Q2 2027 Carmax Inc Earnings Call

September 29, 2026

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Speaker #1: Ladies and gentlemen, thank you for standing by. Welcome to the second quarter, fiscal year 2027 CarMax Earnings Release Conference Call. At this time, all participants are in a listen-only mode.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Q2 fiscal year 2027 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. I would now like to hand the conference over to your speaker today, David Lowenstein, VP Investor Relations. Please go ahead.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Q2 fiscal year 2027 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. I would now like to hand the conference over to your speaker today, David Lowenstein, VP Investor Relations. Please go ahead.

Speaker #1: After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Lowenstein, VP, Investor Relations.

Speaker #1: Please go ahead.

Speaker #2: Good morning. Thank you for joining our Fiscal 2027 Second Quarter Earnings Conference Call. I'm here today with Keith Barr, President and CEO; Enrique Mayer-Mora, Executive Vice President and CFO; and John Daniels, Executive Vice President, CarMax Auto Finance.

David Lowenstein: Good morning. Thank you for joining our fiscal 2027 Q2 earnings conference call. I am here today with Keith Barr, President and CEO, Enrique Mayor-Mora, Executive Vice President and CFO, and Jon Daniels, 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 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 #2: 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.

Speaker #2: 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.

David Lowenstein: 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 #2: In providing projections and other forward-looking statements, we disclaim any intent or obligation to update them. For additional information on important factors and risks that could affect these expectations, please see our Form 8-K filed with the SEC this morning, our annual report on Form 10-K for fiscal year 2026, and our quarterly reports on Form 10-Q previously filed with the SEC.

David Lowenstein: For additional information on important factors and risks that could affect these expectations, please see our Form 8-K filed with the SEC this morning, our annual report on Form 10-K for fiscal year 2026, and our quarterly reports on Form 10-Q previously filed with the SEC. Please note, in addition to our earnings release, we have also prepared a quarterly investor presentation, and both documents are available on the investor relations section of our website. Our commentary today may include non-GAAP financial measures. Reconciliations of these measures to the comparable GAAP measures are available in the investor presentation. 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. Keith?

Speaker #2: Please note, in addition to our earnings release, we have also prepared a quarterly investor presentation. Both documents are available on the Investor Relations section of our website.

Speaker #2: Our commentary today may include non-GAAP financial measures. Reconciliations of these measures to the comparable GAAP measures are available in the Investor Presentation. 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.

David Lowenstein: Our commentary today may include non-GAAP financial measures. Reconciliations of these measures to the comparable GAAP measures are available in the investor presentation. 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. Keith?

Speaker #2: Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow-ups. Keith?

Speaker #3: Thank you, David. Good morning, everyone, and thanks for joining us. As I reflect on my first six months at CarMax, I am proud of the progress we have made in strengthening the business.

Keith Barr: Thank you, David. Good morning, everyone, and thanks for joining us. As I reflect on my first six months at CarMax, I am proud of the progress we have made in strengthening the business. Last quarter, I introduced our strategy for growth built around four pillars that place the customer at the center of everything we do and that are designed to meaningfully improve how we operate at scale and support consistently strong performance. Our strong Q2 results reflect solid execution and the initial benefits we are seeing as we deliver on the strategy. Used unit comps grew 13%, driven largely by improved price competitiveness, with total units across used and wholesale growing 15%.

Speaker #3: Last quarter, I introduced our strategy for growth, built around four pillars that place the customer at the center of everything we do, and that are designed to meaningfully improve how we operate at scale and support consistently strong performance.

Speaker #3: Our strong second quarter results reflect solid execution and the initial benefits we are seeing as we deliver on the strategy. Used unit comps grew 13%, driven largely by improved price competitiveness, with total units across used and wholesale growing 15%.

Speaker #3: Earnings per share grew 81% year over year to $1.16, supported by robust comp growth, further gross profit expansion through the performance of our extended protection plan products, an increase in CAP contribution, and continued SG&A leverage.

Keith Barr: Earnings per share grew 81% year over year to $1.16, supported by robust comp growth, other gross profit expansion through the performance of our extended protection plan products, an increase in CAF contribution, and continued SG&A leverage. I want to thank all of our associates for their hard work, which has underpinned these results. Enrique and Jon will speak to our Q2 performance in more detail in a few moments. Our improving performance has been driven by the speed and focus our teams have put into delivering our strategy. We have named our strategy for growth Shift into GEAR and have rolled it out across our corporate offices and entire field organization. Our associates are highly engaged with the steps we are taking to strengthen our core operations, which are designed to deliver robust financial results over the years to come.

Speaker #3: I want to thank all of our associates for their hard work, which has underpinned these results. Enrique and John will speak to our second-quarter performance in more detail in a few moments.

Speaker #3: Our improving performance has been driven by the speed and focus our teams have put into delivering our strategy. We have named our strategy for growth 'Shifting to Gear,' and have rolled it out across our corporate offices and entire field organization.

Keith Barr: Our improving performance has been driven by the speed and focus our teams have put into delivering our strategy. We have named our strategy for growth Shift into GEAR and have rolled it out across our corporate offices and entire field organization. Our associates are highly engaged with the steps we are taking to strengthen our core operations, which are designed to deliver robust financial results over the years to come.

Speaker #3: Our associates are highly engaged with the steps we are taking to strengthen our core operations, which are designed to deliver robust financial results over the years to come.

Speaker #3: We have a lot to be proud of, and I want to highlight a few examples of the progress we made across each of our four pillars this quarter.

Keith Barr: We have a lot to be proud of, and I want to highlight a few examples of the progress we made across each of our four pillars this quarter. While we speak to the pillars individually, like many aspects of our business, they are interconnected and many overlapping benefits exist. As a reminder, Shift into GEAR starts with a great offering. We will give customers every reason to choose CarMax by offering a great car at the right price. During the Q2, we further strengthened our price competitiveness to support retail sales growth. We did this by continuing to drive efficiencies and reconditioning, dynamically managing GPUs, and then passing savings onto customers. In addition, we continue to improve our pricing algorithms to ensure we remain more competitive across demand cycles.

Speaker #3: While we speak to the pillars individually, like many aspects of our business, they are interconnected and many overlapping benefits exist. As a reminder, shifting to gear starts with a great offering.

Speaker #3: We will give customers every reason to choose CarMax by offering a great car at the right price. During the second quarter, we further strengthened our price competitiveness to support retail sales growth.

Keith Barr: During the Q2, we further strengthened our price competitiveness to support retail sales growth. We did this by continuing to drive efficiencies and reconditioning, dynamically managing GPUs, and then passing savings onto customers. In addition, we continue to improve our pricing algorithms to ensure we remain more competitive across demand cycles.

Speaker #3: We did this by continuing to drive efficiencies in reconditioning, dynamically managing GPUs, and then passing savings on to customers. In addition, we continue to improve our pricing algorithms to ensure we remain more competitive across demand cycles.

Speaker #3: We did this by incorporating local market insights more granularly and by expanding comparison points across a broader set of vehicles. These enhancements resulted in sharper pricing that resonated well with our customers and supported our sales.

Keith Barr: We did this by incorporating local market insights more granularly and by expanding comparison points across a broader set of vehicles. These enhancements resulted in sharper pricing that resonated well with our customers and supported our sales. Our second pillar is easy experience. We will make it easy to do business with us both online and in our stores. This quarter, we enhanced the customer experience to better support the purchase journey from digital to in-person. We scaled AI voice technology to 100% of both inbound store and customer experience center calls, which enables customers to quickly resolve their inquiries through our agentic AI tools or directly connect the right associate for help. Additionally, we improved our digital experience by redesigning our car detail page to make it easier for customers to find and buy the right car for them.

Speaker #3: Our second pillar is easy experience. It will make it easy to do business with us, both online and in our stores. This quarter, we enhanced the customer experience to better support the purchase journey from digital to in person.

Speaker #3: We scaled AI voice technology to 100% of both inbound store and Customer Experience Center calls, which enables customers to quickly resolve their inquiries through our agentic AI tools or directly connect to the right associate for help.

Keith Barr: We scaled AI voice technology to 100% of both inbound store and customer experience center calls, which enables customers to quickly resolve their inquiries through our agentic AI tools or directly connect the right associate for help. Additionally, we improved our digital experience by redesigning our car detail page to make it easier for customers to find and buy the right car for them.

Speaker #3: Additionally, we improved our digital experience by redesigning our car detail page to make it easier for customers to find and buy the right car for them.

Speaker #3: Recent updates include providing greater visibility into our inventory selection, incorporating personalized monthly payments, and communicating next steps in the purchase process more clearly. The enhancements we made this quarter supported sales conversion, and we anticipate further gains over time.

Keith Barr: Recent updates include providing greater visibility into our inventory selection, incorporating personalized monthly payments, and communicating next steps in the purchase process more clearly. The enhancements we made this quarter supported sales conversion, and we anticipate further gains over time. Our third pillar is add value. This pillar focuses on growing profitability by maximizing value across all aspects of our business. This will be done by connecting customers with valuable offerings and by capturing a larger portion of customer financing through CAF. During the Q2, we grew our extended protection plan unit margins materially year-over-year as we continued to launch our redesigned offering. Additionally, we increased our Tier 2 penetration and recorded a gain on the residual sale related to our 26B non-prime securitization. Our final pillar is run lean.

Speaker #3: Our third pillar is 'Add Value.' This pillar focuses on growing profitability by maximizing value across all aspects of our business. This will be done by connecting customers with valuable offerings and by capturing a larger portion of customer financing through CAP.

Speaker #3: During the second quarter, we grew our extended protection plan unit margins materially year over year as we continued to launch our redesigned offering. Additionally, we increased our Tier Two penetration and recorded a gain on the residual sale related to our $26 billion non-crime securitization.

Keith Barr: During the Q2, we grew our extended protection plan unit margins materially year-over-year as we continued to launch our redesigned offering. Additionally, we increased our Tier 2 penetration and recorded a gain on the residual sale related to our 26B non-prime securitization. Our final pillar is run lean.

Speaker #3: Our final pillar is Run Lean. We will unlock efficiencies to enable a great offering, meaningfully improve how we operate at scale, and support strong returns for our shareholders.

Keith Barr: We will unlock efficiencies to enable a great offering, meaningfully improve how we operate at scale, and support strong returns for our shareholders. During the Q2, as I noted earlier, we continued taking cost out of our reconditioning operations and maintained our approach of passing savings onto customers through more competitive pricing to drive sales. Also, from an SG&A perspective, we took additional steps this quarter to solidify achieving our commitment of $200 million in fiscal year 2027 exit rate savings. To support an advance Shift into GEAR, we are strengthening our leadership team. Today, I am pleased to announce two key appointments that will help us build on the momentum we are seeing as we begin to deliver on our strategic plan. First, effective 5 October, Elizabeth Dirgins will join CarMax as Executive Vice President, Chief Digital and Customer Officer.

Speaker #3: During the second quarter, as I noted earlier, we continued taking costs out of our reconditioning operations, and maintained our approach of passing savings on to customers through more competitive pricing to drive sales.

Speaker #3: Also, from an SG&A perspective, we took additional steps this quarter to solidify achieving our commitment of $200 million in fiscal year '27 exit rate savings.

Speaker #3: To support and advance our shift into gear, we are strengthening our leadership team. Today, I am pleased to announce two key appointments that will help us build on the momentum we are seeing as we begin to deliver on our strategic plan.

Keith Barr: Today, I am pleased to announce two key appointments that will help us build on the momentum we are seeing as we begin to deliver on our strategic plan. First, effective 5 October, Elizabeth Dirgins will join CarMax as Executive Vice President, Chief Digital and Customer Officer.

Speaker #3: First, effective October 5th, Elizabeth Thurgan will join CarMax as executive vice president, chief digital and customer officer. In this newly created role, Elizabeth will own and unify the end-to-end customer experience from customer acquisition through vehicle transaction.

Keith Barr: In this newly created role, Elizabeth will own and unify the end-to-end customer experience from customer acquisition through vehicle transaction. In this capacity, she will oversee our marketing, product, and Edmunds team. With more than two decades of digital product and customer experience leadership, Elizabeth comes to us from Volkswagen Financial Services, where she served as Chief Digital Officer for the North American region. Second, Jeff Campbell, who has been with CarMax for over a decade, joined our senior leadership team in August as Senior Vice President Strategy. Jeff is leading a newly centralized function designed to accelerate key decisions by bringing together all of our strategy, data science, AI, and pricing teams. Jeff has held leadership roles at CarMax spanning product, strategy, and transformation.

Speaker #3: In this capacity, she will oversee our Marketing, Product, and Admins team. With more than two decades of digital product and customer experience leadership, Elizabeth comes to us from Volkswagen Financial Services, where she served as Chief Digital Officer for the North American region.

Speaker #3: Second, Jeff Campbell, who has been with CarMax for over a decade, joined our senior leadership team in August as Senior Vice President, Strategy. Jeff is leading a newly centralized function designed to accelerate key decisions by bringing together all of our strategy, data science, AI, and pricing teams.

Keith Barr: Jeff is leading a newly centralized function designed to accelerate key decisions by bringing together all of our strategy, data science, AI, and pricing teams. Jeff has held leadership roles at CarMax spanning product, strategy, and transformation. Elizabeth and Jeff both bring skills, experience, and focus we need as we build a faster, more connected company that puts the customer at the center of everything we do. Both positions will report directly to me. Our customer promise is to deliver a great car at the right price, with an online and in-store experience that our customers love.

Speaker #3: Jeff has held leadership roles at CarMax spanning product, strategy, and transformation. Elizabeth and Jeff both bring the skills, experience, and focus we need as we build a faster, more connected company that puts the customer at the center of everything we do.

Keith Barr: Elizabeth and Jeff both bring skills, experience, and focus we need as we build a faster, more connected company that puts the customer at the center of everything we do. Both positions will report directly to me. Our customer promise is to deliver a great car at the right price, with an online and in-store experience that our customers love. All the steps we have been taking are in service of that promise and to create confidence for the road ahead for our associates, customers, and investors. We have a clear strategy, a solid foundation, and a team that is committed to delivering strong unit and earnings growth that enables us to consistently reward our shareholders. Based on our Q2 performance, continued momentum, and improving leverage, we intend to resume share repurchases at a modest level in the Q3.

Speaker #3: Both positions will report directly to me. Our customer promise is to deliver a great car at the right price, with an online and in-store experience that our customers love.

Speaker #3: All of the steps we have been taking are in service of that promise and to create confidence for the road ahead—for our associates, customers, and investors.

Keith Barr: All the steps we have been taking are in service of that promise and to create confidence for the road ahead for our associates, customers, and investors. We have a clear strategy, a solid foundation, and a team that is committed to delivering strong unit and earnings growth that enables us to consistently reward our shareholders. Based on our Q2 performance, continued momentum, and improving leverage, we intend to resume share repurchases at a modest level in the Q3. Now I'd like to turn the call over to Enrique to discuss our Q2 financial performance in more detail. Enrique?

Speaker #3: We have a clear strategy, a solid foundation, and a team that is committed to delivering strong unit and earnings growth that enables us to consistently reward our shareholders.

Speaker #3: Based on our second quarter performance, continued momentum, and improving leverage, we intend to resume share repurchases at a modest level in the third quarter.

Speaker #3: Now, I'd like to turn the call over to Enrique to discuss our second quarter financial performance in more detail. Enrique?

Keith Barr: Now I'd like to turn the call over to Enrique to discuss our Q2 financial performance in more detail. Enrique?

Speaker #4: Thanks, Keith, and good morning, everyone. We are encouraged by the recent growth across the business as our Shift into Gear strategy is yielding strong financial results, highlighted by the continued improvements in our year-over-year sales and earnings trends.

Enrique Mayor-Mora: Thanks, Keith, and good morning, everyone. We are encouraged by the recent growth across the business as our Shift into GEAR strategy is yielding strong financial results, highlighted by the continued improvements in our year-over-year sales and earnings trends. During the Q2, we delivered total sales of $7.9 billion, up 19% compared to last year. Across our retail and wholesale channels, we sold approximately 388,000 vehicles, up 15% versus the Q2 last year. In our retail business, used unit comps increased 13%, and total used unit sales grew by 14%. Sales performance this quarter was primarily supported by more competitive pricing. As Keith discussed, we continue to realize efficiency gains in cost of sales, and we dynamically manage GPUs, passing those benefits on to customers. Together with the enhancements we are making to our pricing capabilities, these actions supported a significant improvement in our year-over-year sales trend.

Speaker #4: During the second quarter, we delivered total sales of $7.9 billion, up 19% compared to last year. Across our retail and wholesale channels, we sold approximately 388,000 vehicles, up 15% versus the second quarter last year.

Speaker #4: In our retail business, used unit comps increased 13%, and total used unit sales grew by 14%. Sales performance this quarter was primarily supported by more competitive pricing.

Enrique Mayor-Mora: Sales performance this quarter was primarily supported by more competitive pricing. As Keith discussed, we continue to realize efficiency gains in cost of sales, and we dynamically manage GPUs, passing those benefits on to customers. Together with the enhancements we are making to our pricing capabilities, these actions supported a significant improvement in our year-over-year sales trend.

Speaker #4: As Keith discussed, we continue to realize efficiency gains in cost of sales and we dynamically manage GPs, passing those benefits on to customers. Together with the enhancements we are making to our pricing capabilities, these actions supported a significant improvement in our year-over-year sales trend.

Speaker #4: In addition, we benefited from enhanced FTC regulatory focus that has brought greater transparency to advertised vehicle pricing industry-wide by requiring fees to be included.

Enrique Mayor-Mora: In addition, we benefited from enhanced FTC regulatory focus that has brought greater transparency to advertise vehicle pricing industry-wide by requiring fees to be included. Given our long-standing commitment to transparent, no-haggle pricing, this brings more clarity to the strength of the CarMax consumer offer by enabling customers to make more direct price comparisons and is a tailwind to our business. Average selling price was $27,623, a year-over-year increase of $1,630 per unit. Wholesale unit sales were up 16% versus last year's Q2. Average wholesale selling price increased by $145 per unit to $8,036. We bought approximately 310,000 vehicles during the quarter, up 6% from last year. We purchased approximately 262,000 vehicles from consumers, relatively flat to last year's Q2. With the support of our Edmunds sales team, we sourced the remaining approximately 48,000 vehicles through dealers, which was up 54% from last year.

Speaker #4: Given our longstanding commitment to transparent, no-haggle pricing, this brings more clarity to the strength of the CarMax consumer offer by enabling customers to make more direct price comparisons, and is a tailwind to our business.

Speaker #4: Average selling price was $27,623, a year-over-year increase of $1,630 per unit. Wholesale unit sales are up 16% versus last year's second quarter. Average wholesale selling price increased by $145 per unit to $8,036.

Enrique Mayor-Mora: Wholesale unit sales were up 16% versus last year's Q2. Average wholesale selling price increased by $145 per unit to $8,036. We bought approximately 310,000 vehicles during the quarter, up 6% from last year. We purchased approximately 262,000 vehicles from consumers, relatively flat to last year's Q2. With the support of our Edmunds sales team, we sourced the remaining approximately 48,000 vehicles through dealers, which was up 54% from last year.

Speaker #4: We bought approximately 310,000 vehicles during the quarter, up 6% from last year. We purchased approximately 262,000 vehicles from consumers, which was relatively flat compared to last year's second quarter.

Speaker #4: With the support of our admin sales team, we sourced the remaining approximately 48,000 vehicles through dealers, which was up 54% from last year. Second quarter net earnings per diluted share was $1.16 versus $0.64 last year.

Enrique Mayor-Mora: Q2 net earnings per diluted share was $1.16, versus $0.64 last year, an 81% increase, a strong positive change in year-over-year trend relative to the preceding four quarters. Total gross profit was $799 million, up 11% from last year's Q2. Used retail margin of $479 million increased by 8%, driven by higher volume and partially offset by lower profit per used unit of $2,105, which was down $111 per unit from last year's Q2. In managing margins more dynamically, we lowered GPUs by less than the full year $200 per retail unit outlook we provided previously as we balance demand, margins, and efficiency gains in our reconditioning processes to support sales. We expect FY27 full-year retail margins will be down less than the $200 per unit as compared to FY26.

Speaker #4: An 81% increase—a strong positive change in year-over-year trend relative to the preceding four quarters. Total gross profit was $799 million, up 11% from last year's second quarter.

Speaker #4: Used retail margin of $479 million, increased by 8%, driven by higher volume and partially offset by lower profit per used unit of $2,105, which was down $111 per unit from last year's second quarter.

Speaker #4: In managing margins more dynamically, we lowered GPUs by less than the full-year $200 per retail unit outlook we provided previously, as we balanced demand, margins, and efficiency gains in our reconditioning processes to support sales.

Enrique Mayor-Mora: In managing margins more dynamically, we lowered GPUs by less than the full year $200 per retail unit outlook we provided previously as we balance demand, margins, and efficiency gains in our reconditioning processes to support sales. We expect FY27 full-year retail margins will be down less than the $200 per unit as compared to FY26.

Speaker #4: We expect FY27 full-year retail margins will be down less than the 200 dollars per unit as compared to FY26. Wholesale vehicle margin of 138 million dollars was flat to a year ago, with higher volume offset by lower gross profit per unit of 858 dollars, which was down 135 dollars per unit.

Enrique Mayor-Mora: Wholesale vehicle margin of $138 million was flat to a year ago, with higher volume offset by lower gross profit per unit of $858, which was down $135 per unit. Other gross profit was $183 million, an increase of $46 million, or 33% from last year's Q2. EPP margin dollars were up $27 million, driven by growth in both unit volume and unit margins, which were up $46 per unit in the Q2. We have been encouraged with the impact from our EPP product redesign, focused on providing our customers with more affordable options and from our new wheel tire and dent product offering. We remain on track to drive approximately $35 per unit in incremental EPP margin for the full fiscal year. Service margin increased by $22 million, driven primarily by efficiency gains in cost of sales and leverage from unit volume growth.

Speaker #4: Other gross profit was $183 million, an increase of $46 million, or 33% from last year's second quarter. EPP margin dollars were up $27 million, driven by growth in both unit volume and unit margins, which are up $46 per unit in the second quarter.

Speaker #4: We have been encouraged by the impact from our EPP product redesign, which is focused on providing our customers with more affordable options, and from our new wheel, tire, and dent product offering.

Enrique Mayor-Mora: We have been encouraged with the impact from our EPP product redesign, focused on providing our customers with more affordable options and from our new wheel tire and dent product offering. We remain on track to drive approximately $35 per unit in incremental EPP margin for the full fiscal year. Service margin increased by $22 million, driven primarily by efficiency gains in cost of sales and leverage from unit volume growth.

Speaker #4: We remain on track to drive approximately $35 per unit in incremental EPP margin for the full fiscal year. Service margin increased by $22 million, driven primarily by efficiency gains in cost of sales and leverage from unit volume growth.

Speaker #4: CARMAX Auto Finance income of $136 million was up 32% year-over-year. John will provide detail on CAF in a few moments. On the SG&A front, expenses for the second quarter were $629 million, up 4.6% from the prior year.

Enrique Mayor-Mora: CarMax Auto Finance income of $136 million was up 32% year over year. Jon will provide detail on CAF in a few moments. On the SG&A front, expenses for the Q2 were $629 million, up 4.6% from the prior year. SG&A leveraged robustly by $157 per total unit, or 9% to $1,621. SG&A dollars for the Q2 versus last year were mainly impacted by the two factors. First, compensation and benefits, excluding share-based compensation expense, increased by $11 million. This year-over-year comparison reflects materially lower corporate incentive compensation in the prior year and strong performance this year. Excluding this impact, compensation and benefits would have decreased by over $14 million, primarily reflecting lower field and corporate payroll, partially offset by variable costs associated with higher sales. We expect the year-over-year corporate incentive compensation dynamic to remain similar in the Q3 and to moderate in the Q4.

Speaker #4: SG&A leverage improved robustly by $157 per total unit, or 9%, to $1,621. SG&A dollars for the second quarter versus last year were mainly impacted by two factors.

Speaker #4: First, compensation and benefits, excluding share-based compensation expense, increased by $11 million. This year-over-year comparison reflects materially lower corporate incentive compensation in the prior year and strong performance this year.

Enrique Mayor-Mora: This year-over-year comparison reflects materially lower corporate incentive compensation in the prior year and strong performance this year. Excluding this impact, compensation and benefits would have decreased by over $14 million, primarily reflecting lower field and corporate payroll, partially offset by variable costs associated with higher sales. We expect the year-over-year corporate incentive compensation dynamic to remain similar in the Q3 and to moderate in the Q4.

Speaker #4: Excluding this impact, compensation and benefits would have decreased by over $14 million, primarily reflecting lower field and corporate payroll, partially offset by variable costs associated with higher sales.

Speaker #4: We expect the year-over-year corporate incentive compensation dynamic to remain similar in the third quarter and to moderate in the fourth quarter. Second, share-based compensation increased by $7 million, driven by upward movement in our stock price.

Enrique Mayor-Mora: Second, share-based compensation increased by $7 million, driven by upward movement in our stock price. Regarding SG&A, we remain on track to deliver on our $200 million in identified savings as an FY27 exit rate target, and we continue to drive toward expense efficiencies. As part of these efforts, we recently took additional actions to further streamline our corporate cost structure, which we expect will result in approximately $6 million in severance expense in Q3. Also worth noting in this quarter's P&L, other income increased by $15 million compared to the same period last year, primarily reflecting unrealized gains on a small number of equity investments. As we've noted previously, we maintain a modest portfolio of investments across the used auto ecosystem. Separately, we are completing the termination of our legacy pension plan and expect it to be materially complete by the end of the fiscal year.

Speaker #4: Regarding SG&A, we remain on track to deliver on our $200 million in identified savings as an FY27 exit rate target, and we continue to drive toward expense efficiencies.

Speaker #4: As part of these efforts, we recently took additional actions to further streamline our corporate cost structure, which we expect will result in approximately $6 million in severance expense in the third quarter.

Speaker #4: Also worth noting in this quarter's P&L, other income increased by $15 million compared to the same period last year, primarily reflecting unrealized gains on a small number of equity investments.

Enrique Mayor-Mora: Also worth noting in this quarter's P&L, other income increased by $15 million compared to the same period last year, primarily reflecting unrealized gains on a small number of equity investments. As we've noted previously, we maintain a modest portfolio of investments across the used auto ecosystem. Separately, we are completing the termination of our legacy pension plan and expect it to be materially complete by the end of the fiscal year.

Speaker #4: As we have noted previously, we maintain a modest portfolio of investments across the used auto ecosystem. Separately, we are completing the termination of our legacy pension plan and expect it to be materially complete by the end of the fiscal year.

Speaker #4: As part of this process, we estimate approximately $50 million in total settlement-related, non-cash, non-recurring charges will be recorded in other expense, with relatively similar amounts expected to be recognized in the third and fourth quarters of this fiscal year.

Enrique Mayor-Mora: As part of this process, we estimate approximately $50 million in total settlement-related non-cash, non-recurring charges will be recorded in other expense with relatively similar amounts expected to be recognized in Q3 and Q4 of this fiscal year. Our expectation is that the assets in our pension trust will fully fund the settlement of the pension liabilities. Further, the plan's termination will eliminate potential future corporate funding requirements. Regarding capital structure, as Keith mentioned, with a strong Q2, a positive outlook on the balance of the year, and traction on our strategy, we intend to restart our share repurchase program in Q3. We expect to begin our buybacks at a modest pace below the average quarterly pace prior to our pause.

Speaker #4: Our expectation is that the assets in our pension trust will fully fund the settlement of the pension liabilities. Further, the plan’s termination will eliminate potential future corporate funding requirements.

Speaker #4: Regarding capital structure, as Keith mentioned, with a strong second quarter, a positive outlook on the balance of the year, and traction on our strategy, we intend to restart our share repurchase program in the third quarter.

Enrique Mayor-Mora: Regarding capital structure, as Keith mentioned, with a strong Q2, a positive outlook on the balance of the year, and traction on our strategy, we intend to restart our share repurchase program in Q3. We expect to begin our buybacks at a modest pace below the average quarterly pace prior to our pause.

Speaker #4: We expect to begin our buybacks at a modest pace, below the average quarterly pace prior to our pause. Our objective is to appropriately manage our net leverage to maintain financial flexibility and to efficiently access the capital markets for both CAP and CarMax as a whole, while also returning capital back to our shareholders.

Enrique Mayor-Mora: Our objective is to appropriately manage our net leverage to maintain financial flexibility and to efficiently access the capital markets for both CAF and CarMax as a whole, while also returning capital back to our shareholders. As of the end of the quarter, we had $1.31 billion of repurchase authorization remaining. I will now turn the call over to Jon to provide more detail on CarMax Auto Finance and our continuing focus on full credit spectrum expansion. Jon?

Speaker #4: As of the end of the quarter, we had $1.31 billion of repurchase authorization remaining. I will now turn the call over to John to provide more detail on CarMax Auto Finance and our continuing focus on full credit spectrum expansion.

Keith Barr: I will now turn the call over to Jon to provide more detail on CarMax Auto Finance and our continuing focus on full credit spectrum expansion. Jon?

Speaker #4: John?

Speaker #1: Thanks, Enrique. And good morning, everyone. During the second quarter, CarMax Auto Finance originated $2.3 billion, resulting in sales penetration of 40.9% net of three-day payoffs, versus 42.6% last year.

Jon Daniels: Thanks, Enrique, and good morning everyone. During the Q2, CarMax Auto Finance originated $2.3 billion, resulting in sales penetration of 40.9%, net of 3-day payoffs, versus 42.6% last year. The weighted average contract rate charged to new customers was 11.8%, up 60 basis points from the prior year. Third-party Tier 2 penetration was 15.9%, versus 16.5% last year. Third-party Tier 3 was 7.6%, versus 7.3% a year ago. We continue to make meaningful progress expanding across the credit spectrum. During the quarter, CAF was once again the largest Tier 2 lender, financing 22% of Tier 2 volume as compared to 10% a year ago. The observed credit performance in this space continues to be in line with our original expectations, reinforcing confidence in our decision to expand. Despite this growth in Tier 2, overall CAF penetration declined year over year, reflecting lower Tier 1 penetration.

Speaker #1: The weighted average contract rate charged to new customers was 11.8%, up 60 basis points from the prior year. Third-party tier-two penetration was 15.9%, versus 16.5% last year.

Speaker #1: And third-party tier three was 7.6%, versus 7.3% a year ago. We continue to make meaningful progress expanding across the credit spectrum. During the quarter, CAF was once again the largest tier two lender, financing 22% of tier two volume as compared to 10% a year ago.

Jon Daniels: During the quarter, CAF was once again the largest Tier 2 lender, financing 22% of Tier 2 volume as compared to 10% a year ago. The observed credit performance in this space continues to be in line with our original expectations, reinforcing confidence in our decision to expand. Despite this growth in Tier 2, overall CAF penetration declined year over year, reflecting lower Tier 1 penetration.

Speaker #1: The observed credit performance in this space continues to be in line with our original expectations, reinforcing confidence in our decision to expand. Despite this growth in Tier Two, overall cap penetration declined year over year, reflecting lower Tier One penetration.

Speaker #1: Increased funding costs driven by the interest rate environment resulted in Cap increasing rates in Tier One for customers who have more funding alternatives, including cash or financing through credit unions.

Jon Daniels: Increased funding costs driven by the interest rate environment resulted in CAF increasing rates in Tier 1, where customers have more funding alternatives, including cash or financing through credit unions. We view this as a normal response to the higher interest rate environment versus a structural change in behavior from CarMax customers. CAF income was $136 million, up 32% from the prior year's Q2, driven by a $29 million decrease in the loan loss provision to $113 million. During the Q2 of the prior year, we recorded additional provision due to the worsening performance of older vintages at that time. Whereas performance this year has been in line with expectations. This was partially offset by provisioning related to Tier 2 originations in the quarter from our full credit spectrum expansion.

Speaker #1: We view this as a normal response to the higher interest rate environment versus a structural change in behavior from CarMax customers. CAP income was $136 million, up 32% from the prior year's second quarter, driven by a $29 million decrease in the loan loss provision to $113 million.

Speaker #1: During the second quarter of the prior year, we recorded an additional provision due to the worsening performance of older vintages at that time, whereas performance this year has been in line with expectations.

Jon Daniels: During the Q2 of the prior year, we recorded additional provision due to the worsening performance of older vintages at that time. Whereas performance this year has been in line with expectations. This was partially offset by provisioning related to Tier 2 originations in the quarter from our full credit spectrum expansion.

Speaker #1: This was partially offset by provisioning related to tier two originations in the quarter from our full credit spectrum expansion. Additionally, CAP income benefited from a $17 million gain on sale recorded during the quarter and a $6 million increase in servicing fees year over year.

Jon Daniels: Additionally, CAF income benefited from a $17 million gain on sale recorded during the quarter, and a $6 million increase in servicing fees year over year. This was partially offset by impacts from a $1.2 billion year-over-year reduction in outstanding receivables related to the combination of selling the residual interest for two non-prime securitizations and lower sales during fiscal 2026. Please note the timing of our receivables sale differs from last year, when we recorded a $27 million gain on our 25B transaction during the Q3. Our total reserve balance at the end of the quarter was $497 million, or 3.07% of receivables held for investment. Net interest margin on the quarter was 6.6%, consistent year over year. As we reflect on another solid quarter, our multifaceted strategy to enable CAF income growth is hitting the mark.

Speaker #1: This was partially offset by impacts from a $1.2 billion year-over-year reduction in outstanding receivables, related to the combination of selling the residual interest for two non-prime securitizations and lower sales during fiscal 2026.

Speaker #1: Please note the timing of our receivables sale differs from last year, when we recorded a $27 million gain on our $25 billion transaction during the third quarter.

Jon Daniels: Please note the timing of our receivables sale differs from last year, when we recorded a $27 million gain on our 25B transaction during the Q3. Our total reserve balance at the end of the quarter was $497 million, or 3.07% of receivables held for investment. Net interest margin on the quarter was 6.6%, consistent year over year. As we reflect on another solid quarter, our multifaceted strategy to enable CAF income growth is hitting the mark.

Speaker #1: Our total reserve balance at the end of the quarter was $497 million, or 3.07% of receivables held for investment. Net interest margin for the quarter was 6.6%, consistent year-over-year.

Speaker #1: As we reflect on another solid quarter, our multifaceted strategy to enable CAP income growth is hitting the mark. First and foremost, credit losses were within our expectations across both the Tier One and Tier Two portfolios.

Jon Daniels: First and foremost, credit losses were within our expectations across both the Tier 1 and Tier 2 portfolios. Second, the refinement of our non-prime credit underwriting strategy continues to build momentum with origination volume up substantially compared to just a year ago. Third, we continue to benefit from flexibility in how we fund our receivables. Our ability to retain assets on our balance sheet when prioritizing attractive longer-term economics is now well complemented by our evolving method of utilizing off-balance sheet transactions to more quickly monetize cash flows and reduce future risk. This funding flexibility is an important advantage as we continue to grow CAF. The timing and mix of these transactions may create near-term variability in reported income and provision expense from quarter to quarter.

Speaker #1: Second, the refinement of our non-prime credit underwriting strategy continues to build momentum, with origination volume up substantially compared to just a year ago. Third, we continue to benefit from flexibility in how we fund our receivables.

Speaker #1: Our ability to retain assets on our balance sheet, when prioritizing attractive longer-term economics, is now well complemented by our evolving method of utilizing off-balance sheet transactions to more quickly monetize cash flows and reduce future risk.

Jon Daniels: Our ability to retain assets on our balance sheet when prioritizing attractive longer-term economics is now well complemented by our evolving method of utilizing off-balance sheet transactions to more quickly monetize cash flows and reduce future risk. This funding flexibility is an important advantage as we continue to grow CAF. The timing and mix of these transactions may create near-term variability in reported income and provision expense from quarter to quarter.

Speaker #1: This funding flexibility is an important advantage as we continue to grow Cap. The timing and mix of these transactions may create near-term variability in reported income and provision expense from quarter to quarter.

Speaker #1: However, as our evolving mix of funding strategies begins to mature and becomes more routine, over the next 12 to 24 months, we would expect the variability to decrease.

Jon Daniels: However, as our evolving mix of funding strategies begins to mature and becomes more routine over the next 12 to 24 months, we would expect the variability to decrease. To provide a view into our near-term performance, we anticipate CAF's FY27 income will be slightly lower than FY26, all while planning to originate nearly $1 billion in Tier 2 by year-end. It is this disciplined scaling in Tier 2, along with an appropriately sized loss reserve that should lead to significant CAF income growth over time. We plan to share more details during our upcoming strategic update. I would like to turn the call back over to Keith. Keith?

Speaker #1: To provide a few insights into our near-term performance, we anticipate CAP's FY27 income will be slightly lower than FY26, all while planning to originate nearly $1 billion in Tier Two by year-end.

Speaker #1: It is disciplined scaling in tier two, along with an appropriately sized loss reserve, that should lead to significant CAP income growth over time. We plan to share more details during our upcoming strategic update.

Speaker #1: Now, I'd like to turn the call back over to Keith. Keith?

Speaker #2: Thank you, John. Before we open the line for questions, let me leave you with a few final thoughts. We are encouraged by our performance this quarter and the progress we are making across the business.

Keith Barr: Thank you, Jon. Before we open the line for questions, let me leave you with a few final thoughts. We are encouraged by our performance this quarter and the progress we are making across the business. While we are still early in our journey, the results we are seeing reinforce our confidence in our strategy and the opportunity ahead. Shift into GEAR is focused on strengthening our core business and getting CarMax back to sustained growth. We are steadfast in our focus on delivering the right cars at the right price, making it easier for our customers to do business with us, capturing more value from each transaction, and operating more efficiently at scale. This quarter's strong unit and earnings growth reflects solid execution against these priorities.

Speaker #2: While we're still early in our journey, the results we are seeing reinforce our confidence in our strategy and the opportunity ahead. Shifting gears is focused on strengthening our core business and getting CarMax back to sustained growth.

Speaker #2: We are steadfast in our focus on delivering the right cars at the right price, making it easier for our customers to do business with us, capturing more value from each transaction, and operating more efficiently at scale.

Keith Barr: We are steadfast in our focus on delivering the right cars at the right price, making it easier for our customers to do business with us, capturing more value from each transaction, and operating more efficiently at scale. This quarter's strong unit and earnings growth reflects solid execution against these priorities.

Speaker #2: This quarter's strong unit and earnings growth reflect solid execution against these priorities. What encourages me most is that we are delivering these results while much of the work across our four gear pillars is still ahead of us.

Keith Barr: What encourages me most is that we are delivering these results while much of the work across our four GEAR pillars is still ahead of us. We have a solid foundation, an exceptional team, and we are adding leadership in key areas to accelerate our progress. I am confident in our ability to build on this early momentum, continue to improve our business, and create long-term value for our shareholders. None of this happens without our associates, and I want to thank them again for their hard work and embracing our new strategy to create a stronger CarMax. Look forward to sharing more about our strategy, including key initiatives and milestones during our upcoming strategic update, which will take place virtually on 3 November. Thank you for your continued interest in CarMax. Operator, we are ready to take questions.

Speaker #2: We have a solid foundation, an exceptional team, and we are adding leadership in key areas to accelerate our progress. I am confident in our ability to build on this early momentum, continue to improve our business, and create long-term value for our shareholders.

Speaker #2: None of this happens without our associates, and I want to thank them again for their hard work in embracing our new strategy to create a stronger CarMax.

Keith Barr: None of this happens without our associates, and I want to thank them again for their hard work and embracing our new strategy to create a stronger CarMax. Look forward to sharing more about our strategy, including key initiatives and milestones during our upcoming strategic update, which will take place virtually on 3 November. Thank you for your continued interest in CarMax. Operator, we are ready to take questions.

Speaker #2: I look forward to sharing more about our strategy, including key initiatives and milestones, during our upcoming strategic update, which will take place virtually on November 3rd.

Speaker #2: Thank you for your continued interest in CarMax. Operator, we are ready to take questions.

Speaker #3: Thank you. If you'd like to ask a question, press *1 on your keypad. To leave the queue at any time, press *2.

Operator: Thank you. If you would like to ask a question, press star 1 on your keypad. To leave the queue at any time, press star 2. Once again, that is star 1 to ask a question. Your first question comes from the line of Daniela Hagia with Morgan Stanley. Your line is open. You may now ask your question.

Speaker #3: Once again, that is *star one* to ask a question. Your first question comes from the line of Daniela Huygen with Morgan Stanley. Your line is open.

Speaker #3: You may now ask your question.

Speaker #4: Great, thank you for taking the question. So, GPU, along with a lot of other areas of the business, came in really strong this quarter.

Daniela Hagia: Great. Thank you for taking the question. GPU, along with a lot of other areas of the business, came in really strong this quarter, and you are now trending better than that, down $200 year-over-year full year guide. How would you characterize that strength? What was the impact from greater efficiencies in COGS per unit versus maybe some of this FTC uplift or retail wholesale spreads?

Daniela Haigian: Great. Thank you for taking the question. GPU, along with a lot of other areas of the business, came in really strong this quarter, and you are now trending better than that, down $200 year-over-year full year guide. How would you characterize that strength? What was the impact from greater efficiencies in COGS per unit versus maybe some of this FTC uplift or retail wholesale spreads?

Speaker #4: And you're now trending better than that, down to $100 year-over-year full year guide. How would you characterize that strength? What was the impact from greater efficiencies in COGS per unit versus maybe some of this FTC uplift or retail-wholesale spreads?

Speaker #2: Hey, Daniela, thank you for being here. I'll let Enrique respond to that.

Keith Barr: Hey, Daniela. Thank you for being here. I will let Enrique respond to that.

Speaker #5: Yeah. Hey, good morning, Daniela. We've been really pleased that we've been able to come in better than our previous outlook on GPUs. We're now expecting the year to be below a $200 decrease, year over year.

Enrique Mayor-Mora: Yeah. Hey, good morning, Daniela. We have been really pleased that we have been able to come in better than our previous outlook on GPU, certainly now expecting the year to be below a $200 decrease year-over-year. We have done that while maintaining strong sales as we have effectively balanced demand we are seeing in the marketplace for our cars margins as well as efficiency gains. It is really the balance of all three of those things that has allowed us to come in better, if you will, on our GPU and specifically around cost efficiencies that we are seeing in the business. The teams have done tremendous work around rolling out different tools. For our operators, we have a new part selection tool that is benefiting the organization.

Speaker #5: And we've done that while maintaining strong sales as we've effectively balanced demand we're seeing in the marketplace for our cars, margins, as well as efficiency gains.

Speaker #5: And it's really the balance of all three of those things that has allowed us to come in better, if you will, on our GPU.

Enrique Mayor-Mora: It is really the balance of all three of those things that has allowed us to come in better, if you will, on our GPU and specifically around cost efficiencies that we are seeing in the business. The teams have done tremendous work around rolling out different tools. For our operators, we have a new part selection tool that is benefiting the organization.

Speaker #5: And specifically around cost efficiencies that we're seeing in the business, the teams have done tremendous work rolling out different tools for our operators.

Speaker #5: We have a new parts selection tool that's benefiting the organization. We switched, as we've talked about before, from a 90-day warranty to a 30-day warranty for our customers.

Enrique Mayor-Mora: We switched, as we have talked about before, from a 90-day warranty to a 30-day warranty for our customers and actually given that back in terms of lower pricing for our customers as well, and that supported our sales. Overall, really pleased at the demand we are seeing in the marketplace and our ability to again come in better than our GPU previous outlook.

Speaker #5: And actually, we've given that back in terms of lower pricing for our customers as well, and that's supported our sales. But overall, we're really pleased with the demand we're seeing in the marketplace and our ability to, again, come in better than our previous Q2 outlook.

Speaker #4: And maybe the macro part, the impact of the FTC?

Daniela Hagia: And maybe the macro part, the impact of spreads or FTC?

Daniela Haigian: And maybe the macro part, the impact of spreads or FTC?

Speaker #5: Yeah, the FTC impact definitely is a tailwind. When we take a look overall at our comp performance, right, on the quarter, I would say it's evenly mixed between items we control directly.

Enrique Mayor-Mora: Yeah, the FTC impact definitely is a tailwind. When we take a look overall at our comp performance on the quarter, I would say it's evenly mixed between items we control directly. So COGS efficiencies, the GPU decrease, pricing algorithm improvements, customer experience improvements. So those items that we control directly, we think is about half of the comp performance, while the other half is really coming from what we think is the FTC enforcement benefits that we're seeing.

Speaker #5: So, COGS efficiencies, the GPU decrease, pricing algorithm improvements, customer experience improvements—those items that we control directly—we think account for about half of the comp performance, while the other half is really coming from what we think are the FTC enforcement benefits that we're seeing.

Speaker #2: Yeah, thanks. And just to build on that a little bit, I mean, I think there are two aspects Enrique mentioned. Having a really clear strategy that focuses on the core of this business is going to drive performance.

Keith Barr: Yeah, thanks. Just to build on that a little bit, I think there's two aspects, as Enrique said. Having a really clear strategy that focuses on the core of this business is going to drive performance. Also really the strength of the CarMax brand, that price transparency which we've been known for, disproportionately benefits us now going forward. So the FTC's focus on compliance to their guidelines, we've always had more transparency, and it's helping us with price competitiveness too. So it's execution of strategy and also the strength of the CarMax customer value proposition.

Speaker #2: And also, really, the strength of the CarMax brand—that price transparency which it has been known for—disproportionately benefits us now going forward. So, with the FTC's focus on compliance to their guidelines, we've always had more transparency, and it's helping us with price competitiveness too.

Speaker #2: So it's execution of strategy, and also the strength of the CarMax customer value proposition.

Speaker #4: Thank you, that's really helpful. And then maybe, Keith, just a broader question for you. I know it's early days here, but how do you think about CarMax's omnichannel architecture and brand positioning in this future of agentic AI? Right, where these agents are doing searching and comparing on the consumer's behalf. Maybe more to hear on this in November, but curious to hear how you think about it.

Daniela Hagia: Thank you. That's really helpful. Then maybe, Keith, just a broader question for you. I know it's early days here, but how do you think about CarMax's omni-channel architecture and brand positioning in this future of agentic AI, right? Where these agents are doing searching and comparing on the consumer's behalf. Maybe more to hear on this in November, but curious to hear how you think about it.

Daniela Haigian: Thank you. That's really helpful. Then maybe, Keith, just a broader question for you. I know it's early days here, but how do you think about CarMax's omni-channel architecture and brand positioning in this future of agentic AI, right? Where these agents are doing searching and comparing on the consumer's behalf. Maybe more to hear on this in November, but curious to hear how you think about it.

Speaker #5: Sure. Yeah. I mean, we'll talk a little bit about AI. Again, we have an AI Center of Excellence here at CarMax, which basically makes sure we responsibly use AI and look at all the different use cases here that we implement.

Keith Barr: Sure. Yeah. We will talk a little bit about AI. We have an AI center of excellence here at CarMax, which basically makes sure we responsibly use AI and look at all the different use cases here we implement. Things like our agentic voice call center now handling 100% of stores and our customer experience center calls and helping to do that. Your question is related to search, and I think that AI is going to be actually a real benefit to the consumer to be able to go out there and really understand different vehicles and how those vehicles meet their needs. In terms of actually getting down to transactions, I think that it would be really difficult for the used car industry to be negatively impacted by it because every vehicle is an individual SKU.

Speaker #5: And so, things like our agentic voice call center now, handling 100% of stores and our customer experience center calls, are helping to do that.

Speaker #5: Your question is related to search, and I think that AI is actually going to be a real benefit to the consumer. It will allow them to go out there and really understand different vehicles, and how those vehicles meet their needs.

Keith Barr: Your question is related to search, and I think that AI is going to be actually a real benefit to the consumer to be able to go out there and really understand different vehicles and how those vehicles meet their needs. In terms of actually getting down to transactions, I think that it would be really difficult for the used car industry to be negatively impacted by it because every vehicle is an individual SKU.

Speaker #5: In terms of actually getting down to transactions, I think that it would be really difficult for the used car industry to be negatively impacted by it, because every vehicle is an individual SKU.

Speaker #5: You can see how agentic AI e-commerce will impact more CPG faster. And we think it's a real benefit to our business here, to drive us to become more efficient and deliver better customer experiences.

Keith Barr: You can see how agentic AI e-commerce will impact more CPG faster, but we think it is a real benefit to our business here to drive us to become more efficient and deliver better customer experiences.

Speaker #4: Great. Thanks, team.

Daniela Hagia: Great. Thanks, team.

Daniela Haigian: Great. Thanks, team.

Speaker #3: Thank you. Our next question comes from Rajat Gupta with JP Morgan. Your line is now open.

Operator: Thank you. Our next question comes from Rajat Gupta with JP Morgan. Your line is now open.

Speaker #6: Great, thanks for taking the questions, and congrats on the good execution here. I had a question on comps for the rest of the year.

Rajat Gupta: Great. Thanks for taking the question and congrats on the good execution here. I had a question on just comps for the rest of the year. If I look at normal seasonality in the business, based on the 13% comp in Q2, normal seasonality would imply somewhere around mid-teens in the Q3 or mid to high teens in the Q3. I am curious if you are seeing anything there in the macro or just the consumer backdrop that would deviate from that seasonality. That is question number one. I have a follow-up. Thanks.

Speaker #6: If I look at normal seasonality in the business, based on the 13% comp in Q2, normal seasonality would imply somewhere around mid-teens in the third quarter—mid to high teens in the third quarter.

Speaker #6: I'm curious if you're seeing anything, either in the macro environment or just the consumer backdrop, that would deviate from that seasonality. That's question number one.

Speaker #6: I have a follow-up. Thanks.

Speaker #2: Yes, thanks, Rajat. I'll talk about the consumer. I mean, affordability is on everyone's mind. It seems like every single discussion is around that. And I think it speaks to the strength of the CarMax brand, effectively.

Keith Barr: Yes. Thanks, Rajat. I will talk about the consumer. Affordability is on everyone's mind. It seems like every single discussion is around that, and I think it speaks to the strength of the CarMax brand effectively and our focus on having incredibly competitive pricing. The other word I would say about the consumer is resilient at the end of the day. Across all the different spectrums, at the lower end consumer to the higher end consumer, we are definitely seeing resiliency there. The broader industry is down 1% or flat to 1%, and we posted comps to 13%. So I think having great cars, great vehicles at great pricing and making it easy to work with will drive continued growth and performance in the business.

Speaker #2: And our focus on having incredibly competitive pricing—and the other word I would say about the consumer's resilience, at the end of the day, across all the different spectrums of the lower-end consumer to the higher-end consumer—we're definitely seeing resiliency there.

Keith Barr: Across all the different spectrums, at the lower end consumer to the higher end consumer, we are definitely seeing resiliency there. The broader industry is down 1% or flat to 1%, and we posted comps to 13%. So I think having great cars, great vehicles at great pricing and making it easy to work with will drive continued growth and performance in the business.

Speaker #2: I mean, the broader industry is down 1% or flat to up 1%. And we posted comps of 13%. So I think having great cars, great vehicles at great pricing, and making it easy to work with will drive continued growth and performance in the business.

Speaker #5: Yeah. In terms of an outlook to the back half of the year, look, we captured it in our prepared remarks, and you can see it in our bullishness around the business.

Enrique Mayor-Mora: In terms of an outlook for the back half of the year, look, we captured it in our prepared remarks, and you can see it in our bullishness around the business. We are turning our share repro back. Really pleased in terms of where we are and what we are seeing in front of us.

Speaker #5: We're turning our share repo back on. We're seeing continued momentum into the business, and so we're really pleased in terms of where we are and what we're seeing in front of us.

Speaker #6: Got it. And then, once you left, you're going to laugh—the price cuts here in December. Do you believe the business has gotten to a place where there's enough efficiency you're able to drive to remain competitive on price to sustain the share gain?

Rajat Gupta: Got it. Once you lap, you are going to lap the price cuts here in December. Do you believe the business has gotten to a place where there is enough efficiency, you are able to drive to remain competitive on price to sustain the share gain? I am curious how you feel about that based on what you have observed over the last six months.

Speaker #6: I'm curious how you feel about that, based on what you've observed over the last six months.

Speaker #5: Yeah, absolutely. I mean, again, if you think about our strategy—shifting into gear and running lean being that pillar—and that running lean makes sure that we can have a great offering.

Keith Barr: Yeah, absolutely. Again, you think about our strategy Shift into GEAR and running lean being that pillar, and that running lean makes sure we can have a great offering. We have committed to saying we want to self-fund our price competitiveness moving forward. So continue to find efficiencies in the business so that we can deliver great vehicles at exceptional prices, but not having to lower GPU moving forward. So that's the focus of the business, and I am really confident in the team.

Speaker #5: And we've committed to saying we want to self-fund our price competitiveness moving forward, so continue to find efficiencies in the business so that we can deliver great vehicles at exceptional prices, but not have to lower GPU moving forward.

Speaker #5: So that's the focus of the business, and I'm really confident in the team. Yeah, and I would say certainly for FY28, that is the intent, right, as we've talked about before—to self-fund any kind of GPU investments and lower price.

Enrique Mayor-Mora: Yeah. I would say certainly for FY 2028, that is the intent, right? As we have talked about before, to self-fund any kind of GPU investments and lower price. I think for this year, for the guidance we have given here, the outlook, we do expect to be lower, less than $200 year over year in a reduction in GPU. I would expect some decrease in the Q3 and in the Q4 as well. We will be comping over a record quarter in FY 2025 in terms of GPU. So, we are maintaining some flexibility in the business. We are running the business more dynamically, and that includes some flexibility. So I would expect GPUs for this year as a whole and by quarter to be down year over year in support of driving sales.

Speaker #5: I think for this year, for the guidance we've given here, the outlook, we do expect to be lower—less than $200 year over year in a reduction in GPU.

Speaker #5: I would expect some decrease in the third quarter and in the fourth quarter as well. We'll be comping over a record quarter in FY25 in terms of GPU.

Enrique Mayor-Mora: I would expect some decrease in the Q3 and in the Q4 as well. We will be comping over a record quarter in FY 2025 in terms of GPU. So, we are maintaining some flexibility in the business. We are running the business more dynamically, and that includes some flexibility. So I would expect GPUs for this year as a whole and by quarter to be down year over year in support of driving sales.

Speaker #5: So we are maintaining some flexibility in the business. We're running the flexibility, so I would expect GPUs for this year as a whole, and by quarter, to be down year over year.

Speaker #5: In support of driving sales.

Speaker #6: Understood. Great. Thanks for the insight, and good luck.

Rajat Gupta: Understood. Great. Thanks for the color and good luck.

Speaker #3: Thank you. Our next question comes from Jeff Lick with Stevens. Your line is now open.

Operator: Thank you. Our next question comes from Jeff Lick with Stephens. Your line is now open.

Speaker #7: Good morning, and thanks for taking my question. Congrats on the great results. Enrique, maybe for you—the EPP gain was probably a little more than people were expecting.

Jeff Lick: Good morning, and thanks for taking my question. Congrats on the great results. Enrique, maybe for you, the EPP gain was probably a little more than people were expecting. I was wondering if you could unpack that a little bit and just the dynamics of where that's coming from.

Speaker #7: I was wondering if you could unpack that a little bit, and discuss the dynamics of where that's coming from.

Speaker #5: Yeah, I would say that we're very pleased with the execution as a whole in terms of EPP and the incremental margin we're seeing from product redesign, from our new product wheel/tire indent. All of that is in line with our expectations.

Enrique Mayor-Mora: Yeah, I would say that we're very pleased on the execution as a whole in terms of EPP and incremental margin we're seeing from product redesign, from our new product, wheel, tire, and dent. All of that is in line with our expectations. I would say our full year guidance of $35 in incremental EPP for the full year is pretty much in line, I would tell you, with where we ended this quarter being at $46 a unit, recognizing that in the Q1 we are still rolling out nationally. We had a lot less than that. So I would tell you it's very much in line with what we had expected and what we expect to be for the year.

Speaker #5: And I would say our full-year guidance of $35 and incremental EPP for the full year is pretty much in line, I would tell you, with where we ended this quarter, being at $46.

Speaker #5: A unit recognizing that, in the first quarter, we were still rolling out nationally. We had a lot less than that. So I would tell you it's very much in line with what we had expected.

Speaker #5: And what we expect to be for the year. I'll just add to that, kind of qualitatively—look, I think this is something we signaled.

Keith Barr: Yeah, Jeff, John, I'll just add to that kind of qualitatively. Look, I think this is something we signaled. We knew that we could make progress here. We saw an opportunity to really refresh our product. We've gotten this in the stores. It'll be nationally rolled out by end of year, just with getting in California. Our stores have done an outstanding job at selling this product. It's a more affordable product for our customers. We've tacked on what we think is a fantastic cosmetic protection product, wheel, tire, and dent. We saw it coming, we knew that we could deliver, and the stores have done so.

Jon Daniels: Yeah, Jeff, John, I'll just add to that kind of qualitatively. Look, I think this is something we signaled. We knew that we could make progress here. We saw an opportunity to really refresh our product. We've gotten this in the stores. It'll be nationally rolled out by end of year, just with getting in California. Our stores have done an outstanding job at selling this product. It's a more affordable product for our customers. We've tacked on what we think is a fantastic cosmetic protection product, wheel, tire, and dent. We saw it coming, we knew that we could deliver, and the stores have done so.

Speaker #5: We knew that we could make progress here. We saw an opportunity to really refresh our product. We've gotten this in the stores; it'll be nationally rolled out by the end of the year, just with getting in California.

Speaker #5: Our stores have done an outstanding job at selling this product as a more affordable option for our customers. We've tacked on what we think is a fantastic cosmetic protection product.

Speaker #5: Wheel tire indent, we saw it come in. We knew that we could deliver, and the stores have done so.

Speaker #7: And just a quick one for Keith. Keith, on the last call, we talked about dynamic pricing as it relates to your previous career.

Jeff Lick: Just a quick one for Keith. Keith, on the last call, we talked about dynamic pricing as it related to your previous career. I'm just curious, the big question as we get into the next year and we get through easy comps is people are going to look at, okay, can they comp positive and they continue to hold GPU? Just any high level thoughts as you've kind of been observing the data and the business on how you might give investors comfort that this just isn't an easy comp phenomenon.

Speaker #7: And I'm just curious. I mean, the big question as we get into next year and we get through easy comps is, people are going to look at, okay, can they comp positive, and can they continue to hold GPU?

Speaker #7: Just any high-level thoughts as you've kind of been observing the data and the business on how you might give investors comfort that this isn't just an easy comp phenomenon.

Speaker #2: Yeah, no, thanks, Jeff. And that's everything about 'shift into gear'—it's about making sure we have sustainable growth. The complete focus of the team here right now is making sure that, again, we have the right level of saleable inventory.

Keith Barr: Yeah, thanks, Jeff. Everything about Shift into GEAR is about making sure we have sustainable growth. That is the complete focus of the team here right now, is making sure that, again, we have the right level of sellable inventory, we can maintain competitive pricing, we can price dynamically depending upon where demand is and by segments. We are continuing to evolve our pricing algorithms every single month, sharpening up, pulling in external data to make sure we have those local market pricing points too. We have a lot of confidence that this should be a growth business and we show positive comps and outperform the industry moving forward.

Speaker #2: We can maintain competitive pricing. We can price dynamically depending upon where demand is, and by segments. And we're continuing to evolve our pricing algorithms every single month, sharpening them up, pulling in external data to make sure we have those local market pricing points too.

Speaker #2: So, we have a lot of confidence that this should be a growth business, and we expect to show positive comps and outperform the industry moving forward.

Speaker #7: Great, thanks for taking my questions, and best of luck for the rest of the year.

Jeff Lick: Great. Thanks for taking my questions and best of luck the rest of the year.

Speaker #3: Thank you. Our next question comes from Craig Kenison with Baird. Your line is now open.

Operator: Thank you. Our next question comes from Craig Kennison with Baird. Your line is now open.

Speaker #8: Hey, good morning. Thanks for taking my question. Keith, I'm wondering—could you provide examples of how you are taking friction out of the digital journey in order to impact conversion?

Craig Kennison: Hey, good morning. Thanks for taking my question. Keith, I am wondering, could you provide examples of how you are taking friction out of the digital journey in order to impact conversion?

Speaker #5: Yeah, absolutely. Part of it is just really understanding what customers are looking for and making sure we're providing that information in the easiest way possible.

Keith Barr: Yeah, absolutely. Part of it is just really understanding what customers are looking for and making sure we are providing that information in the most easy way possible. A couple examples we have used was car details page, sharpening up what consumers are doing in terms of search and making sure we are putting those pieces of information front and center, putting forward monthly payments, taking steps out of the purchase process and simplifying it. I think I mentioned previously we had our EPP, we had a super complex matrix, and now the way that we are serving it up to customers, it is really self-driven by them, putting in a bit of information and serving up the exact right offerings to them too. So it is really understanding everything from search all the way through transaction, and then how we communicate with customers just to make it easier to do business with us.

Speaker #5: And so a couple of examples we've used were like the car details page—sharpening up what consumers are doing in terms of search and making sure we're putting those pieces of information front and center.

Speaker #5: Putting forward monthly payments, taking steps out of the purchase process, and simplifying it. I think I mentioned previously we had our EPP. We had a super complex matrix, and now the way that we're serving it up to customers is really self-driven by them—putting in a bit of information and serving up the exact right offerings to them, too.

Keith Barr: I think I mentioned previously we had our EPP, we had a super complex matrix, and now the way that we are serving it up to customers, it is really self-driven by them, putting in a bit of information and serving up the exact right offerings to them too. So it is really understanding everything from search all the way through transaction, and then how we communicate with customers just to make it easier to do business with us.

Speaker #5: So it's really understanding everything from search all the way through transaction, and then how we communicate with customers, just to make it easier to do business with us.

Speaker #5: We're still in the early days in some parts of the journey. There are things we can continue to sharpen up, but I'm really excited about having Elizabeth Durgan join us as our new Chief Digital and Customer Officer.

Keith Barr: We are still early days in some parts of the journey. There are things that we can continue to sharpen up, and I am really excited about having Elizabeth Dirgins join us as our new Chief Digital and Customer Officer. She has got 20 plus years in product, in financial services and in automotive, so she is the perfect person to join our team here and really own the customer journey moving forward.

Speaker #5: She's got 20-plus years in product in financial services and in automotive, so she's the perfect person to join our team here and really own the customer journey moving forward.

Speaker #8: Thank you.

Craig Kennison: Thank you.

Speaker #3: Thank you. Our next question comes from David Bellinger with Mizuho. Your line is now open.

Operator: Thank you. Our next question comes from David Bellinger with Mizuho. Your line is now open.

Speaker #8: Hey, good morning. Thanks for the questions. I have a couple of strategic ones. Just following up on the GPU outlook being down less than $200 per unit for the year.

David Bellinger: Hey, good morning. Thanks for the questions. I have a couple of strategic ones. Just following up on the GPU outlook being down less than $200 per unit for the year, that would put you at around $2,100 and still within, call it the legacy guardrails that have governed the business for a while. Why not be more aggressive there? Is there some optionality to further push GPU down beyond this fiscal year if you are seeing the proper payoff in terms of unit growth?

Speaker #8: That would put you at around $2,100 and still within, call it, the legacy guardrails that have governed the business for a while. Why not be more aggressive there?

Speaker #8: Or is there some optionality to further push GPU down beyond this fiscal year if you are seeing the proper payoff in terms of unit growth?

Speaker #5: Yeah, look, I think, as we've talked about, we can largely self-fund those movements, right? So, shift into focus—focus on sustainable comps, sustainable EPS growth.

Enrique Mayor-Mora: Yeah, look, I think as we've talked about, we can largely self-fund those movements, right? Shift into focus on sustainable comps, sustainable EPS growth. We recognize at the same time we need to self-fund and find efficiencies in the system. We believe there's efficiencies to be had in the system, but we don't necessarily need to go down that route as the first selection, if you will. We're going to focus on driving efficiencies in COGS, in our logistics business, and so on and so forth, in order to actually not have to go with margins lower than our initial guidance.

Speaker #5: And we recognize that at the same time, we need to self-fund and find efficiencies in the system. We believe there are efficiencies to be had in the system.

Speaker #5: We don't necessarily need to go down that route as the first selection, if you will. We're going to focus on driving efficiencies in COGS and the logistics business, and so on and so forth, in order to actually not have to go with margins lower than our initial guidance.

Speaker #8: And I think, excuse me, in the November strategic update, we'll be walking through each one of the pillars of the strategy and understanding really the Run Lean piece and the Great Offering piece, how interconnected those are, and talk about the initiatives we have that will deliver the self-funding, which will deliver the price competitiveness and protect GPU moving forward.

Keith Barr: I think in our November strategic update, we'll be walking through each one of the pillars of the strategy and understanding really the run lean piece and the great offering piece, how interconnected those are, and talk about the initiatives we have that will deliver the self-funding, which will deliver the price competitiveness and protect GPU moving forward.

Speaker #8: Got it. I also want to touch on inventory levels. CarMax has been operating pretty consistently with about 80,000 to 90,000 vehicles in any given week.

David Bellinger: Got it. I also want to touch on inventory levels. CarMax has been operating pretty consistently with about 80,000 to 90,000 vehicles in any given week. Is there an opportunity to compress that number and get some more efficiency out of the inventory base? Maybe add another source of GPU upside if you can bypass some of that natural depreciation from holding onto vehicles. Thank you.

Speaker #8: Is there an opportunity to compress that number and get some more efficiency at the inventory base? Maybe add another source of GPU upside if you can bypass some of that natural depreciation from holding onto vehicles.

Speaker #8: Thank you.

Speaker #5: Yeah, so that is a definite area of focus that we have. So, like I was just talking about in terms of efficiencies in our COGS and our logistics, an area of focus for the teams is basically inventory, right?

Enrique Mayor-Mora: Yeah. That is a definite area of focus that we have. Like I was just talking about in terms of efficiencies in our COGS, in our logistics, an area of focus for the teams are basically inventory, right? How can we turn our inventory faster? How do we have less unproductive transfers, unproductive holds, things like that will slow down your whip, that will actually drive slowing down your turns. Those are items that we think are ahead of us in terms of opportunity and are definitely part of the purview of Shift into GEAR. Absolutely on our list of opportunities.

Speaker #5: And how can we turn our inventory faster? How do we have fewer unproductive transfers and unproductive holds—things like that—that'll slow down your WIP, that'll actually drive slowing down your turns.

Speaker #5: Those are items that we think are ahead of us in terms of opportunity and are definitely part of the purview of Shift Into Gear.

Speaker #5: So, absolutely, it's on our list of opportunities.

Speaker #8: And we're regularly testing, understanding how this impacts the consumer. So, understanding if how we handle holds is driving sales but slowing down our inventory turns.

Keith Barr: We are regularly testing, understanding how this impacts the consumer. Understanding how we handle holds, is that driving sales but maybe slowing down our inventory turns? Transfers. We transfer over 2 million, close to 2.5 million vehicles a year. How do we make those transfers more productive and have fewer of them over time? It is really understanding, again, how decisions we make on holds and transfers impact sales, but also impact inventory productivity. We got a lot of work underway there right now as part of our strategy.

Speaker #8: Transfers — we transfer over 2 million, plus 2.5 million vehicles a year. How do we make those transfers more productive, and have fewer of them over time?

Speaker #8: So it's really understanding, again, how decisions we make on holds and transfers impact sales, but also impact inventory productivity. And we've got a lot of work underway there right now as part of our strategy.

Enrique Mayor-Mora: Yeah.

Speaker #8: Thank you.

David Bellinger: Thank you.

Speaker #3: Thank you. Our next question comes from Joseph with UBS. Your line is now open.

Operator: Thank you. Our next question comes from Joe Spak with UBS. Your line is now open.

Speaker #9: Thanks so much. Good morning, and thanks for taking the question. I know you mentioned you're seeing resiliency across consumers of all income levels, but I was wondering if you could provide any detail, if you have it, in terms of either traffic or conversion?

Joe Spak: Thanks so much. Good morning. Thanks for taking the question. I know you mentioned you are seeing resiliency across consumers of all income, but was wondering if you could provide any detail if you had it in terms of either traffic or conversion, however you sort of tier your customer base, whether that is deciles or quintiles. I guess if rates stay high, some other macro pressures persist, I know the goal is eventually to sort of get to self-funding that growth, but in a tougher macro environment, how do you think about the strategic plan? Is GPU still a driver to help drive that growth in a tougher macro?

Speaker #9: However you sort of tier your customer base, whether that's deciles or quintiles. And I guess just if rates stay high, some other macro pressures persist, I know the goal is eventually to get to self-funding that growth. But in a tougher macro environment, how do you think about the strategic plan? Is GPU still a driver to...

Joe Spak: I guess if rates stay high, some other macro pressures persist, I know the goal is eventually to sort of get to self-funding that growth, but in a tougher macro environment, how do you think about the strategic plan? Is GPU still a driver to help drive that growth in a tougher macro?

Speaker #10: Drive that growth in that tougher macro? Yeah, I mean, I'll talk about consumers, because we look at our consumers by different cohorts, effectively, based on income levels.

Keith Barr: Yeah. I will talk about consumers because we look at our consumers by different cohorts effectively on income levels. Again, resilient is the word I would use. Even at our lowest income cohort, we basically have the same number of customers year over year. As you move up the income cohorts, we had those growing year over year too, which is how our inventory developed during the quarter as well too. So we sold more newer vehicles, higher priced vehicles in this quarter because of the strength of that cohort. Again, that was just for this quarter, and that could change in future quarters, and we can manage our inventory dynamically based upon where we are seeing demand come from too. Again, across all the different spectrums, we saw basically either same number of customers or a growing number of customers in a tougher macro environment.

Speaker #10: And again, resilient is the word I would use. I said even at our lowest income cohort, we basically had the same number of customers year-over-year.

Speaker #10: And then, as you move up the income cohorts, we had those growing year over year too, which is how our inventory developed during the quarter as well.

Speaker #10: So, we sold more newer vehicles—higher-priced vehicles—in this quarter because of the strength of that cohort. Again, that was just for this quarter, and that could change in future quarters.

Keith Barr: So we sold more newer vehicles, higher priced vehicles in this quarter because of the strength of that cohort. Again, that was just for this quarter, and that could change in future quarters, and we can manage our inventory dynamically based upon where we are seeing demand come from too. Again, across all the different spectrums, we saw basically either same number of customers or a growing number of customers in a tougher macro environment.

Speaker #10: And we can manage our inventory dynamically based upon where we're seeing demand come from, too. So again, across all the different spectrums, we saw basically either the same number of customers or a growing number of customers in a tougher macro environment.

Speaker #10: And again, I think our price transparency and our price competitiveness are a real, real strength of CarMax. In terms of GPU moving forward, we believe we can find efficiencies in the business to make sure we can protect our GPU.

Keith Barr: Again, I think our price transparency and our price competitiveness is a real strength of CarMax. In terms of GPU moving forward, we believe we can find the efficiencies in the business to make sure we can protect our GPU. Again, it will go down a bit in Q3 and a bit in Q4, as we have already signaled, but going forward into future fiscal years, we will fund the GPU savings that we need to find in this business.

Speaker #10: Again, it will go down a bit in Q3 and a bit in Q4, as we've already signaled. But going forward in future fiscal years, we'll fund the GPU savings that we need to find in this business.

Speaker #10: Thank you. Thank you.

Joe Spak: Okay. Thank you.

Operator: Thank you. Our next question comes from John Babcock with Barclays. Your line is now open.

Speaker #11: Our next question comes from John Babcock with Barclays. Your line is now open.

Speaker #10: Great, good morning, and thanks for taking my questions. Just quickly on that last comment about the GPUs being down in Q3 and Q4—and I know you also mentioned that earlier—can you just talk about what's driving that?

John Babcock: Great. Good morning, and thanks for taking my questions. Just quickly on that last comment about the GPUs being down in Q3 and Q4, and I know you also mentioned that earlier. Can you just talk about what's driving that?

Speaker #10: Sorry, you broke up a little bit. Did you ask what's driving them? Yeah, yeah. So why are you expecting GPUs to be down in Q3 and Q4?

Keith Barr: Sorry, you broke up a little bit. Did you ask what's driving them?

Enrique Mayor-Mora: Sorry, you broke up a little bit. Did you ask what's driving them?

John Babcock: Yeah. So why are you expecting GPUs to be down in Q3 and Q4?

Speaker #10: Yep. So, consistent strategy this year, right? Which we've communicated—in support of sales, we are lowering our GPUs for the year in order to support our sales performance.

Keith Barr: Yeah. So consistent strategy this year, right, which we have communicated in support of sales. We are lowering our GPUs for the year, right, in order to support our sales performance. We are driving efficiencies in the business. As we talked about, we also have a tailwind from FTC. You mix all those things together, and we are, I believe, very effectively balancing demand, efficiencies in order to support sales. So that is why. It is very consistent with what we have said. I think the benefit has been really that we have not had to lower our margins by as much as what we initially provided an outlook for because of that mix of benefits that we are actually seeing.

Enrique Mayor-Mora: Yeah. So consistent strategy this year, right, which we have communicated in support of sales. We are lowering our GPUs for the year, right, in order to support our sales performance. We are driving efficiencies in the business. As we talked about, we also have a tailwind from FTC. You mix all those things together, and we are, I believe, very effectively balancing demand, efficiencies in order to support sales.

Speaker #10: We're driving efficiencies in the business. And as we talked about, we also have a tailwind from FTC. You mix all those things together, and we're, I believe, very effectively balancing demand, efficiencies, and in order to support sales.

Speaker #10: So that—I mean, that's why. It's very consistent with what we've said. I think the benefit has really been that we haven't had to lower our margins by as much as what we initially provided an outlook for, because of that mix of benefits that we're actually seeing.

Enrique Mayor-Mora: So that is why. It is very consistent with what we have said. I think the benefit has been really that we have not had to lower our margins by as much as what we initially provided an outlook for because of that mix of benefits that we are actually seeing.

Speaker #11: Gotcha, thank you. And then, next question: I noticed when going back and looking at some of the historical data that the percentage of vehicles you've been buying from dealers has trended higher over the last couple of years.

John Babcock: Gotcha. Thank you. Next question. I noticed in going back and looking at some of the historical data that the percentage of vehicles you have been buying from dealers has trended higher over the last couple of years. You obviously had a pretty sizable increase this quarter. Just curious, is that availability driving that or is there something else? Also, can you talk about the profitability on those vehicles that you are buying directly from dealers versus if you buy a vehicle from customers?

Speaker #10: And you obviously had a pretty sizable increase this quarter. Just kind of curious, is that availability driving that, or is there something else?

Speaker #10: And then also, can you talk about the profitability?

Speaker #11: on those vehicles that you're buying directly from dealers versus if you buy a vehicle from customers? Yeah, absolutely. So we've been really pleased, really since inception,

Enrique Mayor-Mora: Yeah, absolutely. So we have been really pleased, really since the inception of our acquisition of Edmunds, and they have a sales force out there that partner with our organization, and they have been driving our MaxOffer, buying cars from dealers for a few years now. This quarter is just continued testament to the strength of that product that we have out there, where you saw a 54% growth year over year on the quarter. Now, I will say in terms of profitability, the most profitable buy that we will have is directly from a customer. That is the most profitable buy, as we have always talked about. The least profitable buy is going to an auction house and buying a car at an auction house. All you know there is that you paid more than anybody else for the car, but you got the car.

Speaker #10: ...of our acquisition of Edmunds. They have a sales force out there that partnered with our organization, and they've been driving our Max Offer, buying cars from dealers.

Speaker #10: For a few years now, this quarter is just a continued testament to the strength of that product that we have out there, where you saw 54% growth year-over-year on the quarter.

Speaker #10: Now, I will say in terms of profitability, the most profitable buy that we’ll have is directly from a customer, right? That is the most profitable buy, as we’ve always talked about.

Enrique Mayor-Mora: Now, I will say in terms of profitability, the most profitable buy that we will have is directly from a customer. That is the most profitable buy, as we have always talked about. The least profitable buy is going to an auction house and buying a car at an auction house. All you know there is that you paid more than anybody else for the car, but you got the car.

Speaker #10: The least profitable purchase is going to an auction house. And buying a car at an auction house—all you know there is that you paid more than anybody else for the car, but you got the car.

Speaker #10: And in between there, I'd tell you, is buying a car from a dealer—so kind of midway between buying a car from a customer and going to an auction.

Enrique Mayor-Mora: In between there, I tell you, is buying a car from a dealer. So kind of midway between buying a car from a customer and going to an auction. So definitely accretive to the organization is another contributor that allows us to be more competitive on our pricing as well. So I am very pleased with our performance this quarter.

Speaker #10: So, definitely accretive to the organization. It is another contributor that allows us to be more competitive on our pricing as well. So, we're very pleased with our performance this quarter.

Speaker #11: Okay, thanks. And then just my last question. Obviously, we've seen diesel and transportation costs rise up pretty sharply. I'm just kind of curious if you could talk a bit more about how that's impacting your business and how you're managing through that?

John Babcock: Okay, thanks. Just my last question. Obviously, we've seen diesel and transportation costs rise up pretty sharply. I'm just curious if you could talk a bit more about how that's impacting your business, how you're managing through that.

Speaker #10: Yeah, it's another component within our cost of sales. But as we've talked about, this quarter, effectively, the teams have done a great job in driving efficiency outside of that impact, which has allowed us to be even more price competitive moving forward—certainly in the quarter and in our outlook moving forward.

Enrique Mayor-Mora: Yeah. It's another component within our cost of sales. As we've talked about this quarter, effectively, the teams have done a great job in driving efficiencies outside of that impact that have allowed us to be even more price competitive moving forward here, certainly in the quarter and our outlook moving forward. So we've been able to absorb it, the increase in price in diesel, but definitely it's impacted our costs. Again, our efficiencies elsewhere have allowed us to offset it.

Speaker #10: So we've been able to absorb it—the increase in price in diesel. But definitely, it's impacted our costs. But again, our efficiencies elsewhere have allowed us to offset it.

Speaker #10: All right. Thank you.

John Babcock: Right. Thank you.

Speaker #12: Thank you. We'll go next to Scott Ciccarelli with Truist. Your line is now open.

Operator: Thank you. We'll go next to Scot Ciccarelli with Truist. Your line is now open.

Speaker #13: Good morning, guys. So I know you've cut up a few different ways, but when you look at the sharply improved sales rate, can you help us better understand how much of it was driven more by what you get you guys have historically called top of the funnel, more people coming into your stores and the digital channels versus how much was driven by better conversion rates?

Scot Ciccarelli: Good morning, guys. I know you've cut up a few different ways, but when you look at the sharply improved sales rate, can you help us better understand how much of it was driven more by what you guys have historically called top of the funnel, more people coming into your stores and the digital channels, versus how much was driven by better conversion rates?

Speaker #10: Yeah, I would say that overall in the quarter, our web traffic actually was down by a couple of points. But what we absolutely saw was our sales opportunities being up.

Enrique Mayor-Mora: Yeah. I would say that overall in the quarter, our web traffic actually was down by a couple of points. But what we absolutely saw was our sales opportunities being up and our engaged customers being up and our conversion of those engaged customers being up as well. So what we're seeing is better quality customers coming through, if you will. So web traffic down, but overall quality customers coming through the digital door and the physical door is up. And our conversion of those customers are up as well.

Speaker #10: And our engaged customers are up, and our conversion of those engaged customers is up as well. So what we're seeing is better quality customers coming through.

Speaker #10: Will, right? So web traffic is down, but overall, the quality of customers coming through the digital door and the physical door is up. And our conversion of those customers is up.

Speaker #14: As well. Yeah, I think our marketing team has done an exceptional job of really driving efficiencies in the marketing funnel. And so even though web traffic is down a bit, again, the quality of that traffic has significantly improved, which led to all those factors, as Enrique just pointed out too.

Keith Barr: Yeah. I think our marketing team has done an exceptional job of really driving efficiencies in the marketing funnel. Even though the web traffic is down a bit, again, the quality of that traffic is significantly improved, which led to all of those factors as Enrique just pointed out too. Again, great job by the marketing team.

Speaker #14: So again, great job by the marketing team.

Speaker #13: That's helpful. And then, I know it's a little difficult to tease out, and there's obviously some substitutability, but do you think your Tier 2 cap penetration were all incremental sales?

Scot Ciccarelli: That's helpful. I know it's a little difficult to tease out, and there's obviously some substitutability, but do you think your Tier 2 CAF penetration were all incremental sales? Just trying to figure out if there's a sales impact, if any, as you guys have moved a little bit lower into the credit pool on a direct basis.

Speaker #13: I'm just trying to figure out if there's any sales impact as you guys have moved a little bit lower into the credit pool on a direct basis.

Speaker #13: Yeah, appreciate the question. Short answer is no.

Keith Barr: Yeah. Appreciate the question. Yeah. Short answer is no. I would say it is not all incremental sales. There is always going to be some incrementality. I think we provide an outstanding offer out there. But no, this is really about us being opportunistic and moving down to the volume where our credit partners are great. They have always provided great offers to our customers. We are just taking the opportunity to take some of that volume for ourselves that is above and beyond what they would typically pay us. So no, not incremental, largely at all.

Speaker #10: I would say it is not all incremental sales. There's always going to be some incrementality. I think we provided an outstanding offer out there.

Speaker #10: But no, this is really about us being opportunistic and moving down to the volume, where, again, our credit partners are great. They have always provided great offers to our customers.

Speaker #10: We're just taking the opportunity to take some of that volume for ourselves. It's above and beyond what they would typically pay us. So, no, not incremental largely at all.

Speaker #10: Got it. Thanks, guys.

Scot Ciccarelli: Got it. Thanks, guys.

Speaker #12: Thank you. And as a reminder, if you would like to ask a question, please press star 1 on your keypad now. We'll move next to Alex Perry with Bank of America.

Operator: Thank you. As a reminder, if you would like to ask a question, please press star and 1 on your keypad now. We will move next to Alex Perry with Bank of America. Your line is now open.

Speaker #12: Your line is now open.

Speaker #14: Hi, thanks for taking our question here. I just wanted to get your thoughts on how the FTC regulation could affect the GPU profiles longer term.

Alex Perry: Hi. Thanks for taking our question here. I just wanted to get your thoughts on how the FTC regulation could affect the GPU profiles longer term. Do you think that dealers start to alter their prices with now having to include the doc fees? Then, how long should we expect the FTC tailwind to last for you? What are you seeing in terms of compliance in the overall market? Thanks.

Speaker #14: Do you think that dealers will start to alter their prices now that they have to include the doc fees? And then how long should we expect, you know, that FTC ruling to last for you?

Speaker #14: And, and what are you seeing sort of in terms of compliance in the overall market? Thanks. Sure. I mean, I can give you an example of the FTC benefit for CarMax, and I can't comment on specifically what other companies are going to do with their pricing.

Keith Barr: Sure. I can give you an example of the FTC benefit for CarMax, I cannot comment on specifically what other companies are going to do with their pricing. When you think about our competitive pricing overall versus the broader industry, the percentage of vehicles rated great deals on Cars.com for CarMax more than doubled this quarter compared to Q2 the previous year. That is just significant. Customers out there digitally shopping for vehicles are seeing the fact that, again, the number of great deals on third-party site like Cars.com, we have doubled there. That is going to be a great tailwind for us for the remainder of this year. Compliance really started in the

Speaker #14: But when you think about our competitive pricing overall versus the broader industry, the percentage of vehicles rated 'Great Deals' on Cars.com for CarMax more than doubled this quarter compared to Q2 the previous year.

Speaker #14: So that's just significant, right? And so customers out there, digitally shopping for vehicles and seeing the fact that, again, the number of great deals on third-party sites like Cars.com—we've doubled there.

Keith Barr: Customers out there digitally shopping for vehicles are seeing the fact that, again, the number of great deals on third-party site like Cars.com, we have doubled there. That is going to be a great tailwind for us for the remainder of this year. Compliance really started in the

Speaker #14: So that's going to be a great, great tailwind for us for the remainder of this year. Compliance really started kind of in the May timeframe.

Enrique Mayor-Mora: May

Keith Barr: May timeframe. You probably think about it ramped up into May, so that is probably going to last that sometime.

Speaker #14: And so, you probably think about it ramped up into May. So that's probably going to, you know—we'll lap that.

Speaker #10: Yeah, and there was a bleed-in, actually. Not everybody, you know, complied certainly right away, and there are still some laggards, I'm sure. But really, May is when we saw actual movement there.

Enrique Mayor-Mora: Yeah. There was a bleed in naturally. Not everybody complied certainly right away, there are still some laggers, I am sure. May is when we saw actual movement there. Again, we have until May and then certainly thereafter in benefit.

Speaker #14: So again, we have until May, and then certainly thereafter can benefit. And I think the FTC sent out like 97 letters to different companies.

Keith Barr: I think the FTC sent out 97 letters to different companies back in March telling they were going to. Again, these are not new guidelines. These guidelines have existed.

Keith Barr: I think the FTC sent out 97 letters to different companies back in March telling they were going to. Again, these are not new guidelines. These guidelines have existed. This is basically saying they were going to enforce compliance. The vast majority of the industry is headed in that direction, which is just a tailwind for CarMax because we have already been more transparent.

Speaker #14: Back in March, telling they were going to— again, these aren't new guidelines. These guidelines have existed. This was basically saying they were going to enforce compliance.

Enrique Mayor-Mora: Right.

Keith Barr: This is basically saying they were going to enforce compliance. The vast majority of the industry is headed in that direction, which is just a tailwind for CarMax because we have already been more transparent.

Speaker #14: And so, the vast majority of the industry is headed in that direction again, which is just a tailwind for CarMax, because we've already been more transparent.

Speaker #14: And just to follow up on that, what impact do you think that has on pricing longer term as dealers move to include the doc fees into a sort of all-in, more transparent pricing?

Alex Perry: Just a follow-up on that, what impact do you think that has on pricing longer term, as dealers move to include the doc fees into a sort of all in more transparent pricing? What impact do you think that has on GPUs and the overall pricing environment?

Speaker #14: What impact do you think that has on GPUs and the overall pricing environment? I think it's just going to continue to show how price-competitive we are.

Keith Barr: I think it is just going to continue to show how price competitive we are. I think interestingly, the non-compliance by the broader industry actually was a disadvantage for CarMax. Our customer value proposition being no haggle and being transparent to customers, was exactly the right thing for CarMax to do in terms of building this brand. Now that people have to comply with this, it basically shows again how price competitive we are going to be and being able to maintain our pricing and our GPUs moving forward. We will see again how other people choose to price.

Speaker #14: I think, you know, interestingly, the noncompliance by the broader industry actually was a disadvantage for CarMax. Our customer value proposition—being no-haggle and being transparent to customers—again, was exactly the right thing for CarMax to do in terms of building this brand.

Speaker #14: Now that people have to comply with this, it basically shows again how price-competitive we're going to be, and being able to maintain our pricing and our GPUs moving forward.

Speaker #14: And we'll see again how other people choose to price. Really helpful. Best of luck going forward.

Alex Perry: Really helpful. Best of luck going forward.

Speaker #12: Thank you. Our next question comes from Chris Pierce with Needham. Your line is now open.

Operator: Thank you. Our next question comes from Chris Pierce with Needham. Your line is now open.

Speaker #14: Oh, hey, you kind of just hit on it. I really wanted to get a sense of these third-party sites. If we assume a lot of people start there, I'm just kind of curious about the tie-in between marketing and pricing, and does it really just come down to price?

Chris Pierce: Hey, you kind of just hit on it. I really wanted to get a sense of these third-party sites, if we assume a lot of people start there, I'm just kind of curious, the tie-in between marketing and pricing. Does it really just come down to price? I'd love to get your thoughts on what you're seeing from those sites and the conversion of customers you're seeing from those sites. Then I just have one on the consumer.

Speaker #14: And I'd love to get your thoughts on what you're seeing from those sites and the conversion of customers you're seeing from those sites. Then I just have one on the consumer.

Speaker #14: I mean, again, we don't really talk about it in that level of detail. I mean, what we think about is our research shows that over 90 percent of customers start their search for a vehicle online.

Keith Barr: Again, we don't really talk about it in that level of detail. What we think about is our research shows that 90% plus of customers start their search for a vehicle online. I have to believe it's probably almost 100% in reality. Again, they're going to search at multiple sites. They're going to come to CarMax.com, and they're going to look there. They're going to look at third-party sites. They're going to really understand what vehicles are out there. Then again, our marketing team does an exceptional job through SEO and GEO to be able to attract the right customers to our site and then convert them through the funnel, too. Again, it's making sure that you are priced competitively and that you're showing up on all the right channels, and that's how you maximize, again, the customer acquisition, the customer conversion.

Speaker #14: I'd have to believe it's probably almost 100% in reality. And again, they're going to search at multiple sites. They're going to come to CarMax.com and they're going to look there.

Speaker #14: They're going to look at third-party sites. They're going to really understand kind of what vehicles are out there. And then again, our marketing team does an exceptional job through SEO and geo-targeting to be able to attract the right customers to our site and then convert them through the funnel too.

Keith Barr: Then again, our marketing team does an exceptional job through SEO and GEO to be able to attract the right customers to our site and then convert them through the funnel, too. Again, it's making sure that you are priced competitively and that you're showing up on all the right channels, and that's how you maximize, again, the customer acquisition, the customer conversion.

Speaker #14: So again, it's making sure that you are priced competitively and that you're showing up in all the right channels. And that's how you maximize, again, customer acquisition to customer conversion.

Speaker #15: Okay, perfect. And I think you talked about rates, you know, up 60 basis points on average, maybe across the quarter, and probably gone up through September here.

Chris Pierce: Okay, perfect. I think you talked about rates up 60 bps on average, maybe across the quarter and probably gone up through September here. How should we really think about the consumer being impacted here? Because you've got consumers dropping down from new car into used that are better credit quality because of new car prices. A 1% move in rates I think Cox said is $12 to $15 in monthly payments. Is this something investors are sort of overreacting to, or what's the right reaction, or what level of rates is something that changes the dynamic for you guys? I just want to sort of level set how we should think about this.

Speaker #15: I mean, how should we really think about the consumer being impacted here? Because it's just like you've got consumers dropping down from new car to used, that are better credit quality, because of new car prices.

Speaker #15: Like a 1% move in rates, I think is like Cox said, is like $12 to $15 in monthly payments. Like, is this something investors are sort of overreacting to, or what's sort of the right reaction or what level of rates is something that changes the dynamic for you guys?

Chris Pierce: A 1% move in rates I think Cox said is $12 to $15 in monthly payments. Is this something investors are sort of overreacting to, or what's the right reaction, or what level of rates is something that changes the dynamic for you guys? I just want to sort of level set how we should think about this.

Speaker #15: I just want to sort of, kind of, level-set how investors—how we should think about this.

Speaker #16: Sure. Yeah, I'll kind of initially answer that question. You know, when I think about it from the credit lens, I think the consumer—you’re certainly going to have, it'll be bifurcated.

Jon Daniels: Sure. Yeah. I will initially answer that question. When I think about it from the credit lens, I think the consumer, it will be bifurcated. The higher end prime consumer, they have options. They are going to go to cash. Credit unions just have obviously an advantage there where they can keep rates low. For CarMax in particular, CAF, you are going to see probably some leakage from using the internal financing to those channels. CAF in particular, we have options there, right? We can choose, and that is the benefit of a captive. We can choose at any given point to keep the rate low or raise the rate and to protect our finance margin. So happens this quarter, we chose to raise rates, and we saw great comps that were coming in place. That is an option we have at any given quarter.

Speaker #16: The higher-end prime consumer, right? They have options. They're going to go to cash. You know, credit unions just have an advantage there, where they can keep rates low.

Speaker #16: So, you know, for CarMax in particular, CAF, you know, you're going to see probably some leakage from using the internal financing to those channels.

Speaker #16: Now, you know, CAF in particular—we have options there, right? We can choose, and that's the benefit of a captive. We can choose at any given point to keep the rate low or raise the rate, and protect our finance margin.

Jon Daniels: CAF in particular, we have options there, right? We can choose, and that is the benefit of a captive. We can choose at any given point to keep the rate low or raise the rate and to protect our finance margin. So happens this quarter, we chose to raise rates, and we saw great comps that were coming in place. That is an option we have at any given quarter.

Speaker #16: So, it happens that this quarter we chose to raise rates, and we saw great comps that were coming into place. So that's an option we have in any given quarter.

Speaker #16: But I think overall, in the prime consumer segment, they're just going to switch to a different financing mechanism. As you get further down the credit spectrum, that's where—can that payment, whether it be $12 or $15...

Jon Daniels: I think overall, in the prime consumer, they are just going to switch to a different financing mechanism. As you get further down the credit spectrum, that is where can that payment well be 12, 15 bucks, that might mean a lot. Terms are already extended. Can they find a way to fit that into their budget? There can be a challenge there. Our goal here is to make sure that we have a great competitive front lot price, provide great credit offerings, and make it as affordable for them as possible, even in the face of macroeconomic changes.

Speaker #16: That might mean a lot. You know, terms are already extended. Can they find a way to fit that into their budget? There can be a challenge there.

Speaker #16: Our goal here is to make sure that we have a great, competitive front-lot price, provide great credit offerings, and make it as affordable for them as possible, even in the face of macroeconomic changes.

Speaker #16: Okay, thank you, Angela.

Chris Pierce: Okay. Thank you, and good luck.

Speaker #12: Thank you. We'll now take a follow-up from John Babcock with Barclays. Your line is now open.

Operator: Thank you. We will now take a follow-up from John Babcock with Barclays. Your line is now open.

Speaker #11: Hey, sorry for the follow-up here. I just wanted a clarification though on the GPUs, because you said down in Q3 and Q4. Is that sequentially, or is that year-over-year?

John Babcock: Hey, sorry for the follow-up here. Just wanted a clarification, though, on the GPUs, because you said down Q3 and Q4. Is that sequentially or that is year-over-year?

Speaker #11: Year-over-year. All right. Thank you.

Keith Barr: Year-over-year.

John Babcock: All right. Thank you.

Speaker #12: Thank you. We don't have any further questions at this time. I'll hand the call back to Keith for any closing remarks.

Operator: Thank you. We do not have any further questions at this time. I will hand the call back to Keith for any closing remarks.

Speaker #14: Thank you, operator, and thank you everyone for joining the call today. We appreciate all your questions and your support, and we look forward to talking to you next quarter and seeing you in November.

Keith Barr: Thank you, operator, and thanks everyone for joining the call today. I appreciate all your questions and all your support, and we look forward to talking to you next quarter and then seeing you in November.

Operator: Thank you. Ladies and gentlemen, that concludes the Q2 fiscal year 2027 CarMax earnings release conference call. You may now disconnect.