Carmax Inc (KMX) Q1 2027 Earnings Call Transcript

Please stand by. Your meeting is about to begin. Ladies and gentlemen, thank you for standing by. Welcome to the first quarter fiscal year 2027 CARMAX earnings release conference call. At the time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To register to ask a question at any time, please press star 1 on your telephone. We do ask that you please limit yourself to one question. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Mr. David Lowenstein, Vice President, Investor Relations. Please go first.

Thank you, Bo. Good morning, everyone. Thank you for joining our Fiscal 2027 First Quarter Earnings Conference Call. I'm here today with Keith Barr, President and CEO, Enrique Mayor Mora, Executive Vice President and CFO, and John 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 8K filed with the SEC this morning on Form 10K for fiscal year 2026 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. 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 my time across the entirety of our business while engaging with our associates the opportunities we have to execute better

Our competitive advantage of market share growth is our ability to perform to our cannot get fast. Prices and selection must continue to improve the in-person experience for them as a shipping conversion and preventing us from fully leveraging our unmatched scale. We know exactly what needs to change. Competitiveness, we are incorporating competitive market insights within our pricing algorithms more granularly, with a stronger emphasis on local data points. Additionally, we are expanding comparison points across a broader set of vehicles to sharpen our individual unit pricing. Our second pillar is easy experience. We will make it easy to do business with us through a seamless experience. Industry research, as well as our own, shows that customers want digital convenience combined with an in-store connection. Buying a car is one of the biggest financial decisions someone makes and they have a strong desire to see, touch, and test drive a vehicle that will be part of their daily lives for years to come. Opportunities to better integrate our digital capabilities with our stores to improve conversion and the customer experience. Near-term focus is to simplify communication with customers before they arrive in-store. The readiness to progress is to drive conversion. Stores reach 85% of the U.S. population. This is the largest total to visit our stores, maximizing value across all aspects of road penetration and drive margin expansion over time. On both, the final pillar is run lean to enable a great offering. Initiatives already in flight include reducing reconditioning costs through technology and operational efficiency, while continuing to deliver the high-quality vehicles customers expect. We are also working to enhance our logistics network and are continuing to reduce our SG&A. Our focus is to self-fund to more efficient operations rather than a combination of lower GPUs and efficiency gains. We continue to make progress in this area. In terms of logistics, we are focused on reducing unproductive transfers. With respect to our first quarter, retail unit sales reflect the near-term steps we have been taking across pricing, marketing, and every year basis and against our strongest quarter from fiscal 2026 levered SG&A auto finance penetration protection plan margin, all while improving our year-over-year EPS trend. Enrique and John will speak to our first quarter performance in detail in a few moments. As I previously stated, our objective is clear. Deliver strong unit and earnings growth that enables us to consistently reward our shareholders. It begins with improving our unit growth by enhancing our customer value proposition through greater affordability, broader selection. At the same time, we will strengthen earnings power through an improved digital and in-store experience. We will have a more efficient operating model, deeper customer relationships, and better utilization of our differentiated scale advantages. Strengthen our market position and create long-term value for both our customers and shareholders. We plan to hold a strategic update this fall where we will provide more detail on key initiatives and milestones. I am excited about our strategic plan and and I am confident about the opportunity that lies ahead. Now I'd like to turn it over to Enrique to discuss our first quarter financial performance in more detail.

Good morning everyone. We are encouraged by a performance trajectory as we are showing clear improvements. We have made progress on SG&A reductions, expansion of EPP margins and 22,000 vehicles combined. A retail business of 8.1%. Sales performance this quarter was supported by more competitive vehicle pricing, an increase in strong ROI acquisition marketing and by initial progress toward the four strategic pillars that Keith spoke to earlier. Average selling price was $27,288, a year-over-year increase of $1,168 per unit. Wholesale unit sales were up 8.4% versus last year's first wholesale selling price increased by $405 per unit to $8,364. First quarter net earnings per diluted share was $1.31 versus $1.38 in earnings in the first quarter of last year, a strong positive change in year-over-year trend relative to the total gross profit was $854 million, down 4% from last year's first retail margin of $501 million, decreased by 10%, driven primarily by lower profit per use unit of $2,177, which was down $230 per unit. Volta vehicle margin of $169 million increased by 8% from a year ago with higher volume and relatively flat gross profit per unit of $1,046. Other gross profit was $184 million flat to a year ago. As John noted during our fourth quarter call, we began in the first quarter our national rollout of our EPP product redesign focused on providing our customers with more affordable options and also offering a new wheel, tire, and dent product. EPP unit margins grew slightly in the first quarter, and our full national rollout is expected by the end of this quarter. We are on track to drive approximately $35 per unit in incremental EPP margin in FY27. Total financing income of $140 million was down 1% year-over-year. John will provide detail on CAF in a few moments. On the SG&A front, expenses for the first quarter were $635 million, down 4% from the prior year quarter. SG&A levered by $118 per unit, or 7%, to $1,619. SG&A dollars for the first quarter versus last year were mainly impacted by two factors. Acquisition benefits decreased by $25 million, driven by the actions we have taken to reduce SG&A. In the quarter, both lower CEC and corporate overhead payroll drove the year-over-year favorability. Advertising expense reflecting higher acquisition marketing spend, SG&A reductions were in line with the related full year expectations we set out in the fourth quarter earnings call. As Keith noted, we are on track to deliver on our $200 million savings target, and we continue to drive toward expensive markets above our targeted range. Returning capital to our shareholders remains a critical piece of our value creation plan, and our intent is to do so at the appropriate time. I will now turn the call over to John to provide more detail on CarMax Autofinance and our continuing focus on full credit spectrum.

Thank you, Enrique, and good morning, everyone. During the first quarter, Carmex Auto Finance originated $2.4 billion, resulting in sales penetration of 43.3% net of three-day payoffs. An increase of 150 basis points rate charged to new customers was 11.3%, relatively in line with last year's 15.7% versus 17.7% last year, and third-party tier three was 9% versus 8% a year ago. This significant increase in CAF penetration has been signaled previously and is a direct result of our enhanced funding and underwriting efforts. Of note, CAF was the largest Tier 2 lender during the quarter, further demonstrating the progress we are making in our full-spectrum efforts. CAF income for the quarter was $140 million versus $142 million earned in the same period last year. The loan loss provision was $96 million as compared to $102 million in FY26. The net interest margin on the portfolio was 6.7%, an increase of 20 basis points year-over-year. Once again this quarter, credit losses were in line with our expectations. Our loan loss provision of $96 million largely reflects expected charge-offs on newly-originated loans of $475 million, 5% of managed receivables exclusive of auto loans held for sale. Note, there was a $25 million benefit to this quarter's provision stemming from loans booked classified as held for sale in Q1. Confident in CAP's ability to deliver significant added long-term value to the organization. Our full-spectrum capabilities continue to strengthen, and our evolving ability to deploy a diversified funding approach as needed provides us with tremendous flexibility. Our EPP efforts directly supports our focus on maximizing value on each transaction and will provide future income potential for both CAF and CarMax. Now I'd like to turn the call back over to Keith.

More convinced than ever that this is a business with everything it needs to thrive. Now, removing what has held us back today is not aspirational. The strategic pillars set us up to better leverage our strengths and a great offering. That's why the progress we are already seeing.

Thank you, Mr. Barr. Ladies and gentlemen, at this time, if you would like to ask a question, please press star 1 on your keypad. If you would like to leave the queue at any time, press star 2. And to get to as many questions as possible, again, we ask that you please limit yourself to one question. We go first this morning to Brian Nagel with Oppenheimer.

Morning, Brian.

Nice progress. Congratulations. I want to focus on, I guess, the shorter term in nature, so I apologize, but just on the GPU and sales. So as you talked about your script, we saw GPU down, less than $300, but more than usual here in the fiscal first quarter. So the way I bring the question is maybe two parts. I mean, one, I mean, as you look at the business, you know, how much, right, resetting this GPU, how much of a benefit do you think there was to use unit sales? And then secondarily, you know, as we think about GPU going forward, have you found the sweet spot or should we expect further tweaks here to get to that sweet spot?

Yeah, thanks, Brian. I mean, I think the work that the team kicked off late last year, so impact having the right car at the right price is definitely having a positive impact on our confidence.

Enrique, talk a little bit more detail about you.

In the near term, we've guided that this year requires some margin concessions. On that near term, our goal is to track ahead. And this is really a benefit of managing our business more nimbly, reaching to the business.

Yeah, appreciate all the call.

In terms of other sales drivers on the quarter, like I talked about in my prepared remarks, You know, we did increase our spend on marketing, and that's another area, certainly, that rather than being anchored to a certain marketing investment per quarter based on total units, we're reacting to what we're seeing in the market ahead of us. And so we saw an opportunity to invest in ROHs marketing, and we did.

Thanks again.

Thank you. We go next now to Daniela Hagan with Morgan Stanley.

Thank you, and thanks, team, for taking the question. And similarly, more near-term, since we have the bigger strategic update this fall. Thinking about SG&A, it improved per unit quite nicely. But you have ad spend, as you said, it is up year-on-year. And you've also talked about investing and improving the digital experience. How do you think about balancing the increasing OpEx in those two items relative to those $200 million exit rate savings? And so when you think about on an absolute basis, net-net, how does that compare year-on-year?

Thanks. And I tell you, for the year, it's near-a-year benefit, largely driven by the cost reductions during CEDER. But in terms of the full-year guidance that we provided last quarter, you know, we're not moving off that for the time being. You know, we do expect $1 million.

Thank you.

We go next now to Craig Kinison of Baird.

Hey. Thanks for taking my question. Keith, I think you mentioned too many unproductive transfers. Can you shed more light on that issue?

Sure, I'd be happy to, Craig. You know, when we think about kind of one of the key areas is making that location, so it's a good portion of our business. We transfer over 2 million cars.

We go next now to Rajat Gupta with J.B. Morgan.

Thanks for taking the questions. I just wanted to clarify a comment earlier from the UK on the GPU. It looks like the first quarter came in ahead. Are you suggesting that the full year is probably going to track better than the original $200 decline guidance? I just want to clarify if that was what you had implied. And then, you know, just one more for Keith. Do you think the business has turned a corner in terms of market share recovery? And should we expect the business to, given the actions of taking the price in marketing, are we at a point where the business can, as a company, CarMax, can start to gain share, you know, for the rest of the year and moving forward?

Yes. Well, thanks, Ajit. I think we've definitely turned the corner. You know, when I'm in this company, and I think the team is aligned behind that fact, And our ability to really understand deeply the key drivers of performance and how we can action against those and getting pricing correct to effectively drive to place. So to answer your specific question, we should continue to grow market share on a sustainable basis going forward.

Richard, regarding your question on like full year guidance for DPU, at this point in time, it's early in the year, we know we have a volatile business, right? We're not coming off the full year guidance at this point, but as we know, as we're managing within the quarter, if there are opportunities to give up less margin, we certainly will do so, as you saw in the first quarter, and reconditioning efficiencies, which we are seeing in our operations, which is a great support. Right now, not coming off necessarily guidance. We'll give you an update next quarter, right, for the full year, but still early in the Thanks for all the color, and good luck.

Thank you. We'll go next now to David Bellinger with Mizuho Securities.

Good morning. Thanks for the question. I wanted to touch on GPU again. And two specific comments you made in the prepared remarks about being price competitive across demand cycles and also managing margins more dynamically. So how should we interpret that? Is there the potential for more quarter-to-quarter variability in the GPU? And maybe a strategic change where CarMax is much more proactive in moving up or down GPU targets quarter-to-quarter in order to match the used car cycle. Is there a way where we could see more variability going ahead in the GCU line?

Yeah, well, that's a great question. And, again, you know, pricing was our immediate priority, which started.

Now to Sharon Zaxia with William Blair.

Hi. You know, I guess there were a lot of things underlying the strategic plan, kind of going from becoming more fast and efficient to improving selection to decreasing friction and improving conversion. I guess when I think about all of those, you know, do you have the right people and processes in place? Is there one area where there's going to be a significant investment to get to the other side? And which of these do you view as kind of the lowest thing you prove, the fastest that you can influence quickly, and which kind of maybe is tougher and takes longer to get to the other side?

Yeah, well, great, Sharon. Thank you very much.

To Jeff Lick.

Good morning. Thanks for taking my quick follow-up of Enrique. Enrique, it appears that Bank of America.

Hi, thanks for taking my question here. I just wanted to follow up on the marketing approach, actually, and ask about how much do you think the investments in acquisition marketing supported the sequential comp improvement? Will you continue to lean into this even more going forward? Do you expect sort of advertising as a percent of revenue to trend higher from here? And, you know, how should we? It's all incredibly helpful.

Now to Scott Ciccarelli with Truist.

Good morning, guys. Scott Ciccarelli. So you had a $230 drop in GPU on about a $1,200 increase in ASP. Was the ASP lift a driver of the better-than-expected GPU in a quarter, or was that all from lower reconditioning costs? Just how do we reconcile those bad points? And then secondly, for John, I guess, just a clarification, can you provide any more color around the $25 million benefit to cap this quarter?

Question on the $25 million. Yeah, just to clarify the provision losses for the quarter or if we originated prior to the quarter. This is prior to the quarter.

Got it. And then, Enrique, like my question was really on the GPU side, though. So, like, would the ASD lift and impact, you know, driven by the – excuse me, the GTU impact, was that partly driven by the ASD increase?

Run independently, and the ASDs are going to be run independently.

Okay. Thanks, guys.

We'll connect now to Michael Montani with Evercore ISI.

Yes, hi. Just a question for John, if you could talk a little bit about the underlying health of the consumer that you're seeing from a credit perspective on delinquencies and roll rates, and then if you could discuss how to think about provisioning and NIM really into Fiscal 2Q.

Yeah, great. Appreciate the question, Michael. You know, the fact that, you know, we feel really good about how we are viewing the consumer that's on our books, our receivable base, how we have reserves. I think that was captured in the prepared remarks. This is our third quarter row where we really kind of hit the losses as expected. The consumer overall, I think you can see in the industry, certainly they are continuing to be pressured by overall inflation. If you look at delinquency rates among, excellent handle on that, and that's captured. If I think about provision for us.

NIMS side, do you think that 6.7 is the right rate, or 20-bith improvement year over year, or how should we look at that? Helpful, thank you.

Thank you, we'll be next now to Chris Baudigleri with BNP Paribas.

Hey, I'd like to take the questions. I actually have a similar question to Mike's, but I wanted to ask it anyway. Can you just talk about the drivers for the allowance? So that's stepped up pretty big despite, like, the big cash refund season. Just trying to get a sense, is that – you also mentioned the benefits of transferring loans to help for sale. So trying to understand, like, the step up in the allowance rate, is that just mixed because of you're pushing more to subprime, or is there some level of underlying weakness just given, like, the liquidity rates and subprime that you're provisioning for? I'm trying to understand that.

Yeah, we appreciate the question, Chris. Yeah, that's a tough metric. We provide it, and I think it's important we provide it, as we have over time, but it's absolutely not weakness in the book of business. You know, again, I think we've said our losses are within expectation, and we've reserved accordingly. I think you've got two main things going on this quarter. number one there's absolutely a seasonality component it's tough to describe but if you look at our traditional Q1 all things being equal like there was that will be a step up in overall tier two so then I'm just want

to follow up on Keith's comment on the two million transfers the biggest opportunities are there my napkin map is probably like around a million and a quarter of transfers is from like customer pay wholesale transfers stores without recon centers, like auction-sourced vehicles, so it seems like there are some potentially extraneous transfers. Just kind of curious what you guys see the opportunity as, and maybe just kind of explain, you know, underneath the cardinal a little bit would be helpful.

Yeah, we'll do a deeper dive on that piece of work when we do our strategic update in the fall, but just to give you a little bit of color now, we really need to look at the entirety of our logistics network and really understand what's the most efficient way for us to move vehicles and also have leveraged our own logistic network and also the third parties, too. So we're kicking off a significant piece of work around that through more cars year after Initial work being done.

We'll connect now to John Babcock with Barclays.

Good morning, and thanks for taking my question. I just want to ask, you know, obviously two parts of selling vehicles. I mean, one is getting the price right. The other is obviously having the right vehicle. From that standpoint, I just want to know, what are you doing to ensure that you have the right mix? And also, how is this reflected in the pricing algorithm and how you plan to adjust back on forward?

Great. Yeah, I mean, we have a really great customer.

And if you don't mind, a quick follow-on. Are you able to talk about the impact of fuel prices on your results in the quarter?

We'll go next now to Chris Pierce with Needham.

Oh, hey, good morning. We've talked about pricing, you know, getting the right car, et cetera. I guess, can we just hit on pillar number four, run lean? I'd love to kind of hear what you've found about the recon side of the business how you can lower recon costs or speed up recon time kind of what have you found as you've done a deeper dive there yeah i'm happy to and then if i if i miss something i'll let enrique expand on this because prove upon which enables our teams to effectively find the right

part for the right car at the best price we've got our tire selection tool out there now which has now been integrated into that as well so the marketplace to get the right tire at the best price possible and the more we can do with technology to deeper that in based on finding And what I tell you is that –

I know you opened another standalone center. You've got a couple standalone centers that I think have been open over a year now. Are you seeing a material benefit in terms of new conditioning at these standalone centers in those regions, or is it more about just – I guess you just want to understand as you open more of these what benefit you're seeing now, what you can see in the future?

We'll go next now to Rajat Gupta with J.P. Morgan.

Hey, thanks for taking the question. I just wanted to follow up on, you know, any preview around the analyst day. I know you've talked about, like, moving to full spectrum financing. You have the 50% number out there. Is there any thought process around maybe, you know, taking that number higher and maybe in a more aggressive fashion? Is that something that you would consider as a strategic change? I just wanted to get a thought from that.

Well, I'll make it up at a high level and I'll let John talk about that. I mean, what we're planning to do is a strategic update later on this fall, where we're going to walk through in detail kind of each one of the pillars, how interconnected by themselves are each important, but they are so connected, that's probably one of my biggest learnings here in the first three months is that we go through each pillar and be focusing on the offering, the experience, we'll be talking about.

With regard to the add value pillar, capabilities really shows itself in this quarter's penetration. If you're questioning 50%, that's a number that we've offered as really a midterm objective for us. Certainly, we choose the word midterm very carefully. We think it could be larger than that, but we're really excited in our ability to grow to that level. If you look at what we did from a Tier 2 perspective, we cited we, you know, a year ago we were 10% of the Tier 2 volume. This quarter we are, you know, upwards of 25% of that volume, and we think that will continue to methodically grow over the next, you know, couple of years as we hit that midterm objective. As far as how fast can we go, I think we've really set a good course there. We want to be very thoughtful, making sure we're getting the funding strategies right. We're underwriting it correctly. We don't want to get over our skis there. But yes, I think that's a great midterm objective and beyond that, a table for us.

Understood. Thanks for all the color. Good luck.

Thank you. And ladies and gentlemen, that's all the time we have for questions this morning. Mr. Barr, I'd like to turn things back to you, sir, for any closing comments.

Great. Well, thanks. Thanks, everyone, for joining us and for your continued interest in support of CarMax. Hopefully, you can see the momentum we've built in the business and the strong performance in the quarter, and we expect that momentum to continue throughout the year as we will outperform the broader marketplace. Really excited about the strategy that we have developed as a team.

Thank you, Mr. Barr. Again, ladies and gentlemen, this will conclude the first quarter fiscal year 2027 CarMax earnings release conference call. We'd like to thank you all. much for joining us today and wish you all a great day. Goodbye.