CarMax, Inc. (KMX) Q1 FY2027 Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter Fiscal Year 2027 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 Mr. David Lowenstein, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Bo. Good morning, everyone. Thank you for joining our fiscal 2027 first quarter earnings conference call. I'm here today with Keith Barr, President and CEO; and Enrique Mayor-Mora, Executive Vice President and CFO; and Jon Daniels, Executive Vice President, CarMax Auto Finance. Let me remind you our statements today that are not statements of historical fact, including, but not limited to, statements regarding the company's future business plans, prospects and financial performance are forward-looking statements we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our current knowledge expectations and assumptions, and are subject to substantial risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, we disclaim any intent or obligation to update them. 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 and our annual report on Form 10-K for fiscal year 2026 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 one question and getting back in the queue for more follow-ups. Keith?

Thank you, David. Good morning, everyone, and thanks for joining us. Since our earnings call last quarter, I have continued spending my time across the entirety of our business, listening and learning while engaging with our associates, customers and investors. These conversations have reinforced my understanding of both the strengths that differentiate CarMax from our competition and the opportunities we have to execute better strengthen our performance and reach our full potential. We have an award-winning people-first culture and iconic brand and irreplaceable national footprint and meaningful digital capabilities. No company can replicate these assets at scale. When fully harnessed this combination enhances our competitive advantage and will drive our market share growth and financial returns in one of the largest consumer markets in America, and one that remains highly fragmented. Our objective is clear: deliver strong unit and earnings growth that enables us to consistently reward our shareholders. However, it is also clear there are some areas that have impeded our ability to perform to our full potential. Our core operations are not yet fast and efficient enough. Retail prices and selection must continue to improve and our costs remain too high. Further, our digital experience is too complex and not seamlessly connected to the in-person experience. When a customer arrives at one of our stores, we do not make it as easy for them as it should be, given all the steps they have taken online. This has put friction in the customer experience, ultimately impacting conversion and preventing us from fully leveraging our unmatched scale and store network. We know exactly what needs to change, and we're moving forward with urgency. Today, I'm introducing our strategy for growth built around 4 pillars that place the customer at the center of everything we do and are designed to meaningfully improve how we operate at scale and support consistently strong performance. The first pillar of our strategy is great offering. We will give customers every reason to choose CarMax. We will ensure our pricing remains competitive across demand cycles while we both grow our saleable inventory and provide customers faster access to our vehicles. For example, to further improve our price competitiveness, we are incorporating competitive market insights within our pricing algorithms more granularly with a stronger emphasis on local data points. Additionally, we are expanding comparison points across a broader set of vehicles to sharpen our individual unit pricing. Our second pillar is easy experience. We will make it easy to do business with us through a seamless experience. Industry research as well as our own shows that customers want digital convenience combined with an in-store connection. Buying a car is one of the biggest financial decisions someone makes, and they have a strong desire to see, touch and test drive a vehicle that will be part of their daily lives for years to come. We see significant opportunities to better integrate our digital capabilities with our stores to improve conversion and the customer experience. Our near-term focus is to simplify communication with customers before they arrive in store. To enhance their readiness to progress upon arrival and to provide associates with the tools they need to drive conversion. Our stores reach 85% of the U.S. population, which gives us access to the largest total addressable market. As a result of this initiative, we expect more customers will visit our stores, and we will sell more cars. Our third pillar is to add value on each transaction. This pillar focuses on growing profitability by maximizing value across all aspects of our business and incorporates our cap full spectrum ambitions as well as the extended protection plan redesign initiatives that are already underway. Regarding cash flow spectrum, progress will be measured by our ability to grow penetration and drive longer-term profitability. For EPP, progress will be measured by margin expansion over time. On both, we have shown progress this quarter, and I expect it to continue. Our final pillar is run lean. We will reimagine our cost structure to enable a great offering. Initiatives already in flight include reducing reconditioning costs through technology and operational efficiency while continuing to deliver the high-quality vehicles customers expect from CarMax. We are also working to enhance our logistics network and are continuing to reduce our SG&A. Our focus is to self-fund more competitive vehicle prices through more efficient operations, rather than a combination of lower GPUs and efficiency gains as we are doing this year. We continue to make progress in this area. In terms of logistics, we are focused on reducing unproductive transfers, resetting our network design and optimizing fleet utilization across CarMax and third parties. We intend to reduce costs and improve our network for increased speed. Regarding SG&A, last quarter, we increased our fiscal year 2017 exit rate savings target from $150 million to $200 million. We remain on track to achieve this target and will continue to drive for expense efficiencies. We are moving at pace with this strategy. While this work will take time, we are encouraged that the progress our teams are making across the 4 pillars is already translating into improved trends that we expect will continue this year. In respect to our first quarter, retail unit sales reflect the near-term steps we have been taking across pricing, marketing and conversion to strengthen the business and drive performance. On a year-over-year basis, and against our strongest quarter from fiscal 2026 and we delivered slight growth. Additionally, we levered SG&A on a total unit basis, expanded CarMax Auto Finance penetration and increased extended protection plan margin, all while improving our year-over-year EPS trends. Enrique and Jon will speak to our first quarter performance in detail in a few moments. As I previously stated, our objective is clear. delivered strong unit and earnings growth that enables us to consistently reward our shareholders. This begins with improving our unit growth by enhancing our customer value proposition through greater affordability and broader selection and higher conversion. At the same time, we will strengthen earnings power through an improved digital and in-store experience with our stores serving as a structural moat. We'll have a more efficient operating model, deeper customer relationships and better utilization of our differentiated scale advantages. Together, these outcomes will strengthen our market position and create long-term value for both our customers and shareholders. We plan to hold a strategic update this fall, where we'll provide more detail on key initiatives and milestones. I'm excited about our strategic plan and I'm confident about the opportunity that lies ahead. Now I'd like to turn it over to Enrique to discuss our first quarter financial performance in more detail. Enrique?

Thanks, Keith, and good morning, everyone. We are encouraged by our performance trajectory as we are showing clear improvements in our year-over-year sales and earnings trends. As Keith noted, we also made progress on SG&A reductions, expansion of EPP margins and CAF. During the first quarter, we delivered total sales of $8 billion, up 6.2% compared to last year. Across our retail and wholesale channels, we sold approximately 392,000 vehicles combined, up 3.3% versus the first quarter last year. In our retail business, total unit sales grew slightly, even as used unit comps were marginally down 0.8%. We delivered this sequential improvement in year-over-year sales despite comping over our strongest and tariff supported prior year period retail comp of 8.1%. Sales performance this quarter was supported by more competitive vehicle pricing, an increase in strong ROI acquisition marketing and by initial progress toward the 4 strategic pillars that Keith spoke to earlier. Average selling price was $27,288, a year-over-year increase of $1,168 per unit. Wholesale unit sales were up 8.4% versus last year's first quarter. Average wholesale selling price increased by $405 per unit to $8,364. First quarter net earnings per diluted share was $1.31 versus $1.38 in earnings in the first quarter of last year, a strong positive change in year-over-year trend relative to the preceding 3 quarters. Total gross profit was $854 million, down 4% from last year's first quarter. Used retail margin of $501 million decreased by 10% and driven primarily by lower profit per used unit of $2,177 which was down $230 per unit from last year's record high first quarter. In managing margins more dynamically, we lowered GPUs by less than the $300 per retail unit guidance we provided last quarter as we balance demand, margins and efficiency gains in our reconditioning processes to support sales. Wholesale vehicle margin of $169 million increased by 8% from a year ago, with higher volume and relatively flat gross profit per unit of $1.46. Other gross profit was $184 million, flat to a year ago. As Jon noted, during our fourth quarter call, we began in the first quarter, our national rollout of our EPP product redesign, focused on providing our customers with more affordable options and also offering a new wheel, tire and dent product. EPP unit margins grew slightly in the first quarter, and our full national rollout is expected by the end of this quarter. We are on track to drive approximately $35 per unit in incremental EPP margin in FY '27. CarMax Auto Finance income of $140 million was down 1% year-over-year. Jon will provide detail on CAF in a few moments. On the SG&A front, expenses for the first quarter were $635 million, down 4% from the prior year quarter. SG&A levered by $118 per unit or 7% to $1,619. SG&A dollars for the first quarter versus last year were mainly impacted by 2 factors. First, total compensation and benefits decreased by $25 million, driven by the actions we have taken to reduce SG&A. In the quarter, both lower CEC and corporate overhead payroll drove the year-over-year favorability. Second, advertising expense increased by $8 million, reflecting higher acquisition marketing spend in support of sales and buys. First quarter year-over-year SG&A reductions were in line with the related full year expectations we set out in the fourth quarter earnings call. As Keith noted, we are on track to deliver on our $200 million savings target and we continue to drive toward expense efficiencies. Regarding capital allocation, our priority remains funding the business to drive strong unit and earnings growth that enables us to consistently reward our shareholders. At the same time, we will continue to maintain a disciplined approach to our capital structure, including managing our net leverage to preserve efficient access to the capital markets for both CAF and CarMax overall. Our leverage in the first quarter remained slightly above our targeted range. Returning capital to our shareholders remains a critical piece of our value creation plan, and our intent is to do so at the appropriate time. I will now turn the call over to Jon to provide more detail on CarMax Auto Finance and our continuing focus on full credit spectrum expansion. Jon?

Thanks, Enrique, and good morning, everyone. During the first quarter, CarMax Auto Finance originated $2.4 billion, resulting in sales penetration of 43.3% net of 3-day payoffs, an increase of 150 basis points versus last year. The weighted average contract rate charged to new customers was 11.3%, relatively in line with last year's Q1. Third-party Tier 2 penetration was 15.7% and versus 17.7% last year, and third-party Tier 3 was 9% versus 8% a year ago. This significant increase in CAF penetration has been signaled previously and is a direct result of our enhanced funding and underwriting efforts. Of note, CAF was the largest Tier 2 lender during the quarter, further demonstrating the progress we are making in our full spectrum efforts. CAF income for the quarter was $140 million versus $142 million earned in the same period last year. The loan loss provision was $96 million as compared to $102 million in FY '26. The net interest margin on the portfolio was 6.7%, an increase of 20 basis points year-over-year. Once again, this quarter, credit losses were in line with our expectations. Our loan loss provision of $96 million largely reflects expected charge-offs on newly originated loans and results in a total reserve balance of $475 million or 2.95% of managed receivables, exclusive of auto loans held for sale. Note, there was a $25 million benefit to this quarter's provision stemming from loans booked prior to the first quarter that were classified as held for sale in Q1. We remain confident in CAF's ability to deliver significant added long-term value to the organization. Our full spectrum capabilities continue to strengthen and our evolving ability to deploy a diversified funding approach as needed, provides us with tremendous flexibility as we increase CAF's penetration. Ultimately, this planned growth, coupled with our EPP efforts directly supports our focus on maximizing value on each transaction and will provide future income potential for both CAF and CarMax. Now I'd like to turn the call back over to Keith. Keith?

Thank you, Jon. I came to CarMax because I saw a strong foundation and a significant potential to unlock growth. Three months in, I am more convinced than ever that this is a business with everything it needs to thrive. The work ahead is about removing what has held us back. The strategy we lay out today is not aspirational and is already in motion. Our 4 strategic pillars set us up to better leverage our strengths and scale to drive strong profitable growth. We will provide a great offering, giving customers every reason to choose CarMax. We'll provide customers an easy experience in their shopping journey. We will add value on each transaction by growing profitability across all aspects of our business, and we will run lean by reimagining our cost structure. While we are still early in this journey, we are encouraged by the progress we are already seeing. As I look ahead, I am confident that CarMax is uniquely positioned to build on its leadership position and create significant long-term value. We have a clear strategy, a strong foundation and a team that is committed to delivering for our customers and shareholders. Thank you for your time and continued interest in CarMax. I look forward to speaking with you next quarter and providing you with a more fulsome strategic update in the fall. With that, we will open the line for questions. Operator?

[Operator Instructions] We'll go first this morning to Brian Nagel with Oppenheimer.

Nice progress. Congratulations. And then the first one to ask, I want to focus on, I guess, the shorter term in nature, so I apologize. But just on the GPU and sales. So as you talked about in your script, we saw GPU down. Let is less than $300 a bit more than usual here in the fiscal first quarter. So in the quarter we further question is maybe 2 parts. I mean one, I mean, as you look at the business, how much by resetting this GPU, how much of a benefit do you think there was to use unit sales? And then secondarily, as we think about in GPU going forward. Have you found the sweet spot? Or should we expect further tweaks here to get to that sweet spot?

Yes. Thanks, Brian. I mean I think the work that the team kicked off late last year, focusing on pricing really started to build momentum in the business. And we've been further sharpening our focus on that aspect of it too. And so clearly, getting our pricing right on a competitive basis has had a positive impact, building momentum into sales. And we expect that momentum to continue throughout the year and continue to outperform the broader market, too. So definitely has a positive impact, having our -- the right car at the right price is definitely having a positive impact on our comp sales, and we expect that to continue throughout the remainder of the year. I'll let Enrique talk a little bit more detail about GPU.

Yes. So by GPU, look, if you recall last quarter, in the near term, we've guided that this year requires some margin concession to support sales growth. But beyond that near term, our goal is to self-fund strong competitive positioning through more efficient operations rather than lowering GPU, so we can sustain price competitiveness without hyper pricing profitability. And I'll tell you what, we're off to a strong start. We came in better than the guidance we gave you at the end of the fourth quarter and we're going to continue to track ahead. And this is really a benefit of managing our business more nimbly with more flexibility within the quarter. So rather than being anchored to certain and running the business around that. We're actually managing to the business and the demand that we see ahead of us within each quarter. So you can see the results here in the first quarter. Again, we're off to a really strong start for the year. In terms of other sales drivers on the quarter, like I talked about in my prepared remarks, we did increase our spend on marketing, and that's another area, certainly, that as we manage the business more nimbly rather than being anchored to a certain marketing investment per quarter based on total units, reacting to what we're seeing in the market ahead of us. And so we saw an opportunity to invest in accretive marketing, acquisition marketing, and we did, and that supported our sales as well.

We go next now to Daniela Haigian with Morgan Stanley.

Similarly, more near term since we have the bigger strategic update this fall. Thinking about SG&A, it improved per unit quite nicely, but you have ad spend, as you cited, is up year-on-year, and you've also talked about investing in improving the digital experience. How do you think about balancing the increasing OpEx in those 2 items relative to those $200 million exit rate savings. And so when you think about, on an absolute basis, net-net, how does that compare year-on-year?

Yes. I'll tell you for the year, coming out of the first quarter, we're exactly where we thought we would be when it comes to SG&A savings, we knew the first quarter was going to see actually some year-to-year benefit largely driven by the cost reductions to our CTCs, to our corporate overhead reductions, and we saw that there. But in terms of the full year guidance that we provided last quarter, we're not moving off that for the time being. We do expect to see the full $200 million savings reductions by the end of fiscal year '27, but the guidance I provided last quarter still applies to this year, which means for the balance of the year, we could see a little bit of pressure when it comes to year-over-year SG&A. But again, we are on target for the $200 million exit rate. And Daniela, we continue to be focused on SG&A efficiency opportunities along the way.

We go next now to Craig Kennison of Baird.

Keith, I think you mentioned too many unproductive transfers. Can you shed more light on that issue?

Sure, I'd be happy to, Craig. When we think about kind of our growth strategy and kind of each one of the pillars, one of the key areas is making sure we have the right car at the right location. And transfers are a significant portion of our business. We transfer over 2 million cars a year. And so unproductive transfers are -- have 2 fronts in my mind. One is resetting our logistics network and how we become more efficient in taking costs out of our logistics network, but then also being crystal clear about how do those transfers then turn into sales and making sure we're not having unproductive transfers and holes. So really understanding because that impacts our saleable inventory. So really, really focusing on, are we transferring the right cars to the right location for the right customer and making sure we turn more of those transfers directly into sales, thereby reducing our overall cost in logistics. By reason, our cost and logistics, it underpins our ability to then remain competitive in pricing. So they're all interconnected.

We go next now to Rajat Gupta with JPMorgan.

I just wanted to clarify a comment earlier along the GPU. It looks like first quarter came in ahead. Are you suggesting that the full year is probably going to track better than the original $200 decline guidance. Just wanted to clarify if that was what you had implied. And then just one more for Keith. Do you think the business has turned a corner in terms of market share recovery? And should we expect the business to -- given the actions you've taken on price and marketing, are we at a point where the business can -- as a company, CarMax can start to gain share for the rest of the year and moving forward?

Yes. Well, thanks, Raj. I think we've definitely turned the corner. When I joined CarMax, I saw the potential for growth in this company and how to become increasingly more competitive. I think the team is aligned behind that fact. And our ability to really understand deeply the key drivers of performance and how we can action against those and getting pricing correct to effectively drive increased comp sales and sustain that momentum year after year and again, outperformed the BARDA marketplace. So to answer your specific question, your question specifically, yes, I think we turned the corner, and we're very focused on the fact that this business should continue to grow market share on a sustainable basis going forward.

And regarding Rajat, regarding your question on like full year guidance for GPU. At this point in time, it's early in the year. We know we have a volatile business, right? We're not coming off the full year guidance at this point. But as we know, as we're managing within the quarter, if there are opportunities to give up less margin, we certainly will do so, as you saw in the first quarter here, while also balancing demand and reconditioning efficiencies which we are seeing in our operations, which is great support for margin management as well. But for the full year, right now, not coming off necessarily guidance. We'll give you an update next quarter, right, for the full year, but it's still early in the year.

We'll go next now to David Bellinger with Mizuho Securities.

I wanted to touch on GPU again. 2 specific comments you made in the prepared remarks about being price competitive across demand cycles and also managing margins more dynamically. So how should we interpret that? Is there the potential for more quarter-to-quarter variability in the GPU and maybe a strategic change where CarMax is much more proactive in moving up or down GPU targets quarter-to-quarter in order to match the used car cycle. Is there a way where we could see more variability going ahead in the GPU?

Yes. Great question. And again, pricing was our immediate priority, which started last year. And we've continued to be focused on that. And clearly, the input there is going to be how do we reduce our cost to make sure we have the flexibility to flex our pricing to be competitive in the marketplace to maximize sales, but also adding in changes to our pricing algorithm. So historically, we've had a lot of insight into demand for CarMax. But now our pricing algorithms are incorporating market demands and also unit demand specifically. So we're understanding kind of pricing by markets, pricing by vehicle types. So we can be more dynamic. And so what we're going to be focused on is how do we flex GPU to maximize sales and profitability rather than being tied to a fixed GPU quarter-to-quarter-to-quarter. But again, we're standing behind our $200 reduction in GPU for the year, but we'll continue to focus on how we continue to improve upon that. But yes, there will be more dynamic movement in our pricing and how we maximize sales and profitability going forward. which happens in many, many other industries.

We'll go next now to Sharon Zackfia with William Blair.

I guess there were a lot of things underlying the strategic plan kind of going from becoming more fast and efficient to improving selection to decreasing friction and improving conversion. I guess when I think about all of those, do you have the right people and processes in place? Is there one area where there's going to be significant investment to get to the other side and which of these do you view as kind of the lowest hanging fruit as is that you can influence quickly and which kind of maybe is tougher and takes longer to get to the other side.

Yes. Well, great, Sharon. Thank you very much. I've been incredibly impressed with the team here. I'm 3 months and a day into the role. And I just continue to be impressed with the subject matter expertise and the passion that this team has. But in the corporate office, but actually probably even more importantly, our associates out in the field are just exceptional. So we've got the right people. There are a number of issues in the business that you've identified here when talking about pricing and selection and so forth, logistics. And we have real clarity and talk more about it in the fall about some of the core initiatives that underpin each one. And we already have actions underway against almost all of them and have made great, great progress. I think the 2 areas that we're focused on the most right now has been really ensuring our pricing remains competitive. And so that's how do we lower our cost of goods sold. And the team have, again, a significant number of initiatives leveraging technology, leveraging processes and more to come on that they continue to make sure that our costs stay in control, so our pricing can be competitive. And then it's -- we're continuing to reduce friction in the digital experience and have it be better connected to our stores where the magic really happens at the end of the day. And just to give you a couple of tangible examples. And so reducing that friction in the digital journey, we basically improved the entry point for our customers arriving from online ads. We've made it easier to navigate our website to get towards prequalification and reserving a car. We've effectively shifted away from sticker prices to monthly payments. We've integrated AI-assisted both in our digital experience and in our CEC. So all these things are happening right now to reduce friction and make it easier for our customers to do business with us. But most importantly, as Enrique said earlier, our focus is to run lean as an organization and making sure that we can self-fund these investments. So we're not coming out today saying there's significant increases in new investments in the company. We believe we have the capacity to do that today to move the business forward.

We go next now to Jeff Lick with Stephens.

Keith, I was wondering if we could drill down a little bit more on the concept of the dynamic pricing dynamic GPU management. This is obviously something that in your past life you have a lot of experience with, obviously, you can always get an extra hotel room reservation if you take the price down from $500 to 400, but the problem is, is that you've got to give the $400 rate to everybody that would have paid $500. I'm just wondering how you're thinking about that now in the context of the used car business, your business and the data that you're seeing now?

Yes. I found it, Jeff, to be probably the most fascinating thing to get into. I have a background in pricing and revenue management in my previous life and understanding the similarities and the differences between the 2 because, as you noted in the hotel business, we have an asset if we don't sell it today, we can't sell it tomorrow. In the case of the car business, we have an asset depreciating in value over time. And so really trying to understand how do you maximize the profitability of that asset and maximize the kind of the efficiency of our overall inventory. And so historically, we had very, very complex pricing algorithms and a lot of demand, but it was really very margin-based pricing. And I think what we're shifting to more is kind of understanding how do we flex margin based upon maximizing demand for consumers by bringing in external data, like I mentioned earlier, bringing in that external market data into our pricing algorithms, understanding for individual types of vehicles into our pricing algorithms. So where do we have pricing flexibility where we can maximize sales and where should we actually hold firm in our pricing because we can maximize profitability. So that could lead to some variability in GPU, but maximize profit over time. And it's an area where we've got a fantastic data sciences team, and we're continuing to invest in that space and expand upon how we think about our algorithms and evolve them over time because there's definitely opportunity in this space that can sharpen up our pricing, but it has to be underpinned by getting our costs in the right place on a consistent basis.

If I could just ask a quick follow-up of Enrique. Enrique, there's that a good chunk of your other gross profit came from the servicing parts. Do you -- or service business, could you just explain the kind of the mechanics of how that works? Because, obviously, a lot of us aren't quite familiar here with how that actually flows through given you don't have a traditional service and parts business.

Yes. Service actually for the quarter was strong. Last year, we provided a fair bit of guidance and updates in terms of how we expected service to actually return to profitability and it did last year. We expect the same this year. I'd tell you, this quarter, there wasn't enough of a year-over-year increase to really have note and talk about. But I think the way to think about that is basically, it's the labor behind reconditioning and then we apply fees to that labor in order to cover the cost of reconditioning is how to think about it. And so this quarter, it's a business that levers very strongly in the market and when sales are strong, it will lever very strongly. And then seasonally speaking, when sales get weaker, you deleverage on more of a fixed cost kind of basis. So that's how to think about the service line.

We'll go next now to Alex Perry of Bank of America.

I just wanted to follow up on the marketing and project actually and ask about the shift in the strategy. How much do you think the investments in acquisition marketing supported the sequential comp improvement. Will you continue to lean into this even more going forward? You expect sort of advertising as a percent of revenue to trend higher from here? And how should we be thinking about that?

Yes. Great. It's a great question. Look, we're -- as I mentioned earlier, we're running the business more nimbly than we have in the past. And in the case of marketing, that means we're less anchored to a specific dollar per unit and more tied to the opportunity to drive incremental sales that have a strong ROI in the period that we're managing. This period we saw with strong demand Again, we were comping over last year, which was a positive comp, and we still delivered overall flattish, slightly up used unit growth. We saw a strong demand, and we managed to that. And so the marketing team does an exceptional job of identifying where we can kind of invest in dollars. We have strong processes around do we think that's going to drive incremental sales? And is it going to be profitable? And that's what we did this quarter. I would expect to continue to manage that way from quarter-to-quarter as we also take a look at GPUs and other factors driving sales. And if it's a lever we think we can pull and if it's accretive to the bottom line, then we'll -- that's what we're going to do.

I'll just add on to that a little bit, Alex. One of the things I was really impressed with when I came into CarMax was the caliber of the marketing talent we have from a data analytics perspective. and the way that they're focusing on high ROI marketing and being real time, talking week after week, we're sitting down as a team talking about what's happening in terms of sales, what's happening in terms of the broader marketplace, how are we positioned in terms of pricing what's happening just more broadly across the business and determining how we want to invest our marketing dollars to support both sales and also buys, which is an incredibly important part of our business model, too. And so it's dynamic and it's real time. So as Enrique said, we're just not locking into saying we're going to spend this much money this quarter irrespective of what's happening. We're looking at it week-to-week, month-to-month and making sure we're maximizing profitability and sales.

We'll go next now to Scot Ciccarelli with Truist.

So you had a $230 drop in GPU on about a $1,200 increase in ASP was the ASP looked a driver of the better-than-expected GPU in the quarter? Or was that all from lower reconditioning cost? Just how do we reconcile those guide points and then secondly, for John, I guess, just a clarification. Can you provide any more color around the $25 million benefit to CAF this quarter?

Yes. Regarding our ASPs and use. I mean we were up there really 2 drivers. One was just overall acquisition costs were up in the marketplace that drove it. The second component was mix. We had a little less older cars in the quarter. Demand was strong around kind of the younger cars, kind of our core offering, if you will. And those are the 2 factors that drove kind of ASPs being up -- average is price being up year-over-year.

Great. Scot, I appreciate your question on the $25 million. Yes, just to clarify, that was a held-for-sale transaction we executed within the quarter. when we execute a hub for cell transaction, those are receivables that we no longer need to provision losses for if we originate them in the quarter or if we originate in prior to the quarter. This is prior to the quarter, we had receivables that were on our books, we had provisioned for losses and those receivables were then included in this '26 transaction to the tune of about $25 million of expected loss year in essence allowed to release that from your reserve that offsets the within quarter provision.

Got it. And then Enrique, my question was really on the GPU side, though, like what the ASP lift and impact driven by the -- what the -- excuse me, the GPU impact, was that partly driven by the ASP increase?

Yes. Those are run independently. I mean the ASPs are going to be run independently on how we run our margins. They're not related.

We'll go next now to Michael Montani with Evercore ISI.

Just a question for Jon. If you could talk a little bit about the underlying health of the consumer that you're seeing from a credit perspective on delinquencies and roll rates. And then if you could discuss how to think about provisioning and NIM really into fiscal 2Q?

Yes. Great. Appreciate the question, Michael. Yes, I think overall consumer -- I guess I'd have to lead with the fact that we feel really good about how we are viewing the consumer that's on our books that receive our receivable base, how we have reserved. I think that was captured in the prepared remarks. This is our third quarter in a row where we've really kind of hit the losses as expected. The consumer overall, I think you can see in the industry, certainly, they are -- continue to be pressured by overall inflation if you look at delinquency rates among credit cards, auto, all that, it is higher. But again, we feel like we have an excellent handle on that, and that's captured. If I think about provision for us in the quarter in each successive quarter going forward, a very logical question. How do you model that? The guidance I would give you is to anchor on origination volume. The way I think about that is for every point of penetration that CAF takes, that's roughly $50 million to $60 million of receivables. If that's Tier 1 receivables, we're setting aside probably $1.5 million to $2 million of provision. If that's Tier 2 receivables, we're setting aside about $10 million to $12 million of provision. And to put that Tier 1 versus Tier 2 in perspective, right now, we're about a 1 to 9 ratio. Tier 2 is about 10% of what we're doing. Tier 1 is about 90% of what we're doing. So you kind of can do all the arithmetic there and say that's probably what I'm originating in the full total of the origination provision I'd have to set aside. Notwithstanding, obviously, we are executing hub for sale transactions that is -- really shows our flexibility from a funding perspective that fluctuate from quarter-to-quarter. But again, that's the flexibility that we love, and we're able to execute on that. And then obviously, the last piece there is what is our view on the macro environment is our view on the adjustments on our existing book. Again, we feel really good the last few quarters on how we've provisioned and reserve for our existing book. But that's how I'd build it. I build it from overall origination provision make a perspective on held for sale and then the broader adjustments that you might need to make macro in existing book. That's how I build provision.

And just the NIM side, do you think that 67% is the right rate or a 20 bps improvement year-over-year? Or how should we look at that?

Yes. Obviously, we love the 67%. I would say there's a seasonality component to that. this quarter benefits from a lot of days in the quarter, just the 3 months that are included. So I'd probably gauge more to like a 6.5 would be the way I think about that in the future, the rest of the year.

We'll go next now to Chris Bottiglieri with BNP Paribas.

I actually have a similar question to Mike, I want to ask you anyway. Can you just talk about the drivers to the allowance? So that's set up pretty big despite like a big tax refund season. Just trying to get a sense, is that -- you also mentioned the benefit from transferring loans to held for sale. So trying to understand like the step-up in the allowance rate. Is that just mix because of you're pushing more to subprime? Or is there some level of underlying weakness just given like delinquency rates in subprime that you're provisioning for. Just trying to understand the buy.

I appreciate the question, Chris. Yes, that's a tough metric. We provide it, and I think it's important we provide it as we have over time, but it's absolutely not weakness in the book of business. Again, I think we've said our losses are within expectation, and we've reserved accordingly. I think you've got 2 main things going on this quarter. Number one, there's absolutely a seasonality component. It's tough to describe, but if you look at our traditional Q1, all things being equal, like that will be a step-up in overall reserve receivables. Number two, absolutely you touched on it. We're adding Tier 2 volume. I mean very proud of what we've done, that growth and penetration coming from that Tier 2 space. I just referenced what do you have to add from a provision and ultimately in the reserve from a point of penetration in Tier 2. So that's absolutely going to take you up. And then the third component you also touched on that's going to cause it to fluctuate is what have you done from a held for sale perspective. So it can move around a fair amount, but this quarter, predominantly, again, seasonality and that Tier 2 growth.

That's really helpful. And then I just want to follow up on Keith's comment on the $2 million transfers. What do you think the biggest opportunities are there? My napkin math is probably like around $1 million in a quarter of transfers from like customer pay, wholesale transfer stores without recon centers like auction source vehicles. So it seems like there are some potentially extraneous transfers. Just kind of curious what you guys see the opportunity is and maybe just kind of explain under the current old would be helpful.

Yes, we'll do a deeper dive on that piece of work, and we do our strategic update in the fall. But just to give you a little bit of color now, we really need to look at the entirety of our logistics network and really understand what's the most efficient way for us to move vehicles and also how to leverage our own logistics network and also the third parties, too. So we're kicking off a significant piece of work around that through understanding of what should our logistics network be and making sure it's scalable as we continue to sell more cars year after year, buy more cars year after year? How do we have a network that scales efficiently and keeps our cost in control and also making sure that we really understand why are we moving cars from point A to point B? And are those true -- again, is it enabling us to sell a car at the end of the day or are the unproductive transfers. And so just getting a lot sharper about that. We've already got some initial work being done, but some significant work is about to kick off, which I'm really, really excited about. And again, we'll give you more details in the fall. But again, we see it as an opportunity in 2 fronts. One is we can have more cars available to our customers. So increasing our saleable inventory and the time available on 1 day, 2 days and 4 days. So that increases our saleable inventory and also will lower our cost, which means kept our pricing competitive, too.

We'll go next now to John Babcock with Barclays.

I just want to ask, obviously, 2 parts of selling vehicles. I mean 1 is getting the price, right? The other is obviously having the right vehicle. From that standpoint, I just want to know what are you doing to ensure that you have the right mix? And also, how is this reflected in the pricing algorithm and how you plan to adjust that going forward?

Great. Yes. I mean it's almost a week 2, I was talking to the team. It's right price, right car, right location are the foundational things for us to have a successful business and really understanding that. And so we have really great customer insight in terms of what vehicles are in demand and how does that vary across the country. And that then directly feeds into our buying strategy and understanding these are the vehicles we have to buy and then get them into our reconditioning to make it in our saleable inventory. So -- and that will change throughout the cycle. I mean, right now, for example, it's only a small part of our business. But clearly, there's a move towards hybrids and EVs from a number of consumers. And so our buy teams are out there focusing on making sure we're efficiently buying hybrids and EVs to get those into our saleable inventory more quickly. And again, that will change again where we are within the country and throughout the year. So making sure, again, that we're just really understanding that external input of what is consumer demand and how does that feed into overall, again, our acquisition strategy underpin our sales strategy.

Okay. And if you don't mind a quick follow-on. Are you able to talk about the impact of fuel prices on your results in the quarter?

Yes. The fuel prices will hit us in our COGS really, right, when you're looking at our operations. But the teams have done a phenomenal job of overcoming those cost pressures in our reconditioning processes. And again, actually preconditioning savings in COGS is one of the reasons this quarter, we were able to manage to a less of a margin give up, if you will, to support sales. So they were easy to very easy to overcome this quarter.

We go next now to Chris Pierce with Needham.

We've talked about pricing, getting the right car, et cetera. I guess can we just hit on pillar #4, run lean. I'd love to kind of hear what you found about the recon side of the business, how you can lower recon costs or speed up recon time, kind of what have you found as you've done a per [indiscernible] there?

Yes, I'm happy to. And then if I miss something, I'll let Enrique expand on it. It's a fascinating part of our business and an incredibly important part of our business because as you understand, right, buying the right car at the right price is critically important. But then the cost of reconditioning is fundamental to us being able to have great prices. And we have great, great service ops teams and reconditioning teams out there today. But there's opportunity for us to further leverage technology to continuously improve our cost of goods sold through reconditioning. We've already got a few things out there right now. We've got our part selection tool, which they continue to improve upon, which enables our teams to effectively find the right part for the right car at the best price. We've got our tire selection tool out there now, which has now been integrated into that as well. Similarly, make sure that we're looking at the entirety of the marketplace to get the right tire at the best price possible and that's just 2 examples. But there's a lot more we can do with technology to leverage our efficiency in terms of labor and productivity and how we move our inventory from raw to WIP to being on the loss at the end of the day, too. We'll go definitely deeper that in the fall to explain specifically what we're doing. But again, it's going to be an investment in technology and leveraging new processes, but we'll be funding that out of our existing overhead base as our SG&A.

Yes, it will be self-funded. And what I'd tell you is that it's definitely the biggest opportunity that we have at CarMax is to really just digitize our reconditioning processes, update the processes as well within there. And we think that there's a fair bit of upside when it comes to cost and speed just by leveraging technology more strongly in our reconditioning.

I couldn't agree more Enrique. I think it's one of the areas where by focusing on it and investing appropriately in the technology behind it. It will give us a gain, a sustainable cost advantage and how we can keep our pricing where it needs to be.

Can you just touch on -- I know you opened another stand-alone center, you've got a couple of stand-alone centers that I think have been opened over a year now. Are there -- are you seeing a material benefit in terms of reconditioning at stand-alone centers in those regions? Or is it more about just -- I guess, I just want to understand as you open more of these, what benefit you're seeing now, what you can see in the future?

Yes. We have 7 of them open at this point. And I'd tell you, it's still kind of early to get reconditioning savings. They're still ramping. And really where we start to get leverage on those processes is when we hit kind of peak manufacturing, if you will and they're not there yet, just given that they're fairly new. Where we are seeing savings, though definitely is in logistics, right? So less of the kind of cost of shipping those vehicles because we're in market, we're in the right markets, right? So logistics savings, yes, preconditioning savings, you would not fully add where we want to be, but the team continues to improve kind of quarter-over-quarter. But I wouldn't say that that's the driver right now of reconditioning in [indiscernible] but it will be certain.

We'll go next now to Rajat Gupta with JP Morgan.

I just wanted to follow up on any preview around the Analyst Day. I know you've talked about like moving to full-spectrum financing. You had the 50% number out there. Is there any thought process around maybe taking that number higher and maybe in a more aggressive fashion? Is that something that you would consider as a strategic change? Just wanted to get your thoughts on that.

Well, I'll me start at a high level, and I'll let Jon talk about that. I mean what we're planning to do is a strategic update later on this fall where we're going to walk through in detail kind of each 1 of the pillars, so you really understand. First and foremost, how interconnected each one of these is because by themselves are each important but they are so connected, that's probably one of my biggest learnings here in the first 3 months is that everything is connected here. And so how do we go through each pillar and be focusing on the offering, the experience, how we're going to add value through cash and full spectrum and then how we focus on COGS and things like that. So we'll go through a lot of detail there, both in terms of initiatives and also things that you can hold us accountable to. We'll be talking about kind of how we expect this to impact performance over time to sustainably grow our business and to outperform the broader market on a go-forward basis in terms of sales and do it in an efficient way so that we grow our profitability and reward our shareholders, too. So I'm really excited about it. The team has done a fantastic job of framing up what that strategy is. And again, we'll do a deeper dive in the fall on our strategic update. I'll let Jon talk specifically about what you just asked in CAF.

Yes, Rajat, I appreciate the question. Yes. With regard to the ad value pillar, I think obviously, capital spectrum is a key backbone there. We've signaled that for multiple years. I think we're really pleased with the capabilities we've put in place. The funding capabilities iterative underwriting capabilities and that really shows itself in this quarter's penetration. Your question of 50%, that's a number that we've offered as really a midterm objective for us. Certainly, we choose the word midterm very carefully. We think it could be larger than that. but we're really excited in our ability to grow to that level. If you look at what we did from a Tier 2 perspective, we cited we -- a year ago, we were 10% of the Tier 2 volume. This quarter, we are upwards of 25% of that volume, and we think that will continue to methodically grow over the next couple of years as we hit that midterm objective. As far as how fast can we go, I think we've really set a good course there. We want to be very thoughtful really making sure we're getting the funding strategies right. We're underwriting it correctly. I don't want to get over our skis there. But yes, I think that's a great mid-term objective. And beyond that, absolutely, I think it's definitely on the table for us.

And ladies and gentlemen, that's all the time we have for questions this morning. Mr. Barr, I'd like to turn things back to you, sir, for any closing comments.

Great. Well, thanks. Thanks, everyone, for joining us and for your continued interest and support of CarMax. Hopefully, you can see the momentum we've built in the business and the strong performance in the quarter, and we expect that momentum to continue throughout the year as we will outperform the broader marketplace. Really excited about the strategy that we have developed as a team to, again, drive sustainable growth, improve profitability and reward our shareholders over time. And again, we'll share more with you all in the fall, but also we'll be talking with you next quarter. So thanks, everyone, and have a great remainder of your week.

Thank you, Mr. Barr. Again, ladies and gentlemen, this will conclude the First Quarter Fiscal Year 2027 CarMax Earnings Release Conference Call. We'd like to thank you all so much for joining us today and wish you all a great day. Goodbye.