Q2 2025 Carmax Inc Earnings Call

Operator: I do ask that you please continue to stand by; your conference will begin momentarily.

Stand by your conference will begin momentarily.

[music].

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the second quarter fiscal year 2025 CarMax earnings release conference call. At this time, all participants are in a listen-only mode.

Ladies and gentlemen, thank you for standing by.

Speaker Change: Welcome to the second quarter fiscal year 2025, Carmax earnings release Conference call.

Speaker Change: At this time all participants are in a listen only mode.

Operator: After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded.

Speaker Change: After the speaker's presentation, there will be a question and answer session.

Please be advised that today's conference is being recorded.

David Lowenstein: I would now like to hand the conference over to your speaker today, David Lowenstein, AVP and Vester Relations. Please go ahead.

David Loewenstein: I would now like to hand, the conference over to your Speaker today, David Loewenstein, a b P Investor Relations. Please go ahead.

David Lowenstein: Thank you, Todd.

David Loewenstein: Thank you Todd good morning, everyone. Thank you for joining our fiscal 2025 second quarter earnings Conference call I'm here today with Bill Nash, our President and CEO Enrique Mayor Moore, our executive Vice President and CFO and John Daniels are.

David Lowenstein: Good morning, everyone. Thank you for joining our fiscal 2025 second quarter earnings conference call. I'm here today with Bill Nash, our President and CEO, Enrique Mayor Moore, our Executive Vice President and CFO, and John Daniels, our Senior Vice President, Carmichael O'Finance Operations.

Her vice President Carmax Auto finance operations.

David Lowenstein: Let me remind you, our statements today that are not statements of historical fact, including 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 in our 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 just claim any intent or obligation to update them for additional information on important factors and risks that could affect these expectations.

Speaker Change: Let me remind you our statements today that are not statements of historical fact, including 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.

Speaker Change: 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.

Speaker Change: To update them.

Speaker Change: 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 2024, and our quarterly results on Form 10-Q previously filed with the SEC.

David Lowenstein: Please see our Form 8-K filed with the SEC this morning, our annual report on Form 10-K for fiscal year 2024, and our quarterly results on Form 10-Q previously filed with the SEC.

David Lowenstein: Thank you.

David Lowenstein: 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.

Speaker Change: Should you have any follow up questions. After the call. Please feel free to contact our Investor Relations Department at 804, seven and 470422 extension 7865 Lastly, let me. Thank you in advance for asking only one question and getting back in the queue for more follow up.

Bill Nash: Bill? Thank you, David.

David Loewenstein: Great. Thank you David Good morning, everyone and thanks for joining US we're pleased with our team's execution in the second quarter as we achieved positive sales trends strong margins cost efficiencies and EPS growth, while managing through industry wide auto loan loss pressure beyond.

Bill Nash: Good morning, everyone, and thanks for joining us. We're pleased with our team's execution in the second quarter as we achieve positive sales trends, strong margins, cost efficiencies, and EPS growth while managing through industry-wide auto loan loss pressure. Beyond great execution, our results also reflect the positive impact of delivering associated customer experience enhancements alongside declining prices and a more stable environment for vehicle valuations. In the second quarter, we grew your retail unit volume year-to-year. We delivered strong retail and wholesale GPUs and expanded EPP and service growth profit. We bought more vehicles from dealers, achieving a second quarter record.

Speaker Change: Beyond great execution. Our results also reflect the positive impact of delivering associate customer experience enhancements alongside declining prices in a more stable environment for vehicle valuation.

Speaker Change: In the second quarter, we grew your retail unit volume year over year.

Speaker Change: We delivered strong retail and wholesale Gpus expanded ETP and service gross profit.

Speaker Change: We bought more vehicles from dealers, achieving a second quarter record we.

Bill Nash: We maintained stable calf net interest margin and began to test our new full spectrum underwriting model. We materially delivered SGNA as a percent of gross profit, and we achieved double-digit EPS growth.

Speaker Change: We maintained stable cash net interest margin and began to test our new full spectrum underwriting model.

We materially Levered SG&A as a percent of gross profit and we achieved double digit EPS growth.

Bill Nash: For the second quarter of FY25, our diversified business model delivered total sales of $7 billion, down 1% compared to last year, reflecting lower retail and wholesale prices, partially offset by higher retail volume. In our retail business, total unit sales increased 5.1%, and used unit comps were up 4.3%. Average selling price declined approximately $1,250 per unit, or 5% year-over-year. Second quarter retail gross profit per unit was $2,269, consistent with last year's 2,251. Also, unit sales are down 0.3 versus the second quarter last year and proofs sequentially from being down 8.3% in the first quarter of this year.

Speaker Change: For the second quarter of FY 'twenty five our diversified business model delivered total sales of $7 billion down 1% compared to last year, reflecting lower retail and wholesale prices, partially offset by higher retail volume.

Speaker Change: In our retail business total unit sales increased five 1% and you used unit comps were up four 3%.

Average selling price declined approximately $1250 per unit or 5% year over year.

Speaker Change: Second quarter retail gross profit per used unit was $2269 consistent with last year's $22 51.

Speaker Change: Although unit sales were down <unk> three versus the second quarter last year and improved sequentially from being down eight 3% in the first quarter of this year.

Bill Nash: Average selling prices declined approximately $1,150 per unit, or 13% year-over-year. Second quarter wholesale gross profit per unit was $975, in line with $963 a year ago. We bought approximately 300,000 vehicles during the quarter, up 3% from last year. We purchased approximately 269,000 vehicles from consumers, with more than half of those buyers coming through our online instant appraisal experience. With the support of our Edmund sales team, we source the remaining approximately 31,000 vehicles through dealers, up 60% from last year. We continue to see increased adoption of our omnichannel retail experience. For our second quarter online metrics, approximately 15% of retail unit sales were online, up from 14% last year.

Speaker Change: Average selling prices declined approximately $1150 per unit or 13% year over year.

Second quarter wholesale gross profit per unit was $975 in line with 963 a year ago.

Speaker Change: We bought approximately 300000 vehicles during the quarter up 3% from last year, we purchased approximately 269000 vehicles from consumers with more than half of those buys coming through our online instant appraisal experience.

Speaker Change: With the support of our admin and sales team we source the remaining approximately 31000 vehicles through dealers up 60% from last year.

Speaker Change: We continue to see increased adoption of our omni channel retail experience for our second quarter online metrics approximately 15% of retail unit sales were online up from 14% last year.

Bill Nash: Approximately 57% of retail unit sales were omnichales this quarter, up from 55% in the prior year. Total revenue from online transactions was approximately 29%, slightly down from last year due to wholesale pricing coming down. All of our second quarter wholesale auctions and sales were virtual and are considered online transactions, which represented 17% of total revenue from the quarter. CarMax Auto Finance or CAF delivered income of $116 million, down 14% from the same period last year. CAF results were pressured by an uptick in losses that are being experienced industry-wide.

Speaker Change: Approximately 57% of retail unit sales were omni sales this quarter up from 55% in the prior year.

Speaker Change: Total revenue from online transactions was approximately 29% slightly down from last year due to a wholesale pricing coming down.

Speaker Change: All of our second quarter wholesale auctions and sales where virtual and are considered online transactions, which represented 17% of total revenue for the quarter.

Speaker Change: Carmax auto finance, our Caf delivered income of $116 million down 14% from the same period last year Caf results were pressured by an uptick in losses that are big being experienced industry wide.

John Daniels: The few minutes, Jon will provide more detail on customer financing, the loan loss provision, cap contribution, and our progress on becoming a full credit spectrum lender.

In a few minutes John will provide more details on customer financing the loan loss provision cap contribution and our progress on becoming a full credit spectrum lender, but at this point I'd like to turn the call over to Enrique who will share more information on our second quarter financial performance Enrique Thanks, Bill and good morning, everyone. As Bill noted we delivered on multi.

Enrique Mayor: But at this point, I'd like to turn the call over to Enrique, who will share more information on our second quarter financial performance.

Enrique Mayor: Enrique? Thanks, Bill.

Enrique Mayor: Good morning, everyone. As Bill noted, we delivered on multiple fronts in the quarter. Positive retail unit comps, robust vehicle margins, material growth, and other gross profit per retail unit, maintaining cap net interest margin and strong flow through to the bottom line. Second quarter net earnings per diluted share was 85 cents, up 13% versus a year ago. This was despite the increase in our loan loss provision. Total gross profit was $760 million, up 9% from last year's second quarter. Use retail margin of $479 million increased by 6% with higher volume and relatively flat per unit margins.

Enrique: France in the quarter positive retail unit comps robust vehicle margins material growth in other gross profit per retail unit, maintaining cash net interest margin and strong flow through to the bottom line.

Speaker Change: Second quarter net earnings per diluted share was <unk> 85 up 13% versus a year ago.

Speaker Change: This was despite the increase in our loan loss provision.

Speaker Change: Total gross profit was $760 million up 9% from last year's second quarter used retail margin at $479 million increased by 6% with higher volume and relatively flat for unit margins.

Enrique Mayor: Whole sale vehicle margin of $138 million grew by 1% with margins offsetting a slight decrease in volume. Other gross profit was $144 million, up 33% from a year ago. This was driven primarily by a combination of EPP and service. EPP increased by $20 million as we continued to benefit from the higher max care margins per contract that we previously ruled out. Service delivered $3 million in margin, up $17 million from last year's second quarter. This performance reflected the combined impact of successful efficiency and cost coverage measures in positive sales growth. We expect continued year-over-year improvement for the balance of the year, as governed by sales performance given the leverage due leverage nature of service.

Speaker Change: Wholesale vehicle margin of $138 million grew by 1% with margins offsetting a slight decrease in volume.

Speaker Change: Other gross profit was $144 million up 33% from a year ago.

Speaker Change: Was driven primarily by a combination of ETP and service <unk>.

<unk> increased by $20 million as we continued to benefit from the higher Max care margins per contract that we previously rolled out.

Service delivered $3 million in margin up $17 million from last year's second quarter. This performance reflected the combined impact of successful efficiency and cost coverage measures and positive sales growth we expect.

Speaker Change: <unk> continued year over year improvement for the balance of the year as governed by sales performance given the leverage deleverage nature of service.

Enrique Mayor: On the SGNA front, expenses for the second quarter were $611 million, up 4% or $25 million from the prior year's quarter, but leveraged 4 percentage points, supported by our continued discipline in spend and investment levels. This SGNA leverage would have been even stronger if not for two main factors that impacted the second quarter. First, total compensation and benefits increased by $16 million. This was primarily driven by our corporate bonus accrual, which was lowered in last year's second quarter. Second, occupancy costs rose by $7 million, a higher increase in recent trends driven by the timing of store maintenance-related spend.

Speaker Change: On the SG&A front expenses for the second quarter was $611 million up 4% or $25 million from the prior year's quarter, but leveraged four percentage points supported by our continued discipline in spend and investment levels.

Speaker Change: Yes, SG&A leverage would have been even stronger if not for two main factors that impacted the second quarter first total compensation and benefits increased by $16 million.

Speaker Change: Was primarily driven by our corporate bonus accrual, which was lowered in last year's second quarter.

Second occupancy costs rose by $7 million, a higher increase than recent trends driven by the timing of store maintenance related spend.

Enrique Mayor: I also want to point out two noteworthy items. First, our omni channel selling model, which includes commissions plus the class of operating our CCCs, continues to be more efficient as we further strengthen our digital progression tools and the optimal use of CEC labor. This quarter, we were more efficient year-over-year and versus pre-omni in the three key metrics per retail unit, for total unit, and per gross margin dollar. Second, as Bill will discuss further, we continue to evaluate all aspects of our logistics operations to drive efficiencies. This includes equipment and leasing arrangements. As part of this evaluation, we may incur charges that we estimate will be less than $10 million in the near term that would likely hit other income expense lines.

Speaker Change: I also want to point out two noteworthy items first our omni channel selling model, which includes commissions plus the cost of operating our Ccs continues to be more efficient as we further strengthen our digital progression tools and the optimal use of CEC labor.

This quarter, we were more efficient year over year and versus pre omni and the three key metrics per retail unit for total unit and for gross margin dollar.

Speaker Change: Second as Bill will discuss further we continue to evaluate all aspects of our logistics operations to drive efficiencies. This includes equipment and leasing arrangements as part of this evaluation. We may incur charges that we estimate will be less than $10 million in the near term that would likely hit other income.

Enrique Mayor: John. These charges will be more than offset by the efficiencies gained in our logistics operations over time. Regarding capital allocation, during the second quarter, we re-purchased approximately 1.4 million shares for a total spend of $106 million. As of the end of the quarter, we had approximately $2.15 billion of re-purchased authorization remaining.

Bill: Expense line.

Bill: These charges will be more than offset by the efficiencies gained in our logistics operations over time.

Regarding capital allocation during the second quarter, we repurchased approximately one 4 million shares for a total spend of $106 million.

Speaker Change: As of the end of the quarter, we had approximately $2 one $5 billion of repurchase authorization remaining now.

John Daniels: Now I'd like to turn the call over to John.

Speaker Change: Now I'd like to turn the call over to John Thank you Enrique and good morning, everyone.

John Daniels: Thanks, Enrique. Good morning, everyone. During the second quarter, CarMax Auto Finance originated approximately $2.2 billion, resulting in sales penetration of 42% net of 3-day payoffs, as compared to 42.8% during last year's second quarter. The weighted average contract rate charged to new customers was 11.5% and increased to 40 basis points from a year ago. Third-party tier 2 penetration in the quarter was 17.7%, down slightly from 18.1% a year ago. Third-party Tier 3 volume accounted for 6.7% of sales compared to the 6.4% seen in last year's second quarter. The combined third-party penetration of 24.4% remains in line with Q2 FY24.

John: During the second quarter Carmax auto finance originated approximately $2 2 billion, resulting in sales penetration of 42% net of three day payoffs as compared to 42, 8% during last year's second quarter.

John: The weighted average contract rate charged to new customers was 11, 5% an increase of 40 basis points from a year ago.

John: Third party tier two penetration in the quarter was 17, 7% down slightly from 18, 1% a year ago.

John: Third party tier three volume accounted for six 7% of sales compared to the six 4% seen in last year's second quarter.

John: The combined third party penetration of 24, 4% remains in line with Q2 FY 'twenty four.

John Daniels: Cap income for the quarter was $116 million, down $19 million from the same period last year, predominantly impacted by a year-over-year provision increase of $23 million. Net interest margin for the quarter was 6.1% in line with last year. The provision for loan losses for the quarter was $113 million and resulted in a reserve balance of $501 million. This compares to a provision of $90 million in last year's second quarter. Included in the $113 million provision is a $52 million, roughly 11% increase in our estimate of lifetime losses on existing loans, which we believe reflects industry-wide credit challenges.

Caf income for the quarter was $116 million down $19 million from the same period last year predominantly impacted by year over year provision increase of $23 million.

John: Net interest margin for the quarter was six 1% in line with last year.

John: The provision for loan losses for the quarter was $113 million and resulted in a reserve balance of $501 million.

This compares to a provision of $90 million in last year's second quarter.

John: Included in the $113 million provision is $52 million of roughly 11% increase in our estimate of lifetime losses on existing loans, which we believe reflects industry wide credit challenges.

John Daniels: Also included in the provision is $61 million per expected losses on current quarter originations. The resulting reserve-to-receivables ratio was 2.82%, as compared to 2.79% at the end of Q1 and 3.08% from a year ago. Despite the growth in year-over-year provision, the reserve-to-receivables percentage only increased three basis points, which is a result of credit tightening measures we deployed over the course of the last two years and their growing impact on the near $18 million portfolio. Regarding the broader credit industry, it has been well-sighted that a number of auto loan consumers are struggling in this inflationary environment, especially those borrowers who originated contracts in 2022 and 2023.

Also included in the provision of $61 million for expected losses on current quarter originations.

John: The resulting reserve to receivables ratio was 282% as compared to $2, 79% at the end of Q1 and 3.08% from a year ago.

John: Despite the growth in year over year provision and the reserve to receivables percentage only increased three basis points, which is a result of credit tightening measures. We deployed over the course of the last two years and their growing impact on the near $18 billion portfolio.

John: Regarding the broader credit industry. It has been well cited that a number of auto loan consumers are struggling in this inflationary environment, especially those borrowers who originated contracts in 2022 and 2023 when elevated prices were coupled with high interest rates.

John Daniels: However, the recovery in elevated prices was coupled with high interest rates. To combat these results, lenders have generally tightened underwriting where necessary and have adjusted lifetime loss expectations based on weakening performance. CAS has, to some degree, experienced similar challenges emerging within the industry, but our customers have largely shown an ability to navigate this added inflationary burden. During this last quarter, we observed additional pressure on the consumer, and as a result, we added to our provision accordingly. Despite the adjustment, these higher ASP originations from 2022 and 2023 remain significantly profitable for CarMax, and it is clear that the material tightening deployed in early 2023 has had a meaningful impact on our vintage-level loss rates.

John: To combat these results lenders have generally tightened underwriting where necessary and have adjusted lifetime loss expectations based on a weakening performance.

Speaker Change: That has to some degree experienced similar challenges emerging within the industry, but our customers have largely shown an ability to navigate this added inflationary burden.

Speaker Change: During this last quarter, we observed additional pressure on the consumer and as a result, we added to our provision accordingly, despite the adjustment these higher asps originations from 2022, and 2023 remain significantly profitable for Carmax and it is clear that the material tightening deployed in early 2023 has had a meaningful impact on our vintage level loss.

John Daniels: In addition, we observed the pocket of customers generally concentrated at the lower end of the tier-one credit spectrum that were of noticeably higher risk, which we addressed through the further tightening of our underwriting strategy for cautionary reasons, beginning in April 2021. While the loss allowance was previously adjusted for this pocket in the first quarter, as a part of our standard loan loss modeling process. During the second quarter, we observed further deterioration, which necessitated an additional adjustment on the pre-existing receivables. We believe this quarter's provision adequately captures the performance within the quarter, and the resulting reserve is our best estimate of the remaining lifetime loss for the portfolio.

Speaker Change: <unk>.

Speaker Change: In addition, we observed a pocket of customers generally concentrated at the lower end of the tier one credit spectrum that we're up noticeably higher risk, which we addressed through the further tightening of our underwriting strategy for cautionary reasons beginning in April 2024.

Speaker Change: While the loss allowance was previously adjusted for this pocket in the first quarter as a part of our standard loan loss modeling process. During the second quarter, we observed further deterioration, which necessitated an additional adjustment on the pre existing receivables.

Speaker Change: We believe this quarters provision adequately captures the performance within the quarter and the resulting reserve is our best estimate of the remaining lifetime loss for the portfolio.

John Daniels: As always, Cap will continue to balance credit risk, driving CarMax sales, and capturing its optimal share of highly profitable finance contracts.

Speaker Change: As always capital continue to balanced credit risks driving carmax sales and capturing its optimal share of highly profitable finance contracts.

John Daniels: Now, I will share an update on cap securitization program in full spectrum lending initiative. During the month of June, we successfully executed our first non-prime ABS transaction, and followed in July with our first higher prime ABS deal. The success of these transactions reaffirms our belief that these complementary programs will provide significant additional funding capacity to support CarMax growth, while giving us the flexibility to capture a larger piece of the Tier 2 and Tier 3 landscape. Also, during the second quarter, Cap successfully began testing its new full spectrum credit scoring models and corresponding strategies across both the Tier 1 and Tier 2 spaces, and we expect our Tier 3 testing of the new model to begin during the third quarter.

Speaker Change: Now I will share an update on cash securitization program in full spectrum lending initiative.

Speaker Change: During the month of June we successfully executed our first non prime ABS transaction and solid in July with our first higher Prime ABS deal.

Speaker Change: The success of these transactions reaffirms our belief that these complementary programs will provide significant additional funding capacity to support carmax growth, while giving us the flexibility to capture a larger piece of the tier two and tier three landscape.

Bill: Also during the second quarter cap successfully began testing its new full spectrum credit, scoring models and corresponding strategies across both the tier one and tier two spaces and we expect our tier three testing of the new model to begin during the third quarter now I will turn the call back over to Bill. Thank you Jon Enrique.

Bill Nash: Now let's turn the call back over to Bill. Thank you, John and Rike. As I mentioned in our last earnings call, I'm proud of the durable actions we have been taking to support our business and further differentiate our offering. We are continuing to refine the experience and realize efficiencies that will support future growth. Some examples include: we've completed the nationwide rollout of our new order processing system across our stores and customer experience centers. As a reminder, this system helps associates guide customers through each step of the buying journey and provides a more seamless experience for customers who prefer to blend self-progression with assistance from associates.

Bill: As I mentioned on our last earnings call I'm proud of the durable actions, we've been taking to support our business and further differentiate our offering we're continuing to refine the experience and realize efficiencies that will support future growth.

Speaker Change: Some examples include we've completed the nationwide rollout of our new order processing system across our stores and customer experience centers. As a reminder, this system helps associates guide customers through each step of the buying journey and provides a more seamless experience for customers, who prefer to blur blend self progression with assistance from associates.

Bill Nash: We're now focused on customer shopping accounts. These make it even easier for customers to see the steps they have taken on their shopping journey, whether on their own or with help from an associate. These accounts guide next steps and promote Max Care, our extended service plan offering. We're currently testing in several stores and plan to deploy nationwide later this year. Our data science, CEC, and product teams have recently developed a new knowledge management system that we are testing in our CECs, which leverages generative AI to empower associates with instant access to the information they need.

Speaker Change: We're now focused on customer shopping accounts these make it even easier for customers to see the steps they have taken on their shopping journey, whether on their own with help from an associate.

Speaker Change: These accounts guide next steps and promote Maxicare our extended service plan offering. We're currently testing in several stores and plan to deploy a nationwide later this year.

Speaker Change: Our data science CEC and product teams have recently developed a new knowledge management system that we are testing in our cec's, which leverages generative AI to empower associates with instant access to the information they need associates can ask questions through a chatbot and receive an immediate response, we're finding this to especially helpful for customer.

Bill Nash: Associates can ask questions through a chatbot and receive an immediate response. We are finding this tool especially helpful for customer questions where the response varies from state to state. This will enable our CECs to be more effective and efficient, and we plan to launch the system across all CECs later this year. For finance-based shopping, we release an enhancement that seamlessly incorporates existing instant appraisal offers into our pre-qualification offering, giving customers more precise credit terms. And finally, we launched an EV hub on CarMax.com. The hub contains information and research tools that address top questions shoppers have about electric vehicles, including hybrids, and helps consumers determine if an electric vehicle is right for them.

Speaker Change: Questions, where the response varies from state to state. This will enable our CEC to be more effective and efficient and we plan to launch the system across all Cec's later this year.

Speaker Change: For finance based shopping we released an enhanced and enhancement that seamlessly incorporates existing incident appraisal offers into a prequalification offering giving customers more precise credit terms.

Speaker Change: And finally, we launched an EV hub on Carmax Dot com. The hub contains information research tools that address top question shoppers have about electric vehicles, including hybrid and helps consumers determined if an electric vehicle is right for them.

Bill Nash: As I mentioned last quarter, we're focused on driving down costs of goods sold by pursuing incremental efficiency opportunities that we've identified across our logistics network and reconditioning operations. Lee. This supports affordability as we pass savings on to our customers and also supports our margins. After completing a comprehensive review of our logistics operation, we determine that centralizing some key functions will help us best leverage our network. During the second quarter, we centralized our home delivery appraisal pickup and max offer moves by market. We plan to achieve further efficiencies in upcoming quarters as we roll out our enhanced transportation management system, which provides new planning and execution capabilities.

Speaker Change: As I mentioned last quarter, we're focused on driving down cost of goods sold by pursuing incremental efficiency opportunities, we've identified across our logistics network and reconditioning operations.

This supports affordability as we pass savings onto our customers and also supports our margins.

Speaker Change: After completing a comprehensive review of our logistics operation, we determined that centralizing some key functions will help us best leverage our network.

Speaker Change: During the second quarter, we centralized our home delivery appraisal pickup and Max offer moves by market.

Speaker Change: Plan to achieve further efficiencies in upcoming quarters, as we rollout our enhanced transportation management system, which provides new planning and execution capabilities.

Bill Nash: In conclusion, we're encouraged by our second quarter performance, and assuming current market conditions continue, we feel good about our sales in the second half of the year. We're excited about our future and our ability to grow sales and earnings while continuing to enhance our besting class on the channel experience for our associates and customers, strengthening our competitive mode.

Speaker Change: In conclusion, we're encouraged by our second quarter performance and assuming current market conditions continue we feel good about our sales in the second half of the year, we're excited about our future and our ability to grow sales and earnings while continuing to enhance our best in class Omnichannel experience for our associates and customers strengthening our competitive moat.

Operator: With that, we'll be happy to take your questions.

With that we'll be happy to take your questions.

Operator: Todd. Thank you at this time.

Speaker Change: Todd.

Operator: If you would like to ask a question, please press star one on your telephone keypad. You may remove yourself at any time by pressing star two. Once again, to ask a question, please press star one.

Speaker Change: Thank you at this time, if you would like to ask a question. Please press star one on your telephone keypad.

Todd: You may remove yourself at any time by pressing star two.

Todd: Again to ask a question please press star one.

Seth Basham: Your first question will come from a line of Seth Basham with Whitbush Securities. Please go ahead. Your line is open. Thanks a lot, and good morning. Great to see the progress on sales.

Todd: Yeah.

Speaker Change: Your first question will come from the line of Seth Basham with Wedbush Securities. Please go ahead. Your line is open.

Seth Basham: Thanks, a lot and good morning, great to see the progress on sales and my first question is just if you could give us an update on how comps are trending quarter to date.

Bill Nash: My first question is just if you could give us an update on how the unit comes for trending in quarter to bidding. Yeah, sure, Seth. So, first of all, we are pleased with how the sales have progressed. If I look at the comp cadence for the quarter, they actually sequentially got better, which was great to see. For September, with almost one full month into the third quarter, we're training positive for the quarter in line with the second quarter, but a little bit softer at this point. I would also just point out that September has some heavy day of the week headwind: less one less Friday, one less Saturday, pick up a Sunday, but we get all that back in the quarter.

Speaker Change: Yes sure Seth So first of all we are we're pleased with how the sales have progressed, if I look at the comp cadence for the quarter, they actually sequentially got better which was great to see.

Speaker Change: For September with almost one full month into the third quarter, we're trending positive for the quarter in line with the second quarter, but a little bit softer at this point.

Speaker Change: I would also just point out to September has some heavy day of the week headwinds.

Speaker Change: Yes, one less Friday, one less Saturday pick up a Sunday, but we get all that back in the quarter.

Bill Nash: That's all for color.

Speaker Change: That's helpful color and then secondly on path because you can get some color on.

Seth Basham: And then secondly, on task, if you can get some color on your view of the market at this juncture, does it make sense to push forward with the full spectrum lending given the credit headwind and you expect further tightening on your under any standards? Sure. Appreciate the question, Seth. So first on the overall market. Again, I think we stated, you know, clearly, and I think you've reported this. Industry-wide loss rates clearly are out there. It's a stress consumer. You know, I think that's why we've done the tightening that we've done. April 23, and we're clearly seeing improvement and losses on those ventages mentioned again further tightening in April 24.

Speaker Change: Your view of the market at this juncture as it makes sense to push forward with a full spectrum lending given the current headwinds and do you expect further tightening on your underwriting standards.

Speaker Change: I appreciate the questions Seth So first on the overall market again, I think we stated clearly and I think you've reported this industry wide loss rates clearly are out there it's a stressed consumer.

I think that's why we've done the tightening that we've done here.

Seth Basham: April 23.

Seth Basham: Clearly seeing improvement in losses on those vintages mentioned again further tightening in April 24, I'll address your tightening question right now.

Bill Nash: I'll address your tightening question right now. Right now, we feel good about where we sit. You know, everything that we've tightened on previously highly profitable for CarMax, but just moves that we felt we wanted to make proactively on a cautionary basis. But right now, we feel good about where we are. Again, never say never. We'll watch our portfolio very, very closely, but we feel good about what we're originating right now.

Seth Basham: Right now we feel good about where we sit.

Seth Basham: But everything that we've taken on previously highly profitable for Carmax, but just moves that we felt we wanted to make proactively on a cautionary basis, but right now we feel good about where we are again never say never we'll watch our portfolio very very closely but we feel good about what we're originating right now.

Bill Nash: And with regard to, is this the right time for tier two and tier three? Well, we're in learning mode, and we're really excited about it. We deployed our tier two underwriting model and strategies in the back the back portion of Q2. We're looking to get into the tier three in probably the back portion of Q3. And we're excited to learn, and we're going to continue to learn throughout probably the fiscal quarter. You know, we will decide when it makes sense to go in to go after more volume. We think it's great for the customer that there's going to be cash in there.

Speaker Change: And with regard to is this the right time for tier two and tier three.

Well, we are in learning mode, and we're really excited about it we deployed our tier two underwriting model and strategies in the back the back portion of Q2, we're looking to get into the tier three.

Speaker Change: In probably the back portion of Q3, and we're excited to learn and we're going to continue to learn throughout probably the fiscal quarter.

Speaker Change: We will decide when it makes sense to go in to go after more volume we think it's great for the customer that theres going to be caf in there. We know it's great for Carmax that cap is going to be there. We think there's more opportunity there as we've as we've all stated so we will pick the right time, but we're excited to learn and we will move in prudently and when it makes sense.

Bill Nash: We know it's great for CarMax that caps going to be there. We think there's more opportunity there, as we've, as we've all stated. So we'll pick the right time, but we're excited to learn, and we'll move in prudently in what it makes sense. And Seth, what I'd say is even in this kind of environment, I mean, these are really profitable loans that John and team can target and do an excellent job of targeting those loans and originations. So we're really excited about the full credit spectrum. And yeah, we'll continue to get in the back after the year here.

Speaker Change: And so that's what I'd say is even in this kind of environment. I mean, these are really profitable loans that John and team can target and do an excellent job of targeting those loans and originations. So we're really excited about the full credit spectrum and.

Speaker Change: Yes, we will continue to test in the back half of the year here and I'd be remiss, if I didn't finish up with and Thats what made the securitization program. This summer so exciting for us It really was a great success, both both of those issuances and I think it really sets us up well for the future both in capacity and flexibility.

Bill Nash: And I'd be revisited if I didn't finish up with, you know, and that's what made the the securization program this summer so exciting for us. It really was a great success both of those issuances. And I think it really sets us up well for the future, both in capacity and flexibility.

Speaker Change: Thank you.

Sharon Zackfia: We'll take our next question from Sharon Zackfia with William Blair. Please go ahead. Hi, good morning. Thanks for taking a call. Our question.

Speaker Change: Thank you we'll take our next question from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia: Hi, good morning, Thanks for taking the call a question I guess another question on the finance business.

Sharon Zackfia: I guess another question on the finance business.

Sharon Zackfia: You know, how do we think about the profitability of cash when you've got the higher losses on the one hand, but we also see funding costs obviously start to come down.

How do we think about the <unk>.

Speaker Change: <unk> cash when you've got the higher losses on the one hand, we all pharmacy funding costs.

Enrique Mayor: Is this kind of the 12 in terms of year of your decrease that should expect? I mean, when do you when do you think how concerned to grow again and income? Just any kind of perspective around that would be helpful. Yeah, I appreciate the question.

Speaker Change: They start to come down is this.

Speaker Change: The trough in terms of year over year decrease that we can expect I mean, when do you. When do you think how can start to grow again in income.

Speaker Change: Any kind of perspective around that would be helpful. Yes.

Enrique Mayor: Sharon, so I'll kind of break it down between two of our, yeah, obviously our biggest fine items. You mentioned the interest rate aspect. So, right, that's going to show through in our name. Obviously, we've been even very pleased with how we've managed name in this environment. You know, we've said six felt about the right level. We've hovered around that area, and we've done that in the face of tightening, which actually is generally going to put pressure on them. And obviously, we've been able to capture our share of finance contracts while in a raised rate environment.

Speaker Change: Hey, I appreciate the question Sharon So I'll kind of break it down between two of us.

Our biggest line items you'd mentioned the interest rate aspect right, that's going to show through in our NIM.

Speaker Change: Obviously, we've been we've been very pleased with how we've managed NIM in this environment. We've said six felt about the right level.

Speaker Change: We've hovered around that area and we've done that in the face of tightening, which actually is generally going to put pressure on NIM and obviously, we've been able to capture our share of finance contracts while in.

Enrique Mayor: So we've been pleased about how that's operated. Obviously, is rates trend down. Often there's an opportunity for a lender to enjoy stickier rates and maybe capture a little bit more. But, but largely, you've got an 18 billion dollar portfolio at the current name. It's going to be hard to make a lot of headway against that, but we would hope that would be a tailwind for us with regard to the loss environment, which is kind of the other end.

Speaker Change: Raise rate environment. So we've been pleased about how that's that's operated obviously as rates trend down often there is an opportunity for a lender to enjoy stickier rates and maybe capture a little bit more but but largely you've got an $18 billion portfolio at the current name, it's going to be hard to make a lot of headway against that but but we would hope that would be a tailwind for us with.

Speaker Change: Regards to the loss environment, which is kind of the other end of the spectrum.

Enrique Mayor: In the spectrum, I really want to point out our provision. Let's talk about that in this quarter. Ultimately, if you think about it, when we set our provision and our reserve at the end of, at the end of a quarter, our goal clearly is to only have to, in the success of quarter, set of provision for what we newly originated in that quarter. It never happens that way, as you are well aware. You're going to have points where sometimes it's going to be, you're going to have the ability to release loans because release provision because performance is excellent.

Speaker Change: I really want to point out our provision and let's talk about that this quarter.

Speaker Change: Ultimately if you think about it when we set our provision and our reserve at the end of at the end of the quarter. Our goal clearly is to only happened in the successive quarter.

Speaker Change: We set a provision for what we newly originated in that quarter. It never happens that way as you're well aware youre going to have points, where sometimes it's going to be you're going to have the ability to release loans because it released provision because performance is excellent youre going to have in a higher delinquency environment high loss environment, which we're operating in right now we've seen.

Enrique Mayor: You're going to have in a higher delinquency environment, higher loss environment, which we're operating in right now. We've seen, you know, change that we've had to make in the 10, 20, 30 million dollar range. Let's make clear, we felt the $52 million adjustment on the existing portfolio was outsized versus previous quarters. And it was important we noted that for everyone. And we would hope that obviously we have the provision and the reserve nailed for this quarter, but it's a big deal. So the difference between the 50 and what I would say is in the last 7, 8 quarters, 10, 20, 30 million dollars on the high side a year ago. You know, I think the 50 is certainly more than we would hope to do going forward.

Speaker Change: Change that we've had to make in the 10 20 $30 million range, let's make clear we felt the $52 million adjustment on the existing portfolio was outsized versus previous quarters and it was important we noted that for everyone.

Speaker Change: We would hope that obviously, we have the provision and the reserve nailed for this quarter, but it's a big deal. So the difference between the 50 and what I would say is in the last seven eight quarters 10, 20 $30 million on that on the high side a year ago.

I think the 50 is certainly more than we would hope to do going forward. So again, you've got to gauge what you think our origination volume is the provision there and then what the true up is going to be but again I think this is outsized hopefully on a go forward basis I think the way to think about that is.

Enrique Mayor: So again, you've got to gauge what you think our origination volume is, the provision there, and then what the true-up is going to be. But again, I think this is outsized; hopefully, on a go forward basis. Yeah, I think a way to think about that is, of the 50, probably 20, 25 is probably what we've seen over the past year here, I would say. So you're looking at probably like a 30 million dollar adjustment versus what we typically would have seen on the quarter. Very helpful.

Speaker Change: <unk> probably in 2025 is probably what we've seen over the past year here I'd say, so youre looking at probably like a 30 million dollar adjustment versus what we typically would have seen on the quarter.

Sharon Zackfia: Thank you.

Speaker Change: Very helpful. Thank you.

Sharon Zackfia: Thank you, Sharon.

Speaker Change: Thank you Sir.

John Murphy: Thank you. Our next question will come from John Murphy with Bank of America. Please go ahead. Good morning, maybe just to stay on credit here. I mean, as you see the trajectory, it gets a bit worse, but it's still within the bounds of normal and even the lower end of the normal range. I'm curious how you gauge sort of absolutely how you think about this going forward or sort of the rate of change. Other specific metrics you guys are looking at internally. I mean, if you've kind of cited tightening in April and then tighten again during the quarter, so it seems like you're moving with this.

Speaker Change: Thank you. Our next question will come from John Murphy with Bank of America. Please go ahead.

John Murphy: Good morning, maybe just to stay on credit here I mean, as you see the trajectory.

Speaker Change: A bit worse.

But it's still within the bounds of normal and even the lower end of the <unk>.

Speaker Change: Normal range.

John Murphy: I'm just curious how you how you gauge sort of absolutely. How you think about this going forward as sort of the rate of change.

Pacific metrics you guys are looking at internally.

Speaker Change: You kind of cited tightening in April and then tightened again during the quarter. So it seems like.

John Daniels: But I mean, how do you gauge where this may ultimately land? Yeah, I appreciate the question, John. Yeah, I'll point to one metric, which is, again, our reserve to receivables, which is 2.82. And I think what that number highlights, quarter of a quarter, in the face of a provision of $50 million, which we've just said is relatively outsized, is the tightening that we've done it. And you mentioned that the tightening that we've done, we've looked at our portfolio, we've looked at what we originate, highly profitable loans. We feel good about what's on our books, no doubt about that.

Speaker Change: Youre moving with this but I mean, how do you gauge where this may ultimately.

Speaker Change: <unk>.

Speaker Change: Yes, I appreciate the question John.

Speaker Change: Yes, I'll point to one metric, which is again a reserve to receivables, which is $2 82, and I think what that number of highlights.

Speaker Change: <unk> over quarter in the face of a provision of $50 million, which we've just said is relatively outsized is the tightening that we've done it and you mentioned that the tightening that we've done we've looked at our portfolio. We've looked at what we originate highly profitable loans, we feel good about what's on our books no doubt about that but we really wanted to pinpoint those receivables and those customers that we fell.

John Daniels: But we really wanted to pinpoint those receivables and those customers that we felt could sustain or really perform extremely well in a stressed environment like we're in, and we've done that. And we've tightened, and we're seeing the relative performance play through in our vintage level early looks at losses. How bad could it get? You know, again, hard to say. We feel good about what we have. You've seen a provision that we think really captures where we think losses are headed. We've tightened to the right pockets. You know, it's all very, very profitable. It's the question of what loss rate we are willing to accept, provision for accordingly.

Speaker Change: Could sustain or really performed extremely well in a stressed environment like right and we've done that and we've tightened and we're seeing the relative performance play through in our vintage level early looks at losses, how bad could it get.

Again hard to say, we feel good about what we have you seen a provision that we think really captures where we think losses are headed we've tightened to the right pockets.

Speaker Change: It's all very very profitable. It's the question of what loss rate are we willing to accept provision for accordingly, we have the funding we think in place to really do whatever we want to do going forward.

John Daniels: We have the funding we think is in place to really do whatever we want to do going forward. But again, we're going to be cautious and careful and do what we think makes sense in the quarters to go. So hopefully that addresses your question. And John, you're point of clarification. I think you said tightening in this quarter. We actually get started. And we didn't do any tightening in this quarter. We didn't see the need to. We tightened in the previous quarter. Yeah. Thanks for the clarification. 24 April and 24 of April. We have not done anything significant since April of 24.

Speaker Change: But again, we're going to be cautious and careful and and do what we think makes sense in the quarters to go. So hopefully that addresses your question and John just a point of clarification I think you said tightening in this quarter, we actually.

Speaker Change: We didn't do any tightening in this quarter, we didn't see the need to we tightened in the previous quarter, yes. Thanks for the clarification 'twenty and.

Speaker Change: In 24 of April we have not done anything significant since April of 'twenty, four and don't see anything in the horizon right now okay.

Bill Nash: And don't see anything in the horizon right now. Okay. That's super helpful. And just want to just quick follow up on the sourcing side. I mean, everybody we talked to in the industry is having a tough time finding late model vehicles. It seems like you guys did a really good job in the quarter and actually got the 31,000 out of dealer. So I'm just curious what is changing there. What Edmunds is doing to help you source from dealers who seem like they have a pretty tight hole in these vehicles. Don't want to let them go.

Speaker Change: And just one just quick follow up on the sourcing side.

I mean, everybody we talked to in the industry is having a tough time finding late model vehicles. It seems like you guys did a really good job on the quarter and actually got the 31000 out of dealers. So I'm just curious what is changing there what Edwards is doing to help you source from from dealers, who seem like they have a pretty tight wholly vehicles about one let them go.

Bill Nash: And what kind of impact can that have going forward? Because there is a real shortage in, but you did a good job. This course is trying to understand what changed. Yeah, I think the shortage is really highlighted by the the off least. John, what you know, it's I think it actually bottom about in 22. I think there's a little bit of a step down next year, and 25 minutes will start going, you know, going back, back up. But the reality is because of our diversification of bides, whether the increase in our instant appraisal offers and certainly the max off for the Edmunds team has done a great job.

Speaker Change: And what kind of impact can that have going forward because there is a real shortage, but you did a good job. This quarter. So just trying to understand what changed I think the shortage has really highlighted by the off lease John which you know.

Speaker Change: I think it actually bottomed out in 'twenty, two I think there's a little bit of a step down next year in 'twenty five and then it will start going going back back up but the reality is.

Speaker Change: Because of our diversification of buys whether the increase in our instant appraise offers and certainly the Max off the Edmunds team has done a great job. If you look at year over year, probably got 50% more dealers that are active on it than they were.

Bill Nash: You know, if I look at year over year, we've probably got 50% more dealers that are active on it than they were a year ago. And when it comes to, like, for example, leases, that's never been a significant part of ourselves. But the interesting thing is, with our IO and max off, we actually have better access to them than we did historically, even though the volume is down. For us, the supply just hasn't been an issue. Okay, impressive when maintaining grosses. Thank you. Thank you, John. Thank you.

Speaker Change: A year ago and when it comes to like for example leases Thats never been a significant part of our sales, but the interesting thing is with our Io and Max off where we actually have better access to them than we do.

Speaker Change: Historically, even though the volume is down so for us the supply just hasnt been an issue.

Speaker Change: Okay impressive and maintaining grosses. Thank you.

John Murphy: Thank you John.

Brian Nagel: Our next question will come from Brian Nagle with Oppenheimer. Please go ahead. Good morning. Thanks for your questions. So I have two quick questions on merging together. You're first off with regard to the improving use card unit comps. So first off, congratulations. But, you know, is there anything you could really point to go in the quarter that sort of say underpin that that's strengthening what we've seen in prior quarters.

Speaker Change: Thank you. Our next question will come from Brian Nagel with Oppenheimer. Please go ahead.

Brian Nagel: Good morning, Thanks for taking my questions.

Brian Nagel: So I have two quick questions on both of them together your first off with regard to the used.

Speaker Change: Used car unit comps.

Speaker Change: Relations, but was there anything you can really point to.

Speaker Change: During the quarter that sort of underpins that strengthening what we've seen in prior quarters and then the second question I have with regard to pronounce.

Bill Nash: And then the second question I have with regard to finance. You know, as you look at this, the higher loan loss provision that you took here in the physical second quarter, is that more a reflection of what you're seeing in your portfolio or the inputs that come as a result of your analysis of the overall environment?

Speaker Change: As you look at this.

Speaker Change: Higher loan loss provision that you took your fiscal second quarter is that more reflection of what you've seen in your portfolio.

Speaker Change: Imports have come as a result of your analysis of the overall environment.

John Daniels: All right, so I'll take the first part of that, and John will tackle the second part. So, Brian, on your first part, just kind of improvements and comp kind of drivers, you know, I talked a little bit about this in my opinion. I think it's both internal things that we're doing. I also think there's some macro benefits as well. You know, from an internal standpoint, I'm really pleased with the team and the execution across the board, whether it's finding efficiencies and areas of cost of goods sold, which allow us to do different things with better conversion in our CECs and stores.

Speaker Change: Alright, so I'll take the first part of that and John will tackle the second part so Brian on your first part just kind of improvements in comp kind of drivers.

Speaker Change: I talked a little bit about this in my remarks, I think it's both internal things that we're doing I also think there is some macro benefits as well from an internal standpoint, I'm really pleased with the team and the execution across the board, whether it's finding efficiencies in areas of cost of goods sold which allow us to do different things with better conversion in our CEC in stores.

Bill Nash: The experience, you know, I highlighted that we got order process. You know, last quarter, I talked about the fact that we were testing that. We had it in some stores. We planned to get it out everywhere by the end of the year. We actually got it all out in this very next quarter, which we're thrilled about, which really puts all of our stores to CEC and the cost were all on the same format. So, it makes it much easier and seamless to go back and forth between assistance and help. So, I think that's great. From a macro standpoint, look, prices continue to come down.

Speaker Change: The experience I highlighted that we got order processing last quarter I talked about the fact that we were testing that we had it in some stores we plan to.

Speaker Change: To get it out everywhere by the end of the year, we actually got it all out in the very next quarter, which we're thrilled about which really puts all of our stores the CEC and the customer all on the same format. So it makes it much easier and seamless to go back and forth between assistance and help so I think that's great from a macro standpoint look prices continue to come down and.

Bill Nash: And I think, Enrique, hold me on this, but I think this is seventh quarter in a row of year-over-year price declines in RASP, which, you know, certainly they're not back to where they were, but every bit helps. And then, of course, you know, interest rates, the future of interest rates coming down, I think will help that. We were able to source and have for sale more less than $25,000 cars and more zero to four cars, which I think is great. And then, of course, we're also in this much more of a stable pricing environment. We've talked about that many times over the last few quarters about what happens when you see big price swings, of which we saw two last fiscal year, one year before.

Speaker Change: I think Henry can help me on this but I think this is seventh quarter in a row of year over year price declines in our NSP, which certainly they're not back to where they were but every bit helps and then of course.

Henry: Interest rates the future of interest rates coming down I think will help that we were able to source and have for sale more less than $25000 cars and more zero to four cars, which I think is great and then of course, we also in this much more of a stable pricing environment, we've talked about that many times over the last few quarters.

Henry: About what happens when you see big price swings of which we saw to last fiscal year, one year before we got up and down depreciation, but it's much more normal. So I think it's a combination of things.

Bill Nash: You know, we've got up and down depreciation, but it's much more normal. So, I think it's a combination of things.

John Daniels: Brian, and I'll take your second question.

Speaker Change: Hi, Brian and I'll take your second question basically it was hey, with our larger provision this quarter, but your question was is it really on our portfolio or is it the broader economic environment of paraphrasing, but I wanted to be precise in my answer here. So first diesel and per our reserve methodology. We look at economic factors that are out there.

John Daniels: Basically, it was, hey, with our larger provision this quarter. But your question was, is it really on our portfolio, or is it the broader economic environment? I'm paraphrasing, but I want to be precise from my answer here. So, first and so, and for our reserve methodology, we look at economic factors that are out there, as you might imagine. And so, we weigh them into our decision. But more specifically, our adjustments are based on the observations that we have on our portfolio and the performance that we believe is broad in the industry. You take banks, obviously, the ally banks of the world, other banks, other finance companies; you can see that they're citing similar performance issues.

Henry: There as you might imagine and so we've made them into our decision, but more specifically.

Speaker Change: Our adjustments are based on the observations that we have on our portfolio and the performance that we believe is broad in the industry you take thanks.

Speaker Change: Ally banks of the World other banks other finance companies you can see that they are citing similar performance issues. So I think it's occurring on books across the industry, we absorbed it on ours and we take into account economic factors, but it's largely on us.

John Daniels: So, I think it's occurring on books across the industry. We observed it on ours. We take into account economic factors, but it's largely on us, like on us, on industry performance.

Speaker Change: On us on industry performance.

John Daniels: That's my piece of the code.

John Daniels: Thanks, guys.

Speaker Change: Okay I appreciate the color thanks, guys.

Brian Nagel: Thank you Brian.

Rajat Gupta: Thank you. Our next question will come from Rajat Gupta with JP Morgan. Please go ahead. Great. Thanks for taking the question. Just had one clarification and another question. On the September comes. I did hear it correctly. That's your tracking positive. Yeah, for the September. Well, really, I'm not talking about the quarter. Trend is tracking positive for the quarter. It's in line with the second quarter. It's a little bit softer.

Speaker Change: Thank you. Our next question will come from Rajat Gupta with JP Morgan. Please go ahead.

Rajat Gupta: Great. Thanks for taking the question just had one clarification.

Rajat Gupta: The question on the September comps.

Speaker Change: You heard correctly that you are tracking positive year over year.

Same store basis, so far.

Speaker Change: Yes for the September well really I'm talking about the quarter trend is tracking positive for the for the quarter.

Speaker Change: It's in line with the second quarter, it's a little bit softer, but again I want to point out reach out that there is a day a week.

Bill Nash: But again, I want to point out, Rajat, that there is a day-of-week headwind there for sure with the one last Friday, one last Saturday picking up a Sunday where a bunch of our stores are closed. All that will square away throughout the quarter. Oh, so, so you mean for the quarter, you would expect it to be positive still. You know, that was the comment you were making. At the current trend of sales, yeah. Okay, got it.

<unk> there for sure with the the one less Friday, one less Saturday picking up a Sunday were a bunch of our stores are closed all of that will square away throughout the quarter.

Speaker Change: So you mean for the quarter, you would expect it to be positive.

Speaker Change: Uh huh.

That was the comment you were making.

Speaker Change: The current trend of sales here.

Enrique Mayor: And then just on the advertising spending, I was surprised to see, you know, a big drop there. Curious, like, is there, you know, what's happening there? I mean, is there like some efficiency you're getting with the advertising spending? Is it the right level? So, of course, you know, spending we should be expecting any kind of thought there would be also. Yeah, no, absolutely. I would say that, you know, quarter to quarter, there's going to be some variation, right? But if you look at the first half of this year, we're pretty much in line with where we've communicated is our target.

Speaker Change: Okay got it and then just on the advertising spending.

Speaker Change: I was surprised to see.

Speaker Change: A big drop there I'm curious like is there.

Speaker Change: Whats happening there I mean is there like some efficiency you're getting with your advertising spending is at the right level.

Speaker Change: Our unit spending we should be expecting.

Any further thoughts there would be helpful. Yes.

Speaker Change: Yeah, no absolutely I would say that corner to corner theres going to be some variation right, but if you look at the first half of this year were pretty much in line with where what we've communicated is our target and if you take a look at the back half of the year, it's going to be very similar so I wouldn't read anything into this particular quarter with the marketing spend year over year on a total unit basis.

Enrique Mayor: And if you take a look at the back half of the year, it's going to be very similar. So I wouldn't read anything into this particular quarter with the marketing spend year or year on the total universe. It's just, you know, variances within a quarter. But again, for the first half of the year, pretty much in line with what our expectations are. In the back half of the year, it is in line with what we've communicated.

Yes.

Speaker Change: Variances within a quarter, but again first half of the year pretty much in line with what our expectations are in the back half of the year is in line with what we've communicated.

Enrique Mayor: Thank you.

Speaker Change: Great. Thank you.

David Bellinger: Our next question will come from David Belinger with a Mizzouho. Please go ahead. Hey, thanks for the questions. First one, just on the dorsening trend in a broader auto loan market, you've already got tier three down to about a 7% penetration today. You've tightened up again. Just what's next year?

Speaker Change: Thank you. Our next question will come from David Bellinger with Mizuho. Please go ahead.

Hey, thanks for the questions.

David Bellinger: First one just on the worsening trends in that.

David Bellinger: Broader auto loan market, you've already got tier three down to about 7% penetration today, you've tightened up again.

Bill Nash: You're beginning to plan the business with any type of contingencies for any potential downshift and volumes up in the next few quarters. Maybe just help us think there are any further offsets or cost pullbacks you could have in a wicked and credit environment. Yeah, so I guess let's speak about you mentioned the tier three percentage. I think there's a couple of things going on in the industry. You've got again, worsening performance that we've talked about. And you know, cap cited, you know, they're tightening. I think again, there's tightening that has occurred across the industry as well.

David Bellinger: What's next here, you're beginning to plan the business with any type of contingencies for any potential down shift in volumes over the next few quarters. I mean, maybe just help US think there are any further offsets cost pull back. So you could have in a weakening credit environment.

Speaker Change: Yes so.

Speaker Change: Let's speak about you mentioned the tier three percentage I think theres a couple of things going on in the industry you have got to get again worsening performance.

Speaker Change: We've talked about in cash cited their tightening I think again there is tightening that has occurred across the industry as well that's well documented too so.

Bill Nash: That's well documented too. So I think we've done a great job of absorbing that tightening our lenders on our book of business. We think we have the best credit platform in the industry. We have very loyal partners, and they've done some tightening. No doubt, every lender is going to do their own thing, but they've done some tightening just as we have. Yeah, and we don't know what they're going to do going forward. When we speak to them, they feel like they're in a spot similar to us where they feel good about what they're originating. I want to mention you speak to your tier three comment down to seven percent.

Speaker Change: I think we've done a great job of absorbing that tightening our lenders on our book of business. We think we have the best credit platform in the industry.

Speaker Change: We have very loyal partners and they've done some tightening no doubt every every lender is going to do their own thing, but they've done some tightening just as we have.

Speaker Change: We don't know what theyre going to do going forward.

Speaker Change: When we speak to them they feel like they're in a spot similar to us where they feel good about what theyre originating I.

Speaker Change: As I mentioned you speak to your tier three comment down to 7% I think that's maybe less about the tightening sure theres. Some in there, but a lot of the tier two and tier three volume being down I think thats really an affordability challenge that we have mentioned repeatedly where the consumer.

Bill Nash: I think that's maybe less about the tightening. Sure, there's some in there, but a lot of the tier two and tier three volume being down. I think that's really an affordability challenge that we've mentioned repeatedly, where the consumer, you know, that's looking to purchase. That is shopping is just not in a position to pull the trigger given the payments and the situation occurs. Some of that could be from tightening, no doubt, but if you look at this year, price point, and the monthly payment, I think that's where they're struggling. So I think that's coming from, from as much the consumer as it is the tightening.

Speaker Change: Thats looking to purchase that is shopping is just not in a position to pull the trigger given the payments and the situation that carry some of that could be from tightening no doubt, but if you look at this year.

Speaker Change: This point and the monthly payment I think thats, where theyre struggling so I think thats coming from from as much the consumer as it is the tightening so.

Bill Nash: So I don't know.

Bill Nash: I mean, no other thing I would add is David, is it. Look, I think we feel great about the actions we've done. We feel great about the tightening that we've done. Our lenders and having conversations with them, they've already tightened. They feel good about the Carmack's book of business. John talked about this lower income customer, and he's absolutely right. I think where you're seeing the tier three is not because of necessarily tightening. Sure, where there's been tightening, it's just an affordability issue. And when I look at lower income household income consumers, it's still a fraction of what it used to be.

Speaker Change: The thing I mean, the only other thing I would add David is that look I think we feel great about the actions. We've done we feel great about the tightening that we've done our lenders and having conversations with them they've already tightened they feel good about the Carmax book of business.

John Murphy: John talked about this.

John Murphy: Lower income customer and he is absolutely right I think the where youre seeing the tier three is not because of necessarily tightening sure where theres been tightening. It's just the affordability issue and when I look at.

Speaker Change: Lower income household income consumers, it's still a fraction of what it used to be so we actually think at some point that that will come back.

Bill Nash: So we actually think at some point that that will come back.

Bill Nash: I've got it.

Bill Nash: So I could just ask one more on the digital progression tools. You mentioned order processing. I think there's a new functionality where consumers can complete a transaction from home that's sort of in-store. So is that something available in every location now? And can you talk about any improvement in conversion that you're seeing early on with this? Yeah, so we just rolled it out everywhere recently. You're exactly right. It makes it more seamless. Whether you start in the store or you start online, what was happening before is if you started it online and you worked with the CEC and you did the whole thing through the CEC online, great, because all of our CECs were up on it.

Speaker Change: Got it if I could just ask one more on the digital progression tools you mentioned in order processing I think theres, a new functionality, where consumers can complete attract transaction from home that started in stores is that something available in every location now and can you talk about any improvement in conversion that you're seeing early on with this.

Speaker Change: Yes, so we just rolled it out everywhere recently.

Speaker Change: Youre exactly right. It makes it more seamless whether you start in the store or you start online what was happening before as you. If you started it online and you work with the CEC and you did the the whole thing through the <unk> online great because all of our Ccs were up on it but if you started online work with the CDC and then when you went into the store it wasn't seamless because we didn't have the store.

Bill Nash: But if you started online, work with the CEC, and then you went into the store, it wasn't as seamless because we didn't have the stores on the new order processing. Now we have it everywhere. So it doesn't matter where you start. And this is a benefit not only for the customer, but for the associate as well because when a store associate is working with a customer that's been doing something online, it's now transparent what they did. The next thing that we're doing, which I talked about, was really this shopping cart is what I kind of call it, where now the consumer could get over processing everywhere at first.

Speaker Change: On the new order processing now we have it everywhere so it doesn't matter where you start.

Speaker Change: And this is a benefit not only for the customer but for the associate as well because when a store associate is working with a customer that's been doing something online. It's now transparent what they what they did.

Speaker Change: The next thing that we're doing which I talked about was really this.

Speaker Change: <unk> shot.

Speaker Change: Shopping cart is what I kind of call it where now the consumer because you had to get oil processing everywhere first now when they log into my Carmax account they see everything they did in the store they see everything they've done online. So again, it's a nice little continuation and it prompts them on the next step.

Bill Nash: Now, when they log into my CarMax account, they see everything they did in the store; they see everything they've done online. So again, it's a nice little continuation, and it prompts them on the next step. So it's a little early to talk about what it's generating from a conversion standpoint, although our conversion was up both in the CECs and the stores. We feel like it's just a better customer experience and it will pay off in dividends in the future because the consumers are going to continue to want more.

Speaker Change: So it's a little early to talk about what is what it is generating from a conversion standpoint, although our conversion was up both in the CEC and the stores, we feel like it's just a better customer experience and it will pay off in dividends in the future because the consumers are going to continue to want more.

Bill Nash: Very good. Thanks, Bill.

Speaker Change: Very good thanks, Bill Thank you.

Craig Kennison: Our next question will come from Craig Kinnison with Baird. Please go ahead. Take good morning. Thanks for taking my question. It's somewhat of a follow-up to the last question, but online sales as a percentage of total sales moved up to 15% from 14%. I think it was stuck around 14% for a while.

Thank you. Our next question will come from Craig Kennison with Baird. Please go ahead.

Craig Kennison: Hey, good morning, Thanks for taking my question, it's somewhat of a follow up Kevin last question, but.

Craig Kennison: But online sales as a percentage of total sales moved up to 15% from 14% I think it was stuck around 14% for a while where do you think that metric should be in the coming years, and then as you shift to a lower touch process should we start to see a benefit.

Bill Nash: Where do you think that metrics should be in the coming years? And then, as you shift to a lower-touch process, should we start to see a benefit in unit profitability because of the low-touch nature of that transaction? Yeah, so on the 15%, it's been around 14, I think, for a couple of quarters. They did tick up a little more. Quite awesome. I'm more excited about the two-point tick-up anomaly because that's where most of the customers are. There's only so many folks that just want to do everything online. And I would point out the 15% of people that did it online; the vast majority haven't still wanted to come into the store to actually do the pick-up.

Speaker Change: In unit profitability because of the low touch nature of that transaction, yes.

Speaker Change #100: Yes, so on the 15% it's been around 14, I think for a couple of quarters. They did tick up a little more quite honestly.

Speaker Change #101: More excited about the two point tick up in omni because thats, where most of the customers are you know there's only so many folks that just want to do everything online and I would point out.

Speaker Change #100: The 15% of people that did it.

Speaker Change #101: Online.

Speaker Change #101: Asked majority of them still wanted to come into the store to actually do the pick up.

Enrique Mayor: Talk about the car, that kind of thing. As far as the more self-progression customers do, that is from an efficiency standpoint. That is a win.

Speaker Change #102: Talk about the car that kind of thing.

Speaker Change #102: As far as more the more self progression customers do that is from from.

Speaker Change #102: And efficiency standpoint that.

Enrique Mayor: And I'll let Enrique talk about that. As I mentioned in my preparatory remarks, we're really excited about the progress that we've made on our Omni Selling Model as compared to our pre-omni time period. Not only from a year-over-year basis, but also relative to pre-omni. This quarter, we were actually more efficient on those key metrics. There's key metrics that we've been talking about consistently here for a while. It's on a total basis, on a gross margin basis, and also on a retail basis, which we're more efficient. We had committed to making progress on that and being as efficient and even more efficient.

That is that as a win and I'll, let Enrique talk.

Enrique: As I mentioned in my prepared remarks, we're really.

Enrique: We're really excited about the progress that we've made on our omni selling model as compared to their pre omni time period, not only from a year over year basis, but also relative to pre <unk>. This quarter, we were actually more efficient on those key metrics right. So this key metrics that we've been talking about consistently here for awhile incentive her total unit basis on improved gross margin.

Enrique: And then also on a per retail unit basis, which we were more efficient so.

Enrique: We had committed to making progress on that and being as efficient and even more efficient and we're delivering on that and that should continue to accelerate here in an environment where sales come back in.

Bill Nash: And we're delivering on that, and that should continue to accelerate here in an environment where sales come back, and we should continue to see that flow through. Bill, just to push back on your point, customers that want to purely digital experience really only have a couple of choices: you and a top competitor, and I would think that your perspective is you should have your fair share of that. Do you think you're getting it? Yeah, the way I think about it is, I don't have a target for any, whether they want to do it all in the store, whether they want to do a combination of the two, which is really what Omnies is all about. They want to do everything; we want to have the best process for all three of those, so we're kind of agnostic when it comes to how they want to deliver. I think it's great 15% of them, but we don't, you know, force them one way or the other. So yeah, I want my, I definitely want our fair share of that, but I also don't mind if they think that that's what they want to do, and they end up coming in or doing everything in the store.

Enrique: We should continue to see that flow through so we were really really pleased.

Enrique: And bill just to push back on.

Enrique: Point.

Customers that want a purely digital experience really only have a couple of choices you in a top competitor and I would think that your perspective is you should have your fair share of that do you think you're getting at.

Bill: The way I think about it is I don't have a target for whether they want to do it all in the store whether they want to do a combination of the two which is really what omni is all about it they want to do everything.

We want to have the best process for all three of those so we're kind of agnostic when it comes to how they want it delivered I think its great 15% of them, but we don't force them, one way or the other so yes.

Bill: Yes, I want my definitely want our fair share of that but I also don't mind, if they think that that's what they want to do and they end up coming in are doing everything in the store.

Bill Nash: That's fair, thanks, Bill. Thank you, Craig.

Bill: That's fair Thanks, Bill Thank you Craig.

Scott Ciccarelli: Thank you. Our next question will come from Scott Chica Reilly with Truist. Please go ahead. Good morning, guys. Apologies in advance for another finance question. Previously, you guys had been lowering provisions despite higher delinquencies, and I know John, you were talking about a lot of different factors that you guys consider, but was the provision changed based primarily on delinquencies increasingly converting into write-offs in your book, and then related that with delinquencies hitting a percent rates on your subprime after about three months. What are your initial loss expectations for the subprime polls? Thanks. Sure. Yeah, on your first question, yeah, if you look at kind of, and again, we've said our provision is going to function of our origination mix, which is going to have different levels of provision at any point in time, but certainly there's this added component, and you know, if you look, we have been, we caught throwing up, adding volume based on the performance we've seen, cited the delinquency level, and at any given month, then I think we said that we've definitely had seen our customers operate fine in delinquency.

Bill: Okay.

Bill: Thank you. Our next question will come from Scot Ciccarelli with Truest. Please go ahead.

Scot Ciccarelli: Good morning, guys apologies in advance for another finance question.

Speaker Change #104: Previously you guys had been lowering provision like higher delinquencies and I know John you were talking about a lot of different factors that you guys consider but was the provision change based primarily on delinquencies.

Speaker Change #105: Recently converting into write offs in your book and then related to that with delinquencies hitting 8% rates on your subprime after about three months what are your initial loss expectations for the subprime pools.

John Murphy: Sure Yeah on your first question, Yes, if you look at kind of and again, we've said our provision is going to be function of our origination mix, which is going to have different levels of provision at any point in time, but certainly there is this this added component and if you look we have been.

John Murphy: We call it showing up adding volume based on the performance we've seen decided the delinquency level in any given month and I think we said that we definitely had seen our customers operate fine and delinquency they might come in they might come out, but they were not rolling to loss at nearly the historic levels.

John Daniels: They might come in, they might come out, but they were not rolling to loss at nearly the historic levels that we may have seen five, ten years ago. It clearly was somebody that was navigating the environment fairly well. It so happens in this quarter, we saw that erode a little bit, and that's why we made the outsize adjustment. But again, it's always sort of onus performance, what we're seeing, coupled with obviously the external or the economic factors, but it's mostly the onus performance. We feel good about where we sit today with our reserve. We've made the adjustment; it was certainly outsized, it captures the performance, and we think our tightening will drive through to actually, ultimately, hopefully, not having to make additional adjustments.

We may have seen five years 10 years ago. It clearly with somebody that was net navigating the environment fairly well it so happens in this quarter.

John Murphy: We saw that erode a little bit and Thats why we made the outsize adjustment, but again, it's always sort of on US performance, what we're seeing coupled with obviously the external or the economic factors, but it's mostly the O&M performance, we feel good about where we sit today with our reserve we've made the adjustment it was certainly outsized it captures the performance and.

John Murphy: We think our tightening will drive through to actually ultimately hopefully not having to make additional adjustments yeah. It's Scott I think Thats fair.

John Daniels: Yeah, and it's got, I mean, I think that's a fun point that I want to make sure I kind of reinforce in that, just because you're lowering the provision in previous months doesn't mean you're not doing true-up. We were doing true-ups, and just the origination piece just speaks to the tightening that we've been doing. So, again, I just want to make sure that that point resonates with everyone.

Scott: One point that I want to make sure.

Speaker Change #106: Kind of.

Scott: Reinforcing that just because you're lowering the provision in previous months doesn't mean, you're not doing true up we were doing true ups at just the origination piece just speaks to the tightening that we've been doing so again I just want to make sure that that point resonates with everyone. Okay. And then I will touch on your last question I think you spoke about the subprime. So let's just talk about the different pockets and again, it's more of a continuous rather.

John Daniels: Okay, and then I'll touch on your last question. I think you spoke about the subprime. So let's just talk about the different pockets, and again, it's more of a continuous rather than this sort of discreet the way I'll describe it, but the tier one book of business, obviously we've cited that is our bread and butter. That is where we have operated; historically, it has been that two to two and a half percent loss range. Obviously, we're excited about getting more full spectrum. We've operated in the tier three space. You know, we've said yes, certainly a higher loss level. It's been, way back in the day, it was maybe 1% of our portfolio, but 10% of our losses, so you can do the math there on the loss level you'd expect.

Scott: And then there's sort of a discrete the way I'll describe it but the tier one book of business. Obviously, we've cited that is our that is our bread and butter as where we have operated historically it has been that two to two 5% loss range. Obviously, we're excited about getting more full spectrum. We've operated in the tier three space. We've said, yes, certainly a higher loss level, it's been way back in the day. It was maybe one <unk>.

Scott: Percent of our portfolio by 10% of our losses. So you can do the math there on when the last level you would expect and then tier two is somewhere in between at different continuum. So.

John Daniels: And then tier two is somewhere in between at different continuums. So, you know, when we look at a higher delinquency book, it is, you know, something that we manage; we believe it's highly profitable; we provide a great credit offer to the customer. I think for an earlier question, you know, we'll go in that space when we think it makes sense and with the volume it makes sense. We're just excited for the flexibility to be able to do it, have the models that we're going to hone to be able to do it, and again, we think it's just good business to be a part of.

Scott: When we look at a higher delinquency book it is.

Scott: Something that we manage we believe it's highly profitable we provide a great credit offer to the customer I think per an earlier question. We will go in that space. When we think it makes sense and with the volume. It makes sense. We're just excited for the flexibility to be able to do it have the models that we're going to hone to be able to do it and again, we think it is.

Scott: Good business to be a part of.

John Daniels: Great.

John Daniels: Thanks a lot, guys.

Speaker Change #108: Great. Thanks, a lot guys. Thanks.

Scott: Thanks Scott.

John Daniels: Thank you.

Christopher Pierce: Our next question will come from Chris Pierce with Needham. Please go ahead. Hey, good morning. Just two questions. Do you think CDK helped the comp at all in the quarter given more independent dealers kind of rely on their software suite? And then other gross margins, you called out some. We've seen headwinds; you called out some tailwinds. I just want to know the right way to kind of think what the piece is going forward.

Chris Peers: Thank you. Our next question will come from Chris peers with Needham. Please go ahead.

Chris Peers: Hey, good morning, just two questions do you think CDK.

Chris Peers: Comp at all in the quarter, given more independent dealers kind of rely on their software suite.

Speaker Change #110: And then the gross margins you called out some we've seen headwinds you called out some tailwind I guess one of them the right way to kind of think about the pieces going forward.

Bill Nash: Okay, on the CDK, look, I don't think it really had any material impact. I think a lot of dealers had some work around. Plus, if I just look at our comp cadence through the quarter, it got better each month. So August was over July, and I think CDK kind of worked itself out through that point. So that's why I just don't think it had a material impact.

Chris Peers: Okay.

Speaker Change #111: The CDK look I don't think it really had any material impact I think a lot of dealers had some some workarounds plus if I just look at our comp cadence through the quarter. It got better each each month. So August was over July and I think CDK kind of work itself out through that point. So that's why it's I just don't think it had a material impact and then what was your second question.

Enrique Mayor: And then what was your second question? Other gross margins. On other gross margins. Yeah, it's been trending quite positively. And then you, you know, we have the ECP tailwinds, but you called out some equipment headwinds. They just want to know kind of the right way to think about it, if I heard that right. Yeah, no, absolutely. So for other margins, look, we are really pleased with our performance and other gross margin that rose by 36 million this quarter. That's a 33% year-over-year increase, really driven by two components, right? Service continues to see year-over-year improvement, which we committed to at the beginning of the year.

Speaker Change #112: Although gross margin and other gross margin, it's been trending quite positively and then we had the ETP.

Speaker Change #113: Tailwind, but you've called out some equipment headwinds I just wanted to kind of the right way to think about it if I heard that right.

Speaker Change #114: So if our other margins look we are really pleased with our performance and other gross margin rose by $36 million this quarter Thats, a 33% year over year increase really driven by two components rates service continues to see year over year improvement, which we committed to at the beginning of the year I expect to continue to see that improvement in the back half of the year. It is somewhat governed by sales given the leverage deleverage nature.

Enrique Mayor: I expect to continue to see that improvement in the back half of the year. It is somewhat governed by sales, given the leverage due leverage nature. But all things being equal, I would expect to see continued improvement year over year. And for EPP, we just, again, continue to see improvement. I'd expect to see that because it's really margin that we took earlier periods. And so I'd expect to see that increase in Q3. And then in Q4, we're going to start copying over some of the margin testing that we've done the previous year, but nevertheless, would still expect to see some favorability year-over-year.

Speaker Change #114: But all things being equal I would expect to see continued improvement year over year and for <unk>. We just again continue to see improvement I would expect to see that because it's really margin that we took.

Speaker Change #114: Earlier periods, and so I'd expect to see that increase in Q3, and then in Q4, we're going to start comping over some of the margin testing that we've done in the previous year, but nevertheless, we still expect to see some favorability year over year. So we're bullish on our other margin performance in relation to you.

Enrique Mayor: So we're bullish on our other margin performance. In my prepared remarks, I talked about a potentially, you know, there may be up to $10 million impact. That would not be in gross margin. That would be an other income and expense, so a non-gross margin, non-SGNA impact. And that's really just taking a potentially taking a charge on, as we optimize our logistics network. You know, we took a look at the associate side. We got to take a look at the truck side as well. So we need to make sure that we have the right amount of trucks ourselves, that are dedicated partners, also have the right amount of trucks.

Speaker Change #114: In my prepared remarks, I talked about a potentially there may be up to $10 million impact that would not be in gross margin that would be in other income and expense non gross margin non SG&A impact and Thats really just taking a potentially taking a charge on as we optimize our logistics network. We took a look at the <unk>.

Speaker Change #114: CN side, we've got to take a look at the truck side as well so we need to make sure that we have the right amount of trucks ourselves at our dedicated partners also have the right amount of trucks and we expect that there may be a charge out there, but we're still working through that and that would be a one time hit and so just wanted to call that out.

Enrique Mayor: And we expect that there may be a charge out there, but we're still working through that. And that would be a one-time hit, so just wanted to call that out for the third or fourth quarter.

Speaker Change #114: Our fourth quarter.

Bill Nash: Perfect. And then just one last one, we've seen strength in the wholesale market, kind of non-seasonal strength. And I don't think you know, used car retailers have much price in power right now.

Speaker Change #115: Perfect and then just one last one we've seen strength in the wholesale market.

Speaker Change #116: Non seasonal strength and I don't think used car retailers have much pricing power right now so how should we think about gpus from heaters could there be modest GPU compression around that or am I overreaching too.

Bill Nash: So how should we think about GPUs from here? Could there be modest GPU compression around that, or am I overreading to, you know, a month of strength in the wholesale market? You mean, are we thinking that our GPU would come under strain going forward? Is that the question? Yeah, it's been, it's cost to use car dealers more to buy cars in the wholesale market, and, you know, pricing power is sort of limited right now, based on where we're at as far as affordability. Yeah, look, I, you know, our self-sufficiency, when you look at what we're buying through the appraisal lane and through dealers, as well over 70%.

Speaker Change #116: The strength in the wholesale market.

Speaker Change #117: You mean are we thinking that our GPU would come under strain going forward is that the question.

Speaker Change #118: Yeah, it's been it's costing us cargo was more to buy cars in the wholesale market and.

Speaker Change #119: <unk> power sort of limited right now based on where we're at as far as affordability.

Speaker Change #118: Yeah.

Speaker Change #120: Our self sufficiency when you look at what we're buying through the appraisal lane and through dealers as well over 70% I think that plays a lot into our ability to to get supply I feel great about our own wholesale business. The team is doing a phenomenal job if I look at this probably speaks to your point.

Bill Nash: I think that plays a lot into our ability to get supply. I feel great about our own wholesale business. The team's doing a phenomenal job. If I look at the, and this probably speaks to your point, you know, I look at how many dealers are for every car. That continues to improve, which, you know, obviously helps us continue to manage margin, be able to offer the customers as much as possible for their vehicles. Again, I think some of the concerns on this supply side, again, we just have not, because of our self-sufficiency, is so high, you know, we just have not had an issue.

Speaker Change #120: I look at the how many dealers are for every car that continues to improve which obviously helps us continue to manage margin be able to offer the customer as much as possible for their vehicles, though.

Speaker Change #120: Again, I think some of the concerns on the supply side.

Speaker Change #120: So again, we just have not because of our self sufficiency is so high we just have not had an issue.

Bill Nash: Thank you.

Bill Nash: Perfect. Thank you.

Okay perfect. Thank you. Thank you.

Christopher Bottiglieri: Our next question will come from Chris Battiglieri with B&P Paribas. Please go ahead. Hey guys, Ian Davis on for Chris. Thanks for taking the question. Another one on credit, but hopefully a little bit more high level. What are your peers online peers who've been able to meet and expand their credit for penetration at a level that we would estimate to be in the mid 80s versus your low 70s? So acknowledging some of the conditions in the current environment that you've alluded to previously, what are the constraints that prevent you from getting to those levels today?

Speaker Change #121: Thank you. Our next question will come from Chris, particularly <unk> with BNP Paribas. Please go ahead.

Speaker Change #121: Hey, guys. This is Ian Davis on for Chris. Thanks for taking the question another one on credit, but hopefully a little bit more high level.

One of your peers online peers has been able to meaningfully extend their credit penetration at a level that we would estimate to be in the mid eighties versus your low seventy's today. So acknowledging some of the conditions in the current environment that you've alluded to previously what are the constraints that prevent you from getting to those levels today and maybe what could you tell us about them.

Bill Nash: And maybe what could you tell us about the makeup of the other 30% of customers that aren't procuring financing from CarMax or your lending partners?

Speaker Change #122: The other 30% of customers that arent procuring financing from Carmax or your lending partners.

Bill Nash: Sure. Yeah, I mean, I think speaking to us specifically, you know, I'll just break down our penetration. Again, we are looking to be a full spectrum lender, provide all customers availability to credit. So we think, you know, that's why we have, you know, many lenders in our platform that have been there a long time. And we think we provide great credit offers across this credit spectrum. We're not trying to focus on a low rent, a middle end, a high end. We want to provide it to all customers. And so, therefore, we have additional lenders. Everybody has is going to benefit from CarMax.

Speaker Change #122: Sure Yes.

Speaker Change #124: I think yes.

Speaker Change #125: Speaking to us specifically, yes.

Speaker Change #126: Yeah, and I'll just break down our penetration again, we are looking to be a full spectrum lender provide all customers availability to credit. So we think that's why we have many lenders in our platform that had been there a long time and we think we provide great credit offers across the credit spectrum, we're not trying to focus on a lower end and middle end to high end we want.

Speaker Change #126: It provided to all customers and so therefore, we have additional lenders everybody has is going to benefit from carmax, our partner lenders want volume as well we have volume, we know theres opportunity potentially to grow our volume, but we're looking to provide great offers to all customers within the credit spectrum. That's just an overarching goal of ours.

Bill Nash: Our partner lenders want volume as well. We have volume. We know there's opportunity potentially to grow our volume. But we're looking to provide great offers to all customers within the credit spectrum.

Bill Nash: That's just an overarching goal of ours with regard to the, you know, what prevents cap from growing meaningfully. I think we've decided we're very excited about the ability to choose to grow when it makes sense. But again, we're not going to target one particular pocket. We want to make sure we're making offers across to your two, across to your three, but staying true to who we are into your one. That is what we do. So that's specifically to CAF.

Speaker Change #126: With regard to the what prevents caf from growing meaningfully I think we've decided we're very excited about the ability to choose to grow when it makes sense, but again, we're not going to target. One particular pocket, we want to make sure we are.

Speaker Change #126: We are making offers across tier two across tier three but staying true to who we are in tier one that is what we do so.

Bill Nash: You asked the question about those not procuring finance from CarMax and using a third party. Again, those customers are absolutely going to be your higher-end consumer. It's going to be those that are going to come down and put cash right down because they don't want to pay higher interest rates that are out there in this environment. They are affiliated with the credit union, who absolutely is operating at a cost upon advantage. So they're very rate sensitive. And those are folks that we try to compete with at CAF. But sometimes it's an environment where it's typical to do so.

Speaker Change #126: So specifically to cap you asked the question about those not procuring finance from.

Speaker Change #127: Carmax and using a third party again those customers are absolutely going to be your higher end consumer it's going to be those that are going to come down and put cash rate down because they don't want to pay higher interest rates that are out there in this environment. There are affiliated with the credit Union, who absolutely is operating at a cost of funds advantage. So there.

Speaker Change #127: We're very rate sensitive and those are folks that we try to compete with a caf, but sometimes it's an environment, where it's difficult to do so and as long as we're looking to sell cars to those consumers and focusing on those consumers, which we are we are going to have percentage of volume in this case, it's maybe a little more outsized.

Bill Nash: And as long as we are looking to sell cars to those consumers and focusing on those consumers, which we are, we are going to have a percentage of volume. In this case, it's maybe a little more outsized, more than 30% this quarter of using external financing. That will shrink as the low-rank consumer comes back. We believe that 100% because they will again increase their size of the pie, thus lowering other the the the non finance size of the pie. So a lot in that answer, a lot of your question. I want to make sure I captured it holistically.

Speaker Change #127: More than 30% this quarter of using external financing that will shrink as the low ranked consumer comes back we believe that 100% because they will again increase their size of the pie thus lowering the.

Speaker Change #127: The nonfinancial size of the pie. So a lot in that answer a lot of your question I want to make sure I captured it holistically, yes, im going to add.

Bill Nash: I want to add a little bit more to that answer, which is, look, we can absolutely go there tomorrow. We would just limit the number of partners. We wouldn't allow three-day payoffs. But in reality, when you sell this many cars to the wide spectrum, especially your rate-sensitive customers, having more partners for lots of reasons is a great thing. Now, do we have an opportunity to continue to increase our penetration? Absolutely. And we absolutely well over time. But I think you have to do it in a thoughtful way, especially as your volume grows.

Speaker Change #128: I'm going to add a little bit more of that answer which is look we could absolutely go there tomorrow.

We would just limit the number of partners, we wouldn't allow three day payoffs, but in reality when you sell this many cars to the wide spectrum, especially you are rate sensitive customers, having more partners.

For lots of reasons is a great thing now do we have an opportunity to continue to increase our penetration absolutely and we absolutely well over time, but I think you have to do it in a thoughtful way, especially as your volume growth.

Bill Nash: Scott, I really appreciate the answer to move you. Thank you.

Speaker Change #129: Got it really appreciate the answers.

John Healy: We'll take our next question from John Healy with North Coast Research. Please go ahead. I think stick my question. Just wanted to ask just one big picture type question. You guys have talked about doing some things on the logistics side, which kind of get you to where you want to be. But I haven't heard a lot of talk about the recon side of things, and I was just curious if you could address that. If you're kind of happy with the state and approach to reconditioning and the ability to get, you know, solid margin out of the business, or you may be rethinking or retooling some things there in the background.

Speaker Change #130: Thank you we'll take our next question from John Healy with Northcoast Research. Please go ahead.

Thanks for taking my question just wanted to ask just one big picture type question, you guys have talked about doing some things on the logistics side, which.

John Healy: It kind of gets you to where you want to be but I haven't heard a lot of talk about the recon side of things.

John Healy: Just curious if you could address that if youre kind of happy with the state and approach to reconditioning and the ability to get.

John Healy: All in margin on that business or are you, maybe rethinking retooling some things there in the background.

Bill Nash: Thanks. Yeah, no, John. I mean, look, this is an area of focus. I talked about it last quarter. I mentioned it in the, the mark just high level. I didn't give any specific examples, but I feel great about the initials that we're doing on the reconditioning side. The difference between reconditioning and logistics is reconditioning. It's going to be a lot of little things adding up. So think about, you know, we're seeing some great improvements in some part utilization, whether it's OEM, non-OEM, wind replaced, not to replace. We've got bringing some stuff in house to not subletting as much.

John Healy: Yeah, No John I mean look this is an area of focus I talked about it last quarter I mentioned it in the remarks, just high level I didn't give any specific examples but I feel great about the initiatives that we're doing on.

John Healy: The reconditioning side, the difference being reconditioning and logistics is reconditioning is going to be a lot of little things, adding up so think about we're seeing some some some great improvements in some part utilization, whether it's OEM non OEM window replace not to replace we've got bringing some stuff in house, so not subletting as much.

Bill Nash: Better capacity utilization, outliers, store performance, you know, whip improvements, time for things. There's a lot of things that will add up to some of the internal goals that we've talked about. And quite honestly, you know, last quarter, I said, look, we're going after a couple hundred bucks between, you know, reconditioning and logistics, which that's not insignificant. And obviously, as you realize that you then have the luxury of deciding what to do with it, pass it on to customers, or, you know, take it to margin.

John Healy: Better capacity utilization outlier store performance.

John Healy: With improvements timeframe, there's a lot of things that will add up to.

John Healy: Some of the internal goals that we've talked about and quite honestly you know last quarter. I said look we're going after a couple of hundred bucks between reconditioning and logistics, which that's not insignificant and obviously as you realize that you then have the luxury of deciding what to do with it pass it onto customers or take it take it to margin. So we feel good about our <unk>.

Bill Nash: So we feel good about our progress there on both fronts, whether it's logistics, or it's in the reconditioning, and both of which we're going to continue to get things over the next year from a benefit standpoint.

John Healy: <unk> there.

John Healy: On both fronts, whether it's logistics or it's in the reconditioning and both of which we're going to continue to get things over the next year from a benefit standpoint.

Enrique Mayor: And just one minutia question for me, I think advertising expense was actually down year over year for you guys, and the cops were up. So just kind of wondering if there was some timing thing there, or if you guys are, you know, maybe holding back or changing the way you're thinking about at spending. Thanks. Yeah, no, it was purely timing. If you look at the first half of the year, we're pretty much on course for what we had communicated was the target for the year. And so the first half of the year I expect is going to be the similar to the back half in terms of the per total unit spend.

Speaker Change #132: Got it and just one on Medusa question for me I think AD expense advertising expense was actually down year over year for you guys. In the comps were up so I'm just kind of wondering if there were some timing thing there or if you guys are.

Maybe holding back or change in the way youre thinking about that spending thanks.

Speaker Change #133: Yes, no. It was purely timing if you look at the first half of the year, we're pretty much on course for what we had communicated was the talk.

Speaker Change #133: For the year and so the first half of the year I expect there's going to be similar to the back half in terms of the per total unit spend so it was purely some timing in the second quarter.

Enrique Mayor: So it was purely timing in the second quarter.

Bill Nash: Great. Thank you.

Great. Thank you.

Operator: As a reminder, if you would like to ask a question at this time, please press star one.

Speaker Change #134: Thank you as a reminder, if you would like to ask a question at this time. Please press star one.

David Whiston: We'll take our next question from David Wiston with Morningstar. Please go ahead. Thanks. Good morning.

Speaker Change #135: We'll take our next question from David Whiston with Morningstar. Please go ahead.

David Whiston: I wanted to go back to that explanation on the other financing channel. You said that they're very interest rate sensitive consumers, but you also said that they're more able to pay cash. So are most buyers in that bucket? Are they more budget conscious or really more wealthy or unable to pay cash? In other words, are they borrowing more, or are they just more cash buyers? Yeah, that consumer typically is definitely higher-end consumer. Again, they're coming in with the affinity check with their bank or their credit union, but generally a very rate-sensitive consumer, but absolutely a majority of that is cash.

David Whiston: Thanks, Good morning wanted to go back to that explanation on the other financing channel you said that they are very interest rate sensitive consumers, but you also said that they are more able to pay cash or most buyers.

Speaker Change #136: Buyers in that bucket are they more.

Budget conscious or really more wealthy are unable to pay cash or in other words are they borrowing more and they just more all cash buyers that consumer typically is definitely a higher end consumer.

Speaker Change #138: They are coming in with the.

Speaker Change #138: The affinity check with their bank or credit Union, but generally are very rate sensitive consumer, but absolutely a majority of that is cash and cash in some form it may be true cash it may be home equity loan it may be personal loan, but those are people that have generally have the wherewithal to not pay the higher interest rates that are out there today.

Bill Nash: It's in cash in some form. It may be true cash. It may be a home equity loan. It may be a personal loan, but those are people that generally have the wherewithal to not pay the higher interest rates that are out there today. And you'll find people that are going to do that in all interest rate environments, but especially in this environment, it's cash users highly rate sensitive.

Speaker Change #138: And Youll find people that are going to do that in all interest rate environments, but especially in this environment. It's it's cash users highly rate sensitive.

Enrique Mayor: Okay, and on the kept allocation, do you see buybacks continuing, or are you feeling more cautious given the declines and credit quality? I'm feeling like we're on the pace that we communicated, and I would expect to continue to see that pace for the bounce of the year. Okay, thank you.

Speaker Change #139: Okay and on the capital allocation do you see buybacks continuing or are you feeling more cautious given the declines in credit quality.

Speaker Change #140: I'm feeling like we're on the pace that we had communicated and I would expect to continue to see that pace.

The balance of the year.

Speaker Change #141: Okay. Thank you.

Speaker Change #141: Yeah.

Bill Nash: Thank you. At this time, I'm showing no further questions in queue. I'll turn the call back to Bill for any closing remarks. Okay, thank you, Todd.

Speaker Change #141: Thank you at this time I'm showing no further questions in queue I'll turn the call back to Bill for any closing remarks, alright. Thank you Todd I want to thank everybody for joining the call and your questions and your support obviously, we feel good about our progress.

Bill Nash: Listen, I want to thank everybody for joining the call and your questions and your support, obviously. We feel good about our progress.

Operator: Also, I just want to share my thoughts are definitely with our associates and their families and the communities as Hurricane Helene approaches. We have a number of stores in the storm's path, and as always, the safety of our associates is our top priority to those associates and everyone that's being impacted. Please stay safe, and we will talk again next quarter. Thank you.

Also I just want to share my thoughts are definitely with our associates and their families and the community community. There's a hurricane Helene approaches we have a number of stores in the storm's path and as always the safety of our associates is our top priority to those associates and everyone. That's been impacted please stay safe and we will talk again next quarter. Thank you.

Speaker Change #141: Yeah.

Operator: Thank you, ladies and gentlemen. That concludes the second quarter fiscal year 2025 earnings release conference call. You may disconnect your line at this time and have a wonderful day.

Speaker Change #142: Thank you, ladies and gentlemen that concludes <unk> second quarter fiscal year 2025 earnings release Conference call. You may disconnect. Your line at this time and have a wonderful day.

Speaker Change #142:

Speaker Change #142: [music].

Speaker Change #142: Okay.

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Speaker Change #142: Sure.

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Speaker Change #142: Uh huh.

Yeah.

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Speaker Change #142: Yes.

Speaker Change #142: [music].

Speaker Change #142: Hum.

Speaker Change #142: Yeah.

Speaker Change #142: Okay.

Yeah.