David Lowenstein, during the fiscal 2025 second-quarter earnings call, introduces the key company executives present and states that forward-looking statements made during the call are based on current knowledge and subject to risks. He points to relevant SEC filings for more information and provides contact details for follow-up questions. Bill Nash then thanks David and the attendees, expressing satisfaction with the company's positive performance in sales, margins, cost efficiencies, and EPS growth despite challenges in auto loan losses.

The second paragraph details the company's performance in the second quarter. Highlights include year-over-year growth in retail unit volume, strong retail and wholesale gross profit per unit (GPU), and substantial gains in EPP and service gross profit. They achieved record vehicle acquisitions from dealers and maintained a stable CAF net interest margin while testing a new underwriting model. Despite a 1% drop in total sales to $7 billion due to lower retail and wholesale prices, higher retail volume partially offset this decline. Retail unit sales increased by 5.1% with a 4.3% rise in used unit comps, although average selling prices dropped by $1,250 per unit. Wholesale unit sales fell by 0.3%, but sequential improvement was noted. The average selling price for wholesale units declined by $1,150 per unit, and the gross profit per unit remained stable at around $975. They acquired roughly 300,000 vehicles, with a significant portion sourced through dealers and online instant appraisals. The company also noted increased adoption of its omni-channel retail experience.

In the second quarter, CarMax saw a slight increase in online retail unit sales to 15% and a rise in omni-sales to 57%. Despite a dip in total online revenue to 29% due to lower wholesale pricing, wholesale auctions and sales, all conducted online, made up 17% of total revenue. CarMax Auto Finance (CAF) reported a decline in income to $116 million, down 14%, attributed to industry-wide losses. Additionally, CarMax achieved positive retail unit comparisons, robust vehicle margins, and significant growth in other gross profits. Net earnings per diluted share rose by 13% to $0.85, despite a higher loan loss provision. Overall, total gross profit increased by 9% to $760 million, with used retail and wholesale vehicle margins slightly up, and other gross profit notably growing by 33% due to extended protection plans (EPP) and services.

EPP increased by $20 million due to higher max care margins. Service generated $3 million in margin, up $17 million from the previous year's second quarter due to efficiency improvements and sales growth. SG&A expenses rose 4% to $611 million, partially offset by disciplined spending and investments. Compensation and benefits increased by $16 million, and occupancy costs rose by $7 million. The omnichannel selling model improved in efficiency across key metrics. Additionally, ongoing evaluations of logistics operations may lead to charges under $10 million impacting other income expense.

During the second quarter, CarMax Auto Finance originated approximately $2.2 billion, with a sales penetration of 42% net of three-day payoffs, slightly down from 42.8% last year. The weighted average contract rate for new customers rose to 11.5%. Third-party Tier 2 penetration was 17.7%, and Tier 3 volume was 6.7%, both showing minor changes from the previous year. The combined third-party penetration remained in line with the second quarter of fiscal year '24. CAF's income was $116 million, down $19 million year-over-year, partly due to a $23 million increase in provisions. The net interest margin remained stable at 6.1%. The provision for loan losses was $113 million, leading to a reserve balance of $501 million. This includes a $52 million increase in estimated lifetime losses on existing loans due to industry credit challenges and $61 million for expected losses on current quarter originations. The reserve to receivables ratio was 2.82%, slightly up from 2.79% in Q1 but down from 3.08% a year ago.

The paragraph discusses the impact of credit tightening measures on CarMax's financial performance and the broader credit industry. Despite an increase in provisions, the reserve to receivables percentage saw a minimal rise of 3 basis points, thanks to these measures. Inflation has affected many auto loan consumers, especially those with contracts from 2022 and 2023, leading lenders to tighten underwriting standards and adjust loss expectations. CarMax has faced similar challenges but managed well overall. Increased pressure on consumers led to higher provisions, yet recent high price originations remain profitable. They identified a higher-risk customer segment within the Tier 1 credit spectrum and further tightened underwriting in April 2024. Additional loss adjustments were made after observing further deterioration in these receivables in the second quarter.

The paragraph discusses CarMax’s Credit Acceptance Facility (CAF) activities and updates. They believe their current quarter’s reserve accurately estimates future losses and balance credit risk while promoting sales and profitable finance contracts. CAF executed its first non-prime and higher prime ABS transactions, enhancing funding capacity for CarMax's growth. They also tested new full-spectrum credit scoring models for Tier 1 and Tier 2, with Tier 3 testing beginning next quarter. Bill Nash then highlights ongoing efforts to improve business operations, including rolling out a new order processing system to streamline the customer buying journey, combining self-progression with associate assistance.

The paragraph highlights several initiatives aimed at enhancing customer experience and operational efficiency. These include deploying customer journey accounts, promoting the MaxCare service plan, and testing a generative AI-powered knowledge management system for associates. Moreover, a finance shopping enhancement has been introduced to provide precise credit terms through instant appraisal offers. An EV Hub has also been launched on carmax.com to help shoppers with electric vehicle information. Efforts to reduce costs involve centralizing logistics functions like home delivery and appraisal pickup to improve efficiency and support affordability.

The paragraph details the company's plans and positive outlook. They aim to achieve better efficiencies through a new transportation management system, expect strong sales in the second half of the year, and are optimistic about future growth in sales and earnings. The company emphasizes enhancing their omnichannel experience to strengthen their competitive position. After this summary, the operator invites questions, with the first from Seth Basham of Wedbush Securities. Seth asks about unit sales trends and the market outlook. Bill Nash responds, noting improvement in sales and providing insights on comp cadence and the impact of weekday distributions in September. Seth also inquires about the market and full spectrum lending amid credit challenges, asking Jon Daniels if further tightening of underwriting standards is expected.

The paragraph discusses CarMax's approach to managing loss rates and tightening lending practices in response to a stressed consumer market. They report improvements in losses for loans originated in April 2023 and anticipate further tightening in April 2024. The company feels confident about its current lending portfolio and emphasizes that past tightening decisions were precautionary yet profitable. CarMax is currently exploring Tier 2 and Tier 3 underwriting models, having deployed Tier 2 strategies late in Q2 and planning to introduce Tier 3 strategies in late Q3. The company is excited to learn from these new credit tiers, aiming to expand prudently and increase volume when appropriate. They emphasize that these loans are profitable and beneficial for both CarMax and its customers.

In the article paragraph, Jon Daniels discusses the success of the securitization program and its positive impact on future capacity and flexibility. Sharon Zackfia from William Blair asks about the profitability of CAF concerning higher losses and decreasing funding costs. Jon Daniels responds by addressing the management of the Net Interest Margin (NIM) in a tightening environment, noting satisfaction with maintaining around a six percent level and managing finance contracts effectively despite the raised rate environment. He envisions potential benefits as interest rates trend down, though acknowledges the challenge of making significant progress with the existing $18 billion portfolio at the current NIM.

The paragraph discusses the company's approach to setting provisions and reserves for loan losses at the end of each quarter. The goal is to adjust provisions based only on new originations, though this is rarely achieved. The company highlights that in the current high-loss environment, adjustments range from $10 million to $30 million, but this quarter saw an outsized adjustment of $52 million. This was noted as significantly higher than previous quarters and is hoped to be atypical moving forward. Enrique Mayor-Mora clarifies that of the $52 million, about $20-25 million aligns with the past year's adjustments, indicating an extraordinary $30 million deviation this quarter. Sharon Zackfia finds this information helpful, and Bill Nash thanks her for her comment.

John Murphy from Bank of America asked about the worsening credit trajectory and the specific metrics used to gauge future expectations. Jon Daniels responded by highlighting the reserve to receivables ratio of 2.82 and noting the $50 million provision as evidence of tightening credit conditions. Daniels indicated that their focus has been on originating highly profitable loans and targeting receivables likely to perform well in a stressed environment. While it's difficult to predict the extent of potential losses, he expressed confidence in their current portfolio and provision, emphasizing that they have the necessary funding to navigate future uncertainties.

The paragraph discusses the cautious approach the company plans to take in the upcoming quarters and clarifies that there wasn't any tightening in the current quarter, but rather in the previous one. It highlights the difficulty in sourcing late model vehicles within the industry, noting that the company successfully sourced 31,000 vehicles from dealers. Bill Nash attributes this success to efforts like increased instant appraisal offers and the MaxOffer program, as well as a significant increase in dealer participation. He also mentions that the off-lease vehicle shortage, which bottomed out in 2022, will decrease slightly in 2025 before improving.

In the paragraph, Bill Nash and John Murphy are discussing various aspects of their business performance. While leases haven't been a significant part of their sales, Nash mentions that they now have better access to them through IO and MaxOffer despite a decrease in volume. John Murphy commends Nash for maintaining gross profits. Brian Nagel from Oppenheimer then asks two questions: one about the factors driving the improved used car unit comparisons for the quarter and another regarding the higher loan loss provision in the fiscal second quarter. Nash responds by attributing the improvements to both internal efforts and some macroeconomic benefits. He highlights the team's efficient execution, cost of goods sold management, better conversion rates, and improved order processing as key contributors.

The paragraph discusses several key points regarding the company's recent performance and market conditions. Bill Nash mentions that they successfully aligned all their stores, the customer experience center (CEC), and customer interfaces on the same format, simplifying assistance and support processes. He notes ongoing year-over-year declines in average selling prices (ASP) for the seventh consecutive quarter, although prices have yet to return to previous levels. Lower interest rates and increased availability of cheaper cars ($25,000 or less) and newer cars (0-4 years old) are seen as positive trends. Nash also highlights a stabilizing pricing environment after experiencing significant price fluctuations in the past. Jon Daniels then addresses a question about their larger financial provision this quarter, explaining that while economic factors are considered, their adjustments are primarily based on their observations and performance data within their portfolio, noting that other banks and finance companies report similar performance issues.

The paragraph features a discussion between Rajat Gupta from JP Morgan and representatives from a company, Bill Nash and Enrique Mayor-Mora. Gupta seeks clarification on whether the company's sales for the current quarter are tracking positively year-over-year, to which Nash confirms the positive trend, albeit slightly softer and affected by a calendar issue with fewer high-traffic days. Gupta then inquires about a drop in advertising spending, and Mayor-Mora explains that while there may be quarter-to-quarter variations, overall advertising spending for the year is aligning with their targets and will remain similar in the second half of the year.

In the paragraph, Jon Daniels discusses the current state of the auto loan market, particularly focusing on Tier 3 loans with about 7% penetration. He acknowledges that the market has seen worsening performance and tightening credit conditions, not just from their company but across the industry. Despite the tightening, Daniels believes they have managed well due to their strong credit platform and loyal lending partners. He notes that while lenders have tightened their criteria, they feel confident in their current lending practices. The reduction in Tier 3 loans to 7% is seen as part of this broader industry trend rather than just internal tightening.

The paragraph discusses the reduction in Tier 2 and Tier 3 sales volume primarily due to affordability issues faced by consumers, rather than just tightening credit conditions. Bill Nash mentions that actions taken by CarMax and its lenders have been effective, with lenders feeling confident about CarMax's business. The impact on lower-income consumers is significant, but there is optimism that this will eventually improve. Additionally, Bill Nash talks about a new digital tool that allows customers to complete transactions from home, which has been rolled out to all locations. This tool aims to create a seamless experience whether customers start their process in-store or online, and it shows promising improvements in conversion rates.

The paragraph discusses the improvements made to CarMax's order processing system, making it seamless for customers and store associates whether transactions begin online or in-store. Customers can now see all their activities across platforms when logged into their CarMax account, improving the shopping experience and potentially increasing future conversions. While it's too early to quantify the impact on conversions, initial data shows an increase. This enhanced experience is expected to benefit both customers and associates, leading to long-term advantages. The paragraph ends with a transition to a question from Craig Kennison about the rise in online sales, which has moved from 14% to 15%, and its potential impact on unit profitability.

The paragraph discusses the increase in omni-channel sales and the excitement around this growth, as it caters to most customers who prefer a mix of online and in-store experiences. The majority of online customers still visit stores for pickups and consultations. Efficiency in serving these customers has improved on several key metrics compared to both pre-omni periods and year-over-year performance. This efficiency is expected to continue as sales return. Additionally, Bill Nash expresses that there's no specific target for customer preferences between online, in-store, or a combination, but the aim is to provide the best process for all options.

In this exchange, Scot Ciccarelli from Truist asks about the company's recent decisions on financial provisions, specifically whether the adjustments are due to higher delinquencies converting into write-offs, and what the expected loss rates are for subprime loans. Jon Daniels responds, explaining that provisions are based on a mix of origination and performance factors, noting that historically, customers have managed their delinquencies well. However, recent performance has shown some erosion, prompting a larger adjustment in provisions this quarter.

The paragraph discusses the importance of operational and strategic performance (O&S) in their decision-making, mentioning that economic factors play a role but are secondary. The speaker expresses confidence in their reserve adjustments and suggests that recent tightening measures might prevent further adjustments. Bill Nash emphasizes the importance of consistent reassessments (true-ups) in their process, even when provisions are lowered. Jon Daniels elaborates on their approach to various tiers of lending, noting that Tier 1 is their primary focus with low losses, Tier 2 has an intermediate risk, and Tier 3 involves higher losses. Despite higher delinquencies in some segments, they manage them as they believe these segments are ultimately profitable and offer valuable credit options to customers.

In the conversation, Chris Pierce from Needham asks about the impact of CDK's software on dealer performance and inquires about the outlook for gross margins. Bill Nash responds that CDK didn't have a significant impact on their performance for the quarter and noted a positive trend in their comp cadence throughout the months. Enrique Mayor-Mora adds that their other gross margins have risen significantly, primarily driven by improvements in service, which are expected to continue in the latter half of the year.

The paragraph discusses the impact of sales on margins, expecting year-over-year improvements, particularly in Q3 and Q4 for EPP. It mentions a potential $10 million impact on other income and expenses due to optimizing the logistics network, which may require a charge-off related to truck management. The expectation is for a one-time hit in the third or fourth quarter. Additionally, Chris Pierce raises a concern about potential Gross Profit per Unit (GPU) compression due to the increased costs for used car dealers in the wholesale market and limited pricing power. Bill Nash clarifies, asking if the concern is about future strain on GPU.

In the paragraph, Bill Nash discusses CarMax's strong self-sufficiency in sourcing vehicles, with over 70% of acquisitions coming from the appraisal lane and dealers. This contributes to a stable supply and helps manage margins. He expresses confidence in the company's wholesale business and the improving ratio of dealers to cars, which further aids margin management. Chris Pierce acknowledges this before the conversation moves to a new question from Ian Davis, standing in for Chris Bottiglieri from BNP Paribas. Ian inquires about CarMax's credit penetration, comparing it to a competitor with higher levels. Jon Daniels responds by emphasizing CarMax's commitment to being a full-spectrum lender, offering a range of credit options to meet diverse customer needs.

CarMax aims to cater to all customer segments, offering diverse financing options through multiple lenders. They focus on providing great offers across different credit tiers rather than targeting a specific group. While they recognize that some high-end customers prefer third-party financing to avoid higher interest rates, CarMax continues to compete in this space. They note an increased use of external financing currently, but expect this to decrease as more low-rank consumers return. The goal is to capture a broad customer base while maintaining their core focus.

In the paragraph, Bill Nash discusses the company's approach to logistics and reconditioning. He acknowledges that while logistics strategies help achieve overall goals, less attention has been given to reconditioning. Nash emphasizes that reconditioning is a continual focus and involves numerous small improvements that collectively enhance performance. This includes optimizing part utilization, deciding when to replace parts, bringing more tasks in-house, improving capacity utilization, and enhancing performance at outlier stores. He expresses confidence in these initiatives and their positive impact on margins.

In the paragraph, various company representatives discuss internal goals and recent financial details. Enrique Mayor-Mora explains that a decrease in advertising expenses was due to timing and they are on track with their yearly targets. John Healy acknowledges this clarification. David Whiston from Morningstar asks about financing channels and what kinds of consumers they attract. Jon Daniels responds, stating that consumers in this channel are typically higher-end consumers, who are either capable of paying cash or are more interest rate-sensitive.

The paragraph details two main points from an earnings release conference call. First, it discusses consumer behavior related to cash usage and sensitivity to interest rates, noting that many consumers are using cash or cash equivalents like home equity loans to avoid high-interest rates. Second, in response to a question about capital allocation and buybacks, Enrique Mayor-Mora confirms that the pace communicated earlier for buybacks will likely continue for the rest of the year. The call concludes with Bill Nash expressing appreciation for participants and concern for associates and communities in the path of Hurricane Helene, emphasizing their safety.

This summary was generated with AI and may contain some inaccuracies.