CarMax, Inc. (KMX) Q2 FY2026 Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter Fiscal Year 2026 CarMax Earnings Release Conference Call. [Operator Instructions] 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, Vice President, Investor Relations. Please go ahead.

Thank you, Nikki. Good morning, everyone. Thank you for joining our fiscal 2026 second quarter earnings conference call. I'm here today with Bill Nash, our President and CEO; Enrique Mayor-Mora, our Executive Vice President and CFO; and Jon Daniels, our Executive Vice President, CarMax Auto Finance. Let me remind you our statements today that are not statements of historical fact including, but not limited to, statements regarding 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 2025 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 our quarterly investor presentation, and both documents are available on the Investor Relations section of our website. 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 1 question and getting back in the queue for more follow-ups. Bill?

Great. Thank you, David. Good morning, everyone, and thanks for joining us. Today, I want to start with our priorities. While our second quarter results fell short of our expectations, we remain focused on driving sales, gaining market share and delivering significant year-over-year earnings growth for years to come. We have a differentiated and best-in-class omnichannel customer experience and are focused on maximizing that advantage by driving operational efficiency and sharpening our go-to-market approach. With this mindset, our key priorities include: First, focusing on price and selection. This includes maintaining competitive prices while minimizing macro factor impact and having the cars consumers are looking for at CarMax's high-quality standards. Second, driving consumer awareness of our differentiated experience. This includes not only our new brand campaign Wanna Drive? but also enhancing the conversion waterfall from web traffic all the way to the ultimate buy and/or sell decision. Third, delivering incremental SG&A reductions of at least $150 million over the next 18 months. This will be broad-based, and it includes leveraging technology to drive efficiencies and our Net Promoter Score to new heights. And finally, generating additional profit through components of our diversified business. This includes increasing CAF penetration and profitability in a responsible and thoughtful way. It also includes pursuing other opportunities across our business to drive incremental flow-through to our bottom line. We are already making progress across these fronts and are confident in our strategy and our earnings model, which will produce high teen EPS growth with mid-single-digit retail unit growth. During our first quarter call, I mentioned that we saw an uptick in sales volume in March and April due to the tariff speculation. This impacted our performance in the second quarter in 2 ways. First, we ramped our inventory ahead of the second quarter to support this growth. Across the back half of May through the end of June, we saw about $1,000 in depreciation, which natively impacted our price competitiveness and our sales. Second, while hard to quantify, we believe there was a pull forward of demand into the first quarter. In the second quarter, we responded by lowering retail margin to drive sell-through, and we intentionally slowed buys to balance our inventory with sales. This strategy has worked as both price competitiveness and inventory position have improved since that time and have put us in a better position for the third quarter. During the quarter, we delivered total sales of $6.6 billion, down 6% compared to last year, reflecting lower volume. In our retail business, total unit sales declined 5.4% and used unit comps were down 6.3%. Pressured performance across our age 0 to 5 inventory was partially offset by increased sales in older, higher mileage vehicles. Average selling price was $26,000, a year-over-year decrease of approximately $250 per unit. Second quarter retail gross profit per used unit was similar to last year but down approximately $200 from the first quarter. The sequential decline was more than twice our historical average, reflecting the actions that I mentioned earlier. We will continue to focus on maintaining our price competitiveness, and we remain disciplined yet nimble in leveraging selection and margins to drive sales. Wholesale unit sales were down 2.2% versus the second quarter last year. Average wholesale selling price increased approximately $125 per unit to $7,900 and wholesale gross profit per unit was historically strong and similar to last year. We bought approximately 293,000 vehicles during the quarter, down 2% from last year. We purchased approximately 262,000 vehicles from consumers, with more than half of those buys coming through our online instant appraisal experience. With the support of our Edmunds sales team, we sourced the remaining approximately 31,000 vehicles through dealers, which is slightly up from last year. This quarter's buy performance is a direct result of a decision to pull back offers to right-size inventory. We are no longer intentionally slowing buys and expect to see year-over-year improvement in the third quarter. At the end of August, we launched our new Wanna Drive? brand position campaign that brings to light our unique omnichannel experience. Our Net Promoter Score is the highest it's been since we rolled out our digital capabilities nationwide, driven by record high satisfaction among customers purchasing online as well as those using our omnichannel experience. Wanna Drive? spotlights this unique offering, empowering customers to buy their way, with the clarity, confidence and control to navigate the journey on their terms. Wanna Drive? appears across TV, streaming social, digital and audio and represents the first phase of a sustained multiphase strategy. This approach, which we will complement with increased advertising spend, demonstrates our commitment to long-term brand investment that supports our growth objectives. As previously discussed, we've been focused on driving SG&A efficiencies. We're pleased with our progress so far and have line of sight to at least an incremental $150 million in SG&A reductions over the next 18 months. This does not impact our growth strategy as we will continue to invest in initiatives that position us for the future. Later, Enrique will comment on the anticipated scope of our efforts and the likely timing. At this time, I will now turn the call over to Jon to provide more detail on CarMax Auto Financing and our continuing focus on full credit spectrum expansion. Jon?

Thanks, Bill, and good morning, everyone. During the second quarter, CarMax Auto Finance originated over $2 billion, resulting in sales penetration of 42.6% net of 3-day payoffs, which was 60 basis points above last year. The weighted average contract rate charged to new customers was 11.2% versus 11.4% last quarter and reflects downward rate testing executed within the quarter. While CAF's full quarter increase in penetration appears modest, we believe the tariff pull forward in Q1 negatively impacted CAF share during the early part of the quarter. Since the beginning of the fiscal year, we have made underwriting adjustments that translate to 100 to 200 basis points of growth, but the full realization of this growth can be impacted by noncontrollable factors such as customer credit mix and partner lender behavior. It is important to note that more than half of the impact from these adjustments comes from recaptured Tier 1 segments, but with additional criteria overlay to reduce risk, while the remainder comes from within the top half of the Tier 2 space, which we have been testing over the past year. Third-party Tier 2 and Tier 3 penetration in the quarter combined for 23.8% of sales versus 24.4% last year as cash growth had an impact on partner volume. CAF income for the quarter was $103 million, down $13 million from FY '25. Net interest margin on the portfolio was 6.6%, up over 50 basis points from last year and relatively in line with last quarter. CAF's loan loss provision of $142 million results in a total reserve balance of $507 million for 3.02% of managed receivables exclusive of auto loans held for sale. Of the $142 million, $71 million is attributed to new originations within the quarter, while the remaining $71 million is an adjustment to the loss expectation of the existing portfolio. Also of note, as was seen in the first quarter, there was a reduction on the required provision stemming from $16 million in the reserve allocated to loans booked prior to Q2 now classified as held for sale. The primary driver of the $71 million adjustment on the existing portfolio comes from additional losses anticipated within the 2022 and 2023 vintages. Recall, these customers have been the most impacted by the convergence of rapidly increasing vehicle prices and broader inflation. Despite the observed worsening, these vintages still remain highly profitable at an estimated lifetime profit of $1,500 per unit versus $1,800 contemplated at origination. Additionally, they continue to shrink in size and contribution to the overall portfolio as they are replaced with more recently originated Tier 1 receivables at significantly lower loss rates. Note that 2024 and 2025 post-contraction vintages continue to be right in line with our original loss expectations. Regarding the funding aspect of our full spectrum efforts, yesterday we closed our '25-B transaction, our second nonprime securitization of the year. This was upsized to $900 million in total notes and, for the first time, included the sale of most of the residual financial interest in the transaction to third-party investors, thus resulting in off-balance sheet treatment. We expect the gain on sale to be approximately $25 million to $30 million in third quarter income. We also expect to receive approximately $40 million to $45 million in additional CAF income related to servicing fees and the retained beneficial interest over the life of the transaction. As a reminder, going forward, there will be no loss allowance or provision for this pool of loans. Now I'd like to turn the call over to Enrique to discuss our second quarter financial performance in more detail. Enrique?

Thanks, Jon, and good morning, everyone. Second quarter net earnings per diluted share was $0.64 versus $0.85 a year ago. The decrease was driven primarily by lower volume and the CAF loss provision adjustment. Total gross profit was $718 million, down 6% from last year's second quarter. Used retail margin of $443 million decreased by 8%, with lower volume and relatively stable per unit margins. Retail gross profit per used unit was $2,216, in line with historical average. Wholesale vehicle margin of $137 million decreased by less than 1% from a year ago, with lower volume partially offset by a slight increase in per unit margins. Wholesale gross profit per unit was $993. Other gross profit was $138 million, down 4% from a year ago. This was driven primarily by EPP, which decreased by $6 million driven by lower retail unit volume. Service recorded a $4 million margin, reflecting a small improvement over last year's second quarter. Continued efficiency and cost coverage improvements were partially offset by the deleverage inherent in the lower year-over-year second quarter sales. On the SG&A front, expenses for the second quarter were $601 million, down 2% from the prior year driven primarily by lower stock-based compensation. We continue to realize expense savings, but they were offset by cost pressures in the quarter. SG&A to gross profit deleveraged 350 basis points to 84% as lower volume more than offset lower costs. The continued deployment of AI technology remains a key driver of efficiency gains and experience enhancements across our operations. For example, this quarter, Skye, our AI-powered virtual assistant continue to deliver year-over-year double-digit percent improvements in containment rate, customer experience consultants productivity and web and phone response rate SLAs. We recently fully rolled out Skye 2.0, which leverages agentic AI and expect this release will drive even more efficiency and experience improvements. As Bill noted, we are committed to further reducing our SG&A by continuing to deliver efficiency gains across the business. The investments in technology, systems and processes that we have made as part of our omni transformation will allow us to substantially reduce spend through several key initiatives: modernizing and consolidating our technology infrastructure, automating manual processes, renegotiating and reducing third-party contracts and eliminating redundancies across the organization. The goal of at least $150 million in SG&A reductions over the next 18 months represents a material improvement in our cost profile and reflects the execution on the plan that we have been developing with outside support. While we expect to realize some of these savings this fiscal year, we expect the vast majority will materialize in our exit rate by the end of fiscal 2027. In addition to offsetting inflationary pressures, these ongoing savings will provide additional flexibility to reinvest in areas that directly drive sales, while also serving as a tailwind to our already robust earnings model of a high-teens EPS growth CAGR when retail unit growth is in the mid-single digits. We will continue to provide updates on this initiative during future earnings calls. Looking forward, I'll cover a few items. Regarding marketing, we expect an increase in per total unit spend in the back half of the year, particularly in the third quarter as we appropriately support our new brand positioning launch. We expect service margin to face pressure in the back half of the year due to seasonal sales volumes. For the full year, we still expect to deliver positive margin, which is a direct result of our efficiency improvements and cost coverage measures. Turning to capital allocation. During the second quarter, we continued our share repurchases at an accelerated pace, buying back approximately 2.9 million shares for a total expenditure of $180 million. As of the end of the quarter, we had approximately $1.56 billion of our repurchase authorization remaining. Now I'll turn the call back over to Bill.

Thank you, Enrique and Jon. Our customer-centric car buying and selling experience is a key differentiator in a very large and fragmented market and positions us well for the future. We are intently focused on driving this differentiated and best-in-class experience and doing so with greater efficiency. As you heard from us today, we're actively executing on our key priorities, which include driving sales, advancing innovations to improve customer and associate experiences, bolstering our marketing efforts, increasing company-wide efficiencies and expanding CAF participation across the credit spectrum. All of these priorities will give us added flexibility and strengthen us for the future. With that, we will be happy to take your questions. Operator?

[Operator Instructions] Your first question comes from the line of Brian Nagel with Oppenheimer.

So the first question I want to ask, just with regard to used unit sales. So Bill, if I heard you correctly, it seemed like the most disruptive factor here in fiscal Q2 was -- now was it clearer, a pull forward in demand into the fiscal first quarter. So the question I have is, could you -- are there numbers you can give us to size that better, that disruption? And then as we look -- as you look through the quarter, I know you typically don't discuss sales trends in the quarter, but following that pull forward impact, I mean, has the business -- or have sales got back to a more normal run rate, and what is that?

Yes. So Brian, first of all, like I said, it's actually, we think, 2 factors. And I would put the -- I put the other factor probably first, because it is hard to quantify exactly how much each one is. But my commentary around buying inventory up and then seeing that depreciation happen. I would say that is probably the most impactful. And then the pull forward. But again, it's hard to quantify exactly how much each of those are. For the quarter, each month was down year-over-year, and each month got a little weaker throughout the quarter. Now what I'll tell you for September and month-to-date is that it is stronger than the quarter and any of the months in the second quarter. But when I look at it from a year-over-year, it's still a little soft from a year-over-year standpoint. But certainly, we put ourselves in a better position with the start of this quarter, both on an inventory position as well as from a pricing standpoint.

That's helpful. If I -- could I ask a follow-up?

Sure.

Just with regard to pricing, so CarMax has for a long time talked about having an attractive pricing within the market. It seems to me, just listening to your comments say that you're focusing on this more now, so I guess, is that the case? And then the question I have is, are you seeing something in the marketplace or other competitors are getting more price aggressive that CarMax may have to change some of its stance there?

Yes. I think the pricing commentary, first of all, is you're right, we're always focused on pricing, we want to be competitive. I think in the quarter, we fell into a spot where we weren't as competitive. Again, I feel better about where we are now. And then the only other thing I would add to that is I think we just need to continue to be as nimble as possible when it comes to pricing. And then you saw in the quarter, we saw that $1,000 depreciation over a month period, and we started acting on it very quickly. And there's a lot that goes into that decision as far as what do you do with your prices when you see depreciation, that kind of thing. But I think the takeaway for -- that I want you to hear is that we're always focused on competitive pricing. And certainly, the focus as we go forward is to continue to be as nimble as possible because it's an aggressive environment out there.

Our next question comes from Rajat Gupta with JPMorgan.

I've got a couple. First one on CAF. Last quarter, you had mentioned that you expect CAF income to be up year-over-year for the full year. Could you give us an update on that? And if it has changed? I'm just surprised by just the magnitude of the provision pickup because we had your last earnings call just 2 months ago, so curious like how could it have changed so dramatically for the short period of time? And any color there would be helpful. And I have a quick follow-up on SG&A.

Sure, Rajat. Appreciate your question. First, let's touch on the CAF income. Obviously, as mentioned, there's a larger provision impact this quarter. Also we mentioned we're excited about the '25-B transaction, which will yield gain during Q3. You put all that together yes, we did highlight that we thought there would be increase year-over-year in CAF income. I think we're going to be flat to down, obviously 2 more quarters to go, but flat to slightly down. But I think there's some nice trade-offs that are occurring there. Obviously, all disclaimers with how does the consumer perform, how our sales come in, because that would yield provision originations for us. But I believe that gives you a little flavor on the income cadence. Regarding provision, it's certainly a fair question. I'll give a little color on what we saw for the quarter beyond what I did in my prepared remarks. So let's highlight the '22 and '23 vintages. That customer, as I mentioned, high ASP, certainly a higher APR environment, higher overall payment they were seeing. They come into the purchasing cycle with excess cash from COVID and they hadn't fully experienced inflation yet. So we had a lot to learn about that customer. Initially, we saw some -- again, we're coming off of incredibly low trough loss rates of '19, '20, '21 vintages, so hard to gauge how there's '22 and '23 vintages were going to perform. We saw an increase in losses initially, but that's not surprising because it's coming off of trough lower vintages of those previous years. So as we watched that customer perform, we saw it and thought maybe it was a pull forward in losses. Ultimately, as we saw a little increase, so maybe a timing curve adjustment, and then we watch that customer begin to struggle and continue to struggle a little bit. We made some adjustments that we thought were very smart for the consumer and smart for us, and that has proven to be the case. And that was we adjusted our extension policy in the fall. We saw more payments come in, had we otherwise not done that, so we were pleased to see that, but we had to watch that play through. We saw some of those customers coming back into delinquency and loss during Q1. It's obviously a tax time season as well so it's a little muddied. So we did make an adjustment in Q1. And we wanted to watch it all play through. We saw some good performance initially with, again, those extensions, we wanted to see how much was going to come back in delinquency. And unfortunately, during the quarter, we saw more revert back to delinquency and loss. That being said, we've made a significant adjustment this quarter, as you see. We made what we would say a sizable adjustment last quarter. I think we have a much better handle on where these guys are going to land because we've watched these extensions play through almost completely at this point. Also, if you look at the totality of those vintages, you're about 2/3 of the way through those vintages. So there's about 1/3 left. So it's really going to ultimately play through. There's more to come, but it really has played through. And then if you look at these '24 and '25 vintages, we are extremely pleased with those. So we're watching those losses early on. We're now 12, 15 months through there, and that stuff is right on the mark from what we expected. So yes, I hate to have to make an additional adjustment. I think there are a lot of confounding factors that had to play out. We feel like we have a much better understanding of them. And then I'll end with, and again, just as a reminder, these things are incredibly so profitable. $1,800 was maybe what we anticipated, $1,500 because of these loss adjustments, roughly $0.5 billion we're going to achieve in lifetime value across the '22 and '23 vintages. So a lot to say there because I wanted to explain what was going on there, but hopefully, that answers your question.

That's helpful color. And just on the SG&A, could you elaborate a little bit more on the areas of cost reduction? I'm curious because it seems to me that a lot of these might be tied to the omnichannel support function because you've already gained good productivity on your in-store salespeople. I'm curious like should investors be worried that these actions might hurt your ability to recover some of the share loss that you've seen? I'm curious like how do you balance those 2. And also like what's the offset from the pickup in advertising?

Yes. No, absolutely, Rajat, I'll jump into it. We do not think it's going to impact our growth strategy. As I noted in my prepared remarks, our investments in technology, systems and processes are really going to allow us to rationalize our costs. So very specifically, I'll give you some examples. So we have a stronger ability to retire legacy systems. We have an ability to lower licensing usage as we either need less of them, or we can eliminate certain functionality as well given our investments in technologies such as chat due to investments in Skye. We've become even more efficient in our call centers, and I have been talking about that for quite a few quarters at this point in time, able to automate manual processes and leverage AI to even more frequently review third-party contracts. So these are just some of the examples that will help us take out that $150 million. And if you'll note, those examples don't really impact our growth strategy. And part of our thinking as well is that there is a portion of these savings, and again, it's $150 million, at least $150 million, that we do expect to direct back to investments that have a direct tie with sales, such as an example this quarter would be marketing. We are going heavier up in marketing, appropriately so, to support our new brand positioning, and that would be an example of something that we're going to go invest in. I do think it's important to remember, right, that we had been in investment mode as we transformed our company into an omni retailer. But once you're done with that, the next step really is to optimize and then rationalize that spend, and that's where we are.

It's not a net $150 million reduction. Is that a net number that you can give us?

Yes. So it's going to be net of any ongoing SG&A expenses to accomplish that number, but it's not net of any kind of onetime charges that we may end up having to incur. But it is net of ongoing expenses to realize those savings.

No, I meant like net of like investment in other areas like advertising and other sales initiatives...

Like I said, there will be part of those dollars that will be reinvested back into the business to drive top line sales. However, that being said, we do expect just the SG&A savings to be a material tailwind to our already robust earnings model.

Our next question comes from Sharon Zackfia with William Blair.

I wanted to go back to Brian's question on price. And as you think about -- and I know you're talking about reinvesting some of the SG&A savings, and back in 2019, which seems like forever ago, you had talked about kind of maybe targeting some lower GPU to drive incremental sales. So kind of putting that all together, is there a thought process or a strategy about taking kind of the bulk of the $150 million and really reinvesting it to the consumer and price or selection to drive the top line? Because it does feel like the consistent market share story that we had in the past has kind of become much more volatile post pandemic.

Yes, Sharon, I think you're thinking about it the right way, but I would expand on it a little bit. I mean the $150 million in SG&A reductions, as Enrique pointed out, some of that we will reinvest directly back into things of driving sales. The other piece I would tell you, which is another reason why we're focused on key priorities, just being able to generate additional profit from other parts of the business because that also gives you flexibility and allows you to reinvest some of that in pricing. So again, I think it goes back to Brian's initial question that we want to be as nimble as possible, make sure that we're as competitive as possible, and we feel like we're going to have several levers to be able to do that.

Bill, can I just follow up? Do you think there's price elasticity of demand that if you were more aggressive on price, you could stimulate sales in a profit accretive way?

Yes. Look, there's always elasticity when it comes in -- we've talked about this before. We know pretty much because we're constantly testing when you take prices down a certain dollar amount, we know what you get for that. So what you have to think -- the way we think about it is that when you look at the price elasticity, there's a lot of things that go into that equation. So for example, your variable expenses. So the better that you're doing in your variable expenses, it makes that equation easier. The capacity of your operational workforce. Are they at the capacity? Are they not at the capacity? Are you having to pay people for unproductive time? Your ancillary profit attachment, how well we're doing on things like ESP or finance. So there's a lot of things that we look at to decide, okay, does this make sense? And that equation changes depending on the market factors. I mean even without taking some of those things, the elasticity will change just given what competitors are doing. So we will continue to be nimble. We will continue to make improvements in some of these other factors because, again, that makes the elasticity pay off.

Our next question comes from Chris Bottiglieri with BNP Paribas.

Two questions on credit for me. So the first one is, can you elaborate on the servicing fee of $40 million, $45 million? I would think there's probably some servicing costs to achieve that servicing revenue. Just wondering if you could help us think through the cost since receivables won't be on the balance sheet but the expenses will be. And then bigger picture question on credit. Like you guys are normally really conservative, really prudent guys historically. You're kind of pushing into deep subprime now. The market's, I think beyond your control, is getting a little bit weaker. Just wanted to kind of like test to resolve, like how committed are you to pushing into subprime right now just given the macro backdrop? Is it something that you're going to pull forward into regardless? Or if macro keeps worsening, are you going to maybe hit the brakes a little bit?

Yes. I'll start off and then I'll pass it over to Jon. I just wanted to clarify something on deep subprime. Jon in his comments talked about going into really the top half of what we call the Tier 2. So we're not talking about deep subprime. So I just want to have some clarification there. And then, Jon, I'll let you add just to that end, to the first part of the question.

Yes, Bill is kicking me under the table because we wanted that one. Yes, I mean we want to make that very clear. I mean it is not the subprime at all. Again, we have been in Tier 3 space, and we have experience there and all that. But again, we're trying to be very prudent, to your point, Chris, of how we go down when we go down. Now make no mistake, there is money to be made there. We have partners that make tremendous profit there. You need to price it right, provision correctly, service correctly. We believe we're learning how to do that. So -- but yes, I wouldn't characterize it as deep subprime. There's a lot of penetration to be gained as we inch our way down there, no doubt about it. To your first question on the expenses, just to step back, if I take the opportunity to speak to the overall program. Again, we are super excited because it ties to the first question, the full spectrum nature. We have laid out a plan, and I think we have gone after that plan. First, it was, hey, we're going to bifurcate our securitization program. We've done that. We've executed multiple deals now there. We said we were going to recapture volume in Tier 1 and expand into Tier 2. Again, we're being very prudent about that. Then we announced that we plan to do a deal where we're actually going to sell the future residual interest in that deal, and we've done that very, very successfully. So we are super pleased. This was supposed to give us flexibility, obviously, give us insight into what a deal like this looks like, and we've, I think, hit on all of those. That being said, we've enjoyed the gain -- we'll enjoy the gain that we're going to see a $25 million to $30 million, and you highlight -- we also referenced the additional value to be gained on the servicing side and, again, future interest there. On the expense there, yes, there is a little additional volume to be gained from the servicing side. There was a cost to us, but yes, we will make additional value there. Enrique, anything you want to add?

Yes. And Chris, you'll see the servicing income. It will be broken out in the CAF contribution line, so you'll get a good view of that kind of on a go-forward reporting, and while the servicing costs will be embedded in kind of your cost to do business, right? And so that's how it will be reported, and you'll see that moving forward.

And the $40 million to $45 million also includes retained...

Also the income from the 5% retention as well, the 5.5%. So we expect that will continue as well. So all in all, like Jon mentioned, we're really pleased with the deal and the execution of the deal out there and really proud of the teams in getting that done. And as Jon mentioned, this just fits our overall strategy, and we are executing on that strategy.

Got you. Okay. Is most of the income coming from the beneficial interest or from the servicing fees? I mean, do we like to mention that a bit at all?

Yes. It's coming from kind of a mix.

Yes, it is.

Okay. Okay. Thanks for clarifying, you probably did say that in the prepared remarks today, I probably can misspoke there. So thanks for clarifying that.

Our next question comes from David Bellinger with Mizuho.

Can you help us walk down the path back to positive unit comps and what the time line could be there? And Bill, you mentioned the aggressive environment. So maybe if we take this up to the industry level, is the used car market just getting materially worse in your view? Are there some macro cracks forming with these CAF adjustments? Or any other signals of a more strained consumer? Or do you think this is more of a competitive element here in Q2 versus other players in that sector and something that you guys have to invest against going forward? Just help us piece all that together.

Yes. So when I say aggressive environment, I wouldn't say it's necessarily more aggressive than last quarter. It's been aggressive for a while. I think the strained consumer, look, I think we are seeing where consumers, especially your mid to high FICO customers, they seem to be sitting on the sidelines a little bit. And we just measure that by just pure app volume. I think we're seeing that with -- it's a little bit of a headwind in September, but that's not unique to us. We've talked with our finance partners and they're seeing something similar. So again, I think -- and even that, consumer has been distressed for a little while. I think there's some angst, the consumer sentiment isn't great. But again, I think we've put ourselves in good shape and I think the priorities that we're focused on will continue to pay dividends. As I think about the full year, we set out this year to gain market share. And look, through the first half of the year, we feel good about it, through the calendar June, which is where we have data through. I would just caution people when you're looking at June, July and August, it's tough on a year-over-year comparison just because of the CDK outage last year. But we're not backing off of our stance, like we started this year going after market share. And at this point, I don't see a reason why we would back off that. We expect to gain market share for the full year. So hopefully, that adds a little color.

Yes. David, I'd love to just jump in on the consumer just to highlight a few things, again, the cracks as you said. Look, I think there's something incredibly unique about the 2022 to '23 consumer, and it is an industry issue. You look at other lenders out there, they would tell you, those are some tough vintages. It's kind of the perfect storm of high ASP and probably an overconfident consumer coming in with they think they have plenty of cash, they get hit with inflation. If you look at the '24 and '25 consumer, they're just more eyes wide open walking in the door, prices have come down a little bit, the interest rates have come down a little bit. Typically, people that buy in a more stressed environment, perform usually better. Now again, we think we have reserved. We watch very carefully how those guys are performing. And we know they might perform worse than maybe pre-COVID, but I think that '24, '25 consumer is going to just be a better one.

Yes. So I think to your point, David, the second quarter kind of event, that would be a second quarter event, truing that up and we feel good about where we stand on that. We know that that's getting to be less and less of a population. As Jon said, the extensions are kind of back in, and that's really what this was to clean up on. So we feel good about where we are there.

Our next question comes from Scot Ciccarelli with Truist.

This is Josh Young on for Scot. So as we think about the slowdown in sales here, is this a function of you just aren't getting people into the top of the funnel? Or is it more you get them in there, but then they're kind of falling out of the bottom? Just any color on how you guys are thinking about that would be helpful.

Yes. No, look, our web traffic is up year-over-year. Our conversion, as you go down the funnel, is actually improving. I would say the biggest opportunity -- and some of it I think we can control and some of it we can't control. And that's really kind of web traffic to what we call a selling opportunity. Does the customer do something that we can then kind of start the process versus just folks that have come to the website that are just viewing cars? Some of it is going to be that we can't control because there's going to be some folks who are just -- they're window shopping. Others, I think we can control, and just how well we do in the presentation on that first initial glance, how we make the website stickier at that top of the funnel. So I think it's a little bit kind of macro, but I think there's absolutely some improvements we can make.

We will move next with David Whiston with Morningstar.

Kind of staying on that question, I mean, maybe help me fill in some blanks here because, I mean, it sounds like at the beginning of the quarter you wanted to -- the tariff -- the juicing of demand didn't really happen in the quarter, so you were trying to clear to get rid of that depreciation. But you're saying web traffic was up year-over-year and conversion is improving, yet your unit volumes were still down over 5%. And used prices have been elevated for a long time now. Is the consumer just staying away or is it that they're still having sticker shock despite this many quarters of elevated pricing?

Yes, David, so just for a clarification, the web traffic is up. What's down for us would be what I would call selling opportunities. Once we have a selling opportunity, the conversion, we're actually seeing some good improvement in conversion just down through the rest of the funnel. So the opportunity really is when a customer hits our website, actually getting them to do something on the website. And again, some of that, I think, is in our control, some of it is not in our control. You're just going to have folks that are coming in there and really, well, either they're just looking or they just -- they're not ready to buy. So that's kind of the clarification of your question between, well, your traffic is up, your conversion is up, why aren't you seeing more sales? That's why.

And again, I would say not all traffic is considered the same. A 780 comes through the door versus 580 comes through the door, they convert at tremendously different rates.

And high quality is down even at the very high end of premium, right?

Well, yes. What we're seeing is that the higher FICO customers, the app volume is down. And that's a core customer of ours. And really, you're seeing that kind of -- and Jon, keep me honest on that, you're probably seeing it probably 600 and above is probably down. Certainly, at the high end, I think the one area that's maybe not down is probably low FICO, 550 and below.

Right. And I think, again, I don't think we're alone there. We can talk to other lenders, other dealers, you can see it in the credit bureaus, it's apparent.

Our next question comes from Jeff Lick with Stephens Inc.

I was wondering if you could talk about the concept of the reserve inventory that you guys do. My understanding is it's at the most 7 days. It's usually around 7, but not always 7. But our records or just our analysis shows that roughly about 40% of your inventory at any given time online is reserved. It appears that this just takes a unit that is probably attractive because someone's reserving it, so someone else who wants it doesn't see it or it's at the back of the queue. I'm wondering your thoughts there in terms of how that's affecting sales and if that's a policy you're looking at changing.

Yes. No, look, I think there's both reserve inventory and there's inventory that can't be transferred. I think the reserve inventory generally is inventory that has a customer that's basically interested in that inventory. And that's obviously when you've got a customer enrichment that's interested in a car in Pennsylvania, we think that's a huge benefit that, that customer can actually get that car. So that plays into our transfers. I think the only thing that we'd be looking at there from a reserved inventory standpoint is just making sure that we're being active on how long a consumer can actually hold the car or reserve the car, and that the transaction is progressing. On the vehicles that our label is not transferred, the only reason they're not transferred at that time is because it's generally related to title issues. In some states, you can sell them. So you'll see it on our website, "Hey, this can be transferred," because you can sell that car without a title in that state. But there's other states you cannot sell a car without the title. So we're not going to transfer that car in that case. And then once the title becomes available, it certainly can be open for transfer if it's still around. So those are the 2 buckets we think about that would bring just kind of your overall available inventory down.

And do you, I'm assuming you won't disclose this, but in terms of the amount of sales -- of the percentage of people that are reserving, I'm wondering what percent actually buy versus it goes back in? So how much of the inventory actually kind of sits out of view of the next potential buyer for 7 days?

Yes. I mean we haven't gone in to the specifics. But obviously, there's -- we look at the economics of that. The other thing I'd let you know is even on the reserved inventory, consumers can still express interest for it and say, "Hey, please let me know if this does not actually pan out with that customer." Keep in mind, when you think about the reserved inventory, 1/3 of our sales are through transfers and they go through the reserved inventory process. So you're absolutely right, we go through an economic decision. And where we are with that is we feel really good about it. Can we add a little extra friction just to make sure that cars aren't held for reserve over 3 days? Sure. But that's a small enhancement.

Our next question comes from Michael Montani with Evercore ISI.

I just had 2 questions. The first question was really around the credit trends. Can you just give us some more color in terms of the progression that you saw playing out throughout the quarter when you think about kind of delinquency rates, and then how we should be thinking for provisions into the third quarter? And then the other question -- let's do that and hopefully get to the other one.

Sure. Yes, I appreciate the question. Yes. If you look at delinquency rates for the quarter, there's definitely a seasonality trend that you're always going to have to observe there. So you're coming off of tax time into Q2. It ramps up delinquency, will ramp up through the rest of the calendar year and then back down through delinquency time typically. But all in all, if you look at overall delinquency rates, we're really looking at it by vintage. We're looking at it. Are they as expected? They're often not the best indicator of ultimate loss, timing of loss, what have you. But if I think broadly through the quarter, aside from again, those vintages that we adjusted on, as you can imagine, the delinquency trends on the newer stuff, and even the older stuff that's more seasoned, continued to be in line. So again, we feel very positive as we're going to -- as we continue to put on that, again, lower risk tightened stuff that will perform well. So hopefully, that addresses your question.

And Mike, I think part of your question too was just on the kind of provision as we go forward. And I think the way to think about that, I mean, you saw what our provision was for originations this quarter, you saw what the -- what we're calling the true-up is. I think the way you should think about it is the provision this quarter for the new originations, I think that's pretty representative. We'll -- just with the stuff that we're going into, it might be a little bit higher, but we feel good about the true-up. So for provisions, Jon, you can certainly speak up, but we would expect it to be more...

Yes. You saw the $71 million this quarter. Again, you can go back and look at where we didn't have outside strips where it was. Probably lean a little higher considering that we are, again, going after a little bit lower in the credit spectrum. So that's going to require a higher upfront provision. But yes, hopefully, the true-ups are going to be minimal. That is our goal through this. We feel like that older stuff is rolling off. So yes, I would think you'd see more in that $70 million, $80 million, certainly south of $100 million range from a provision standpoint.

And like Jon said, right, what we're seeing in the '24 and '25 vintages is they are meeting our expectations in terms of what the loss trends are. So what we're really talking about here, and we've taken a material hit to our provision this quarter, so what you're really talking about is the provision for new originations that Jon and Bill just spoke to.

Okay. And then the follow-up question, that's helpful, was just around some of the cost savings. So you had called out $150 million which could work out to somewhere around $200 a car here potentially as reinvestment fuel, if you decided to do it. And then on the COGS front, I believe you've said in the past that there could be another $100 or $200 there as well. So I just wanted to understand, is that separate and distinct? Am I kind of in the ballpark there in terms of some of the COGS opportunity? And then kind of bottom line, if it does require several hundred dollars of reinvestment into sharper pricing, is that something that you all are committed to doing in order to kind of reinvigorate the top line?

Yes. So okay, a lot in that question. Let me tackle the COGS and the SG&A. You're thinking about that the right way. They're separate, separate initiatives. So on the COGS side, if you recall last year, we were going after -- over a couple of years, we were going after $200 in COGS savings. Last year, we actually got $125. At the beginning of this year, we actually talked about going after another $125 for this year. So we're ahead of where we thought we'd be from a $200 goal. I will tell you, we're still on track for that $125 for this year partway through the year. And that is a separate and distinct initiative versus the SG&A savings. So we don't want to get those 2 mudded up. To your question about, hey, would you be willing to reinvest all of that back in to be -- to make sure that you're competitive, what I would tell you is yes. But I would also tell you, I don't think that's necessary. I think that we'll be able to take some to the bottom line, absolutely, but we'll invest some of them back an appropriate amount. And as I'd tell you right now, I don't -- I can't see a scenario where you'd have to take all that savings and put it back into price. But again, I also want you to know that we're going to continue to be price competitive.

Our next question comes from Chris Pierce with Needham.

Just kind of following up on that question, I guess, we talked a lot about pricing in the quarter, pricing going forward, is this something that should we reset our -- because you guys have sort of reset GP expectations kind of higher with your performance. Does this conversation around pricing mean that investors should maybe reach that GPU expectations modestly lower? Or is it too soon to tell? Or how kind of intertwined would those be?

Yes. No, Chris, it's a great question. And what I had said at the beginning of the year is from a modeling standpoint, you can kind of think about year-over-year on a retail GPU will be similar. I also said, hey, any given quarter, there's going to be some puts and takes. And I think that's what you're seeing here. I think we still feel comfortable for the year as a whole to use that kind of retail GPU target. But what I will tell you is, if you think about the third quarter, if you look at last year's third quarter, it was a record high. So I would expect us to certainly come off of that from last year and be more kind of in the historical range. And I think you didn't ask it, but I think you can think about wholesale being the same way on a year-over-year, I think you can keep that target that we talked about being very similar. But similar to retail, last year's third quarter, wholesale was one of the strongest, probably the top 2 or 3 GPUs that we had in wholesale for a third quarter. So I would expect to come down and be more in line with kind of historical averages on that one for the quarter.

Okay. And then just I might get my years wrong here, but at the end of '22, I believe it was calendar 2022 when you guys had too much inventory at that period in time and dealers were being more aggressive on price and it kind of took you longer to work through because you wanted to hold margin versus pricing and there was sort of a longer reset to your inventory level. I just want to confirm that's sort of not what we're talking about here because of kind of your commentary about September and this being more onetime. Or I guess I'd just love to hear you kind of talk through that, and apologies if I got the dates wrong, given your -- in terms of kind of quarters.

You actually did get the dates wrong. Really I think what you're referring to is the big depreciation event, which we saw in calendar '23 and '24. I believe there was one in -- end of '23 and there were 2 in '24, that we worked through. And just to remind everyone, on those events, it was about -- for each of them, it was about $3,000 in each of the event over a few months. So the degree of it was different back then than it is here. And this event, a couple of different things. One, it was $1,000 over about a month period, and then you saw some stabilization. And then we're also going into a period where you're going to see generally seasonal depreciation. So we wanted to make sure we get -- we got through that. But yes, those events that you're talking about, basically at those times, you look at the elasticity with all the things that we talked about earlier that go into that equation, and we held our margins a little bit more because at the time that made sense. This one actually, it made sense, let's get this stuff through. And so again, we'll tackle these things as they come up.

[Operator Instructions] We have a follow-up from Rajat Gupta with JPMorgan.

Just want to follow-up on CAF, just going back to the commentary on still expecting flat to slightly down. Could you help us a little bit more on the third quarter? You're going to get the gain on sale from the $900 million, but you're also going to lose like a quarter of net interest income on that $900 million, so almost like a wash. Is that the right way to think about it? Just if you could give us a little more color on how you'd get to still flat income? Even if you have like $80 million provisions in the third quarter and maybe the fourth quarter, just hard to bridge that.

Sure. Yes. I think you've got a couple of things going on there. First, yes, you've got the income, but you're going to realize that all upfront, whereas again the receivables you're going to no longer have there. You were going to gain that income over time. So that's a bit of a pull forward. Your overall NIM will be impacted. There's no doubt about that, Rajat, you're correct. But yes, obviously, when we look at the provision going out, that's a key piece of it. But again, you're bringing on higher NIM receivables as well. So I think that's helping benefit you to bring that NIM back up in the -- probably by the fourth quarter off of where you are in the third quarter. So I think all that's playing together.

Yes, I think you got servicing income, you have the 5% retention. So there are things that should provide a tailwind.

Yes. And again, I'd probably say it's more slightly down. Again, a lot plays into what's the origination provision, where is the NIM, where the losses go ultimately. But yes, I'd say probably slightly down more than flat.

For the full year, not for third quarter.

No. For the full year. So take last fiscal year, this fiscal year, that's what I'm referring to.

We do have another follow-up from Brian Nagel with Oppenheimer.

So my follow-up question, I think we've discussed this in the past, but did you notice anything with regard to -- I'm looking at used car unit demand, anything notable with regard to kind of the different type of vehicles? I mean was there a stronger trend, high end, low end, that type -- and does anything shift as we push here through the fiscal year?

Yes. I think a couple of observations. I mean I still -- just the industry as a total, you're seeing older vehicles, like if you look at older vehicle registration, older vehicles being older than 10-year-old -- 10 years old, that market segment is doing better than the 0 to 10. In the first quarter, I think we kind of had a barbell effect where your under $25,000 cars were up year-over-year, but so were like your $40,000 plus. This quarter, pretty much everything was down. The under $25,000 was, as a percent of sales, was up a little bit over last year. But as far as the other ones, they were either down or a little bit flat. So you still picked up some more as a percent of sale in the under $25,000 car.

And then, Bill, to that end, I know you've been merchandising different, so to say, to reflect the consumer preferences. But so as you look forward, is there -- are you pushing further into that older inventory within the system?

Yes. Look, we've obviously, Brian, been focused on this. I think if we look at the -- what we call that [ValueMax] sale, let's call it 6 years and older or more than 60,000 miles, we had a bump-up in sales in that. We're up -- if you look year-over-year, we had a nice little tick up, which means we had more of that available. I think our goal will be to continue to have more of that available. But I also think that we have to make sure that there's also a good selection of later-model used cars as well because that appeals to a lot of CarMax customers also. So you can't go to -- at some point, you have the benefit that you get of having older, higher mileage will be offset because you don't have some of the vehicles that the core CarMax customer is looking for. So we'll walk that -- we'll walk that line.

Thank you. And we don't have any further questions at this time. I will hand the call back to Bill for any closing remarks.

Great. Thank you, Nikki. Well, listen, thank you for joining the call today and for your questions and your support. As always, I just want to thank our associates for everything they do to take care of each other and the customers and our communities, and we will talk again next quarter.

Thank you, ladies and gentlemen. That concludes the Second Quarter Fiscal Year 2026 CarMax Earnings Release Conference Call. You may now disconnect.