CarMax Inc

Stand by, your program is about to begin. If you should require operator assistance, please press star zero. Ladies and gentlemen, thank you for standing by. Welcome to the fourth quarter fiscal year 2025 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 of Investor Relations. Please go ahead.

Thank you, Madison. Good morning, everyone, and thank you for joining our fiscal 2025 fourth quarter earnings conference call. I'm here today with Bill Nash, our president and CEO, Enrique Mayor Moore, our executive vice president and CFO, and John Daniels, our executive vice president, CarMax Auto Finance Operations. 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. For additional information on important factors and risks that could affect these expectations, please see our Form 8-K filed with the SEC this morning, our annual report on Form 10-K for fiscal year 2024, and our quarterly reports on Form 10-Q previously filed with the SEC. 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. Phil?

Great. Thank you, David. Good morning, everyone, and thanks for joining us. We're very pleased with the continuing momentum across our diversified business during the fourth quarter. Our results reflect solid execution and the strength of our business model. We delivered robust year-over-year EPS growth as we drove unit volume increases in sales and buys, materially increased gross profit, grew cap income, and realized additional cost efficiencies. Our associates, stores, technology, and digital capabilities all seamlessly tied together enable us to provide the most customer-centric car buying and selling experience. This is a key differentiator that gives us the right to win and access to the largest total addressable market in the used car space. This also positions us to drive sales, gain market share, and deliver significant year-over-year earnings growth for years to come. In the fourth quarter, on a year-over-year basis, we grew retail and wholesale unit volume. We delivered strong retail, wholesale, and EPP GPUs and materially improved service growth profit. We bought more vehicles from both consumers and dealers, achieving an all-time record with dealers. We grew CAF's net interest margin and continued to advance our full credit spectrum underwriting model. We materially leveraged SG&A as a percent of gross profit, and we also achieved double-digit EPS growth for the third consecutive quarter. For the fourth quarter of FY25, we delivered total sales of $6 billion, up 7% compared to last year, primarily driven by higher volume. In our retail business, total unit sales increased 6.2% and used unit comps were up 5.1% despite having one less selling day, inclement weather, and a delayed start to this year's tax season. Average selling price was in line with last year's fourth quarter. For the full year, total retail unit sales increased 3.1% and used unit comps were up 2.2%, with a decline in the first quarter more than offset by gains across the second, third, and fourth quarters. Our market share data indicates that our nationwide share of age 0 to 10-year-old used vehicles was 3.7% in calendar 2024, consistent with 2023. External title data shows year-over-year, while our share came under pressure during the first half of 2024, it then recovered as we achieved accelerating gains through the second half with particular strength in age 0 to 4 vehicles, which grew for the entire year. The data indicates that our market share continue to grow year over year during January 2025, the latest period for which information is available. While I do not intend to provide another update until this time next year, we remain confident in our ability to achieve further market share gains and across 2025 and beyond. Fourth quarter retail gross profit per use unit was $2,322, a fourth quarter record up from last year's $2,251. Wholesale unit sales were up 3.1% versus the fourth quarter last year. Average selling price was flat year over year. Fourth quarter wholesale gross profit per unit was $1,045, which is historically strong, though down from the $1,120 a year ago. We bought approximately 269,000 vehicles during the quarter, up 15% from last year. We purchased approximately 223,000 vehicles from consumers with more than half of those buyers coming through our online instant appraisal experience. With the support of our Edmond sales team, we sourced the remaining approximately 46,000 vehicles through dealers, which is up 114% from last year. For the fourth quarter, approximately 15% of retail unit sales were online, up from 14% last year. Total revenue from online transactions was approximately 29% compared with 30% last year. All of our wholesale auctions and sales were virtual and are considered online transactions, which represented 17% of the total revenue for the quarter. Approximately 58% of retail unit sales were omni sales for this quarter, up from 55% in the prior year. As a reminder, our omni-channel sales definition incorporates customers who complete some, but not all, of the following transactional activities online. Reserving the vehicle, financing the vehicle if needed, trading in or opting out of a trade-in, and creating a sales order. To better reflect the ways customers are utilizing our digital capabilities to buy a car, Going forward, we are updating our definition of an omni-channel sale to also include customers who complete any of the following steps online. Pre-qualifying for financing, setting appointments, and signing up for notification on cars coming soon. Based on this updated definition, approximately 67% of our retail unit sales were omni this quarter, up from 64% last year. Of note, this does not impact how we calculate online sales since the steps to complete an online retail transaction remain the same. Across Omni and online, our digital capabilities supported over 80% of our sales during the fourth quarter. We expect that our mix of digitally supported sales will continue to grow over time as we add further enhancements to our online tools, customers become more accustomed to leveraging them, and as we improve our ability to track their use. Turning to finance, CarMax Auto Finance or CAF delivered income of $159 million, up 8% from the same quarter last year. In a few moments, John will provide more detail on customer financing, the loan loss provision, and cap contribution, as well as our progress on full credit spectrum lending and increasing caps penetration. At this point, I'd like to turn the call over to Enrique, who will share more information on our fourth quarter financial performance. Enrique?

Thanks, Phil, and good morning, everyone. The momentum we built over the last few quarters continued into the fourth quarter. We achieved positive growth in retail and wholesale units, Increased per unit and total dollar margin, grew CAF income, and had strong flow-through to our bottom line. Fourth quarter net earnings per diluted share was 58 cents, up 81% versus a year ago. Adjusted for a $12 million non-cash impairment within other expense related to an Edmunds lease, EPS was 64 cents, which has doubled from a year ago. Total gross profit was $668 million, up 14% from last year's fourth quarter. Used retail margin of $424 million increased by 9%, with higher volume and per unit margins. Wholesale vehicle margin of $125 million declined by 4%, with an increase in volume offset by a reduction in per unit margins. Other gross profit was $119 million, up 72% from a year ago. This was driven primarily by a combination of EPP and service. EPP increased by $8 million, or $10 per retail unit, as we lapped over the initial rollout of margin increases that took place in last year's fourth quarter. Service recorded a $1 million loss, which was a $44 million improvement over last year's fourth quarter. We achieved this performance improvement through successful cost coverage, efficiency measures, and growth in sales. On the SG&A front, expenses for the fourth quarter were $611 million, up 5% or $30 million from the prior year. SG&A leveraged by 770 basis points, driven by growth in gross profit and our ongoing actions to improve expense efficiency. SG&A dollars for the fourth quarter versus last year were mainly impacted by two factors. First, total compensation and benefits increased by $22 million. Over half of this increase was due to our corporate bonus accrual, with the majority of the balance driven by unit volume growth. Second, advertising was up by $9 million due to timing. This was in line with the guidance we provided last quarter. In respect to capital allocation, during the fourth quarter, we repurchased approximately 1.2 million shares for a total spend of $99 million. As of the end of the quarter, we had approximately $1.94 billion of repurchase authorization remaining. As we look ahead, I'll highlight a few key areas which support our earnings model that Bill will speak to shortly. We are testing EPP product enhancements that will focus on increasing penetration and per unit margins. These enhancements are expected to drive a small year-over-year increase in per unit EPP margin in FY26, with the potential for more expansion in fiscal 27. We expect service margin in FY26 to grow year over year, predominantly in the first half of the year, and to deliver a slight positive profit contribution for the full year, as governed by sales performance given the leveraged, deleveraged nature of service. Additionally, we expect service to continue to serve as a slight profit lever beyond FY26. In respect to SG&A, in the near term, we expect to require low single-digit gross profit growth to lever on an annual basis, including in FY26. This will be supported by our goal of hitting full-year omnicost neutrality in FY26 for the first time, with continued improvement thereafter. We expect all three metrics, per used unit, per total units, and as a percent of gross profit, to be more efficient than pre-OMNI for the full year. This reinforces our pathway back to a lower SG&A leverage ratio with the initial goal of returning to the mid-70% range over time as we see healthier consumer demand. In FY26, we expect that marketing spend will be approximately the same as in FY25 on a total unit basis. With regard to capital expenditures, we anticipate approximately $575 million in FY26. The increase is primarily driven by the timing of land purchases as we experience favorability to our FY25 outlook due to the timing of certain deal closures. Similar to FY24 and FY25, the largest portion of our CapEx investment is related to the land and build-out of facilities for long-term growth capacity in off-site reconditioning and auctions. In FY26, we plan to open six new store locations up from five in FY25 and four standalone reconditioning and auction centers, up from two in FY25. Our extensive nationwide footprint and logistics network continue to be a competitive advantage for CarMax. Now I'd like to turn the call over to John.

Thanks, Enrique, and good morning, everyone. During the fourth quarter, CarMax Auto Finance originated approximately $1.9 billion, resulting in sales penetration of 42.3% net of three-day payoffs, which was in line with last year's fourth quarter. The weighted average contract rate charged to new customers was 11.1%, a decrease of 40 basis points from a year ago, which was reflective of credit tightening and APR reductions executed prior to Q4. Third-party Tier 2 penetration in the quarter was 17.6% of sales, down 110 basis points from last year, while third-party Tier 3 volume accounted for 7.9% of sales, down 30 basis points from last year. CAF income for the quarter was $159 million, which was up $12 million from FY24. This increase was driven by net interest margin, which remained steady from the third quarter at 6.2%, but is up 30 basis points from last year's fourth quarter. Provision for loan losses was $68 million and results in a total reserve balance of $459 million, or 2.61% of managed receivables. This sequential improvement in the reserve to receivable ratio reflects an additional quarter with a more normalized provision, along with the continuation of previous credit tightening. Regarding our full spectrum lending initiative, we remain excited about CAF's continued efforts in this space, as well as the tremendous growth potential unlocked by the broadening of our securitization program. During the month of March, CAF began measured expansion by recapturing profitable portions of Tier 1 originations that we had shifted to our Tier 2 lenders as we tightened lending standards. This adjustment is targeted to grow our penetration by 100 to 150 basis points in the near term and is enabled by our non-prime securitization program, which allows us to efficiently fund these non-prime receivables while retaining the full economic value of the contracts. We were also pleased to successfully execute our second non-prime ABS transaction, which closed in late March and was well received in the market. We continue to learn from our new underwriting models and corresponding tests currently in place and anticipate capturing additional volume across Tier 2 and Tier 3 during the back half of the fiscal year. But, as always, we will carefully monitor the consumer and the broader economy and will adjust our origination strategy as needed. It is worth noting that in the first quarter, we are forecasted to have a larger provision sequentially and year-over-year driven by new origination volumes. This stems from seasonally higher sales and a lower credit quality period, plus the need for additional reserve given the profitable but higher loss nature of the recaptured receivables that I mentioned a few moments ago. As a reminder, we expect this initial impact from building the loss reserve as we grow cap penetration to be materially offset by future income over time. Now let's turn the call back over to Bill.

Thank you, John and Enrique. As I mentioned at the start of the call, I'm pleased with the momentum we are seeing across our business. The associate and customer-facing tools we launched during fiscal 25 are contributing to our results into providing the most customer-centric car buying and selling experience. I'm proud of the steps we took during the year to further differentiate our offering and drive incremental operational efficiencies. Some examples include, for retail, we rolled out a number of new systems that enhance consumer shopping experiences, support conversion, and enable our associates to be more efficient. These include order processing in our stores, customer accounts online, AI-driven knowledge management in our CECs, and EV research and shopping tools on the Edmunds and CarMax websites. Our digital tools enhancements have made it easier for consumers to self-progress in their shopping journey. Sky, our AI-powered virtual assistant, is now able to independently answer over half of the questions our customers ask it, reflecting more than a 20% year-over-year improvement. Additionally, the rate of fully self-progressed online sales grew by 25% across fiscal 2025. For supply, we enhanced both our consumer and dealer-facing appraisal experiences. We are now able to give digital offers to approximately 99% of the customers who come to CarMax.com for an appraisal, and we made MaxOffer even easier to use. This has attracted more dealers to the offering and has driven strong record sourcing volume each quarter. For finance, we began testing new credit scoring models and corresponding strategies across the full credit spectrum, which positions us to further grow cap income modestly in the near term and more materially over time. We also released an update to our finance-based shopping experience that seamlessly incorporates existing instant appraisal offers into our pre-qualification offering, giving customers more precise credit terms. And finally, we continued to focus on driving down cost of goods sold by pursuing incremental efficiency opportunities across our logistics network and reconditioning operations. We achieved savings of approximately $125 per unit this year and anticipate that we will achieve at least another $125 per unit in fiscal 2026. This exceeds the initial $200 target we set at the beginning of fiscal 2025. These efficiencies support affordability as we pass savings on to our customers and also support our margins. In fiscal 2026, we will leverage and enhance our capabilities to drive growth through better execution, innovative offers, innovative efforts, and up-leveled experiences. Some examples include, for retail, we will continue leveraging data science and AI to offer even better digital experiences for our associates and consumers, driving conversion and efficiency. We plan to improve our online vehicle transfer experience and to expand Sky's functionality with additional data and new architecture. In recognition of the breadth and seamlessness of our best-in-class offering, we will also launch a new marketing campaign over the summer that will bring our omnichannel experience and our digital capabilities to the forefront for a broad set of consumers. For supply, we plan to streamline the online appraisal checkout process and expand appraisal pickup availability to new markets. We will also further enhance MAC's offer to attract new dealers, expanding our access to directly sourced vehicles. For credit, as John mentioned, we plan to continue expanding CAF's participation across the credit spectrum to grow penetration and capture profitable returns. Additionally, we plan to modernize the ownership experience on CAF's digital platform, which will enhance customer experience and drive operating efficiencies. Looking ahead, we've positioned the company to achieve ongoing growth in retail and wholesale unit sales and market share with double digit EPS growth for years to come. We're excited about the power of the earning model we have built. Our model is designed to deliver an earnings per share growth CAGR in the high teens when retail unit growth is in the mid single digits. In addition to retail and wholesale unit growth, other key inputs driving our model are strength and other gross profit, caps, credit spectrum expansion, continued operating efficiencies, SG&A leverage, and our share repurchase program. Regarding our long-term goals, we are focused on growing the business and we continue to make progress towards those goals. However, at this point, we are moving the timeframes associated with them given the potential impact of broader macro factors. Before turning to Q&A, I want to recognize two significant milestones. First, Fortune Magazine recently named CarMax as one of its 100 best companies to work for for the 21st year in a row. I am incredibly proud of this recognition. It's due to our associates' commitment to supporting each other, our customers, and our communities every day. Second, we opened up our 250th store during the fourth quarter. Reaching 250 stores across the country is a fantastic accomplishment. I want to thank and congratulate all of our associates for the work that they do. They are our differentiator and the key to our success. In closing, we're excited about the strength of the business model and the opportunities that lie ahead to grow sales and earnings. We are proud to offer customers the ability to progress seamlessly through and across online and in-store channels delivering what our research affirms is the most customer-centric buying and selling experience. This competitive advantage gives us access to the largest total addressable market in the used car space and provides a strong runway for future growth. With that, we'll be happy to take your questions. Madison?

Thank you. And at this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. In the interest of time, we ask that you limit your questions to one at a time. Once again, that is star and one to ask a question. And your first question comes from the line of Sharon Dikthia with William Blair. Your line is open. You may now ask your question.

Hi, good morning. I guess, you know, as we think about fiscal 25 and kind of that tale of two halves where there were some share losses in the first half, followed by the accelerating gains in the second half. As you kind of diagnose that, can you give us some insight into kind of what you think the drivers were between the first half and the second half and why you kind of saw that inflection? And I guess secondarily, as we're kind of staring down this idea of maybe used car prices going up again with tariffs, I mean, what lessons did you learn over the past several years that could maybe help the business more if affordability becomes more challenged again in the industry. Thank you.

Okay, Sharon. On the first question about kind of first half versus second half, look, the main driving factor that we talked about that being in the years, we were coming off of, if you remember, last calendar year, that last quarter, there was a big price correction. Remember, it was the third last and third one that we saw. And when you have those big price corrections, I think if I remember correctly, it was probably around $3,000 in a very short period of time of depreciation. That impacts us a little bit differently. So I think you had that that kind of really worked into the fourth quarter that masked a lot of the things that were providing benefit for the rest of the year. If you think about the improvements, and I cited a lot of them on the call today, but I think there's just a lot of factors. You know, you take We'll continue to make the experience better for the consumers and our associates. We've got better execution. You've got the benefit of efficiency gains and kind of flexibility that gives you both in your pricing and your margin, making sure that you're competitively priced. You know, our inventory acquisition expansion, we continue to set new records with our max offer. It just gives you a wider variety of inventory. And then I think the other thing is this year we've also just seen a more normal pricing environment. So I think there's a lot of things going on there, but I do think that the actions that we've taken are really what's driving the momentum. And I think they were masked a little bit in the first quarter because we were coming off of a big macro factor. As far as your second question goes, I think it was just kind of, if I remember correctly, what have we kind of learned? How are we better positioned now versus previous? And again, I think there's a lot of things that we learned in the last two or three years. One of them, obviously, is You know, we've sharpened our skills. When we came out of COVID, you know, our six to 10 year old cars just wasn't a big focus for us, as big a focus. And that's not really what customers were looking for. And so we had to build that muscle up. So we have more six to 10 year old cars that, you know, over time. I think other things we've expanded the sourcing, which I just talked about. I think John spoke about the ABS bifurcation. You know, if you remember, Tom Connelly- Coming out of coven there's a lot of profitable loans out there, but we couldn't we had to pass them on to lenders, because we had one ABS that required a certain. Tom Connelly- return and certain loss ratio, so you know now having a second ABS I think absolutely helps us preserve some of those sales you like to think all of them get picked up, but some of them won't get picked up, so I think that's. Tom Connelly- that's another one you got the cost improvements that we've been focused on over the last couple years. Tom Connelly- The work that john and his team have done on the fbs and making sure that. we make it very easy for customers to understand their monthly payment and look for options that fit that monthly payment. So I think there's just a lot of great things as well as just the overall Omni experience. We didn't slow down during the last few years. We kept plugging along at it because we knew this is where we wanted to get. So I think there's a lot that goes into that.

Thank you. And your next question comes from the line of Seth Basham. With Wedbush Securities, your line is open.

Thanks a lot, and good morning. Bill, if you wouldn't mind commenting on quarter-to-date used comp trends, that would be great. And then as you think about this macro environment and the potential for new car tariffs driving double-digit increases in new car prices, what does that mean for you guys from a share gain perspective and from a used car industry growth perspective? Thank you.

Good morning, Seth. On the... The comp trends, if I look at the fourth quarter, December and January were very strong. February was a little softer, which we expected, given that we had leap day last year. We also think February was slightly impacted by the delay of refunds. And what I mean by there is, if you remember, probably halfway through February, refunds were off significantly year over year. Now, they caught up pretty much by the end of February, but I think it pushed a little bit into March, as well as we had some weather impacts. Then we get into March and we saw a step up that was a little stronger than the fourth quarter comp, and it continued the whole month until the end of March where we saw some strength, some additional strength, which continued and then accelerated into the first few days of April, which obviously we're early into April right now. From a comp standpoint, first quarter to date, we're running high single digits. Your second question, I think it was on tariffs. Is that correct?

Yeah. New car tariffs if they drive double-digit increases in new car prices. What does that mean for the used car industry and your ability to gain market share in that environment?

Yeah. I think there's a lot of moving pieces here, and I'm sure it's probably changed even while we've been on this call, but there's a lot to watch. You want to look at the new car pricing, the supply. Parts costs, used vehicle supply, just market volatility in general with consumer sentiment. Obviously, as you pointed out, new car prices are definitely going to go up. I think certainly as new car prices go up, that'll put a bigger spread between late model used and new cars. So obviously just the speculation of the tariffs and now the tariffs actually being out there, it's driven demand. I mean, you're seeing it in the franchise dealers. We're seeing it just based off of the step up that I just spoke to. You know, I think it will push some folks into looking at used cars, late model used cars, which is interesting because that's what we're seeing a lot of interest in right now. Now, I think over time what could happen is that the used car prices will also go up. Now, the question is how much will they go up over what period of time? I think the other thing to think about on the tariffs is that impacts our business, as well as anybody that sells used cars, is just the parts piece. When it comes to reconditioning, the parts will be going up. And it just makes our work that much more important on the efficiencies that we're going after on cost of goods sold to offset those increases.

Thank you very much.

Yep.

Thank you. And your next question comes from the line of John Murphy with Bank of America. Please go ahead.

Good morning, guys. I mean, I love hearing about the investment in the recon centers and the auctions because it, you know, gives you more throughput and production capacity. I'm just curious, Bill, you know, as you think about that, does that give you the ability to stay and maintain this presence in the six to 10 year old, you know, sort of car segment of the car population? And could that actually be increased over time and sort of kind of, you know, along that same line? you know, you talk about the 200, you know, in, in cog savings going at, it sounds like now two 50, you know, how much of that do you think you're gonna, you know, be able to maintain as you kind of go through this, the reconditioning and other efficiencies and is, you know, 23 to 2,400, the new 2,200.

Okay. Good morning, John. So, um, on the reconditioning and the auctions, yeah, look, we're, we're thrilled. I mean, that's gonna give us additional, additional capacity, which is why you're seeing that we open up more certainly. We want to have the cars out on the lot. You know, we sell zero to 10 year old cars. We want to have what the consumers are looking for. And if they're looking for six to 10, we're certainly going to continue to, to try to move that mix without sacrificing the quality. I mean, that's something that you and I we've talked about in the past is we don't want to push cars out there. to meet an age parameter that don't meet our quality standards. Because quite honestly, we're fine with taking those cars and wholesaling them. And we don't get the retail market share for them, but it's a great business when you're turning an $8,000 car and making $1,000 every seven days. So interestingly, if I look at the sales mix this last quarter, we actually sold a little bit more zero to four cars than we did older cars. That's not to say we're not pushing on the older cars and putting out those at the consumers. an interesting anecdote that actually the consumers are looking a little bit more for the younger cars this quarter. I think on the $250 efficiency that we're going after, look, I think the big wild card there is just how much tariffs end up impacting parts. I feel great about the fact that we're getting these efficiencies across the system in old stores, in old production centers, in new stores. Um, so I feel good about getting those. Then the question becomes how much will tariffs kind of offset that? Uh, which again, we'll, we're going to continue to focus and, and, and, and go after that. The other thing I would tell you on these reconditioning centers, these offset reconditioning centers, the additional, um, benefit that you get from that is that you now have the cars closer to the stores and the markets, and we put them in, you know, we're putting them in, in markets where we have capacity challenges. And so we're having to pull cars from further distance. for retail. Now with these production centers being closer, you cut down on your logistics, which is a savings that we're going to continue to get whether there's tariffs or not.

Good to hear. Thank you very much.

Thank you, John.

Thank you. And your next question comes from the line of Brian Nagle with Oppenheimer. Your line is open.

Hi, good morning. Nice quarter. Congratulations.

Thank you, Brian.

So I want to – I can step up the question about the quarterly trend business. And you said, you know, Bill, you're running high-cycle digits. It would be a step up from what you did in Q4 and then particularly as you talked about February. So I guess – and I know you're not – I know you don't give guidance. So what I want to ask is, I mean, as you're looking at the business, how should we – particularly against what is a very fluid macro backdrop, I mean, how should we think about the sustainability of that? early fiscal Q1 performance? I mean, do you think it is it is it a catch up from maybe February? Is it does it reflect, you know, potentially people buying cars ahead of time because of tariffs? There is this overall sustainability from your standpoint?

Yeah, first of all, I don't think it's a catch up for for February, I think we probably got a little bit of benefit there. Because, because again, you're not going to get the catch up on the leap day miss, which you will get a little catch up on is the tax refunds a little weather, but You know, that's very small in the scheme of things. So I wouldn't look at it as nearly like a catch-up. As you said, we don't give guidance for the full year, but I will tell you, Brian, I mean, you know, we expect that momentum that we've been seeing for the last three quarters, we're coming into the year very strong, and we've got some good momentum, and we would expect to continue that momentum. Obviously, you alluded to it. I mean, there's a lot that's going on in the macro right now, and it's changing. It's a very fluid situation. We're constantly monitoring it. You know, we're looking at mitigation plans from a part standpoint, all kinds of things. So it's a little hard to speak on the whole year, but I will tell you that we feel good about the momentum coming into this year.

That's helpful. I appreciate it. Thank you.

Sure. Thank you. And your next question comes from the line of Scott Ciccarelli with Truist. Your line is open.

Good morning, guys. Josh Young on for Scott. You talked a bit about the improving market share here in the back half of the year, but with it sitting just under 4% today, what do you think you have to do from here and what has to happen to get closer to that 5% target over time?

Yeah, I think everything that they're working on that I've highlighted earlier on this call, look, our big focus right now is growing sales and robust EPS. And if you do those things, all the other stuff is going to work out great, including market share. If I look at the market share, you know, for this last year. We're gaining market share. We're taking it from other dealers. The interesting thing is you also see where P2P is growing market share when you look at that zero to ten space. And the P2P strength is really in kind of the older vehicles, which you would expect. So I think we're, you know, we've got all the steps in place to continue, as I said, you know, January, which is the latest title data that we have at this point. We're continuing that share gain. And like I said, you know, with Brian, we like the momentum that we're on and we would expect to continue to gain market share.

Got it. That's helpful.

Thank you.

Thank you. And your next question comes from the line of Jeff Flick with Stevens Inc. Your line is open.

Good morning, guys. Congrats on a nice quarter. I was wondering if we could talk about sourcing. In this quarter, you bought 46,000 units from dealers, which is the most you've ever done on a percent basis in terms of improvement or even unit basis. And also, your overall purchase of 269 was 89% of the combined units. I think a big thing going forward, especially in this terrorist scenario, is going to be your ability to source. Could you talk about... both on the dealer front and the consumer front and any evolutions or changes and what drove the pickup there and improvement in Q4?

Yeah, it's a great question. And you're right, I think sourcing is critical. We're very pleased with the MaxOffer product. I think it's a solution that works well for dealers, obviously, with the expansion. When I think about the performance there over the last year, it's being driven by, first and foremost, just dealer expansion. This quarter, we were up from an active dealer standpoint 40% year over year. As I said in my prepared remarks, we also made it very easier for them to use. If you look at the last year, we've got a gradients and offer program for them. We also have one that allows them to take pictures if they'd like us to see some of the pictures that might be unique to that vehicle. We consolidated the vehicle condition information, making it faster and easier. We've made improvements. a dealer may start this max offer on the desktop, but they need a mobile device to go see the car or whatever. So we've made a very seamless transition to go from device to device. So this past year was really about trying to make that experience better. The other thing that I would add is that we've also started to embed it in their inventory management system in the dealership, which just makes it more convenient. And as I look forward to the upcoming year, I think we can still, we've got some improvements, you know, we're working on some landing page improvements, and I think some more integrations into dealers, which will continue to attract dealers. So, you know, we feel good about it. Feel good about the momentum. Awesome. Well, congrats. Yeah, I think you also asked about the consumers. And again, the consumers, as I said in my prepared remarks, you know, we pretty much can give you an offer online now. There's very few cars that we can't. There is a small subset that... you know, we really need to see the car. But, you know, essentially 99% you can get those offers. We've made it easier. I think there's progress. We've got some things queued up there, again, you know, with appraisal express drop-off, appraisal pickup. There's some other things that we're working on there, again, just to enhance that experience and continue to drive incremental buyers.

And in the last two weeks have been kind of crazy. There's been a pickup and conversion at the auction lanes in general. Any comments in terms of Just looking at what we just talked about with Q4, any changes with the last two weeks?

Yeah, well, I think you hit the nail on the head. If you look at the wholesale the last couple weeks, there's a lot of folks out there trying to bid, which again, I think it just makes me feel really good about all of our initiatives on supply and sourcing directly versus having to go that route.

Awesome. Well, congrats and good luck in the next quarter.

Thank you, Jeff.

Thank you. And your next question comes from the line of Gupta with J.P. Morgan. Your line is open.

Great. Thanks for asking the question. I just had to follow up to Jeff's question earlier. Bill, I'm trying to understand, how are you as an organization trying to manage inventory acquisition over the next few weeks, couple months? Given, firstly, there's already a lot of uncertainty around the tariffs. It may happen. It may go away. You know, you're hearing a lot about the auction lien activity. I mean, I'm curious, like, how are you managing your inventory acquisition in that backdrop? I mean, you think you need to be aggressive, or are you just being cautious, you know, just in case, you know, like, tariffs actually don't stick? Ultimately, I'm just curious, like, how is the company strategizing around that? And I have a very quick follow-up on service growth process.

Yeah, well, look, I think we manage inventory better than anybody in the business. We've been doing it for over 30 years. We are very familiar with operating and changing a fluid type of environment. Keep in mind, we have the benefit of professional buyers who are on the ground. They're seeing things coupled with data that we're getting coupled with our own auctions. So I feel really good about where we are, both from an inventory on the ground and our inventory

uh going forward and i i have no doubt that the team will continue to execute it at a very high level um and then you said you had a question on service as well uh yes uh curious what drove the significance like i mean typically seasonally you know we see like a big drop in like service gross profit a curious one drove uh you know the improvement it was just you know, just better productivity, you know, you know, just maybe some like cost takeout, just trying to understand, you know, the cadence there. I know, I think, Enrique talked about like slavish gross profit, a little more than slavish for the full year. So does it mean that, you know, this is going to be less seasonal from here on, on just that cadence? Just curious if you could add any more comments on the service gross profit.

I'll start maybe with your second point. Seasonality will still be in play. So from quarter to quarter, there's definitely still seasonal aspects to it, which is why we expect the first quarter of the year, as I had in my prepared remarks, to be probably the strongest in the year because volume is higher. We'll also be comping over some cost coverage metrics we did last year. But I tell you in terms of why it's getting better, there's really three things that are driving the improvement that we've seen over the past two years now. We've consistently improved our performance and service. Number one is efficiency opportunities that we've driven. We've made investments in technologies like RFID trackers, investments in technologies we can have better reporting in the stores to manage our costs. That's number one. Number two is we have taken cost coverage as well. So to match cost inflation that we've seen, we've had an ability to increase our fees there. And part of that is also driven by what Bill has talked about, the efficiency improvements in COGS and logistics gives us an ability to take some fees there. without increasing the price of our cars. And then lastly, certainly sales being positive helps because service does have a large component of fixed costs. Certainly when you think of all the technicians that we're trying to retain, there is an aspect of fixed costs, especially in the shorter term. So you have positive sales, you know, stronger ability to leverage. And we would expect going into this year to have a year of profitability in service, which we haven't had in several years. And thereafter, too, feeding the earnings model that Bill talked about and our ability to deliver double-digit EPS growth over several years is also because of that as well.

Got it. Great. Thanks for all the color and good luck.

Thank you.

Thank you. And your next question comes from the line of Michael Montani with Evercore ISI. Your line is open.

Yes. Hey, good morning. Thanks for taking the question. Just wanted to ask, I guess, a two-part thing. One was, if you look at historically periods of appreciating prices, what does that typically do for your market share and then also your margins? How would you typically respond there? Because historically, you've called out it can be challenging if we have abnormal depreciation. So if you get appreciation in price does that help you from a share and margin perspective and the follow-up question was you guys had mentioned an eps outlook that includes you know if mid single digit unit growth is there you could have high teen eps growth so i'm wondering if there's anything we need to keep in mind as it relates to that for this current year and then also you know anything we should know about from a timing perspective as we think through quarterly cadence

Okay, so Michael, good morning. On the appreciating price environment, I think for every group that sells used cars, when you're in an appreciating environment, it makes it easier. And I think generally in an appreciating environment, your margins are easier to manage because you're not having to do as many markdowns because, again, you're going to sell the car, and if it's appreciating, the next car is going to be a little bit more expensive. So I think it helps your margin. I think from a market share standpoint, too, it would also help that. So I think that's good. And then your second question was on the model.

Yeah, so from a model, you know, we've spent the past several years, as we all know, investing in our omni-channel model, investing in capabilities, investing in efficiencies, and we feel very confident about our ability at this point to deliver robust EPS CAGR growth for several years at least, talking to high teams, like we mentioned, prepared marks on just mid-single-digit retail sales. And what that's enabled on are strong margins, strong growth in other GPU as well, exceeding retail units. I talked about service. We talked about EPP opportunities. You're also talking about SG&A. You know, we're done with the heavy investment period. We're pivoting from building capabilities to leveraging and enhancing them to grow efficiencies and to grow the bottom line. So we think we are really well positioned to grow. And then you throw in the share repurchase program that we're committed to. That's also going to juice our EPS. And then you take a look at CAF. We're making those investments there in terms of the full spectrum credit that John talked about. Those are also kind of in the shorter term and the medium term and definitely in the longer term accelerators to our EPS growth. So we think we've built a model here that is in this really strong position to deliver outsized returns.

Anything cadence-wise to think about as we progress through the year? Because I think you called out there could be some CAF-related things to keep in mind in the first quarter, but then on the flip side, you also have potentially some benefits from the work you've done in service and EPP.

Yeah, before jumping into CAF, I'll turn it over to John. Certainly from service, we do expect the first half of the year to perform probably better, holding everything constant in the back half, purely due to seasonality. when you think of higher volume and comping over some cost coverage metrics we did last year. So for service, I would expect outsized performance in the front half. And then for CAF, we'll just turn it over to John.

Sure. Yeah, I'd definitely like to take the opportunity to speak to Kate and so on provision coming up. You know, I mentioned prepared remarks that anticipate a sequentially higher year-over-year increase in provision. And just to give some orders of magnitude around that. So I'll jump off Q4. So we had a $68 million more normalized provision in Q4. You're gonna have a sequentially higher provision in Q1 because it's a higher, from a seasonality standpoint, it's a higher volume quarter. It is a lower credit quality quarter. So you can anticipate about a 30 to 35% increase off of that Q4 number simply from that aspect. Couple that with the fact that we said we are going to, uh, we have taken some volume back, uh, that we were giving to flowing to tier two partners, kind of undo a portion of our tightening. So you can add probably another 10 to 15% increase off of the Q4 number there. So you absolutely could see a 45 to 50% increase in provision in Q2 and that can, uh, sorry, in Q1 and that tightening will continue. Uh, sorry, that, that, that increase will continue because again, this is volume that we anticipate keeping. you're going to have to continue to provision for that added volume and taking on. And then, again, we will watch that economy very, very carefully. But the back half of the year, we're anticipating taking in more volume from our Tier 2 and Tier 3 testing. So, again, that would stack on there. All in the long run, a very, very good thing for CAF, but an impact in the near term to our provision.

That's relative to Q4.

And that's relative to Q4 is the key, yes.

Thank you. Thank you. And your next question comes from the line of Chris Bottiglieri with BNP Paribas. Your line is open.

Hey, guys. Thanks for taking the question. So you've done a really nice job taking costs out of the business the last few years. Certainly consistently my own expectations. The question is, though, if the economy slurs from here and sales turn negative to mid-single or high single digits again, does ETFs decline high-teens? very much like the upside or do you have levers left a disposal to continue to collect costs and mitigate the operating leverage?

Yeah, we feel good. A couple of things. I mean, one is we still have room for efficiency improvements. Those are part of our plan, irrespective of kind of the macro economy. We're going after those efficiency improvements. That's number one. Number two is if there is a downturn in the economy, you know, we have pulled levers in the past. You know, we're position to pull those levers if we had to. Again, you're looking at a management team here that's been through quite a few things here over the past few years, so we know how to manage through these kind of environments, whether they're upswing or downswing.

Thank you. Thank you. And your next question comes from the line of John Healy with North Coast Research. Your line is open.

Thanks for taking my question. Just kind of wanted to ask a big picture question, Bill. In the last couple of weeks, obviously, outside of the macro, probably the biggest item on used retail has just been some of the Amazon news. And, you know, obviously, it doesn't appear like they're becoming a retailer per se in the auto space. But would love to get your thoughts about them entering in the fray. And, you know, do you view them as a, you know, adversary competitor, you know, maybe elevating your peers? Or do you view them potentially as a partner? And, you know, would you be surprised if you maybe work collaboratively with them going forward? Thanks.

Yeah, good morning, John. Yeah, you know, I don't think anybody was surprised to see them actually get into this space. They've been kind of talking about it. And to your point, they recently clarified they're more interested in kind of the listings, the lead generation, the advertising. So the way I see it is at this point, it's more like a you know, a facilitator that we, you know, we facilitate with, I mean, we work with a lot of different facilitators. Uh, I would see us as more of a collaboration. You know, we obviously a lot of traffic just through carmax.com, but we also, we work with facilitators to help compliment the carmax.com traffic. And I think that that's the way we kind of view it at this point, but certainly, you know, it's something that we, you continue to monitor. I would also just tell you, it just makes me really glad that we've, we've gone through this pivot to really become an omni-channel retailer, because I think customers are really looking for this combination of physical and digital assets when it comes to buying a car. And it's a big competitive moat that we built, and it's very hard to replicate. So if you're going to get into the used car business, there's a lot that has to be considered.

Thank you. And your next question comes from the line of Chris Pierce with Needham. Your line is open.

Hey, good morning, everyone. Good morning. I just was curious, as you move kind of more into six to 10 less late model because of the opening of the credit spectrum, is that an opportunity for, are you competing against dealers you haven't traditionally competed against at a larger rate and there's potential for a new set of share gains or is like the six to eight year old car now what used to be the two to four year old car because of what's happened with new car production. Like, is this a new competitive set or is it just kind of continuation of the dealers you've been competing against for years now?

Yeah. You know, I think, look, we've always sold one to 10 year old cars. And I think, you know, the, and I talked a little bit about this earlier, the biggest thing that we want to make sure that we do is that whatever we put the CarMax label on, it meets our quality standards. And, and, you know, when you start getting into the six to 10 population, there's a lot of vehicles that just don't meet the CarMax standards. And we're just not going to, we're not going to, you know, flinch on that standard. That being said, though, we've obviously built the muscle to continue to produce that type of car and get it up to the CarMax standard. So, you know, what I would say is it's continuing to compete in the space that we've been in. But quite honestly, You know, it's a space where there's a lot of transactions that happen. You know, I talked about the P2P, you know, consumer to consumer selling each other, especially in the 7, 8, 9-year-old, 10-year-old cars. There's a lot of vehicles in there that just, while it's in the denominator, it's not going to necessarily be in our numerator set. It's just not going to be able to be brought up to the quality standard. So I think that's the thing to think about. And I think the way it enhances is Again, if consumers are challenged on just everyday expenses and they're trying to figure out how to work a budget and they would traditionally buy a three- or four-year-old car, they may be saying, okay, well, I'm going to buy a six- or seven-year-old car, and we want to be able to meet that need. I think it's very similar to the folks that are thinking they're going to buy a new car and they realize, well, I can't get the new car to work in my monthly payment. I'm going to go down to a one- or two-year-old late model car. So I think it's just – It's just kind of an evolution of the business and where the consumer is going.

Just one thing to clarify.

Yeah, just one thing I want to clarify, Chris. You made the comments, you know, as you go full spectrum and go 6 to 10, I think they're relatively disconnected. The fact that CAF is going full spectrum, all we're doing is likely taking some volume from our Tier 2 and Tier 3 partners. We will drive some incremental sales, but – You know, our Tier 2, Tier 3, even our Tier 1 players love 6- to 10-year-old cars. So, you know, I'd separate the inventory needs that we have from where CAF is playing in the credit spectrum.

As well as they love 0-4. Absolutely. You can go back and forth. Absolutely. I'm glad you made that point, John.

Okay, and then just to follow up on that, though, can it be thought of as a GPU tailwind as you move into these – I don't want to say move into these older cars, but maybe as you sell it.

Yeah, I'm sorry. I didn't catch that part of the question. So a GPU tailwind. Look, when you sell older vehicles, they cost more to recondition, but especially in CarMax's case, they're kind of like a unicorn, you know, where it's at the CarMax quality standard. It certainly isn't a commodity. We think the quality is better than others. So, you know, those do bring a little bit more margin.

Okay. Thank you.

Thank you.

Thank you. Thank you. And your next question comes from the line of David Wishton with Morningstar. Your line is open.

Thanks. Good morning. Can you just talk a little bit more about the decision-making process to change the $2 million goal where you just withdrew the timeline completely as opposed to saying, given macro factors, we think it will be more like fiscal 30? Because doing it the way you did, it just seems like it's a bit more pessimistic. And maybe that was intentional or maybe it wasn't. I just wanted to get more clarification. Thanks.

Yeah, it definitely wasn't pessimistic. Look, I think the important thing right now is everybody should know that we're focused on driving sales and driving robust EPS growth. And look, there are a lot of macro factors. And I'll give you a prime example. If you see a highly appreciating market, well, you can get to the $30 billion way quicker. And it's really nothing that we've done at this point. Um, same thing as if you see a slowdown, it may delay the total unit. So it's right now, there's just so much uncertainty out there. Why put a target out there? That's really speculative, not knowing exactly where this environment is going to go. And we just think that that's the prudent thing, but it does not take the focus on what we're going after and those targets. It's just, it doesn't make sense to put a range on them at this point.

Yeah. And just to build on that, like even in our earnings release, you'll, you'll notice like we are focused on growing sales. and focus on growing the bottom line. And I think that's what's important in this kind of environment. And then at the appropriate time, we'll come back with a timing outlook as well. We just need some more stability in what's out there. But again, we are focused on driving sales and driving profitability.

Thanks, guys. Thank you. And as a reminder, if you would like to ask a question today, please press the star and 1 on your telephone keypad now. And your next question comes from the line of John Murphy with Bank of America. Your line is open.

Sorry, guys. I just wanted to sneak one follow-up in. I understand that the long-term goals have been postponed here in the guidance, but you did reiterate the earnings per share growth model, gave an update there. When you talk about double-digit earnings per share growth for years to come, you're talking about sort of that has to come with – you'll get a CAGR of high teens on EPS with unit growth in the mid-single digits. I'm just curious, when you think about that, does that include the normalization of SG&A from this 90% range back down to 70%? Or is that after that's happened? Because if you're taking SG&A down to back to the normal level, I mean, you're really kind of taking some of the growth capital that you're putting into the model, which makes sense. But I'm just curious, is this kind of run rate basis once we've gotten back to 70%, 75% SG&A to gross, or does that include the normalization from 90% down to 70% in that statement?

Yeah, like over time, we expect to get back to the mid-70s. You know, it's going to take us some time to get there. All of that's factored into the guidance that we're providing, right? So we expect that, again, with mid-single-digit retail unit growth, we'd expect a CAGR – of high teen EPS growth. And there's an assumption of STNA kind of ramping down over time, but that's embedded in that guidance.

But to be fair, the gap between 90% and mid-70s, that's analogous to sort of CapEx or growth capital. That shouldn't be viewed as operating. So I'm just trying to understand, is this something that on an operating basis you think you can do once, you know, as, you know, regardless of that normalization of SG&A?

Well, John, you know, unless we got some robust volume this year, I can't see us getting back to the mid-70s this year yet. You know, we stand by what the model, we feel really good about the momentum and think that we can provide great, robust EPS growth, even in the range that we're at right now.

Again, the timing of getting back to the mid-70s, is it embedded in that guidance? And what I tell you is that you mentioned 90, you know, 91% where we ended this quarter relative to mid-70s. Q4 is the high point of SG&A as a percent of gross profit. For the year, we were in the low 80s, right? And so just as a point of clarification.

Okay. All right. Thank you very much.

Thank you. Thank you. And your next question comes from the line of Rajat Gupta with JP Morgan. Your line is open.

Srinivasan Parthasarathy, Great thanks for thanks for allowing me to follow up, I just wanted to clarify because you've gotten some like advanced like to the course of the call. Srinivasan Parthasarathy, You know just on the comments around CAF and provisioning understand the mechanics around the first quarter step up fairly just curious like always was the suggestion from john that. Srinivasan Parthasarathy, You know that level of provisioning will continue to the remainder of the year or into two to three key or it was just. Rashad Mahmood, The fact that you know you know you're increasing the subprime mix or that you're going to mix that will continue just wanted to make sure we're tying those two comments appropriately thanks.

Amit Singer- yeah happy to happy to clarify that Rashad appreciate the question so yeah I think. Amit Singer- If you couple the two things the larger one really in Q1 is certainly the step up in volume and the lower credit quality. nature of q1 so that is going to be the real big driver of the significant growth in the q1 provision again as compared to the q4 provision referring to um and then yes you tack on to there the fact that we are going to capture 100 150 basis points back um at obviously highly profitable but at a higher loss reserve requirement so higher provisioning there now that 100 150 basis points we anticipate keeping through subsequent quarters. And then again, on the back half, we look to tack on more as we continue our testing in the tier two and tier three space. So that will add further, again, different seasonality in different quarters, but I just want you to keep in mind that, you know, that added penetration, added volume from calf going deeper has to be factored into your provisioning going forward. Again, long run, it's a win, but I want you to keep that in mind. And then of course, all, you know, always the overarching comment of we will watch the macroeconomic situation and decide what we do. But I wanted to make sure you keep the added penetration in mind in subsequent quarters.

The other thing I would just add to that, Rajat, because you said something about subprime mix. I mean, what John's talking about here in the near term is taking back stuff that we were originating earlier. I just want to be clear, it's not going into subprime It's basically pulling stuff back in that we had passed off to our Tier 2 partners. Now, later in the year, when we decided to go deeper into Tier 2 and Tier 3, then you could see a little bit of that. So I just wanted to make that distinction.

Understood. Thanks so much for clarifying that. Again, thanks again, and good luck.

Thank you.

Thank you.

Thank you. And your next question comes from the line of Michael Montani with Evercore ISI. Your line is open.

Yes, hi. Thanks for letting me sneak another one in. I was just hoping, could you clarify a little bit more what the Edmunds lease impairment charge was for? And then secondly, when could we think about the added penetration turning into a win? I guess more specifically, can you grow CAF profits if provisioning have to step up that much for this year?

Yeah, I'll take the first one. We have a couple floors in the Edmonds Santa Monica headquarter that we've been actively trying to sublease, really since we acquired them. But it's been a hard market in L.A., as you can imagine. So more recently, an elementary school was impacted by the L.A. fires, unfortunately, and they were in need of space. So we ended up subleasing one of the floors to them. So we were able to find the subleaser while helping the community. So it really was a win-win situation, and that is what drove the impairment there.

Yeah, and my second question, you know, do we see given the provision growth in CAF income? Short answer is absolutely yes. We see growth in FY26 for CAF income on top of the provision that comes from strong net interest margins, obviously mentioning our expenses and all of that. But yeah, we absolutely see growth within the year and then obviously strong growth beyond that as the as the provision is trumped by the overall income we're going to gain.

Understood, thanks for the clarity.

Thank you. We do not have any further questions at this time. I'll hand the call back to Bill for any closing remarks.

Well, great. Well, thank you all for joining the call today and for your questions and support. Again, I want to just congratulate all of our associates for how they've built and enhanced our great culture, for everything they do to take care of each other, our customers, and our communities. And we'll talk again next quarter. Thank you.

Thank you. Ladies and gentlemen, that concludes the fourth quarter fiscal year 2025 CarMax Earnings release conference call. You may now disconnect.