business, they are interconnected and many overlapping benefits exist.

As a reminder, Shift into Gear starts with a great offering. We will give customers every reason to choose CarMax by offering a great car at the right price. During the second quarter, we further strengthened our price competitiveness to support retail sales growth. We did this by continuing to drive efficiencies in reconditioning, dynamically managing GPUs, and then passing savings on to customers.

In addition, we continue to improve our pricing algorithms to ensure we remain more competitive across demand cycles. We did this by incorporating local market insights more granularly and by expanding comparison points across a broader set of vehicles. These enhancements resulted in sharper pricing that resonated well with our customers and supported our sales. Our second pillar is Easy Experience.

We will make it easy to do business with us both online and in our stores. This quarter we enhanced the customer experience to better support the purchase journey from digital to in-person. We scaled AI voice technology to 100% of both inbound store and Customer Experience Center calls, which enables customers to quickly resolve their inquiries through our agentic AI tools or directly connect to the right associate for help. Additionally, we improved our digital experience by redesigning our Car Detail page to make it easier for customers to find and buy the right car for them.

Recent updates include providing greater visibility into our inventory selection, incorporating personalized monthly payments, and communicating next steps in the purchase process more clearly. The enhancements we made this quarter supported sales conversion, and we anticipate further gains over time. Our third pillar is Add Value. This pillar focuses on growing profitability by maximizing value across all aspects of our business.

This will be done by connecting customers with valuable offerings and by capturing a larger portion of customer financing through CAF. During the second quarter, we grew our Extended Protection Plan unit margins materially year over year as we continued to launch our redesigned offering. Additionally, we increased our Tier 2 penetration and recorded a gain on the residual sale related to our 26B non-prime securitization. Our final pillar is Run Lean.

We will unlock efficiencies to enable a great offering, meaningfully improve how we operate at scale, and support strong returns for our shareholders. During the second quarter, as I noted earlier, we continued taking costs out of our reconditioning operations and maintained our approach of passing savings on to customers through more competitive pricing to drive sales. Also, from an SG&A perspective, we took additional steps this quarter to solidify achieving our commitment of $200 million in fiscal year 27 exit-rate savings. To support and advance Shift into Gear, we are strengthening our leadership team.

Today I'm pleased to announce two key appointments that will help us build on the momentum we are seeing as we begin to deliver on our strategic plan. First, effective October 5, Elizabeth Durgans will join CarMax as Executive Vice President, Chief Digital and Customer Officer. In this newly created role, Elizabeth will own and unify the end-to-end customer experience from customer acquisition through vehicle transaction. In this capacity, she will oversee our Marketing, Product, and Edmunds team.

With more than two decades of digital product and customer experience leadership, Elizabeth comes to us from Volkswagen Financial Services where she served as Chief Digital Officer for the North American region. Second, Jeff Campbell, who has been with CarMax for over a decade, joined our senior leadership team in August as Senior Vice President, Strategy. Jeff is leading a newly centralized function designed to accelerate key decisions by bringing together all of our Strategy, Data Science, AI, and Pricing teams. Jeff has held leadership roles at CarMax spanning product, strategy, and transformation.

Elizabeth and Jeff both bring the skills, experience, and focus we need as we build a faster, more connected company that puts the customer at the center of everything we do. Both positions will report directly to me. Our customer promise is to deliver a great car at the right price with an online and in-store experience that our customers love. All the steps we have been taking are in service of that promise and to create confidence for the road ahead for our associates, customers, and investors.

We have a clear strategy, a solid foundation, and a team that is committed to delivering strong unit and earnings growth that enables us to consistently reward our shareholders. Based on our second quarter performance, continued momentum, and improving leverage, we intend to resume share repurchases at a modest level in the third quarter. Now I'd like to turn the call over to Enrique to discuss our second quarter financial performance in more detail. Enrique Maymora, Executive Vice President and CFO Thanks, Keith, and good morning everyone.

We are encouraged by the recent growth across the business as our Shift into Gear strategy is yielding strong financial results, highlighted by the continued improvements in our year-over-year sales and earnings trends. 9 billion, up 19% compared to last year. Across our retail and wholesale channels we sold approximately 388,000 vehicles, up 15% versus the second quarter last year. In our retail business, used unit comps increased 13% and total used unit sales grew by 14%.

Sales performance this quarter was primarily supported by more competitive pricing. As Keith discussed, we continue to realize efficiency gains in cost of sales, and we dynamically manage GPUs, passing those benefits on to customers. Together with the enhancements we are making to our pricing capabilities, these actions supported a significant improvement in our year-over-year sales trend. In addition, we benefited from enhanced FTC regulatory focus that has brought greater transparency to advertised vehicle pricing industry-wide by requiring fees to be included.

Given our longstanding commitment to transparent no-haggle pricing, this brings more clarity to the strength of the CarMax consumer offer by enabling customers to make more direct price comparisons and is a tailwind to our business. Average selling price was $27,623, a year-over-year increase of $1,630 per unit. Wholesale unit sales were up 16% versus last year's second quarter. Average wholesale selling price increased by $145 per unit to $8,036.

We bought approximately 310,000 vehicles during the quarter, up 6% from last year. We purchased approximately 262,000 vehicles from consumers, relatively flat to last year's second quarter. With the support of our Edmunds sales team, we sourced the remaining approximately 48,000 vehicles through dealers, which was up 54% from last year. 64 last year, an 81% increase, a strong positive change in year-over-year trend relative to the preceding four quarters.

Total gross profit was $799 million, up 11% from last year's second quarter. Used retail margin of $479 million increased by 8%, driven by higher volume and partially offset by lower profit per used unit of $2,105, which was down $111 per unit from last year's second quarter. In managing margins more dynamically, we lowered GPUs by less than the full-year $200 per retail unit outlook we provided previously. As we balance demand, margins, and efficiency gains in our reconditioning processes to support sales, we expect FY27 full-year retail margins will be down less than the $200 per unit as compared to FY26.

Wholesale vehicle margin of $138 million was flat to a year ago with higher volume offset by lower gross profit per unit at $858, which was down $135 per unit. Other gross profit was $183 million, an increase of $46 million, or 33% from last year's second quarter. EPP margin dollars were up $27 million, driven by growth in both unit volume and unit margins, which were up $46 per unit in the second quarter. We have been encouraged with the impact from our EPP product redesign focused on providing our customers with more affordable options and from our new wheel, tire, and dent product offering.

We remain on track to drive approximately $35 per unit in incremental EPP margin for the full fiscal year. Service margins increased by $22 million, driven primarily by efficiency gains in cost of sales and leverage from unit volume growth. CarMax Auto Finance income of $136 million was up 32% year over year. John will provide detail on GAAP in a few moments.

6% from the prior year. SG&A leveraged robustly by $157 per total unit, or 9%, to $1,621. SG&A dollars for the second quarter versus last year were mainly impacted by two factors. First, compensation and benefits.

Excluding share-based compensation, expense increased by $11 million. This year-over-year comparison reflects materially lower corporate incentive compensation in the prior year and strong performance this year. Excluding this impact, compensation and benefits would have decreased by over $14 million, primarily reflecting lower field and corporate payroll, partially offset by variable costs associated with higher sales. We expect the year-over-year corporate incentive compensation dynamic to remain similar in the third quarter and to moderate in the fourth quarter.

Second, share-based compensation increased by $7 million, driven by upward movement in our stock price. Regarding SG&A, we remain on track to deliver on our $200 million in identified savings as an FY27 exit rate target, and we continue to drive toward expense efficiencies. As part of these efforts, we recently took additional actions to further streamline our corporate cost structure, which we expect will result in approximately $6 million in severance expense in the third quarter.

Also worth noting, in this quarter's P&L, other income increased by $50 million compared to the same period last year, primarily reflecting unrealized gains on a small number of equity investments. As we have noted previously, we maintain a modest portfolio of investments across the used auto ecosystem. Separately, we are completing the termination of our legacy pension plan and expect it to be materially complete by the end of the fiscal year.

As part of this process, we estimate approximately $50 million in total settlement-related non-cash, non-recurring charges and these will be recorded in other expense, with relatively similar amounts expected to be recognized in the third and fourth quarters of this fiscal year. Our expectation is that the assets in our pension trust will fully fund the settlement of the pension liabilities. Further, the plan's termination will eliminate potential future corporate funding requirements.

Regarding capital structure, as Keith mentioned, with a strong second quarter, a positive outlook on the balance of the year, and traction on our strategy, we intend to restart our share repurchase program in the third quarter. We expect to begin our buybacks at a modest pace below the average quarterly pace prior to our pause. Our objective is to appropriately manage our net leverage to maintain financial flexibility and to efficiently access the capital markets for both CAF and CarMax as a whole, while also returning capital back to our shareholders. 31 billion of repurchase authorization remaining.

I will now turn the call over to John to provide more detail on CarMax Auto Finance and our continuing focus on full credit spectrum expansion. Jon Daniels, Executive Vice President Thanks, Enrique, and good morning, everyone. 6% last year. 8%, up 60 basis points from the prior year.

3% a year ago. We continue to make meaningful progress expanding across the credit spectrum during the quarter.