CARMAX INC Q4 FY2025 earnings call

Management Statement and Operational Highlights

• Business Momentum: The company achieved robust year-over-year EPS growth, driven by unit volume increases in sales and buys, material gross profit growth, cap income growth, and cost efficiencies.
• Digital Capabilities: Enhanced online tools, including Sky (an AI-powered virtual assistant) answering over half of customer questions, a 25% year-over-year increase in fully self-progressed online sales, and updated omni-channel sales definition. Digital capabilities supported over 80% of sales.
• Finance Initiatives: CarMax Auto Finance was growing income, with testing of new credit scoring models and expansion of full credit spectrum lending. The non-prime securitization program was successfully executed.
• Efficiencies: The company achieved $125 per unit COGS savings in fiscal year 2025 and aimed for another $125 per unit in fiscal 2026.
• Store and Facility Expansion: Plan to open 6 new store locations and 4 stand-alone reconditioning and auction centers in fiscal 2026, up from 5 stores and 2 centers in fiscal 2025.

Segment Performance

• Retail: Fourth quarter total sales reached $6 billion, up 7% year-over-year. Retail unit sales increased 6.2%, with used unit comps up 5.1% despite challenges like fewer selling days, inclement weather, and delayed tax season. Fourth quarter retail gross profit per used unit was $2,322, a record. Approximately 15% of retail unit sales were online, and with the updated omni-channel definition, ~67% of retail unit sales were omni. Digital capabilities supported over 80% of sales.
• Wholesale: Unit sales were up 3.1% year-over-year, with average selling price flat. Fourth quarter wholesale gross profit per unit was $1,045. The company bought approximately 269,000 vehicles during the quarter, up 15% from the prior year, with 46,000 vehicles sourced from dealers, a 114% increase from the prior year.
• Finance (CAF): CarMax Auto Finance delivered income of $159 million, up 8% year-over-year. Net interest margin was 6.2%, and provision for loan losses was $68 million, resulting in a total reserve balance of $459 million, or 2.61% of managed receivables.

Guidance

• EPS Growth: High-teen EPS growth is expected with mid-single-digit unit growth in retail. The company's model is designed for high-teen EPS CAGR with mid-single-digit retail unit growth.
• SG&A: Expect low-single-digit gross profit growth to leverage SG&A annually, aiming for full year omni-cost neutrality in fiscal 2026 and improved efficiency metrics.
• CapEx: Anticipate $575 million in capital expenditures in fiscal 2026, driven by land purchases and facility expansions for long-term growth.
• CAF: Expect cap income growth, with temporary provision impacts in Q1 due to seasonality and new lending initiatives, but long-term profitability is expected as provisioning is outweighed by overall income.

Risks

• Macro Uncertainties: Impact of tariffs on new car prices, which could affect used car prices, parts costs, and consumer affordability.
• Credit and Provision Risks: Temporary step-up in provisioning for CarMax Auto Finance due to seasonality and new lending initiatives, though long-term profitability is expected.
• Market Share Volatility: Fluctuations in market share due to macroeconomic factors and competitive landscape changes.

Question and Answer

• Q: Insights on first-half vs second-half share performance and impact of tariffs on affordability A: First-half share losses were due to a price correction, while second-half gains resulted from improved customer experience, efficiency gains, and inventory acquisition. Tariffs on new cars may increase new car prices, widening the spread with late-model used cars, potentially driving demand for used cars.
• Q: Quarter-to-date used comp trends and impact of new car tariffs on share gain A: Fourth quarter used comps were strong, February was softer due to leap day and refund delays, but March and April showed a step-up. New car tariffs could increase new car prices, pushing consumers to used cars, benefiting market share gains.
• Q: Sourcing strategies and inventory management in tariff environment A: Focus on improving dealer and consumer appraisal experiences, with the Max offer product enhancing dealer sourcing. Digital tools are improving consumer offers. Inventory management considers tariff impacts on parts costs and continues dealer and consumer sourcing initiatives.
• Q: Service gross profit improvement and EPS outlook A: Service margin is expected to grow, driven by efficiency improvements, cost coverage, and sales growth. The EPS outlook includes high-teen growth with mid-single-digit unit growth, leveraging SG&A improvements and other gross profit drivers.
• Q: Amazon entry into auto space and collaboration potential A: Amazon is viewed as a facilitator, collaborating to complement traffic on carmax.com. The company's omnichannel retail model provides a competitive moat, and collaboration is seen as a potential approach.
• Q: EPS growth model timing and CAF provisioning A: The EPS growth model includes mid-single-digit unit growth and high-teen EPS growth, with timing dependent on macro factors. CAF provisioning in Q1 is due to seasonality and new lending, but long-term profitability is expected as provisioning is outweighed by income growth.