Q1 2026 Carmax Inc Earnings Call
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Operator: Welcome to the First Quarter Fiscal Year 2026 Carmax Earnings Release Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.
Welcome to the first quarter fiscal year 2026, Carmax earnings release Conference call.
At this time all participants are in a listen only mode.
After the Speakers' 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, Vice President, Investor Relations. Please go ahead. Thank you, Nikki.
Speaker Change: I would now like to hand, the conference over to your Speaker today, David Loewenstein, Vice President Investor Relations. Please go ahead.
Speaker Change: Thank you Nikki good morning, everyone and thank you for joining our fiscal 2026 first quarter earnings conference call.
David Lowenstein: Good morning, everyone. And thank you for joining our fiscal 2026 first 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 Executive Vice President, Carmax Auto Finance.
Speaker Change: Here today with Bill Nash, our President and CEO Enrique Mayor Moore, our executive Vice President and CFO and John Daniels, Our executive Vice President Carmax Auto Finance, let me remind you our statements today that are not statements of historical fact, including but not limited to statements regarding.
David Lowenstein: Let me remind you, our statements today that are not statements of historical fact, including, but not limited to, statements regarding the company's future business plans, prospects, and financial performance, are forward-looking statements we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our current knowledge, expectations, and assumptions, and are subject to substantial risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, we disclaim any intent or obligation to update them.
Speaker Change: The company's future business plans prospects and financial performance are forward looking statements, we make pursuant to the safe Harbor provisions.
Speaker Change: Private Securities Litigation Reform Act of 1995. These statements are based on our current knowledge expectations and assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially from our expectations.
Speaker Change: In providing projections and other forward looking statements, we disclaim any intent or obligation to update them.
David Lowenstein: For additional information on important facts and risks that could affect these expectations, please see our Form 8K filed with the SEC this morning and our annual report on Form 10K for fiscal year 2025 previously filed with the SEC.
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.
Speaker Change: In our report on Form 10-K for fiscal year 2025, previously filed with the SEC.
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: Do you have any follow up questions. After the call. Please feel free to contact our Investor Relations Department at 8047, 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 ups Bill.
Bill Nash: Bill? Thank you, David.
Speaker Change: Thank you David Good morning, everyone and thanks for joining us our first quarter results highlight the strength of our earnings growth model, which is underpinned by our best in class Omnichannel experience diversity of our business and a sharp focus on execution.
Bill Nash: Good morning, everyone, and thanks for joining us. Our first quarter results highlight the strength of our earnings growth model, which is underpinned by our best-in-class omnichannel experience, diversity of our business, and a sharp focus on execution. Across the company, we are operating with a continuous improvement mindset. We are focused on growing sales and getting market share, expanding gross profit, managing CAF's credit spectrum expansion, leveraging SG&A, and buying back shares. This focus, combined with our ability to provide a unique customer experience across our large total addressable market, provides a long runway for profitable growth. In the first quarter, on a year-over-year basis, we grew retail and wholesale unit volume.
Speaker Change: Across the company, we are operating with a continuous improvement mindset.
Speaker Change: Focus on growing sales and gaining market share expanding gross profit managing cash credit spectrum expansion, leveraging SG&A and buying back shares. This focus combined with our ability to provide a unique customer experience across our large total addressable market provides a long runway for profitable growth.
Speaker Change: In the first quarter on a year over year basis, we grew retail and wholesale unit volume, we delivered robust retail wholesale E. P. P and service Gpus, we bought more vehicles from both consumers and dealers achieving an all time record with dealers. We grew cash net interest margin and continued to advance our full credit spectrum.
Bill Nash: We delivered robust retail, wholesale, EPP, and service GPUs. We bought more vehicles from both consumers and dealers, achieving an all-time record with dealers. We grew CAF's net interest margin and continued to advance our full credit spectrum underwriting and funding model. We materially leveraged SG&A as a percent of gross profit. We doubled the pace of our share repurchases and we achieved 42% EPS growth. This marks our fourth consecutive quarter of positive retail unit comps and double-digit year-over-year earnings per share growth. During the period, we delivered total sales of $7.5 billion, up 6% compared to last year, reflecting higher volume partially offset by lower prices.
Speaker Change: From underwriting and funding model, we materially leveraged SG&A as a percent of gross profit we.
Speaker Change: We doubled the pace of our share repurchases and we achieved 42% EPS growth.
Speaker Change: This marks our fourth consecutive quarter of positive retail unit comps and double digit year over year earnings per share growth.
Speaker Change: During the period, we delivered total sales of $7.5 billion up 6% compared to last year, reflecting higher volume, partially offset by lower prices.
Bill Nash: In our retail business, total unit sales increased 9% and used unit comps were up 8.1%. Average selling price was $26,100, a decrease of approximately $400 per unit year over year. First quarter retail gross profit per use unit was an all-time record driven by strong demand and operating efficiencies across our logistics network and reconditioning operations. Wholesale unit sales were up 1.2% versus the first quarter last year. Average wholesale selling price declined approximately $150 per unit to $8,000. Also gross profit per unit was historically strong and similar to last year. We bought approximately 336,000 vehicles during the quarter, up 7% from last year.
Speaker Change: In our retail business total unit sales increased 9% and using our comps were up eight 1%.
Speaker Change: Average selling price was $26100 a decrease of approximately $400 per unit year over year.
Speaker Change: First quarter retail gross profit per used unit was an all time record driven by strong demand and operating efficiencies across our logistics network and reconditioning operations.
Speaker Change: Wholesale unit sales were up one 2% versus the first quarter last year average wholesale selling price declined approximately $150 per unit to $8000.
Speaker Change: Wholesale gross profit per unit was historically strong and similar to last year.
Speaker Change: We bought approximately 336000 vehicles during the quarter up 7% from last year, we purchased approximately 288000 vehicles from consumers with more than half of those bonds coming through our online instant appraisal experience.
Bill Nash: We purchased approximately 288,000 vehicles from consumers, with more than half of those buys coming through our online instant appraisal experience. With the support of our Edmunds sales team, we sourced the remaining approximately 48,000 vehicles through dealers, which is up 38% from last year. Our digital capabilities supported 80% of our retail unit sales during the first quarter. 66% were omni and 14% were online. Relative to traditional and online-only dealers, we are the only nationwide retailer to offer an integrated, simple, seamless, and personalized experience to meet the largest and growing segment of used car buyers. According to Cox Automotive Research, as well as our own, the majority of customers shopping for used cars intend to transact via an Omni experience.
Speaker Change: With the support of our Edmond sales team, we source the remaining approximately 48000 vehicles through dealers, which is up 38% from last year.
Speaker Change: Our digital capability supported 80% of our retail unit sales during the first quarter, 66% were omni and 14% were online.
Speaker Change: Relative to traditional and online only dealers we are the only nationwide retailer to offer an integrated simple seamless and personalized experience to meet the largest and growing segment of used car buyers.
Speaker Change: According to Cox automotive research as well as Ryan the majority of customer shopping for used cars intend to transact via an omni experience the.
Bill Nash: The combination of our associates, stores, technology, and digital capabilities all seamlessly tied together is a key differentiator that gives consumers the optionality to shop online, in-store, or a combination of the two. Our Net Promoter Score is the highest it has been since rolling out our digital capabilities nationwide, supported by new record high online and omni scores reflecting that this experience is resonating well with customers. Our differentiating offering gives us a unique opportunity to reach more customers.
Speaker Change: The combination of our associates stores technology and digital capabilities. All seamlessly tied together is a key differentiator that gives consumers the optionality to shop online in store or a combination of the two.
Speaker Change: Our net promoter score is the highest it's been since rolling out our digital capabilities nationwide supported by new record high online and omni scores, reflecting that this experience is resonating well with customers.
Speaker Change: Our differentiated offering gives us a unique opportunity to reach more customers to further capitalize on this opportunity. We're excited to launch a new marketing campaign later in the summer that will bring our omnichannel experience and our digital capabilities to the forefront for a broad set of consumers.
Bill Nash: To further capitalize on this opportunity, we're excited to launch a new marketing campaign later in the summer that will bring our omni-channel experience and our digital capabilities to the forefront for a broad set of consumers.
John Daniels: And now we'll turn the call over to John to provide more detail on Carmax Auto Finance. John?
Speaker Change: Now I will turn the call over to John to provide more detail on Carmax Auto finance, John Thanks, Bill and good morning, everyone.
John Daniels: Thanks, Bill, and good morning, everyone. During the first quarter, Carmax's auto finance originated over $2.3 billion, resulting in sales penetration of 41.8% net of three-day payoffs, which was 150 basis points below last year. The weighted average contract rate charged to new customers was 11.4%, in line with last year's first quarter. CAF's reduction in penetration was primarily driven by an influx of self-funded, higher credit purchasers seen during the initial announcement of tariffs, and to a lesser degree, higher Tier 3 penetration, both of which more than offset our expansion since Q4. Third party tier two penetration in the quarter was down 100 basis points year over year to 17.7% of sales, while third party tier three volume accounted for 8% of sales, up from 7.5% last year.
John: During the first quarter Carmax auto finance originated over $2 3 billion, resulting in sales penetration of 41, 8% net of three day payoffs, which was 150 basis points below last year.
Speaker Change: The weighted average contract rate charged to new customers was 11, 4% in line with last year's first quarter.
Speaker Change: Cost reduction and penetration was primarily driven by an influx of self funded higher credit purchasers seen during the initial announcement of tariffs and to a lesser degree higher tier three penetration both of which more than offset our expansion since Q4.
Speaker Change: Third party tier two penetration in the quarter was down 100 basis points year over year to 17, 7% of sales while third party tier three volume accounted for 8% of sales up from seven 5% last year.
John Daniels: CAF income for the quarter was $142 million, which was down $5 million from FY25. Net interest margin was 6.5%, up over 30 basis points from last year, as customer APRs outpaced the increase in our funding costs. CAF's loan loss provision of $102 million was impacted by several notable items. First, Q1 is a seasonally higher sales and lower credit quality period requiring a larger provision for newly originated volumes. Second, lost performance within the quarter, particularly within 2022 and 2023 vintages, along with the uncertain economic outlook necessitated additional loss reserved. Note that 2024 vintages remain largely in line with our original loss expectation.
Speaker Change: Caf income for the quarter was $142 million, which was down $5 million from FY 'twenty five net interest margin was six 5% up over 30 basis points from last year as customer APR has outpaced the increase in our funding cost.
Speaker Change: Capsular own loss provision of $102 million was impacted by several notable items first Q1 is our seasonally higher sales and lower credit quality period, requiring a larger provision for newly originated volume.
Speaker Change: Second loss performance within the quarter, particularly within 2022, and 2023 vintages, along with the uncertain economic outlook necessitated additional loss reserves.
Speaker Change: Note. The 2024 vintages remained largely in line with our original loss expectation.
John Daniels: The last noteworthy item impacting the Q1 provision relates to CAF's continued build-out of our full-spectrum lending capability. While we remain focused on increasing our penetration across the credit spectrum, we also want to carefully manage future risk from higher profit, higher loss receivables. To that end, during the quarter we earmarked a held-for-sale pool of loans with a $632 million principal balance from our non-prime portfolio. That loan pool is intended to be fully sold off our balance sheet as a part of a non-prime securitization transaction. In the immediate term, this treatment removes the requirements to reserve for future losses expected on this pull of receivables.
Speaker Change: The last noteworthy item impacting the Q1 provision relates to cash continue to build out of our full spectrum lending capabilities.
Speaker Change: While we remain focused on increasing our penetration across the credit spectrum. We also want to carefully manage future risk from higher profit higher loss receivables too.
Speaker Change: To that end during the quarter, we earmarked to held for sale pool of loans with a $632 million principal balance from a non prime portfolio.
Speaker Change: That loan pool is intended to be fully sold off our balance sheet as a part of our non prime securitization transaction.
Speaker Change: In the immediate term this treatment removes the requirement to reserve for future losses expected on this poll of receivables.
John Daniels: In the period in which the ABS transaction closes, CAP will book any gain realized by selling the financial interest in the loan. Also, the risk of any financial impact from this pool due to future deterioration is removed once sold. This additional funding lever, as well as other off-balance sheet funding vehicles under consideration, will provide Carmax with significant flexibility and allow us to mitigate risk while focusing on our growth plan. Our loan loss provision of $102 million results in a total reserve balance of $474 million, or 2.76% of managed receivables, exclusive of auto loans held for sale.
Speaker Change: In the period in which the ABS transaction closes capital book any gain realized by selling the financial interest in the allowance also the risk of any financial impact from this pool due to future deterioration is removed oneself.
Speaker Change: This additional funding lever as well as other off balance sheet funding vehicles under consideration will provide carmax with significant flexibility and allow us to mitigate risks while focusing on our growth plan.
Speaker Change: Our loan loss provision of $102 million results in a total reserve balance $474 million or $2, 76% of managed receivables exclusive of auto loans held for sale.
John Daniels: Note there was a reduction on this quarter's provision stemming from $26 million in the reserve allocated to loans booked prior to the first quarter, now classified as held for sale.
Speaker Change: Note there was a reduction on this quarters provision stemming from $26 million and the reserve allocated to loans booked prior to the first quarter and now classified as held for sale.
John Daniels: As we reflect on the bigger picture, CAF has delivered solid income for yet another quarter and we see tremendous potential for the future.
Speaker Change: As we reflect on the bigger picture our Caf has delivered solid income for yet another quarter and we see tremendous potential for the future now I'd like to turn the call over to Enrique to discuss our first quarter financial performance or detail or weekend.
Enrique Mayor: Now I'd like to turn the call over to Enrique to discuss our first quarter financial performance in more detail. Enrique?
Enrique Mayor: Thanks, John, and good morning, everyone. As a reminder, last quarter we provided a view into the strength of the earnings model that we have built as part of our Omni transformation. This model is designed to deliver an annual earnings per share CAGR in the high teens when retail unit growth is in the mid-single digits. First quarter results delivered net earnings per diluted share of $1.38, up 42% versus a year ago. Total gross profit was $894 million, up 13% from last year's first quarter. Used retail margin of $554 million, increased by 12%. higher volume and per unit margin.
Enrique: Thanks, John and good morning, everyone.
Enrique: As a reminder, last quarter, we provided a view into the strength of the earnings model that we have built as part of our omni transformation.
Enrique: This model is designed to deliver an annual earnings per share CAGR in the high teens when retail unit growth is in the mid single digits.
Enrique: First quarter results delivered net earnings per diluted share of $1 38 up 42% versus a year ago.
Enrique: Total gross profit was $894 million up 13% from last year's first quarter.
Enrique: Used retail margin of $554 million increased by 12%.
Enrique: Higher volume and per unit margins retail gross profit per used unit was $2407 up $60 from a year ago and a record high.
Enrique Mayor: Retail gross profit per used unit was $2,407, up $60 from a year ago, and a record high. Wholesale vehicle margin of $157 million was flat from a year ago with an increase in volume offset by a slight reduction in per unit margin. Wholesale gross profit per unit was $1,047, which was historically strong, though down slightly from a year ago. Other gross profit was $183 million, up 31% from a year ago. This was driven primarily by a combination of EPP and service. EPP increased by $13 million, or $9 per retail unit, as we fully comped over margin increases taken in the prior year.
Wholesale vehicle margin of $157 million was flat from a year ago with an increase in volume offset by a slight reduction in per unit margins.
Enrique: Wholesale gross profit per unit was $1047, which was historically strong though down slightly from a year ago.
Enrique: Other gross profit was $183 million up 31% from a year ago.
Enrique: This was driven primarily by a combination of E. P. P and service E. P. P increased by $13 million or $9 per retail unit as we fully comped over margin increases taken in the prior year.
Enrique Mayor: Service recorded a $33 million margin, which was a $30 million improvement over last year's first quarter. We achieve this performance improvement through cost coverage, volume-based leverage, and efficiency. On the SG&A front, expenses for the first quarter were $660 million, up 3% or $21 million from the prior year. SG&A the gross profit leveraged by 680 basis points to 74%. driven by the growth in gross profit and our ongoing actions to improve expense efficiency. SG&A dollars for the first quarter versus last year was mainly impacted by a compensation and benefits increase of $19 million. The majority of this increase was related to unit volume growth.
Enrique: Service recorded a $33 million margin, which was $30 million improvement over last year's first quarter.
We achieved this performance improvement through cost coverage volume based leverage and efficiencies.
Enrique: On the SG&A front expenses for the first quarter were $660 million up 3% or $21 million from the prior year.
Enrique: SG&A to gross profit leveraged by 680 basis points to 74%.
Enrique: Driven by the growth in gross profit and our ongoing actions to improve expense efficiencies.
Enrique: SG&A dollars for the first quarter versus last year was mainly impacted by a compensation and benefits increase of $19 million. The majority of this increase was related to unit volume growth.
Enrique: We continue to deliver efficiency gains across the business.
Enrique Mayor: We continue to deliver efficiency gains across the business.
Enrique Mayor: We are off to a strong start in achieving our goal of omni-cost neutrality in fiscal year 26 for the first time across three key metrics. In the first quarter, we were both more efficient versus pre-OMNI and versus last year, per used unit, per total unit, and as a percent of gross profit. Recall that this compares the variable commission costs of selling and buying vehicles in our pre-Omni model to our costs now, which includes a new per-unit commission as well as the costs of running our Customer Experience Center. The key driver of these efficiency gains and experience enhancements has been our strategic deployment of AI technology across our operations.
Enrique: We are off to a strong start in achieving our goal of hanmi cost neutrality in fiscal year 'twenty six for the first time across three key metrics.
Enrique: In the first quarter, we were both more efficient versus pre omni and versus last year per used unit for total unit and as a percent of gross profit.
Enrique: Recall that this compares to variable commission costs and selling and buying vehicles in our pre owned model to our cost now which includes a new per unit commission as well as the costs of running our customer experience centers.
Enrique: A key driver of these efficiency gains and experience enhancements has been our strategic deployment of AI technology across our operations.
Enrique Mayor: A few key metrics that illustrate the progress we are making year over year include Sky, our AI powered virtual assistant, realized a 30% improvement in containment rate Our customer experience consultant's productivity improved by 24%. and phone and web response rate SLAs improved by double digit. We see tremendous opportunity to continue expanding AI applications across our business to drive both the top line growth and operational excellence.
Enrique: A few key metrics that illustrate the progress we are making year over year include sky, our AI powered virtual assistant realized a 30% improvement in containment rate.
Enrique: Our customer experienced consultant productivity improved by 24%.
Enrique: And phone and web response rate SLA has improved by double digits.
Enrique: We see tremendous opportunity to continue expanding AI applications across our business to drive both the top line growth and operational excellence.
Enrique: Turning to capital allocation, we remain committed to creating long term shareholder value. Our priorities are clear invest in our core business, primarily through the reallocation of resources.
Enrique Mayor: Turning to capital allocation. We remain committed to creating long-term shareholder value. Our priorities are clear. Invest in the core business, primarily through the reallocation of resources, evaluate new growth opportunities through investments, partnerships, or acquisitions, and return excess capital to shareholders. During the first quarter, we accelerated the pace of our share repurchases, buying back approximately 3 million shares for a total spend of $200 million. As of the end of the quarter, we had approximately $1.74 billion of repurchase authorization.
Enrique: Valuate, new growth opportunities through investments partnerships or acquisitions and returned excess capital to shareholders.
Enrique: During the first quarter, we accelerated the pace of our share repurchases buying back approximately 3 million shares for a total spend of $200 million.
Enrique: As of the end of the quarter, we had approximately $1 seven $4 billion of repurchase authorization remaining.
Enrique: Looking forward to the balance of the year I'll cover a few items.
Enrique Mayor: Looking forward to the balance of the year. I'll cover a few items. We expect service margin to grow year-over-year, predominantly in the first half of the year, and to deliver a positive profit contribution for the full year, as governed by sales performance, given the leverage-deleverage nature of service. Recall that the first quarter is typically the strongest for service margin due to higher seasonal sales volume. Turning to marketing, we expect for the full year that our spend on a total unit basis will be flat year over year.
Enrique: We expect service margin to grow year over year predominantly in the first half of the year and to deliver a positive profit contribution for the full year as governed by sales performance given the leverage Deleveraged nature of service recall that the first quarter is typically the strongest for service margin due to higher seasonal sales volumes.
Enrique: Turning to marketing, we expect for the full year that our spend on the total unit basis will be flat year over year.
Enrique: Regarding cash funding strategy. Our current plan is to execute the programmatic off balance sheet sale of the financial interest in the non prime securitization once a year.
Enrique Mayor: Regarding CAP's funding strategy, our current plan is to execute the programmatic off-balance sheet sale of the financial interest in a non-prime securitization once a year. As John noted, we will also be assessing additional off-balance sheet funding levers to further accelerate CAF penetration while continuing to learn from our full-spectrum model.
Enrique: As John noted, we will also be assessing additional off balance sheet funding levers to further to further accelerate caf penetration, while continuing to learn from our full spectrum models.
Bill Nash: Now I'll turn the call back over to Bill. Great. Thank you, Enrique and John.
Bill Great: Now I'll turn the call back over to Bill Great. Thank you Enrique and John before.
Bill Nash: Before I open it up for questions, let me summarize what you heard from us today about our strong first quarter. We delivered our fourth consecutive quarter of positive retail unit comps and double-digit earnings per share gross. We grew both retail and wholesale unit volumes. Our sourcing efforts hit another milestone with a record dealer volume through Max Offer and we continue to leverage our cost structure with meaningful SG&A improvements. Our digital capabilities and overall experiences are resonating with customers as evidenced by our Net Promoter Score. We're also continuing to leverage AI across the business to further enhance the experience for both customers and associates and to increase operational efficiency.
Bill Great: Before I open it up for questions. Let me summarize what you heard from US today about our strong first quarter.
Bill Great: We delivered our fourth consecutive quarter of retail.
Bill Great: Positive retail unit comps and double digit earnings per share growth. We grew both retail and wholesale unit volume our sourcing efforts had another milestone with a record dealer volume through through Max offer and we continued to leverage our cost structure with meaningful SG&A improvement are.
Bill Great: Our digital capabilities and overall experiences are resonating with customers as evidenced by our net promoter score. We're also.
Bill Great: We're continuing to leverage AI across the business to further enhance the experience for both customers and associates and to increase operational efficiencies.
Bill Nash: We're taking the next steps in our credit expansion by delivering a new funding method for a portion of our non-prompt portfolio that mitigates risk, gives us more flexibility, and supports the growth of caffeine. and we doubled our share repurchase pace. Our associates, stores, technology, and digital capabilities, all seamlessly tied together, enable us to provide the most customer-centric car buying and selling experience.
Bill Great: We're taking the next steps in our credit expansion by delivering a new funding method for a portion of our non prime portfolio that mitigates risk gives us more flexibility and supports the growth of Caf income.
Bill Great: And we doubled our share repurchase pace.
Bill Great: Our associates stores technology, and digital capabilities, all seamlessly tied together enable us to provide the most customer centric car buying and selling experience.
Bill Nash: This is a key differentiator in a very large and fragmented market and positions us to continue to drive sales, gain market share, and deliver significant year-over-year earnings growth for years to come.
Bill Great: This is a key differentiator and a very large and fragmented market and positions us to continue to drive sales gain market share and deliver deliver significant year over year earnings growth for years to come.
Bill Nash: I want to thank our associates across the country for their dedication in delivering these results and providing an unmatched experience for our customers.
Bill Great: I want to thank our associates across the country for their dedication in delivering these results and providing an unmatched experience for our customers.
Operator: With that, we'll be happy to take your questions. Thank you. And at this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may withdraw your question by pressing star 2. Once again, to ask a question, please press the star and 1 on your telephone keypad.
Bill Great: That will be happy to take your questions.
Bill Great: Thank you and at this time, if you would like to ask a question. Please press star one on your telephone keypad.
Bill Great: You may withdraw your question by pressing star two.
Bill Great: Once again to ask a question please press star and one where your telephone keypad.
Brian Nagel: And your first question comes from the line of Brian Nagel with Oppenheimer. Your line is open. You may now ask your question. Nice quarter. Congratulations. Really nice quarter. Thank you, Brian. Thank you.
Speaker Change: And your first question comes from the line of Brian Nagel with Oppenheimer. Your line is open.
Bill Great: You May now ask your question.
Speaker Change: Nice quarter, congratulations really nice quarter. Thank you Ryan Thank you.
Brian Nagel: I guess the question I want to ask, we've seen a nice acceleration here in your used car business.
Speaker Change: Well I guess the Washington.
Speaker Change: We've seen a nice acceleration here in your used car business.
Brian Nagel: I know you don't typically talk much about inter-quarter trends or trends into the following quarter, but I would look at the question I want to ask is, how are you viewing the sustainability here? As you look at this, is the business coming back? Is there anything unique to this re-acceleration?
Speaker Change: I know you don't typically talk about chipotle doing intra quarter trends or trends in the following quarter, but I've been out with a question I ask is I mean, how are you viewing that sustainability here.
Speaker Change: As you know as you're looking at this as a business coming back is there anything unique to this re acceleration and then a follow up to that is you showed again in this quarter nice SG&A leverage, but as we're thinking about sales continuing to restrain. It here how should we consider expenses coming back into the model or to what degree expenses need to come back to the model to support that.
Brian Nagel: And then a follow-up to that is, and you showed again in this quarter, nice SG&A leverage, but as we're thinking about sales continuing to restrain here, how should we consider expenses coming back into the model? To what degree expenses need to come back in the model to support those sales? Thanks.
Speaker Change: Sales thanks.
Bill Nash: Sure, Brian. I'll take the first one, then Enrique, you want to talk about the expenses. As far as, you know, acceleration, look, Brian, we feel really good. I mean, first of all, just back up a second, we're really pleased that this is the fourth consecutive quarter of comp growth. Obviously, this quarter we're pleased with the comps, especially, you know, all three months were positive. You know, as I think about the acceleration, and we talked a little bit about this last quarter, you know, I think this month or this quarter's performance is driven some by the macro factors, but I also think it's driven some by what we have can control.
Speaker Change: Sure Brian I'll take the first one and then Ricky you want to talk about the expenses as far as acceleration look Brian we feel really good I mean first of all just backup a second we're really pleased that this is the fourth consecutive quarter of comp growth. Obviously this quarter, we're pleased with the comps, especially in all three months were positive.
Speaker Change: Think about the acceleration and we talk a little bit about this last quarter I you know I think this month or this quarter's performance has driven some by the macro factors, but I also think it's driven some by with what we have can control and I would go back to some remarks I made in the last quarterly call, which is the quarter started off strong and then we start we saw in up.
Bill Nash: And I would go back to some remarks I made in the last quarterly call, which is, you know, the quarter started off strong, and then we saw an uptick at the end of the quarter when there was speculation about the tariffs. And then I talked about that uptick towards the latter part of March, and then rolling into April we saw another little uptick. And so April ended up being the strongest month for us. But I would just go back to even before we saw the initial uptick, the business was growing, was doing well. And I think that's a reflection of a lot of the work that we've done, you know, internally, whether it's the inventory management, it's our pricing, it's our savings, it's the omni-channel experience, continuing to make that better.
Speaker Change: <unk> at the end of the quarter. When there was speculation about the tariffs and then I talked about that uptick towards the latter part of March and then rolling into April we saw another little uptick and so April ended up being the strongest month for us, but I would just go back to even before we saw that the initial uptick the business was growing.
Speaker Change: It was doing well and I think that's a reflection of a lot of the work that we've done.
Speaker Change: Internally, whether it's the inventory management, our pricings as our savings its the omnichannel experience continuing to make that better. So I think there's this performance as both part market driven I think it's also driven driven by us. So we feel great about the the rest of the year as I said at the beginning of the at the end of last year that we would expect to grow sales and.
Bill Nash: So I think this performance is both market-driven, I think it's also driven by us. So, you know, we feel great about the rest of the year. I think, as I said at the end of last year, that we'd expect to grow sales and gain share this year, and there's nothing that's changed that out.
Speaker Change: <unk> gained share this year and there's nothing that's changed that outlook.
Enrique Mayor: Enrique? Yeah, for SG&A, Brian, we spent the past couple of years being able to lever SG&A and that's really given all the actions we've taken on focusing on efficiency and we're committed to continuing to lever the business. I do think this quarter is really illustrative of the power of the model that we built. So strong comps and we levered SG&A almost 700 basis points this quarter. And when you look at the increase in SG&A for this quarter, it's primarily it was driven by variable costs. But again, with those variable costs, we were able to lever again by almost 700 basis points taking us to the mid 70% in the first quarter.
Speaker Change: Enrique Yeah for SG&A, you know, Brian we spent the past couple of years being able to lever SG&A and that's really given all the actions we've taken on focusing on efficiency.
Speaker Change: We're committed to continuing to lever the business I do think this quarter is really illustrative of the power of the model that we felt so strong comps and we lever SG&A almost 700 basis points this quarter and when you look at the increase in SG&A for this quarter is primarily it was driven by variable costs, but again, what those variables.
Speaker Change: We were able to lever again by almost 700 basis points, taking a set of mid 70 percents in the first quarter. Here. So you know we're committed to continue doing that and you can see the power of the model, Yes, yes, Brian the only thing I would add to that is that that's a big focus for us is continuing that leverage.
Enrique Mayor: So, you know, we're committed to continue doing that and you can see the power of the model here. Yeah, and Brian, the only thing I would add to that is that's a big focus for us is continuing that leverage. And we certainly like the additional volume and how it helps that, but we're also very much focused on continuing to find efficiencies, continuing to take SG&A out, and we just think there's a lot of opportunities still there.
Speaker Change: We certainly like the additional volume how it helps that but we're also very much focused on continuing to find efficiencies continuing to take SG&A out and we just think there's a lot of opportunity still there.
Speaker Change: Thanks, guys and again congrats.
Brian Nagel: Thanks, guys. Again, congrats. Thanks, Brian. Thank you.
Brian: Thanks, Brian.
Speaker Change: Thank you. Our next question comes from Scot Ciccarelli with Teresa. Please go ahead. Your line is open.
Scott Ciccarelli: Our next question comes from Scott Ciccarelli with Chariste. Please go ahead.
Scott Ciccarelli: Your line is open. Scot, your line is open.
Speaker Change: Your line is open.
Scot Ciccarelli: Good morning, guys good morning.
Scott Ciccarelli: Good morning, guys. I apologize. Good morning.
Scott Ciccarelli: Bill, I know you guys don't guide, but with comp growth kind of bouncing around a bit the way it has, and comparisons getting much more difficult in the balance of the year, how should, you know, we, from an outside modeling perspective, be thinking about the comp growth on a go-forward basis? Are we thinking about stacks? Is that something that, like, two-year stacks or three-year stacks, is that relevant? I know, obviously, there's a lot of moving pieces on the macro, and you guys are making all the changes that you've already cited, but just from a broader perspective, like, how should we be thinking about the comp growth for the balance of the year?
Well I I know you guys don't guide, but with comp growth kind of bouncing around a bit the way it has and comparisons getting much more difficult in the balance of the year, how should we from an outside modeling perspective would be thinking about that the comp growth on a go forward basis. How are we thinking about stacks is that something that.
Speaker Change: Two year stacks or three statues that relevant I know, obviously, there's a lot of moving pieces on the macro and you guys are making all the changes that you've already excited but just from a broader perspective like how how should we be thinking about the comp growth for the balance of the year.
Bill Nash: Yeah, I'll tie back a little bit to what I talked about and Brian, but you know, as far as like, you can look at two year stack, three year stack, they tell a little bit of a mixed story. I think that you can't rely 100% on that because there's lots of dynamics that happen over the years and You know, as far as the outlook for the rest of the year, we feel like we've put ourselves in a good position. And as I said to Brian's question, we're not changing our outlook for the year based off of what we laid out there for the beginning of the year.
Speaker Change: Yeah.
Bill Great: It back a little bit to what I talked about him and Brian, but you know as far as like you can look at two year stacks three year stacks. They tell a little bit of a mixed story and I think that you can't rely 100% of that because there's lots of dynamics that happen over the years and.
Bill Great: As far as the outlook for the for the rest of the year, we feel like we've put ourselves in a good position and as I said to Brian's question. We don't we're not changing our outlook for the for the year based off of what we laid out there for the beginning of the year and so we expect to continue to grow sales and continue to gain market share and not nothing has changed that that outlook. So.
Bill Nash: And so we expect to continue to grow sales and continue to regain market share. Nothing has changed that outlook.
Scott Ciccarelli: Okay and then I'll take a quick follow-up if I can. Can you just provide a little bit more color on the shift on the non-prime like if I heard you correctly it sounded like there was going to be another 26 million dollar provision but you don't have to count it because it's now being held for sale. Was that the correct interpretation? Sure, yeah, I can take that question, Scott. So first, overarching, let's just talk about the help for sale transaction. broader picture, like we are super excited about our full spectrum strategy. If you look at what we put in place, we bifurcated our securitization program, we've implemented our new models, we've executed two transactions where we held the future cash flows.
Bill Great: Okay.
Bill Great: And then I'll take a quick follow up if I can can you just provide a little bit more color on the shift on that that the non prime like if I heard you correctly. It sounded like there was going to be another $26 million provision, but you don't have to count it because it's now.
Bill Great: Being held for sale was that the correct interpretation.
Bill Great: Sure Yeah, I can take that question Scott. So first overarching, let's just talk about the the held for sale transaction.
Bill Great: Broader picture like we are Super excited about our full spectrum strategy. If you look at what we put in place we bifurcate our securitization program. We've implemented our new models, we've executed two transactions, where we got held up the future cash flows and this is the next step.
John Daniels: And this is the next step. This help for sale transaction is something we have been thinking about, along with other all balance sheet transactions, but it was just the right time to move on this thing. So the mechanics of it is, ultimately, for those receivables, you do not need to hold any lost reserve because you have intent to sell them. So those $630 million, we're able to not have to put dollars into the reserve. So that works for you in your provision line. Beyond that, there's no future risk there associated with those receivables, if there were deterioration, mentioned that in the prepared remarks.
Bill Great: Held for sale transaction is something we have been thinking about along with other off balance sheet transactions, but it was just the right time to move on this thing.
Bill Great: So the mechanics of it is ultimately for those receivables you do not need to hold any loss reserve because you are intent to sell them strip there was $630 million, we're able to.
Bill Great: Not have to put dollars into the reserve so that works for you in your provision line beyond that are there.
Bill Great: No future risk there associated with those receivables, yes, there were deterioration mentioned that in the prepared remarks. So that again is a risk mitigates, there, especially really well targeted to this non prime space, which we're looking to to really drive growth.
John Daniels: So that, again, is a risk mitigant there, especially really well targeted to this non-prime space, which we're looking to really drive growth in. On top of that, you're going to capture the gain when the sale closes. Don't know when the sale will close, but you can imagine, probably not in Q2, but sometime after that, which is going to bring all of those cash flows up front for us. So rather than earning them over time, we get them right up front. So, again, a really pivotal thing for us in our strategy and just an extra tool in our toolkit.
Bill Great: On top of that you're going to capture the gain.
Bill Great: When the sale closes don't know when the sale will close but you can imagine is probably not in Q2, but sometime after that.
Bill Great: Which is going to bring all of those cash flows upfront for us so rather than earning them over time.
Bill Great: Get them right upfront, so again really.
Bill Great: Pivotal thing for us in our strategy and just an extra <unk> extra tool in our tool kit regarding the provision in the quarter. Just as you mentioned just to play that out. So again you had your origination volume, we signaled about a $100 million provision at the in the Q4 call.
John Daniels: Regarding the provision in the quarter, just as you mentioned, just to play that out. So, again, you had your origination volume. We signaled about a $100 million provision in the Q4 call. We landed on that number, but there were puts and takes there. You had some increase in the provision from the true-up 2022 and 2023 vintages, which we've mentioned. The economic view that we have, we've put aside not an insignificant amount of dollars for that as well. But, again, this held for sale, you're able to offset some of that with dollars you no longer have to hold in the reserve.
Bill Great: We landed on that number but there were puts and takes there you had some increase in the provision from the true up of 2022, and 2023 vintages, which we've mentioned the economic.
Bill Great: The economic view that we have we've put it aside and not an insignificant amount of dollars for that as well, but again thats held for sale you were able to offset some of that with dollars you no longer have to hold in the reserve. So long answer when I laid out the entire transaction how it plays out and how the provision was impacted by that so hopefully that that's clear I think Scott you know what.
John Daniels: So, long answer, want to lay out the entire transaction, how it plays out, and how the provision was impacted by that. So hopefully that's clear. I think, Scott, you know what I would add to that is we're really excited about the program. I think a simple way to think about it is that it really enables full-spectrum and cap income growth while mitigating the risk. So it's a tool that we're excited about.
Bill Great: I would add to that is we're really excited about the program I think a simple way to think about it is that it really enables full spectrum and caf income growth while mitigating risk.
Speaker Change: It's a tool that we're excited about as John had mentioned in his remarks. We're also looking at other off balance sheet potential funding vehicles as well to further accelerate and help us grow our full spectrum strategy.
John Daniels: As John had mentioned in his remarks, we're also looking at other off-balance sheet potential funding vehicles as well to further accelerate and help us grow our full-spectrum strategy.
Scott Ciccarelli: Okay, super helpful. Thanks, guys. Thank you.
Speaker Change: Okay Super helpful. Thanks, guys.
Bill Great: Yes.
Speaker Change: Thank you. Our next question comes from Michael Montana with Evercore. Please go ahead. Your line is open.
Michael Montani: Our next question comes from Michael Montani with Epicor. Please go ahead.
Michael Montani: Your line is open. Yes, hey guys.
Michael Montana: Yes, Hey, guys. Good morning, congrats on the quarter. Thanks for taking the question.
Michael Montani: Good morning. Congrats on the quarter. Thanks for taking the question. Thank you.
Speaker Change: Thank you.
Michael Montani: I just wanted to ask, I guess, a two-parter, but the first part was you made a really interesting comment in the prepared remarks about doing a marketing campaign to kind of aware folks to your multi-channel capabilities. So I'm just kind of wondering, can you share some basic levels of awareness kind of prior to that campaign and what exactly it is you're doing differently there?
Speaker Change: Just wanted to ask I guess, a two parter, but but the first part was you made a really interesting comment in the prepared remarks about doing a marketing campaign to kind of aware folks to your multichannel capabilities. So I'm just kind of wondering can you share some some basic.
Speaker Change: Level of awareness kind of prior to that campaign and what exactly it is you're doing differently. There and then I guess the follow up was just also related to credit which was you know does this signal that you'll be kind of increasing subprime.
Michael Montani: And then I guess the follow-up was just also related to credit, which was, you know, does this signal that you'll be kind of increasing subprime penetration as a percentage of the loans that you're issuing as well? And just how should we think about that?
Speaker Change: Penetration as a percentage of the loans that you're issuing as well and just how should we think about that.
Bill Nash: Yeah, great.
Speaker Change: Great I'll I'll hit the marketing and then I'll pass it to John to talk about the subprime question as far as the marketing goes and kind of awareness there.
John Daniels: I'll hit the marketing and then I'll pass it to John to talk about the subprime question. As far as the marketing goes and kind of awareness there, Mike, we've built up our awareness on both digital capabilities and the fact that we can do an online sale. So that's been increasing through our marketing campaigns in the past. I think I talked about the last call. You know, we've gone with a new ad agency, 72 and Sunny, and we're really pleased with how the relationship is going. And, you know, I cited some Cox information and I did that purposeful because if you look at how customers want to buy, they intend to buy Omni.
Speaker Change: Mike Mike We've had we've built up our awareness on both digital capabilities and the fact that we can do.
Speaker Change: Online sales so that's been increasing through our marketing campaigns in the past I think I talked about the last call. We've gone with a new AD agency 72, and Sunny and we're really pleased with how the relationship is going and I cited some some cox information and I did that purposeful because if you look at how customers want to buy they they intend.
Speaker Change: To buy harmony, but if you look at the how the vast majority of them still buy today, it's all in store and I think what happens is consumers they want to buy a certain way, but then they settle they go into a dealership and they they are forced to buy a certain way and what we want to make sure that we educate the consumers on it is that look you don't have.
Bill Nash: But if you look at how the vast majority of them still buy today, it's all in-store. And I think what happens is consumers, they want to buy a certain way, but then they settle. They go into a dealership and they're forced to buy a certain way. And what we want to make sure that we educate the consumers on is that, look, you don't have to settle. You don't have to go for the one way a dealer has. You have optionality. So I think the campaign buildout is like don't settle. Carmax has the best experience no matter how you want to buy, and I think that is really going to start to resonate with folks as they're looking for options.
Speaker Change: To settle you don't have to go for the one way ideal has you have optionality. So I think the campaign Buildout is like don't don't settle like <unk>.
Speaker Change: Carmax has a has the best experience no matter, how you want to you want to buy and I think that is really going to start to resonate with folks.
Speaker Change: As they are looking for options in the future John alternative you're on the subprime Yeah, Michael I'll take that you take your question on the subprime growth and Yeah Fair question.
Bill Nash: John, I'll turn it over to you on the subprime. Yeah, Michael, I'll take your question on the subprime growth. And yeah, fair question. Short answer is, absolutely, we are looking to grow. We've signaled that very clearly. We made adjustments at the beginning of Q1, taking volume back. We signaled 100 to 150 basis points of growth. Now, that was muted because of a lot of stuff that happened in the first quarter, tariffs, etc. We cited that in the prepared remarks. But yes, if you look at what we're doing from our full-spectrum strategy, we're putting things in place that allow and fuel that growth, especially we think this help for sale supports that.
Speaker Change: Short answer is absolutely we are looking to grow we've signaled that very clearly we made adjustments at the beginning of Q1.
Speaker Change: Taking volume back we signaled a 100 to 150 basis points of growth now that was muted because of a lot of stuff that happened in the first quarter tariffs et cetera, and we decided that in the prepared remarks, but yes. We are if you look at what we're doing from a full spectrum strategy, we're putting things in place.
Speaker Change: Allow and fueled that growth, especially we think thats held for sale supports that so if I were signaling a level to you have a penetration because again were at 42, 43%. Historically, we've said we want to grow that.
John Daniels: So if I were signaling, you know, a level to you of penetration, because again, we're at 42, 43% historically, we said we want to grow that. I'd put a great first step for us at 50%. We're not going to get there this year. We will tell you as we grow that. But yeah, that is our plan. And we're real excited about it, a tremendous amount of value as we grow this. In the quarters and upcoming years.
Speaker Change: I put a great first step for us at 50%, we're not going to get there. This year, we will tell you as we grow that but yeah that is our plan.
Speaker Change: And we're real excited about a tremendous amount of value as we grow this.
Speaker Change: In the quarters in upcoming years.
Michael Montani: Thank you.
Speaker Change: Thank you. Our next question comes from Chris, particularly here with BNP Paribas. Please go ahead. Your line is open.
Chris Bottiglieri: Our next question comes from Chris Bottiglieri with BNP Paribas. Please go ahead.
Chris Bottiglieri: Your line is open. Hey, guys.
Chris: Hey, guys. Thanks for the question.
Chris Bottiglieri: Thanks for the question. So first off, congrats on the mental agility around the subprime funding. I think it's an interesting structure.
Speaker Change: So first off congrats on the mental agility around the subprime funding I think it's interesting structure.
Chris Bottiglieri: I just have one clarifying question, just a broader question on credit. What percentage of new originations were classified as health per sale? Were those part of the $26 million you cited, or would that be incremental?
Chris: I just have one clarifying question just a broader question on credit.
Speaker Change: What percentage of new originations were classified as held for sale.
Speaker Change: As part of the $26 million. So I think it would that be incremental and then my broader question is just you know obviously you elaborated on the.
John Daniels: And then my broader question is just, you know, obviously, you elaborated on the, you know, the allowance stepping up and some of the factors that drove that. How much of this is like the macro environment with student loan lending? Like, are you seeing, like, as the credit scores have dropped and credit performance in the broader economy has worsened a bit, is that impacting capital? Is that measurable? Like, what percentage of your customers have student loan debt? Just curious how that's having an impact at all. Sure, yeah. I appreciate the questions, Chris. All right. Take them in order.
Speaker Change: It would be a language stepping up in some of the factors that drove that.
Speaker Change: How much of this is like the macro environment with student loan lending like are you seeing like the credit scores are dropped in credit performance in the broader economy has worsened a bit.
Speaker Change: That impacting capital measurable like what percentage of your customers have student loan debt I'm just curious.
Speaker Change: Having an impact at all.
Chris: Sure Yeah I appreciate the questions, Chris sorry, I take them in order.
John Daniels: So, you know, how do we think about the provision takedown from the help for sale? How much was it from new originations versus the fourth quarter originations or previous originations we had on the books that were already in the reserve? I'll just tell you the majority of it was from receivables that were already in the reserve. So, yes, certainly some of it from Q1, but the majority were already in the reserve. So, that handles that one.
Chris: So how do we think about the the provision takedown from the held for sale how much was it from new originations versus the fourth quarter originations are previous originations. We had on the books that were already in the reserve I'll. Just tell you. The majority of it was from receivables that were already in the reserve. So yes, certainly some.
Chris: Of it from a Q1, but the majority were.
Chris: Already in the reserve so that handles that one second question give a little more flavor around what we're seeing in the step up in the reserve to 276%, what we're seeing in performance and as it relates to student loans, Yeah. As said in the prepared remarks, I think you know the 22 and 'twenty three vintages, certainly where are ones that performance more unfavorably in the quarter.
John Daniels: Second question, give a little more flavor around what we're seeing in the step up in the reserve, the 2.76 percent, what we're seeing in performance and as it relates to student loans. Yeah, as said in the prepared remarks, I think, you know, the 22 and 23 vintages certainly were ones that performed more unfavorably in the quarter. Again, we think we have appropriately reserved and adjusted accordingly. I did say in the prepared remarks actually 2024 we feel real good about. We're kind of on the mark there, you know. a year in on that stuff, a year plus in on that stuff.
Chris: Again, we think we've appropriately reserved and adjusted Accordingly, I did say in your prepared remarks actually 'twenty 'twenty four we feel real good about.
Chris: And on the Mark there.
Chris: It's a year in on that stuff, a year, plus and all that stuff regarding student loans.
John Daniels: Regarding student loans, let's give you some statistics there. In the CAF portfolio, about 30% that we can see per the credit bureaus, 30% of our customers have student loans. We've been watching them, as you might imagine, for years now with the thought of, are payments going to be made? What forgiveness is done for those and how they've performed? Ultimately, what I'll tell you is we have not seen a material change in those customers in the recent year as compared to what we've normally seen. We're watching this very, very closely as payments are expected, as it may impact their credit report, et cetera.
Speaker Change: Yes, let me give you some statistics there in the cat portfolio about 30% of that we can see for the credit Bureau is 30% of our customers have student loans, we've been watching them.
Chris: Imagine for for years now.
Chris: With the thought of our payment is going to be made what forgiveness is done for those perform and how they performed ultimately what I'll tell you is we have not seen a material change in those customers in the in the recent year as compared to what we've normally seen so we're watching this very very closely as payments are expected as it may impact.
Chris: Their credit report et cetera, we would hope that auto is still remains top of wallet share for them.
John Daniels: We would hope that auto still remains top of wallet share for them, but we'll watch them closely, but no change to date.
Chris: But we'll watch them closely but no change today and Chris the only thing I would add there when you think about kind of what I call. The true up that was primarily driven by the 'twenty two and 'twenty three vintages and I just want to remind everybody even with that Theres still super profitable and then to a lesser degree the the kind of the economic factors as you lean forward not immaterial, but I want to make sure I understand.
John Daniels: Chris, the only thing I would add there, when you think about what I call the true-up, that was primarily driven by the 22 and 23 vintages, and I just want to remind everybody, even with that, they're still super profitable, and then to a lesser degree, the economic factors as you lean forward, not immaterial, but I want to make sure everybody understands it's more of the 22, 23s that are driving that, and even with that, they're still very, To clarify that, last thing I'll tackle on there is unemployment rates, the big one that's driving that. Again, not insignificant contributor, but not the majority of it.
Chris: It's more of the the 'twenty two 'twenty threes that are driving that and even with that there is still very very profitable yeah and to clarify that last thing ill tackle and there is unemployment rates the big the big one that's driving that yes, again not insignificant contributor.
Chris: But not the majority of all the economic factor correct, yes.
John Daniels: On the economic factors? Correct. Yes. Really helpful.
Chris: Really helpful. Thank you.
John Daniels: Thank you.
Chris: Thank you.
Sharon Zackfia: Thank you. Our next question comes from Sharon Zackfia with William Blair. Please go ahead. Your line is open.
Sharon Zackfia: Our next question comes from Sharon Zackfia with William Blair. Please go ahead.
Sharon Zackfia: Your line is open. Hi, thanks for taking the question.
Sharon Zackfia: Hi, Thanks for taking the question I wanted to ask a question on Caf with the move to full spectrum lending how far have you gone into kind of a full spectrum. So far like how do we think about that for the second half of the year and then in terms of increasing that caf penetration I know there was.
Sharon Zackfia: I wanted to ask a question on CAF with the move to full spectrum lending. How far have you gone into kind of the full spectrum so far? Like, how do we think about that for the second half of the year? And then in terms of increasing that CAF penetration, I know there was, you know, there were moving parts in this quarter, but do you expect CAF penetration to increase, you know, year over year in the August quarter?
Chris: There are moving parts in this quarter, but do you expect caf penetration to increase you know year over year in the August quarter. Thanks, Yeah sure I. Appreciate the question Sharon So, let's just break down in penetration as it as it typically sits you know capsule has been historically sitting in where it's at.
Sharon Zackfia: Thanks. Yeah, sure. Appreciate the question, Sharon. So let's just break down penetration as it as it typically sits, you know, CAF has been historically sitting in where it's originally, where it's normally originated 42 to 43%. We've cited our tier two and tier three players taking combined, call it 26% of volume. As we grow, that is definitely where we're looking to grow. So we're looking to penetrate that we think about, I think really, since your question is, you know, how fast will we grow where, you know, that's really where we're looking to grow, grow down there.
Chris: Originally or people are just normally originated of 42% to 43%, we said at our tier two and tier three players taking combined call. It 26% of volume as we grow that is definitely where we're looking to grow. So we're looking to penetrate that when you think about I think really since your question is how.
Chris: How fast we grow.
Chris: That's really where we're looking to grow outgrow down there I think key for us will be we've got just curative patients in play we're looking for the held for sale transaction that we need to close that's got to happen, we're just coming up anniversarying on our models.
John Daniels: I think key for us will be, we've got two securitizations in play, we're looking for the health for sound transaction that we need to close, that's got to happen. We're just coming up anniversary on our models, we put in place 100 to 150 basis points of growth at the beginning of the quarter. Now, as we say to terrorists really through a bit of a snafu in that in showing that growth that we realized, but we have made progress as sort of that volume normalizes, because so much of it came with non, you know, coming up with our own financing, as that normalizes, you're going to see that we have made progress on that.
Chris: We put in place a 100 to 150 basis points of growth at the beginning of the quarter now as we say to tariffs really through a bit of a snafu in that and showing that growth that we realized but.
Chris: But we have made moves we've made progress as sort of that volume normalizes and because so much of it came with non it's coming up with their own financing as that normalizes youre going to see do we have made progress on that and again, we're going to look to grow that we will signal when that when that happens, but I think youre going to see material growth we would expect.
John Daniels: And again, we're going to look to grow that we will signal when that when that happens. But I think you're going to see material growth, we would expect in the not going to get there this year, Sharon at that 50% number I labeled, but you're going to see hopefully material growth in the quarters to Sharon, the only other thing, you know, when you think about the penetration speed, there's really two governors on that. One is having your funding available, and that's certainly taken care of. The other one, to John's point, is your credit model. Remember, you know, we had a lot of experience at the top.
Chris: I'm going to get there this year sharing at that 50% number I label, but youre going to see hopefully material growth in the quarters to come.
Chris: Sure and the only other thing.
Chris: When you think about the penetration speed Theres really two governors on that one as having your funding available and that's certainly taken care of at the other one to John's point is your your credit model remember.
Chris: We had a lot of experience at the top we had a lot of experience at the bottom, but then we put the full spectrum credit model in there, which we're still testing I mean, John how long has that been in play.
John Daniels: We had a lot of experience at the bottom, but then we put the full-spectrum credit model in there, which we're still testing. I mean, John, how long has that been in play that, you know? Yeah. August, we launched it. Yeah. So it just takes time to make sure your model is exactly the way. So those are the two governors.
John: Yes, we launched it yet so it just takes time to make sure. Your model is exactly the way. So those are the two governors.
John: Thank you.
Sharon Zackfia: Thank you. Sure, thank you.
John: Sure. Thank you.
David Bellinger: Thank you.
Speaker Change: Thank you. Our next question comes from David Bellinger with Mizuho. Please go ahead. Your line is open.
David Bellinger: Our next question comes from David Bellinger with Mizuho. Please go ahead.
David Bellinger: Your line is open. Hey, everyone.
David Bellinger: Hey, everyone. Good morning, nice results and thanks for the question here.
David Bellinger: Good morning. Nice results. And thanks for the question here. Another run around the marketing spend in the new campaign and understanding the flexibility for consumers will be front and center. But is some of that new push being driven by this omni-cost neutrality that you mentioned in the prepared remarks and suggested that Carmax is now ready to flow more digitally initiated volumes and in a more profitable way going forward? We're just trying to gauge whether you're seeing a step change within the digital economics of the business and opting to put more marketing dollars behind that now.
Speaker Change: Another one around the marketing spend and the new campaign and understanding the flexibility for consumers will be front and center, but.
Speaker Change: If some of that new push being driven by this omni cost neutrality that you mentioned in the prepared remarks.
Speaker Change: Suggested that Carmax is now ready to flow more digitally initiated volumes in a more profitable way going forward, but we're just trying to gauge whether youre seeing a step change within the digital economics of the business and perhaps you can put more marketing dollars behind that now.
Bill Nash: Yeah, I mean, that definitely enables, you know, the push on efficiency, the productivity, customer service, all of those things, again, fueled by AI, fueled by our associates, definitely enabling a better experience, but then makes us feel a lot better about going out there and advertising and letting our customers know the incredible experience and highly differentiated experience that they're going to get through Carmax.
Speaker Change: Yes, I mean that definitely enables.
Speaker Change: On efficiency the productivity customer service all of those things again fueled by AI feel by our associates definitely enabling a better experience for them makes us feel a lot better about going out there and advertising and letting letting our customers know the incredible experience and having a differentiated experience that theyre going to get through Carmax, Yeah I think.
Bill Nash: Yeah, I think, you know, David, the way I think about it, too, is, you know, FY25 was a big year for us from an experience standpoint and really closing some of the last big gaps, you know, with the rollout of order processing and shopping cart, and so we feel like we're at a point where if you're going to go out and celebrate this and really point direct, you know, customers to this fact that, like, you don't have to be forced into a fixed path. You better have best-in-class in-store, you better have best-in-class on-me, you better have a best-in-class online-only experience, and we feel like we're at that point where, like, we need consumers to understand you don't have to settle, and so that's a lot of the thrust, why we're thinking about it now in addition to the efficiency stuff that Enrique has already mentioned.
Speaker Change: David the way I think about it too as you know FY 'twenty five was a big year from us from an experience standpoint, and really closing some of the last big gaps with the rollout of order processing and shopping shopping card and so we feel like we're at a point, where if youre going to go out and celebrate this and really point direct customers to this fact that you don't have to be forced.
Speaker Change: Into a fixed path you better have best in class in store you better have best in class Omni and you better have a best in class online only experience and we feel like we're at that point, where like we need consumers to understand you don't have to settle and so that's that's a lot of the thrust for why we're thinking about it now in addition to the efficiency stuff.
Speaker Change: That Enrique has already mentioned.
Bill Nash: Great. Thank you both. Thank you.
Speaker Change: Great. Thank you both thank you.
Speaker Change: Thank you. Our next question comes from Rajat Gupta with JP Morgan. Please go ahead.
Rajat Gupta: Our next question comes from Rajat Gupta with JP Morgan. Please go ahead. But Greg, thanks for taking the questions. I just have like a couple of clarifications from like some of the commentary. Firstly, you know, any color on how the second quarter might have started, you know, we heard anecdotes just in the broader macro around, you know, some meaningful pullback from like just the pre-buy ahead of tariffs. I'm curious if your businesses felt any of that here in June, any color you could give on comps there. And then just on CAF, I mean, obviously a lot of discussion there.
Rajat Gupta: Great. Thanks for taking the questions just had a couple of clarifications from like some of the commentary.
Speaker Change: Firstly, you know any color on how the second quarter Might've started no your word anecdotes just in the broader macro.
Speaker Change: You know some some meaningful pull back from just the pre buy ahead of tariffs I'm curious as your business has felt any of that here in June any color you could give on comps there and then just on cap I mean, obviously a lot of discussion there.
Rajat Gupta: You know, in the last quarter, you had given us some guidance around the provisioning, you know, cadence for the year, any color you could give us on how the second quarter might look like, especially in context of all the changes that are happening. You know, that would be helpful. Thanks.
Speaker Change: No I think in the last quarter, you had given us some guidance around the provisioning.
Speaker Change: Oh cadence for the year any color you could give us on how the second quarter might look like especially in context of all the changes are happening.
Speaker Change: That would be helpful. Thanks.
Bill Nash: Okay, Rajat, on June, look, we're 19 days into it. We'll talk about June when we talk about the second quarter. At the end of the second quarter, the only thing I would add to that is just, you know, remember, or you may not know this, but the second quarter, we do lose a Saturday and that happens to fall out in the month of June, and then you don't pick it up for the rest of the quarter. You won't pick that Saturday up until the rest of the year.
Speaker Change: Okay Rajat on June look were 19 days into it we'll talk about June when we talk about the second quarter at the end of the second quarter. The only thing I would add to that is just you know remember or you may not know this but the second quarter, we do lose a Saturday and that happens to fall out in the month of June and then you don't pick it up for the rest of the quarter you won't pick that Saturday up until the rest of the year.
John Daniels: Jon, I'll toss to you on the provision. Sure, yeah. Just think about the cadence of provision for the year. We would expect Q1 to be the high-water mark here. We've made the adjustment that we believe needs to be made on those older vintages. We feel good about the 24s. Obviously notwithstanding the consumer and all that could happen in the future, but again, we feel good about a reserve. Ideally, this would just be provisioning for new originations. The only thing that could throw that is, what is our growth plan? Obviously, if we grow, you're going to have to add provision accordingly for that non-prime space, but we'll signal that when we're going to do any material more growth there.
Speaker Change: Sure John I'll toss to you on the provision sure yeah yeah.
Speaker Change: Just think about the cadence of provision for the year, we would expect Q1 to be the high watermark here. We've made the adjustments that we believe needs to be made on those older vintages. We feel good about the 'twenty four is obviously notwithstanding the consumer and all of that could happen in the future, but but again, we feel good about our reserves ideally you'd be just here.
Speaker Change: Provisioning for new originations and the only thing that could throw that is what is our growth plan. Obviously, if we grow youre going to have to add provision accordingly for that non prime space, but we will signal that when we're going to do any material more growth. There. So yeah I think the way you should think about it is what he talked about last quarter as we're going into near term. After the 100 150 basis points, where we are.
Bill Nash: Yeah, I think the way you should think about it is what he talked about last quarter. If we're going in the near term after the 100 to 150 basis points, we're well on our way there. Just got a little bit of math this quarter. And it's a great bunch of the color.
Speaker Change: Well on your way there just got a little bit masked this quarter.
Speaker Change: Yeah.
Speaker Change: Understood great. Thanks for the color.
Rajat Gupta: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from Craig Kennison with Baird. Please go ahead.
Craig Kennison: Our next question comes from Craig Kennison with Baird. Please go ahead.
Craig Kennison: Hey, good morning. It's been a helpful call. I appreciate it.
Craig Kennison: Hey, good morning, it's been helpful color I appreciate it I wanted to ask a question in the press release, you talked about digitally supported sales at 80% that was down from 82% in the February quarter. So I think you lost a point in omni and appoint an online I know you're really focused on the omnichannel, but digital had been gaining share.
Craig Kennison: I wanted to ask a question in the press release, you talked about digitally supported sales at 80%. That was down from 82% in the February quarter. So I think you lost a point in Omni and a point in online. I know you're really focused on the Omni channel, but digital had been gaining share and clearly feels like the future. So I'm just curious if you can explain why that might have stepped back in this quarter. Yeah, I think I think part of it is just is just seasonally, Craig. I mean, I don't really I mean, I think maybe I think Omni is actually up a point and maybe online splatter or, you know, maybe down a point.
Craig Kennison: Clearly feels like the future. So I'm just curious if you can explain why that might have stepped back.
Craig Kennison: In this quarter.
Speaker Change: Yes, I think our I think part of it is just it's just seasonally.
Craig Kennison: Craig I mean, I don't really I mean, I think maybe I think omni is actually up a point and maybe online flatter or.
Speaker Change: Maybe down a point, but I mean, I think it's more seasonally driven I think the the the more interesting than the more relevant point is that we continue in the omni bucket. We continue to see more transactions more pieces of these digital capabilities being used and I think that's the more relevant point.
Bill Nash: But I mean, I think it's more seasonally driven. I think the the the more interesting and the more relevant point is that we continue in the Omni bucket. We continue to see more transactions, more pieces of these digital capabilities being used. And I think that's the more relevant point than, oh, did everybody go to online or did everybody go to Omni? It's like, OK, of your Omni bucket, you're seeing that the number of steps that they're doing is continuing to increase.
Speaker Change: They know did everybody go to online or did everybody got omni it's like okay of your omni bucket, you're seeing that the number of steps that theyre doing is continuing to increase.
Bill Nash: And then just to follow up on the marketing comments you've made, how is AI changing the way you think about search engine optimization as part of this new marketing campaign? Yeah, well, you know, I think the big new buzzword is, is GEO instead of SEO. And you know, that generative engine optimization, that's what it's all about. It's like, how do you show up? Well, so it's critical. I think if you're only focused on SEO, you're going to miss the boat. SEO is still super important. You still got to focus that but now you have to kind of also be really good at at GEO.
Speaker Change: And then just to follow up on the marketing comments, you've made how is AI changing the way you think about search engine optimization as part of this new marketing campaign.
Speaker Change: I think the big New Buzzword is G O instead of SCO and degenerative engine optimization, that's what it's all about it's like how do you show up well so it's critical.
Speaker Change: If you're only focused on C O youre going to Miss the boat.
Speaker Change: Yes, it's still Super important you still got folks that because now you have to kind of also be really good at at Oh, So it'll pay play a big role in the marketing campaign and I just think in marketing in general I think you.
Bill Nash: So it'll pay play a big role in the marketing campaign. And I just think in marketing in general, I think, you know, generative AI, there's just a lot of potential there.
Speaker Change: Generative AI, there's just a lot of potential there.
Jeff Lick: Thank you.
Speaker Change: Thank you thank.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you. Our next question comes from Jeff <unk> with Stephens, Inc. Please go ahead.
Jeff Lick: Our next question comes from Jeff Lick with Stevens Inc. Please go ahead.
Jeff Lick: Good morning, congrats on a great quarter and thanks for taking my question. There was obviously, this quarter is a lot of puts and takes in terms of, you know, you expanding the credit spectrum, you know, kind of the tariff surge, and then also you guys have kind of been, you know, you indicated in your annual state leaning into a bit more on the, you know, the value cars, you know, six, you know, the seven plus years, you know, maybe if you could just kind of walk us through, you know, anything, any call outs as the quarter progressed and, you know, and how those buckets influenced your impressive call.
Speaker Change: Good morning, Congrats on a great quarter and thanks for taking my question.
Speaker Change: Yeah.
Speaker Change: There was obviously this quarter is a lot of puts and takes in terms of.
Speaker Change: You're expanding if the credit spectrum.
Speaker Change: Kind of a tariff surge and then also you guys had kind of been you indicated in your analyst day leaning into a bit more.
Speaker Change: The value cars six seven plus years, maybe if you could just kind of walk us through.
Speaker Change: And you think any callouts as the quarter progressed.
Speaker Change: How those buckets influenced your impressive comp.
Jeff Lick: Yeah, I appreciate the question, Jeff.
Speaker Change: Yes, I appreciate the question, Jeff look I think it will take some of the noise like the credit spectrum expansion take that out it's still a great quarter. Okay.
Bill Nash: Look, I think take some of the noise, like the credit spectrum expansion, take that out. It's still a great quarter. Okay. You know, we're really pleased with it. And I think the the credit expansion, look, it's the next step. We've been we've been working through that it didn't we didn't contemplate it in the provision of the fourth quarter, but something we've been been working on. So we're we're excited about that.
Speaker Change: No.
Speaker Change: We're really pleased with it and I think the credit expansion look it's the next step we've been we've been working through that it didn't we didn't contemplate in the provision for the fourth quarter, but it's something we've been we've been working on so we're excited about that I think he brought up an interesting point on just the age you know.
Bill Nash: I think you brought up an interesting point on just the age, you know, We did sell, if I look at our, let's call it 10-plus-year-old cars, you know, we increased, we probably sold roughly 25,000 more of those cars. When I say it's like, think about the 10-year-old, the 11-year-old, the 12-year-old, and that's by continuing to really kind of push in that area, because we do know customers, they're interested, they want to buy, but even like this past quarter where we saw this higher no finance, those are folks that have higher credit, but interestingly, if you look at how they bought, they bought vehicles across the spectrum.
Speaker Change: We did sell if I look at our let's call it 10 plus year old cars.
Speaker Change: We increased we probably sold roughly 25000 more of those cars when I say, it's like think about the 10 year old 11 year old the 12 year old and that's that's a by continuing to really kind of pushing that area. Because we do know customers, they're interested they want to buy but even like this past quarter, where we saw this higher no fire.
Speaker Change: And those are folks that have higher credit, but interestingly if you look at how they bought they they bought vehicles across the spectrum in fact, our biggest growing.
Bill Nash: In fact, our biggest growing contributor to sales this quarter was kind of barbelled. It was the under $20,000 cars and the over $40,000 cars, and so I think having a good answer there for all those is going to be critical, and that's an area that we'll continue to focus on without sacrificing the quality standards of Carmax, but that is a work track that we're definitely focused on. Yeah, and between those two is really the under $20,000, increase in under $20,000 that drove our comp, so that focus on affordability, and internally, as you know, we call our certain cars our older cars, more of a value max car.
Speaker Change: Contributor to sales this quarter was kind of barbell. It was the under $20000 cars in the over 40000 dollar cars and so I think having a good answer there for all of those is going to be critical and that's an area that we'll continue to focus on without sacrificing the quality standards of Carmax, but that is at work track that where we're definitely.
Speaker Change: Focused on between those two is really the under 20000 increase another 20000 that drove our comps so that focus on affordability and internally as you know we all are certain cars are older cars and more of a value Max car.
Bill Nash: That was up five points year over year on the quarter as well, so those that bleeds into that under $20,000 car, so focus on affordability and ability to meet the customer where they want to be.
Speaker Change: That was up five points year over year on the quarter as well so those that bleeds into that under $20000 car. So I'll focus on affordability and ability to meet the customer where they want to be met.
Jeff Lick: Great. I'll get back in the queue and let someone else ask a question. All right. Congrats again. Thank you.
Speaker Change: Great I'll get back in the queue and let someone else ask a question. Congrats again. Thank you.
David Whiston: Thank you. Our next question comes from David Whiston with Morningstar. Please go ahead. Your line is open.
David Whiston: Our next question comes from David Whiston with Morningstar. Please go ahead. Your line is open. Thanks. Good morning.
David Whiston: Thanks, Good morning.
David Whiston: I was curious if you can talk at all about how you see buyback spending trending the rest of the fiscal year relative to Q1 spend and how financially stressed is the consumer right now in your opinion? On the share buyback, you know, what I tell you is our intent entering this year was to modestly accelerate the pace of our buybacks as compared to last year. And in the first quarter, based on valuation, based on cash flow dynamics, we saw an opportunity to sizably increase the amount of share repost clearly. So when determining the pace for Q2 and beyond, you know, we'll have the same considerations, the valuation, cash flow dynamics, as well as the broader macro backdrop.
David Whiston: Curious if you can talk at all about how you see buybacks spending trending the rest of the fiscal year relative to Q1 spend and.
David Whiston: And how financially stressed as the consumer right now in your opinion.
David Whiston: Yeah on the share buyback what I'd tell you is our intent to entering this year was to modestly accelerate the pace of our buybacks as compared to last year and in the first quarter based on valuation based on cash flow dynamics, you saw an opportunity to size. It really increase the amount of share repos clearly when determining the base for Q2 and beyond you know well have the same considerations.
David Whiston: <unk> cash flow dynamics as well as the broader macro backdrop.
Bill Nash: Yeah, and I think as far as the consumers, you know, how stressed that, look, I wouldn't categorize it as way more stressed than the last, but I certainly wouldn't say they're less stressed. And I think what you're seeing is some of the consumers are, you know, obviously we talked about the student loans. You can see some default on folks that have got student loans. We haven't seen any impact on our business, but I think there's also a little bit of kind of wait and see on tariffs, you know. While tariffs have impacted some prices, I think there's a lot of stuff was already – a lot of things were already in the U.S.
Speaker Change: And I think as far as the the consumers.
Speaker Change: How stressed that look I wouldn't care categorize it is way more stressed in the the last but I certainly wouldn't say, they're less stressed and I think what you're seeing at some of the consumers are.
David Whiston: Obviously, we talked about the student loans default on folks that have got student loans, we haven't seen any impact on our business, but I think there's also a little bit of kind of wait and see on tariffs.
David Whiston: While tariffs have impacted.
Speaker Change: Some prices.
Speaker Change: There's.
Speaker Change: A lot of stuff was already a lot of.
Speaker Change: Things are already in the U S. Before tariffs kicked in so I think really well you just need to watch going forward as prices go up on for everyday consumables, how that might push them, but I would say from a consumer sentiment standpoint.
Bill Nash: before tariffs kicked in. So I think really you just need to watch going forward as prices go up on for everyday consumables how that might push them. But I would say from a consumer sentiment standpoint, you know, they're probably a little less positive about the future, but I don't think it's necessarily showed up so much in the buying habits at this point. Thank you. And once again, that is star and one on your telephone keypad.
Speaker Change: You know there there are probably a little less positive about the future, but I don't think it's necessarily showed up so much in the and the buying habits at this point.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Thank you and once again that is star one on your telephone keypad. If you would like to join the queue. We will move next to Chris peers with Needham. Please go ahead. Your line is open.
Chris Pierce: If you would like to join the queue, we will move next with Chris Pierce with Needham. Please go ahead.
Chris Pierce: Your line is open.
Speaker Change: Hey, good morning, everyone can you just walk me through cost avoidance in other cost of sales I, just I'm not sure what to model going forward. It was down 33 million bucks year over year and drove up pretty high.
Chris Pierce: Hey, good morning, everyone. Can you just walk me through cost avoidance and other costs of sales? I just, I'm not sure what the model going forward. It was down 33 million bucks year over year and drove a pretty high. Yeah, I'd just love to hear about cost avoidance there and what to think about going forward. I'm sorry, which line are you talking about? $7 million in other cost of sales versus $40 million year over year. If you're talking about service, we had an improvement of $30 million in service line in our gross margin. If that's what you're talking about, then again, we had benefits coming there from cost coverage that we had taken, meaning we had taken some fees to overcome some of the cost pressures we had last year.
Speaker Change: I just love to hear about cost avoidance, there and you've got to think about going forward.
Speaker Change: Well, I'm, sorry, which which line are you talking about.
Speaker Change: $7 million in other cost of sales versus $40 million year over year.
Speaker Change: Others.
Speaker Change: Youre talking about service, we had an improvement of $30 million in service line in our in our gross margin. If that's what you're talking about then again, we had benefits coming there from cost coverage that we have taken meaning we have taken some fees to overcome some of the cost pressures. We had last year, we saw leverage on our <unk>.
John Daniels: We saw a leverage on our largely fixed cost base in service through positive sales. We'll create some leverage, and then we continue to go after efficiencies in that business as well, and we continue to deliver on those like we've committed to on an annual basis. That's why we saw the $30 million improvement in the service. So those, that 95% of the gross margin, that's something.
Speaker Change: Largely fixed cost base and service rights with positive sales will create some leverage and then we continue to go after efficiencies in that business as well and we continue to deliver on those like we've committed to on an annual basis.
Speaker Change: That's why we saw the million.
Speaker Change: Improvement in service.
Speaker Change: So those that 95% of other gross margin that's something.
Enrique Mayor: I mean I guess how should we think about other gross margin going forward given the impact it has on EPS? Yeah, the gross margin is certainly aligned when I talked about our earnings model and our focus on being able to deliver high teen EPS growth over time and on, you know, mid single digit comps. That is something that we're focused on is continuing to grow that, that margin, the other margin and the key components and other margin are going to be service like I just talked about. And the other component is our EPP products, right?
Speaker Change: I mean, I guess, how should we think about the gross margin going forward given the impact it has on EPS.
Speaker Change: Yeah. The gross margin is certainly a lag when I talked about our earnings model and our focus on being able to deliver high teen EPS growth overtime and on a mid single digit.
Speaker Change: Cops that is something that we're focused on is continuing to grow that that margin. The other margin and key components and other margin are going to be a service like I just talked about and the other component is our ETP products right beside our EVP margin go up again this quarter am I.
Enrique Mayor: We saw our EPP margin go up again this quarter. I talked last quarter about where we're undergoing some tests in terms of product enhancements in our, in our EPP products. We've been pleased with the results of those tests in terms of product enhancements. Those have to do with deductibles, terms, and we would expect to see a modest rollout in the back half of this year and then with a full financial impact or more full financial impact as we head into FY27. But, you know, we are laser focused on other gross profit as a vehicle for growth.
Speaker Change: I talked last quarter about where you were undergoing some tests in terms of product enhancements in our in our <unk> products. We've been pleased with the results of those tests in terms of product enhancements of this has to do with deductibles terms and we would expect to see a modest roll out in the back half of this year and then with the full financial impact.
Speaker Change: <unk> financial impact as we head into FY 'twenty seven, but we are laser focused on how the gross profit as a as a vehicle for growth in terms of fueling our EPS growth, Yes, I think Chris for your for your modeling standpoint, I think it goes to some comments earlier, because a lot of thats being driven by service and.
Enrique Mayor: fueling our EPS growth. I think, Chris, for your modeling standpoint, I think it goes to some comments earlier, because a lot of that's being driven by service, and, you know, the service in the first quarter is always the strongest. We would expect, as we said last quarter, to be profitable for the year, but you shouldn't expect the service gains equal, like you saw in the first quarter, for the rest of the year. Yeah. And again, yeah, I made a note of that in my prepared remarks as well. The first quarter is usually the strongest when it comes to service, just because it's the highest volume quarter that we have, just seasonally, and again, you're levering on a somewhat fixed cost basis, and so you're going to lever more strongly.
Speaker Change: The service in the first quarter is always the strongest we would expect as we said last quarter or two to.
Speaker Change: To be profitable for the year, but you shouldn't expect that the service gains equal like you saw in the first quarter for the rest of the year.
Speaker Change: Yeah, I made a note of that in my prepared remarks as well the first quarter is usually the strongest when it comes to service just because it's the highest volume.
Speaker Change: Quarter that we have just seasonally and again, you're levering on the somewhat fixed cost basis, and so youre going to lever more strongly there, but again, we're committed to growing our other gross profit in totality as part of our earnings model moving forward and that's what you've seen now for the past couple of years.
Enrique Mayor: But again, we're committed to growing our other gross profit in totality as part of our earnings model. And that's what you've seen now for the past...
Enrique Mayor: Okay, and then just lastly, going back to the first question, SG&A per retail unit was down mid single digit year over year, but it was sort of flattish if we look back two years ago. So I just kind of want to get a sense of where we are in fully levering, you know, omni costs and how you think about this kind of going forward. Yeah, we have opportunity to continue to lever our costs, whether it be specific on the sales side, when you're thinking about CEC expense, that kind of thing, or just across the business.
Speaker Change: Okay, and then just lastly, going back to the first question.
Speaker Change: SG&A per retail unit was down mid single digits year over year, but it was sort of flattish. If we look back two years ago. So I just kind of let it get sense of where we are in fully levering omni costs and how we should think about this going forward.
Speaker Change: Yeah, I don't we have we have opportunity to continue to to lever our cost whether it be specific on the sales side, when you're thinking about <unk> expense that kind of thing or just across the across the business and we have initiatives are in pretty much every single area. So we still feel like there's there is additional opportunity there.
Enrique Mayor: We have initiatives in pretty much every single area, so we still feel like there's additional opportunity there. Yeah, and what you certainly see from us is a commitment to doing that. It's been a couple years now where we've been levering and levering our SG&A as a percent gross profit. Whether comps were positive or whether comps were negative, we've been able to successfully lever our SG&A, and we intend on continuing.
Speaker Change: Yeah, what did you certainly see from US is a commitment to doing that it's been a couple of years now where even the levering and levering our SG&A as a percent of gross profit.
Speaker Change: Comps are positive or weather comps were negative we've been able to successfully leverage our SG&A and we intend on continuing to do.
Enrique Mayor: All right, thank you. Thank you.
Speaker Change: Okay. Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you. Our next question comes from it's actually a follow up from Rajat Gupta with Jpmorgan. Please go ahead. Your line is open.
Rajat Gupta: Our next question comes from, it's actually a follow-up from Rajat Gupta with JP Morgan. Please go ahead, your line is open. Oh, great. Yeah, sorry. Sorry for the follow up. You know, just wanted to follow up on the new off balance sheet approach. And is it fair to assume that, you know, a lot of the incremental penetration that you see in the capital, you know, from 42 to 50%? All of that will go through this off balance sheet approach, you know, basically trying to understand like what's the mix going to be or what you are targeting in terms of on versus off balance sheet for CAF.
Rajat Gupta: Great Oh, yeah, sorry, sorry for the follow up.
Speaker Change: Just wanted to follow up on the new off balance sheet approach and.
Speaker Change: Is it fair to assume that you know a lot of the incremental penetration that you see in the cash flow from 42% to 50%.
Speaker Change: All of that.
Rajat Gupta: We'll go through this off balance sheet approach.
Rajat Gupta: I'm basically trying to understand like what's the mix going to be or what you're targeting in terms of onwards as off balance sheet forecast. Thanks.
John Daniels: Yeah, appreciate the question, Rajat, and a fair follow up. So I think one of the things we wanted to drive home here was we think this is a periodic play for us. You know, it's, it's, you know, obviously, we have our higher prime deals, we don't think it's necessarily set up for this approach, less volatility there, less risk in those customers. And the non prime approach, especially as we grow from 42 to 50%, which you've, which you've cited, and I think it really does set itself up to at some points in time, maybe we do want to retain that, risk and all the additional cash flows that come with it, because there is additional value there, where we're willing to offload some of that risk, take the cash up front.
Speaker Change: Yes, I appreciate the question and follow up.
Speaker Change: So I think one of the things we wanted to drive home here was we think this is a periodic play for us.
Speaker Change: It's.
Speaker Change: Obviously, we have our price or a higher prime deals. We don't think it's necessarily set up for this approach less volatility there is less risk in those customers and the non prime approach, especially as we grow from 42% to 50%, which you've which you cited.
Speaker Change: I think it really does set itself up to at some point in time, maybe we do want to retain that risk and all the additional cash flows that come with it because there is additional value. There we're willing to offload some of that risk take the cash upfront and again, maybe theres a little bit of a haircut there, but I think it's an opportunistic play as.
John Daniels: And again, maybe there's a little bit of a haircut there. But I think it's an opportunistic play, as we're going to see. So maybe it's once a year, we'll see how it plays out. But I wouldn't think about it as an all or nothing play here at all. Yeah, I definitely wouldn't think about it that way. There's, you know, there's, you look at the tier one business, we aren't changing.
Speaker Change: We're going to see so maybe it's once a year, we will see how it plays out but I wouldn't think about it as an all or nothing play here at all yeah, I definitely wouldn't think about it that way.
Speaker Change: When you look at the tier one business, we arent changing that I mean that we hold on it think about it more being able to expand on some things right here at the end of the day I don't want to carry that.
John Daniels: I mean, that we hold on to think about it more being able to expand on some things that, hey, at the end of the day, probably don't want to carry that, you know, and so to John's point, it's, don't think about it as all in one bucket or the other, it's going to be a nice complement of the two. Yeah, they're definitely subprime receivables that we want to keep and hold for investment. And we'll continue to do that. Absolutely. I think of this play, and I mentioned it earlier, just kind of simplistically, you know, it's going to enable our full spectrum and cap income growth over time, while mitigating some of that risk.
Speaker Change: So to John's point, it's don't think about it is all in one bucket or the other it's gonna be a nice complement of the two yes. There are definitely sub prime receivables that we want to keep and hold for investment and we'll continue to do that absolutely I think of this play and I mentioned it earlier, just kind of Simplistically, it's gonna enable our full spectrum and caf income growth over time while.
Speaker Change: Mitigating some of that risk. So we're really excited for this program, but yeah, yeah. That's.
John Daniels: So we're really excited for this program. But that's how I think of it. I understood. That makes a lot of sense. Thanks for answering the question. Sure. Thank you.
Speaker Change: How should I think about it.
Speaker Change: Understood that makes a lot of sense.
Speaker Change: Thanks for taking the question.
Speaker Change: Sure.
Speaker Change: Thank you and we have another follow up from Jeff Lake with Stephens, Inc. Please go ahead.
Jeff Lick: And we have another follow up from Jeff Lake with Stevens Inc.
Jeff Lick: Please go ahead. Great, thanks for taking the follow up. I just wanted to double back or ask about retail GPUs. Surprise, we actually haven't hit on this, you know, it's a record at 2407, first time we've seen that 2400.
Speaker Change: Great. Thanks for taking the follow up.
Speaker Change: I just wanted to double back you're asking about.
Speaker Change: Retail GPU surprised we actually haven't hit on this it's a record of $24. Seven first have you seen in the 2400.
John Daniels: You know, last quarter, you talked a little bit or highlighted the you know, improvements in logistics, and then also recon, if we could get into the, if you wouldn't mind elaborating on the standalone recon centers, do that, do those have an immediate impact or does it, is it actually diluted for a few quarters or a year before they show up? And then I guess, lastly, on GPUs, are the 10 plus year old vehicles, I'm assuming those might have higher GPUs than the chain average, so if you can just kind of talk about the improvements you're seeing there and where the trajectory might be.
Speaker Change: Last quarter, you talked a little bit or highlighted the.
Speaker Change: Improvements in logistics and then also recount if we could get into the if you wouldn't mind elaborating on the Standalone recon centers that do that do those <unk>.
Speaker Change: Have an immediate impact or does it is it actually dilutive for a few quarters or a year before they show up and then I guess lastly on Gpus 10, plus year old vehicles.
Speaker Change: Those might have higher gpus in the chain average. So if you could just kind of talk about the improvements youre seeing there and where the trajectory might be.
John Daniels: All right, Jeff, I'm going to try to hit it. There's a lot in that question. I'm going to try to hit it all, but you can keep me honest at the end. So, look, yeah, we're pleased with the retail GPUs. I think the big, the big thing there you should be thinking about, and I talked a little bit about this last quarter, because someone asked, hey, how do you think about retail GPUs? And I said, look, if you're modeling it, think about it on a yearly basis and think about it being similar to what it was last year.
Speaker Change: Alright, Jeff I'm going to try to hit it Theres a lot in that question. So I'll try to hit at all but you can keep me honest at the end so but yeah. We're pleased with the retail Gpus and I think the big the Big thing there you should be thinking about it and I talk a little bit about this last quarter, because someone asking hey, how do you think about repeat retail Gpus and I'd say look if you're modeling it think about it on a yearly basis and think about it being similar to what.
Speaker Change: It was last year, but I also said.
John Daniels: But I also said that, you know, on any individual quarter, it's going to be up or down. And the reason I said that is because you've got to look at the factors in the quarter. And, you know, sometimes it's, you know, if you think about all the different things that go into the decision, you know, think about elasticity and price competitiveness and variable costs and how you're improving on that and ancillary services that you attach or products that you attach, there's going to be some quarters where you know what, and this was one of those quarters, like, look, we're going to take some of those savings that you're talking about from the reconditioning and logistics, and we're going to just flow them through to the bottom line.
Speaker Change: That on any individual quarter, it's going to be up or down and the reason I said that is because you got to look at the factors in the quarter and sometimes it is.
Speaker Change: If you think about all the different things that go into the decision here to think about elasticity on price competitiveness and variable costs and how you're improving on that and ancillary services that you attach or products that you attach.
Speaker Change: There's going be some quarters, where you know what and this is one of these quarters. It's like look we're going to we're going to take some of those savings that youre talking about from the reconditioning and logistics and we're going to just flow them through to the bottom line.
John Daniels: Now, as far as the standalone reconditioning centers, look, the benefits that we're getting from reconditioning and logistics, I just want to remind everybody, we've had large reconditioning centers all up until now, because if you think about it, we have 250 plus stores, but we only have a little over 100 places where we produce cars. We're seeing the benefits across the board. And it's so early on the reconditioning side, you know, we just opened up a couple more large recon centers. We are seeing some improvements there, but that's more towards the logistics, because we're having to ship cars from, you know, less out of market and being able to put them right there in the market.
Speaker Change: Now as far as the Standalone reconditioning centers look are the benefits that we're getting from reconditioning and logistics I just want remind everybody. We've had large reconditioning centers all up until now because if you think about it we have 250 plus stores, but we only have a little over 100 places where we produce cars were seeing the.
Speaker Change: It's across across the board and it's so early on.
Speaker Change: The reconditioning side, we just opened up a couple more large recon centers, we are seeing some some improvements there, but that's more towards the logistics because we're having to ship cars from less out of market and being able to put them right. There in the market, they're not they're not I think we've got one that's probably fully ramped to capacity I would expect.
John Daniels: They're not, they're not, I think we've got one that's probably fully ramped to capacity. I would expect to continue to get synergies outside of those. But, you know, we're getting synergies across the board when you think about the reconditioning, and I would expect to continue to do that as we go forward. Did I miss anything?
Speaker Change: To to continue to get synergies outside of those but you know.
Speaker Change: We're getting synergies across the board when you think about the reconditioning and I would expect to continue to do that as we go forward.
Speaker Change: Did I Miss anything I did I did.
John Daniels: Oh, yeah, I did. I did. You asked about the 10-plus. The 10-year-old cars. Yeah. The 10-year-old cars. Yeah. Historically, we've talked about older cars. You bring them up to the Carmax standard, they're generally a little bit of a unicorn. They will get a little bit more margin. You're able to make a little bit more margin on those vehicles. So that's fair.
Speaker Change: Year old cars, yes, yes.
Speaker Change: Yes, the 10 year old cars yeah.
Speaker Change: Historically, we've talked about the older cars, you bring them up to the Carmax standard. They are generally a little bit of a unicorn they will get a little bit more margin there you're able to make a little bit more margin on those on those vehicles.
Speaker Change: That's fair Okay.
Bill Nash: Okay, great, well, nice progress there. All right, thank you, Jeff. Thank you.
Speaker Change: Great well nice progress there alright, thank you Jeff.
Speaker Change: Thank you.
Speaker Change: Thank you.
Operator: We don't have any further questions at this time.
Bill Great: Don't have any further questions at this time I will hand, the call back to bill for any closing remarks, okay. Great. Thank you. Thank you well listen thank you all for joining the call today and for your continued questions and your support and as always I just want to thank our associates for everything that they do.
Bill Nash: I will hand the call back to Bill for any closing remarks. Great. Thank you. Well, listen, thank you all for joining the call today and for your continued questions and your support. And, as always, I just want to thank our associates for everything that they do and how they take care of each other and our customers. We will talk again next quarter. Thank you.
Bill Great: And how they take care of each other and our customers. We will talk again next quarter. Thank you.
Speaker Change: Thank you, ladies and gentlemen that concludes our first quarter of fiscal year 2026.
Operator: Ladies and gentlemen, that concludes our first quarter fiscal year 2026 Carmax earnings release conference call.
Speaker Change: Earnings release Conference call you may now disconnect.
Operator: You may now disconnect.
Bill Great: Hum.
Bill Great: Okay.
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