CarMax (NYSE:KMX) Q3 2026 Earnings Call December 18, 2025 09:00 AM ET Company ParticipantsJon Daniels - EVP of CarMax Auto FinanceTom Folliard - Interim Executive Chair of the BoardEnrique Mayor-Mora - EVP and CFOMichael Montani - Managing DirectorSharon Zackfia - Group Head of ConsumerDavid Lowenstein - VP of Investor RelationsDaniela Haigian - VP of Equity ResearchDavid McCreight - Interim President and CEOJeff Lick - Managing DirectorConference Call ParticipantsJohn Babcock - Equity AnalystBrian Nagel - ...

Financial Data and Key Metrics Changes - Total sales for the third quarter were $5.8 billion, down 6.9% year-over-year, reflecting lower volume [15] - Retail unit sales declined by 8%, with used unit comps down 9% [15] - Average selling price increased to $26,400, a year-over-year increase of $230 per unit [15] - Net earnings per diluted share were $0.43, down from $0.81 a year ago, impacted by $0.08 of restructuring expenses [16] - Total gross profit was $590 million, down 13% from the previous year [16] - SG&A expenses were $581 million, up 1% from the prior year [17] Business Line Data and Key Metrics Changes - Used retail margin decreased by 11% to $379 million, driven by lower volume and profit per used unit of $2,235 [16] - Wholesale vehicle margin decreased by 17% to $115 million, with gross profit per unit down approximately $120 year-over-year [17] - CarMax Auto Finance (CAF) income was $175 million, up 9% over last year [17] Market Data and Key Metrics Changes - The company purchased approximately 238,000 vehicles during the quarter, down 12% from last year [16] - The average wholesale selling price declined by $40 per unit to $8,100 [15] Company Strategy and Development Direction - The company is focused on narrowing the price gap with the broader marketplace by lowering margins and increasing marketing spend [10][12] - A renewed emphasis on customer experience and digital selling capabilities is being prioritized to drive conversion and improve customer satisfaction [11][25] - The company aims to reduce SG&A expenses by at least $150 million by the end of fiscal year 2027 [18] Management's Comments on Operating Environment and Future Outlook - Management acknowledges that recent results have been unacceptable and emphasizes the need for immediate change [5][10] - There is optimism that immediate pricing and marketing actions will improve sales performance, although they may pressure earnings in the near term [13][19] - The company believes it has the necessary attributes for a successful turnaround and is committed to strengthening performance [14][25] Other Important Information - The board is actively searching for a permanent CEO who can drive sales and maximize the benefits of the omnichannel experience [6][7] - The company is committed to leveraging technological platforms and process enhancements to reduce costs [12] Q&A Session Summary Question: Can you provide insight on the GPU reset expected in February? - Management indicated that margin reductions will be meaningful and are optimistic about improving retail sales trends [30] Question: Are there customer cohorts where CarMax has become less competitive? - Management noted a loss of volume in the higher FICO segments and is focused on recapturing that market [31][32] Question: What is the baseline SG&A for the $150 million reduction goal? - The baseline SG&A is approximately $2.5 billion, with reductions compared to last year [47][48] Question: What is the strategy for reducing COGS? - The company is focused on COGS reduction through initiatives like regional reconditioning centers and improved parts selection tools [79][80] Question: What is the outlook for service margins? - Service margins are under pressure, with expectations of being slightly profitable or unprofitable for the full year depending on sales performance [93][94]

Financial Data and Key Metrics Changes - Net sales for Q3 2025 were approximately $1.38 billion, up 3% year-over-year, with a comparable store sales (comp) decrease of 0.9% [25][28] - Gross margin increased to 35.7%, up 170 basis points from the previous year, driven by merchandise margin growth and improved freight costs [9][26] - Operating income grew 9.7% to approximately $100 million, and diluted earnings per share increased over 14% to $1.05 [28][30] Business Line Data and Key Metrics Changes - Sports and recreation division saw a 6% increase, driven by growth in baseball, outdoor cooking, fitness equipment, and bicycles [9] - Apparel sales grew 3%, supported by strong performance from national brands like Nike and Jordan, as well as private brands [9] - Footwear business grew 2%, with strong sales from performance running brands [10] Market Data and Key Metrics Changes - The top two income quintiles (households earning over $100,000) now represent approximately 40% of sales, with traffic from these cohorts growing in the high single digits [12] - The company continues to see market share growth across key categories, including apparel, footwear, and sporting goods [13] - Firearms market share has grown for over 18 consecutive months, despite softness in the ammunition segment [13] Company Strategy and Development Direction - The company plans to open 20-25 new stores in 2026, focusing on legacy and existing markets [16][15] - E-commerce sales grew 22% in Q3, with a penetration rate of 10.4% of total sales, indicating a strong omnichannel strategy [16][25] - The company is investing in technology and talent to enhance the customer experience and drive growth in the dot-com business [17][18] Management's Comments on Operating Environment and Future Outlook - Management noted that consumers are shopping episodically and seeking value due to rising prices [4] - The company is optimistic about the upcoming holiday season, with strong promotional pricing and inventory management strategies in place [9][31] - Management expects trends of upper-income consumers trading into Academy to continue, despite challenges in the lower-income segments [50][51] Other Important Information - Free cash flow was negative $9 million due to tariff payments, but the company maintains strong liquidity with $290 million in cash [29][30] - The company has over $530 million remaining on its share repurchase authorization and plans to resume repurchases in Q4 [30] Q&A Session Summary Question: Can you discuss the average ticket increase and pricing dynamics? - Management indicated that average unit retails (AUR) were up mid- to high-single digits, while units per transaction (UPT) were down mid-single digits, reflecting a trade-off between AUR and unit sales [34][35] Question: What is the contribution of the Jordan brand at the store level? - The Jordan and Nike brands combined saw high single-digit comp growth, with plans to roll out more apparel and footwear in spring [42] Question: How does the company view the health of its customer base? - The company is seeing continued growth in upper-income consumers, while lower-income consumers are pulling back, but the overall customer base is becoming healthier [50][51] Question: How did Black Friday promotions compare to last year? - Promotions were consistent with last year, and the company is monitoring customer response to promotions as a key factor for the holiday season [65] Question: What are the potential pressure points for Q4 gross margin? - The health of the consumer and their response to promotions will be critical for Q4 gross margin outlook [61]

Financial Data and Key Metrics Changes - The company reported significant margin expansion of 700 basis points from 2022 to 2024, achieving historical highs in its current margin profile [12] - Earnings per share (EPS) growth was the strongest in six years, indicating improved financial performance [13] - The balance sheet is strong, with total assets reported at $2.4 billion, reflecting a significant increase [13] Business Line Data and Key Metrics Changes - The company has achieved six consecutive quarters of comparable sales growth, indicating a positive trend in performance [11][33] - The flagship brand Gap has been reinvigorated with successful marketing campaigns, contributing to the overall growth [28][30] - Old Navy is positioned as the number one specialty apparel retailer in the country, with a strong focus on the active category [40] Market Data and Key Metrics Changes - The company is focusing on three strategic categories: active, denim, and kids and baby, which are expected to drive future growth [17][46] - The beauty and accessories categories are identified as high-potential areas for growth, with plans to invest and expand in these segments [51][56] Company Strategy and Development Direction - The company aims to become a high-performing house of iconic brands, focusing on brand reinvigoration and operational rigor [6][10] - The transformation journey includes a phased approach, moving from fixing fundamentals to building momentum and accelerating growth [14][50] - The company is enhancing the consumer experience through new store formats and improved merchandising strategies [59][63] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to continue comping the comp, driven by the execution of their playbook and brand relevance [21][23] - The company is optimistic about its market share leadership across categories and the potential for further growth in e-commerce [68][69] - Management emphasized the importance of consistency and accountability in delivering on promises to consumers and investors [15][70] Other Important Information - The company has closed over 350 underperforming stores as part of its fleet rationalization strategy, positioning itself for future growth [60] - The company is actively testing and rolling out new store formats that enhance the shopping experience and align with brand narratives [62][64] Q&A Session Summary Question: What opportunities can fuel continued growth in the business? - Management highlighted the importance of executing the playbook consistently to drive relevance and emotional connectivity with consumers [15][21] Question: What is the approach and strategy for category leadership? - The company is focusing on specific categories like active, denim, and kids and baby, where it believes it has a rightful place to win [17][39] Question: What are the high potential categories for long-term growth? - Management identified beauty and accessories as key areas for investment and growth, leveraging existing brand recognition [51][56]

Financial Data and Key Metrics Changes - The company reported significant margin expansion of 700 basis points from 2022 to 2024, achieving historical highs in its current margin profile [12] - Earnings per share (EPS) growth was the strongest in six years, indicating improved financial performance [13] - The balance sheet is strong, with total assets reported at $2.4 billion, reflecting a significant increase [13] Business Line Data and Key Metrics Changes - The company has experienced six consecutive quarters of comparable sales growth, outperforming the market [11] - The flagship brand Gap has been reinvigorated, with successful campaigns driving relevance and emotional connectivity with consumers [30][31] - Old Navy is recognized as the number one specialty apparel retailer in the country, with a strong performance in the active category [41] Market Data and Key Metrics Changes - The company is focusing on three strategic categories: active, denim, and kids and baby, which are expected to drive growth [17] - The beauty and accessories categories are identified as high-potential areas for future growth, with the beauty market expected to surpass $100 billion in 2025 [54][56] Company Strategy and Development Direction - The company aims to become a high-performing house of iconic brands, focusing on brand reinvigoration and operational rigor [6][10] - The transformation journey includes a phased approach: fixing fundamentals, building momentum, and accelerating growth [14][53] - The company is enhancing the consumer experience through new store formats and improved merchandising strategies [62][66] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to continue comping the comp, driven by the execution of their playbook [22][24] - The company is optimistic about its market share leadership across categories and the potential for further growth in e-commerce [71][72] - Management emphasized the importance of consistency and accountability in achieving their strategic goals [15][73] Other Important Information - The company has closed over 350 underperforming stores as part of its fleet rationalization strategy, positioning itself for future growth [61][62] - The company is actively investing in its omni-channel experience to enhance consumer engagement [18][19] Q&A Session Summary Question: What opportunities can fuel continued growth in the business? - Management highlighted the importance of executing the playbook consistently to drive relevance and emotional connectivity with consumers [15][16] Question: What gives confidence that brands can continue to comp the comp going forward? - Management stated that relentless repetition and focus within the playbook framework provide confidence for future growth [22][24] Question: Talk about the approach and strategy for category leadership. - Management discussed the strategic focus on active, denim, and kids and baby categories, emphasizing innovation and consumer engagement [40][44][47] Question: What high-potential categories can drive long-term growth? - Management identified beauty and accessories as key areas for growth, supported by consumer insights and market trends [53][56]

Financial Data and Key Metrics Changes - In Q2 2025, net sales decreased by 2.3% with comparable sales down 1.4% due to 25 net store closures in 2024 and an additional 10 closures year to date, bringing the U.S. store count to 1,388 [23][24] - Gross margin expanded by over 120 basis points to 39.3%, driven by a disciplined approach to average unit cost and retail pricing [25] - SG&A expenses decreased by $36 million year over year, leveraging more than 150 basis points, contributing to a $41 million increase in operating profit to $43 million [26][27] - Adjusted EBITDA increased by $30 million to $114 million, expanding nearly 220 basis points to 7.6% as a percentage of sales [27] Business Line Data and Key Metrics Changes - The company is focusing on improving store performance, which has shown positive results, while e-commerce is being retooled for profitability [61] - The introduction of new product categories aimed at humans has been initiated, responding to customer interest in pet-themed products [14] Market Data and Key Metrics Changes - The pet industry is currently showing flat growth, but the company is maintaining its market share while improving profitability [80] - Customer sentiment has improved, as indicated by sequential increases in the Net Promoter Score (NPS) since the end of the previous year [10] Company Strategy and Development Direction - The company is in Phase two of its transformation, focusing on operational improvements and preparing for Phase three, which aims for profitable sales growth [19] - The North Star project is being implemented to enhance customer experience, service delivery, merchandising differentiation, and omnichannel capabilities [56] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to deliver improvements and raised the adjusted EBITDA outlook for 2025 to between $385 million and $395 million, an increase of roughly 16% at the midpoint [29] - The company is preparing for potential tariff impacts in the second half of the year, which are expected to be more significant [43] Other Important Information - Free cash flow for the quarter was over $50 million, with a cash balance of $190 million and total liquidity of $684 million [28] - The company is committed to a disciplined promotional strategy and improving customer experience as part of its growth initiatives [19][30] Q&A Session Summary Question: When can the firm be held accountable for generating a positive comp? - Management indicated that results will likely begin to show up in 2026, with the third quarter being the hardest compare of the year [33] Question: Were gross margin gains primarily from online promotions? - Management noted that the focus has been on improving store performance, which represents the majority of sales, while e-commerce is being cleaned up for profitability [34][36] Question: How did gross margin perform relative to expectations? - Management expressed satisfaction with the gross margin expansion, which was driven by a disciplined approach to pricing and promotional strategies [42] Question: What updates can be provided on planogram resets? - Management confirmed that planogram resets have been completed successfully, improving on-shelf availability and store productivity [50] Question: What is the status of the e-commerce retooling? - Management stated that the e-commerce channel is more profitable now, and ongoing improvements are being made to enhance the customer experience [61] Question: What is behind the increase in NPS scores? - Management attributed the increase to various improvements in store experience and customer engagement efforts [64] Question: What are the biggest remaining execution gaps? - Management indicated that the focus is now on investing back into the business and continuing to build on the progress made [73]

Financial Data and Key Metrics Changes - In 2024, the company reported total sales of $83.7 billion, a decrease of 2.7% on a comparable basis [14] - Adjusted operating margin was 12.3%, and adjusted diluted earnings per share were $11.99 [14] - The company returned $6.5 billion to shareholders through dividends and share repurchases [15] - A 4% increase in quarterly dividend was approved, raising it from $1.15 to $1.20 per share [15] Business Line Data and Key Metrics Changes - Pro penetration increased to approximately 30% in 2024, up from 19% in 2019, with mid-single-digit comparable sales growth for Pro [16][17] - The redesigned Pro loyalty program, My Lowe's Pro Rewards, was launched to incentivize repeat purchases among small to medium Pros [17] - The first online product marketplace in home improvement was launched in December 2024, expanding product offerings without carrying inventory [19] Market Data and Key Metrics Changes - The acquisition of Artisan Design Group (ADG) aims to serve a larger pro customer base in a $50 billion market, addressing the need for 18 million homes in the U.S. by 2033 [22][23] Company Strategy and Development Direction - The company refined its total home strategy in 2025 to align with home improvement demand drivers [15] - Key pillars of the strategy include driving pro penetration, accelerating online sales, expanding home services, creating a loyalty ecosystem, and increasing space productivity [15] - The company is leveraging generative AI to enhance customer and associate experiences, improve forecasting, sourcing, and inventory planning [21][35] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenging macroeconomic environment due to inflation and higher interest rates but expressed confidence in navigating market uncertainties [14][15] - The leadership team emphasized the importance of diversity and inclusion as a core value, contributing to the company's success [24][29] Other Important Information - The company has made strategic investments totaling over $4 billion in wages and benefits for frontline associates since 2018 [30] - The company sources approximately 60% of its purchases from within the U.S., equating to $30 billion in annual spend [33][34] Q&A Session Summary Question: Why did you scale back DEI because of pressure from conservative activists? - The company stated that no changes were made to its diversity approach due to activist pressure, emphasizing its commitment to diversity as core to its values [28][29] Question: Will you be increasing wages to be more competitive? - The company frequently monitors and adjusts wages to remain competitive, having invested over $4 billion in wages and benefits since 2018 [30] Question: What are you doing to improve your management of inventory? - The company is pleased with its inventory management, leveraging technology and AI-driven solutions for better replenishment and demand planning [31] Question: How do you plan to control your cost of goods given increased tariffs? - The company has diversified its global sourcing and currently sources products from over 100 countries, with 60% of purchases made in the U.S. [33][34] Question: What is the board's plan for downstream profits from AI? - The company aims to enhance customer and associate experiences through AI, which is expected to deliver improved profits [35] Question: What do you intend to do to help stores run more efficiently? - The company is committed to investing in technology and process improvements to enhance store operations and customer service [36][38]