CarMax, Inc. (KMX) Earnings

Management highlights

### Strategic Framework & Core Business Assessment - Management introduced a new four-pillar customer-centric growth strategy to address existing operational frictions that have limited performance: core operations are not fast/efficiency enough, digital-in-store integration is poor, costs are too high, and pricing/selection need improvement. The strategy is already in motion, not aspirational. - CarMax's key competitive moats include an award-winning people-first culture, iconic brand, national footprint reaching 85% of the U.S. population, and established digital capabilities that cannot be replicated at scale by competitors. The overall U.S. used vehicle market remains highly fragmented, creating meaningful growth opportunities. ### Four Strategic Pillars - **Great Offering**: Maintain competitive pricing across demand cycles while growing saleable inventory and speeding customer access to vehicles. Pricing algorithms have been updated to incorporate more granular local competitive market data and broader vehicle comparison sets to improve individual unit pricing. - **Easy Experience**: Seamlessly integrate digital convenience with in-store interaction to match customer preference for combining digital research with in-person test drives. Near-term focus includes simplifying pre-arrival customer communication, improving in-store readiness, and equipping associates with conversion-focused tools. Early improvements already implemented include simplified website navigation, shifting from sticker prices to monthly payment displays, and integrating AI assistance for digital and call center interactions. - **Add Value Per Transaction**: Grow profitability across all transactions, expanding on in-flight initiatives including CAF full credit spectrum expansion and extended protection plan (EPP) redesign. Progress is measured by growing CAF penetration for full spectrum and long-term margin expansion for EPP, with positive early progress in Q1. - **Run Lean**: Reimagine cost structure to self-fund competitive pricing through operational efficiency, rather than relying on sustained gross profit per unit (GPU) cuts. Key initiatives include: reducing reconditioning costs via technology and process improvement; optimizing the logistics network to eliminate unproductive vehicle transfers, reset network design, and improve fleet utilization; and reducing SG&A expenses. The FY27 SG&A exit rate savings target was previously raised from $150 million to $200 million, and the company remains on track to hit this target. ### Q1 Operational Summary - Total combined retail and wholesale vehicle sales reached ~392,000 units, up 3.3% year-over-year, against a tough comparison to the prior year Q1 which delivered an 8.1% retail comp. Total revenue was $8 billion, up 6.2% year-over-year, with net diluted EPS of $1.31. The national rollout of the redesigned EPP product began in Q1 and is on track for completion by the end of Q2 FY27. CAF became the largest Tier 2 lender in the quarter, demonstrating progress on full spectrum expansion.

Guidance

- The company maintains its FY27 exit rate SG&A savings target of $200 million, with Q1 year-over-year SG&A reductions in line with full-year expectations set last quarter. It remains on track to deliver the full $200 million in savings by the end of FY27, with some modest year-over-year SG&A pressure expected for the remainder of the year. - Management maintained full-year guidance for a ~$200 year-over-year reduction in GPU, though Q1 came in better than the prior guidance of a $300 GPU reduction, and management noted it will update full-year guidance next quarter if appropriate. No change to full-year guidance has been made at this early point in the fiscal year. - CAF's midterm penetration target of 50% is reaffirmed, and management noted penetration could ultimately exceed that level as Tier 2 penetration continues to grow methodically. - A full strategic update with detailed initiatives, milestones, and performance expectations will be provided in fall 2027. - Management expects the sales momentum built in Q1 to continue through the remainder of FY27, and that CarMax will outperform the broader used vehicle market for the full year.

Segment performance

1. Retail Used Vehicle: Gross profit was $501 million, a 10% year-over-year decrease, representing 58.7% of total gross profit. Gross profit per used unit fell to $2,177, down $230 year-over-year. Total retail unit sales grew slightly year-over-year, while used retail comparable units were down 0.8%. 2. New Vehicle (Wholesale): Wholesale gross profit was $169 million, an 8% year-over-year increase, accounting for 19.8% of total gross profit. Wholesale unit sales rose 8.4% year-over-year, with gross profit per unit relatively flat at $1,046. 3. Other Gross Profit: Other gross profit (including service and extended protection plans) was $184 million, flat year-over-year, making up 21.5% of total gross profit. EPP unit margins grew slightly in the quarter, with the full national rollout of the redesigned EPP product expected to deliver ~$35 per unit in incremental EPP margin for FY27. 4. CarMax Auto Finance (CAF): CAF income was $140 million, down 1% year-over-year. Originations totaled $2.4 billion, with sales penetration (net of three-day payoffs) reaching 43.3%, up 150 basis points year-over-year. Net interest margin on the portfolio was 6.7%, up 20 basis points year-over-year. The loan loss provision was $96 million, including a $25 million reserve release from pre-quarter originated loans classified as held for sale, resulting in a total reserve balance of $475 million (2.95% of managed receivables).

Risks & headwinds

- Forward-looking statements about future performance, strategic initiatives, and growth are subject to substantial risks and uncertainties that could cause actual results to differ materially from expectations, including risks related to macroeconomic conditions, consumer credit health, and used vehicle market dynamics, outlined in the company's SEC filings. - Consumers continue to face pressure from persistent inflation, and industry-wide auto and credit card delinquency rates are elevated, which could impact loan loss performance for CAF. - Dynamic pricing and GPU management may lead to greater quarterly variability in gross profit, which could differ from analyst and investor expectations. - Scaling standalone reconditioning centers and logistics network redesign are multi-quarter projects, and cost savings may take time to materialize, potentially impacting near-term profitability. - Leverage remains slightly above the company's targeted range, which could impact near-term capital return plans and capital market access.

Analyst Q&A

• Q: With GPU down less than the $300 per unit guidance in Q1, what benefit has lower GPU had on used unit sales, and will further GPU tweaks be needed going forward?

  A: Competitive pricing has already had a clear positive impact on comp sales momentum, and management expects this momentum to continue through the year, with CarMax outperforming the broader market. While near-term margin concessions are still required to support sales growth, the long-term goal is to self-fund competitive pricing via operational efficiency rather than sustained GPU cuts, and Q1's better-than-expected result reflects progress on this approach. The company now manages pricing dynamically based on quarterly demand conditions rather than being anchored to a fixed GPU target.

• Q: Can you explain what unproductive vehicle transfers are and the opportunity to improve logistics efficiency?

  A: CarMax transfers over 2 million vehicles per year, and unproductive transfers refer to moving vehicles that do not ultimately convert to sales, creating unnecessary costs and tying up saleable inventory. The company is resetting its entire logistics network design to increase efficiency, reduce costs, and ensure the right vehicles are moved to the right locations to meet local customer demand. Lower logistics costs directly support the ability to maintain competitive retail pricing, and more details on this initiative will be shared in the fall strategic update. Reducing unproductive transfers will also increase the amount of saleable inventory available to customers.

• Q: How does dynamic GPU and pricing management work in the used vehicle context, given the risk of giving lower prices to customers who would have paid more?

  A: Unlike hotels where unsold inventory has no value the next day, used vehicles are a depreciating asset, so the goal is to maximize total long-term profitability of the overall inventory portfolio. Historically, CarMax's pricing algorithms were heavily margin-focused; the updated model incorporates external market and local demand data by vehicle type to identify where the company can flex margin to increase sales and where it should hold pricing to maximize profitability. This more granular approach will lead to more quarterly GPU variability but higher overall long-term profit, and is underpinned by ongoing work to reduce fixed operating costs. The company has a strong in-house data science team that is continuing to refine these algorithms.

• Q: What opportunities exist to reduce reconditioning costs, and what progress have you seen so far?

  A: Reconditioning cost reduction is the largest identified efficiency opportunity at CarMax, with upside for both lower costs and faster processing times through increased digitization and technology adoption. Existing improvements already deployed include digital part and tire selection tools that help teams source parts at the lowest market prices, with more technology investments underway to improve labor productivity and inventory flow. Seven standalone reconditioning centers are already open, and while they are still ramping up to peak utilization and have not yet delivered full reconditioning savings, they have already generated meaningful logistics cost reductions by locating reconditioning in key markets. All investments in reconditioning will be self-funded from existing overhead budgets.