CarMax(KMX)2024-09-26 15:33Financial Data and Key Metrics - Total sales for Q2 FY25 were $7 billion, down 1% YoY, driven by lower retail and wholesale prices, partially offset by higher retail volume [5] - Retail unit sales increased 5.1% YoY, with used unit comps up 4.3% [5] - Average selling price (ASP) declined by $1,250 per unit or 5% YoY [5] - Retail gross profit per used unit was $2,269, consistent with $2,251 in the prior year [6] - Wholesale gross profit per unit was $975, in line with $963 a year ago [6] - CarMax Auto Finance (CAF) income was $116 million, down 14% YoY, impacted by industry-wide loan loss pressures [7] - Net earnings per diluted share were $0.85, up 13% YoY [8] - Total gross profit was $760 million, up 9% YoY [8] Business Line Performance - Retail business saw a 5.1% increase in total unit sales, with used unit comps up 4.3% [5] - Wholesale business purchased approximately 300,000 vehicles, up 3% YoY, with 269,000 from consumers and 31,000 from dealers [6] - Online retail unit sales accounted for 15% of total retail unit sales, up from 14% last year [7] - Omni-sales accounted for 57% of retail unit sales, up from 55% in the prior year [7] - CAF originated approximately $2.2 billion in loans, with a sales penetration of 42% [12] Market Performance - Retail unit sales improved sequentially from an 8.3% decline in Q1 to a 0.3% decline in Q2 [6] - Online transactions accounted for 29% of total revenue, slightly down from last year due to lower wholesale pricing [7] - Wholesale auctions and sales were 100% virtual, representing 17% of total revenue [7] Strategy and Industry Competition - The company is testing a new full spectrum underwriting model to expand its lending capabilities [5][16] - CAF successfully executed its first non-prime ABS transaction and a higher prime ABS deal, enhancing funding capacity [16] - The company is focusing on driving down the cost of goods sold through logistics and reconditioning efficiencies [20] - CarMax launched an EV Hub on its website to address consumer questions about electric vehicles [20] Management Commentary on Operating Environment and Future Outlook - Management noted industry-wide auto loan loss pressures but remains optimistic about future sales and earnings growth [4][21] - The company expects continued year-over-year improvement in service margins, driven by efficiency measures and sales growth [9] - Management highlighted the importance of the omnichannel experience and digital tools in driving customer satisfaction and operational efficiency [19][20] Other Important Information - The company repurchased 1.4 million shares for $106 million during the quarter, with $2.15 billion remaining in the repurchase authorization [11] - SG&A expenses increased by 4% YoY to $611 million, primarily due to higher compensation and occupancy costs [9] - The company expects to incur less than $10 million in charges related to logistics optimization, which will be offset by long-term efficiencies [10] Q&A Session Summary Question: Update on unit comps and market view [22] - Unit comps are trending positive for Q3, in line with Q2, but slightly softer due to fewer weekend days in September [22] - Management is cautious about credit headwinds but remains committed to full spectrum lending, with Tier 2 and Tier 3 testing underway [23][24] Question: CAF profitability and loan loss provisions [28] - CAF profitability is impacted by higher loan losses, but management expects funding cost reductions to provide a tailwind [29] - The $52 million provision adjustment for existing loans was outsized compared to previous quarters, but management believes the reserve adequately captures future losses [31] Question: Credit trends and underwriting adjustments [32] - Management tightened underwriting in April 2024 and is monitoring portfolio performance closely, with no further tightening expected in the near term [33][36] Question: Vehicle sourcing and dealer relationships [37] - The company sourced 31,000 vehicles from dealers, up 60% YoY, driven by the Edmunds sales team and increased dealer participation [38] Question: Improving used car unit comps and loan loss provisions [41] - Retail unit comps improved due to internal efficiencies, declining prices, and a stable pricing environment [42][43] - The higher loan loss provision reflects both portfolio performance and broader industry trends [44] Question: September comps and advertising spend [46] - September comps are tracking positive for the quarter, with advertising spend in line with annual targets despite quarterly variations [46][49] Question: Credit environment and Tier 3 penetration [50] - Tier 3 penetration is down to 7%, primarily due to affordability challenges rather than underwriting tightening [51] Question: Digital progression tools and conversion rates [52] - The new order processing system has been rolled out nationwide, improving the customer and associate experience, though early conversion rate impacts are still being assessed [53] Question: Online sales and unit profitability [55] - Online sales accounted for 15% of total retail unit sales, with omni-sales up to 57% [55] - The company is more efficient in its omni-selling model compared to pre-omni metrics [56] Question: Wholesale market and GPU trends [72] - The company maintains strong self-sufficiency in vehicle sourcing, with over 70% of vehicles bought through appraisal lanes and dealers, helping to manage margins [73] Question: Credit penetration and third-party financing [75] - CAF aims to be a full spectrum lender, with current penetration at 42%, and expects to grow penetration over time while maintaining a diverse lender base [75][76] Question: Reconditioning and logistics efficiency [82] - The company is focused on improving reconditioning efficiency through various initiatives, including better part utilization and capacity management [83] Question: Advertising expense and comps [85] - Advertising expense was down YoY due to timing, with full-year spending expected to align with targets [85] Question: Other financing channel and capital allocation [88] - The other financing channel primarily serves rate-sensitive, higher-end consumers, many of whom pay in cash [88] - Share repurchases are expected to continue at the current pace [89]