To all sights on hold, we do appreciate your patience and ask that you continue to stand by. To all sites on hold, we do appreciate your patience and ask that you continue to stand by. Go outside on hold. We do appreciate your patience and ask that you continue to stand by. To all sites on hold, we do appreciate your patience and ask that you continue to stand by. Please standby, your program is about to begin. Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter Fiscal Year 2026 CarMax Earnings Release Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Lowenstein, 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 a 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. Bill?

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 eighteen 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 increase in sales volume in March and April due to the tariff speculation. This impacted our performance in the second quarter in two ways. First, we ramped our inventory ahead of the second quarter to support this…

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 three-day payoffs, which was 60 basis points above last year. 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 one segments but with additional criteria overlaid to reduce risk. While the remainder comes from within the top half of the tier two space, which we have been testing over the past year. Third party Tier two and Tier three penetration in the quarter combined for 23.8% of sales versus 24.4% last year as CAF growth had an impact on partner volume. CAF income for the quarter was $103 million, down $13 million from FY 2025. Net interest margin on the portfolio was 6.6%, up over 50 basis points from last year and relatively in line with last quarter. GAAP's loan loss provision of $142 million results in a total reserve balance of $507 million or 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…

Thanks, John, 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, decreased by $6 million driven by lower retail unit volume. Service recorded a $4 million margin, reflecting a small improvement over last year's 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. 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, Sky, our AI-powered virtual assistant, continued 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 Sky 2.0 which leverages AgenTeq AI and expect this release will drive even more…

Thank you, Enrique and John. 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 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?

Thank you. And at this time, if you would like to ask a question, please press the star and one on your telephone keypad. Your first question comes from the line of Brian Nagel with Oppenheimer. Please go ahead. Your line is open.

Hey, guys. Good morning.

Morning, Brian.

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

Yeah. So, Brian, first of all, you know, like I said, it's actually, we think, two 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 know, my commentary around buying inventory up and then seeing that depreciation happen, I would say that is probably the the most impactful and then the pull forward. But, again, it's hard to it's hard to quantify exactly how much each of those each of those are. Know, for the quarter, each month, was 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 on a from a year over year standpoint. But certainly, we put ourselves in a better position the start of this quarter, both on an inventory position as well as from a a pricing standpoint.

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

Sure.

Just just with with regard to pricing. So, you know, the know, CarMax has, for a long time, talked about, you know, you know, know, having attractive pricing within the market. It seems me just listening to your comments say that you're you're focusing on this more now, So I guess that's is that the case? And then know, the 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?

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

Right. Appreciate all the color. Thanks.

Sure, Brian.

Thank you. Our next question comes from Rajat Gupta with JPMorgan. Please go ahead. Your line is open.

Great. Thanks for taking the question. Just got a couple. First one on CAF. Last quarter, had mentioned that you expect CAF income to be up year over year for the full year. Can you give us an update on that? And if it has changed, I'm just surprised by just the magnitude of, you know, the provision pickup know, because we had your last earnings call just two months ago. So curious, like, how could it how could it have changed so dramatically in shift 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 cap income. Obviously, as mentioned, there's a larger provision impact this quarter. Also, we mentioned we're excited about the the twenty five b transaction, which will yield gain in, you know, in during Q3. You put all that together, Yeah. We did highlight that we thought there would be, you know, increase year over year in CAF income. I think we're gonna be, you know, flat to down. Obviously, two 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, you know, how does the consumer perform, how does sales come in, because that would yield a provision origination for us. But, hopefully, 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, you know, certainly a higher APR environment, higher overall payment they were seeing, They come into the, yeah, 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 you know, again, we're coming off of incredibly low trough loss rates of 19, 20, 21 vintages. So hard to gauge how those twenty two and twenty three vintages were gonna perform. We saw an increase in losses initially, but that's not surprising because it's coming off of trough lower vintages. So there's previous years. So as we watched that customer perform, we saw it and thought maybe it was a pull forward…

That that's that's helpful color. And just 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, you know, a lot of you might need might be tied to know, 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 know, these actions might hurt your ability to recover some of the share loss that you seen. I'm curious, like, how do you balance those two?

Yeah. Absolutely. Thanks. Yeah. And and also, like, what he offers offset from the pickup and advertising. Thanks. Yeah. No. Absolutely, Rajat. I'll I'll jump into it. We do not think it's gonna impact our growth strategy. As I noted in my prepared remarks, our investments in technology, systems, and 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 a stronger ability to retire legacy systems. 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 technology such as chat. Due to invest investments in Sky. Become even more efficient in our call centers, and I've 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 those are just some of the examples. That will help us take out that 150,000,000 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 again, it's $150,000,000 at least 150,000,000 that we do expect to direct back to investments that have a direct tie with sales, you know, such as an example this quarter would be marketing. You know, we are going heavier up in marketing, appropriately so, or our new brand positioning, and that'd be an example of something that we're gonna 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 it's not a net $150,000,000 reduction. Is there a net number? That you can give us?

Yeah. So it's gonna 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 to incur. But it is net of ongoing expenses to to realize the savings.

No. No. I meant, like, net of, like, investment in other areas like advertising and other sales initiatives. Is there any Like I said, there there will be part of those dollars that will be a reinvestment back into the business to drive top line sales. However, that being said, know, we do expect just the SG&A savings to be, you know, a material tailwind to our already robust earnings model.

Understood. Great. Thanks for the color, good luck.

Thank you. Our next question comes from Sharon Zackfia with William Blair. Please go ahead. Your line is open.

Hi. Good morning. I wanted to go back to morning. I wanted to go back to Brian's question on price. And as you think about it, 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 a thought process or a strategy about taking of the bulk of the 150,000,000 and really reinvesting it to the consumer and price your selection to drive the top line? Because it does feel like the consistent market share story that we had had in the past has kind of become much more volatile, you know, post pandemic.

Yeah. Sure. I I think you're thinking about it the right way, but I would expand on it a little bit. I mean, the $150,000,000 in SG&A reductions, as Enrique pointed some of that we will reinvest directly back into things to of driving sales. The other piece I would tell you, which is another reason why we're focused on it, the key priority, is 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 price. So, again, I think it goes back to Brian's initial questions that we wanna be as nimble as possible make sure that we're as competitive as possible, and we feel like we're gonna have several levers to be able to do that.

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

Yeah. There's look. There's always elasticity when it comes in. You know, we've talked about this before. You know, we know pretty much because we're constantly testing. You take prices down a certain dollar amount, we know what you get for that. The what you have to think way we think about it is is that 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 of your operational workforce. Are they at capacity? Are they not? Capacity? Are you having to pay people for unproductive time? Your ancillary profit attachment, how well we're doing on things like ESP or or finance, 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 in, the elasticity will change just given what competitors are doing. So we will con continue to be nimble. We will continue to make improvements in some of these other factors because, again, that makes the elasticity pay off.

K. Thank you.

Sure. Thank you.

Thank you. Our next question comes from Chris Bottiglieri with BNP Paribas. Please go ahead. Your line is open.

Hey, guys. Two questions on credit for me. So the first one is, can you elaborate on the servicing fee of $4,045,000,000? I would think there's probably some servicing cost to achieve that servicing revenue. Just was wondering if you'd help us think through the cost since the receivables won't be in on the balance sheet, but the expenses will be. And then bigger picture question on credit. Like, you guys are normally really conservative, you know, really prudent guys historically. Kinda pushing into deep subprime now. The market's you know, I think beyond your control is getting a little bit weaker. Wanna kinda, like, test to resolve. Like, how committed are you to pushing into subprime right now? Just given the macro backdrop? Is it something you're gonna pull, you know, forward into regardless, or if macro keeps worse or you'd have maybe hit the brakes a little bit. Bit?

Yeah. I'll start off and then I'll I'll pass it over to John. Just wanna to clarify something on deep subprime. Know, John and his comments talked about going into really the top half of what we call the tier two. So you know, we're not talking about deep subcoms. I just wanna have some clarification there. And then, John, I'll let you add just to that end. The first part of the question.

Yeah. Kicked me under the table because he wanted that one. Yeah. I mean, that we wanna make that very clear. I mean, it is not It it is not deep subprime at all. Again, we have been in tier three space. And we 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 there is money to be made there. We have partners that make tremendous profit there. You need to price it right, provision correctly, service it correct. We believe, you know, we're learning how to do that. So but, yeah, 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, I just just to step back because I like to take that after I speak to the overall program. Again, we are super excited because it ties to the first question. The 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 gonna bifurcate our securitization program. We've done that. We've executed multiple deals now there. We said we're gonna recapture volume in tier one and expand into tier two. Again, we're being very prudent about that. Then announced that we that plan to do a deal where we're actually gonna sell the the future's 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, you know, give us insight into to what a deal like this looks like, and we've I think, hit on all of those. That being said, we've enjoyed the game. We'll enjoy the game that we're gonna see 25 to $30,000,000 in new highlights also referenced the additional value to be gained on the servicing side. Again, future interest there. On the expense on the expense there, yes, there is a little additional volume to be gained from the servicing side. There is a cost to us, but, yes, we will make additional additional value there. Enrique, anything you wanna add?

Yeah. And, Chris, you don't see the servicing income. It'll be broken out the cap contribution line, so you'll get a good view of that kinda on go forward reporting. And while the servicing costs will be embedded in kind of your your your cost of your business. Right? And so that's how it'll be reported. And you'll see that moving forward.

Yeah. And and and the 40 to 45 also includes retain Yeah. Some retainers. Also, income from the five percent retention as well, the five and five. So we expect that'll continue as well. So, you know, all in all, like John mentioned, we're really pleased with the deal and the execution of the deal out there and and and really proud of the teams in getting that done. And as John mentioned, this just fits our overall strategy, and we are executing on that strategy.

Gotcha. Okay. Is the is most of the income coming from the beneficial interest or from the service fees? Or would I like to mention that a at all?

Yeah. It's coming from kind of a mix. Yeah. It is.

Okay. Okay. And thanks thanks for clarifying this stuff, Rami. You did say that prepared remarks. So spoke there, so thanks for clarifying Yep.

Thank you. Our next question comes from David Bellinger with Mizuho. Please go ahead. Your line is open.

Hey, good morning. Thanks for the question. Can you help us walk down the path back to positive unit comps and what the the timeline could be there? 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? Or 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 the sector and something that you guys have to invest against going forward? Just help us piece all that together.

Yeah. So, you know, when I say aggressive environment, I wouldn't say it's necessarily more aggressive than last quarter. It's been aggressive aggressive for a while. I think, you know, on the the strained consumer, I think we are seeing where consumers, especially your your mid to high FICO customers, they be sitting on the sidelines a little bit, and we just measure that by just pure app volume. Think we're seeing that with you know, it's a it's a little bit of a headwind in September, but that's not you unique to us. We we've talked with our finance partners, and they're seeing something similar. So you know, again, think and and even that, you know, consumer's been distressed for a little while. I think there's some angst. You could the consumer sentiment isn't isn't great. But again, I think we've put ourselves in in good shape, and I think the priorities that we we're focused on will will continue to pay dividends. You know, as I think about the full year, we we set out this year to to gain market share. And, you know, look, through the first half of the year, we feel good about it. Through the calendar June, which is where we have data through. 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 you know, we're not backing off of our stance. It's 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 that adds a little color.

Yeah. David, I'd to just jump in on the consumer just to highlight a few things again, the cracks issue set. I think there's something incredibly unique about the twenty twenty two to twenty three consumer, and it is an industry issue. You look at other issue lenders out there, they would tell you, those are some tough vintages. It's kind of the perfect storm of IAS and probably an overconfident consumer coming in with they think they have plenty of cash. Get hit with inflation. If you look at the 2425 consumer, they're just more eyes wide open walking in the door. Prices have come down a little bit. They're you know, interest rates have come down a little bit. Typically, people that buy in a a in a more stressed environment perform usually better. Now, again, we think we have reserved. We watch very carefully, how those guys performing, and and we know they might perform worse than maybe pre COVID. Yeah, I think that 24, 25 consumer is gonna just be a a better one.

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

Great. Very helpful. Thank you.

Thank you, guys.

Thank you. Our next question comes from Scott Ciccarelli with Charisse. Please go ahead. Your line is open.

Hey. Good morning, guys. This is Josh Young on for Scott. So as we think about the slowdown in sales here, is it 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.

Yeah. No. Look. Our 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 we can't control and that's that's really kind of web traffic to what we call a selling opportunity. Do does the customer do something that we can then you know, kind of start the process versus just folks that come to the website that are just, you know, viewing cars. Some of it is gonna be that we can't control because there's gonna be some folks who are they're they're window shopping. Others, I think we we can control and just how we how well we do in the presentation on that first initial glance how we make this the website stickier at that that topper part of top of the 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.

Got it. That's helpful. Thanks.

Sure.

Thank you. We will move next with David Winston with Morningstar. Please go ahead. Your line is open.

Thanks. Good morning. I was 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 the tariff the juicing of demand didn't really happen on the quarter, so you're you were trying to clear inventory to get rid of that depreciation. But you're saying web traffic was up year over year conversions improving. Yeah. Your unit volumes were slowed down over 5%. 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?

Yeah. David, just so just for 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, a customer hits our website, actually getting them to do something on the website. And, some of that I think is in our control. Of it is not in our control. You're just gonna have folks that are coming in there and realize, well, you know, either they're just looking or they just they're not ready to to to buy. So that's that's of the clarification of you know, your question between, well, your traffic's up, your conversion up, why aren't you seeing more sales? That's why.

And, again, I would say not all traffic is considered the same. A seven eighty comes through the door versus a five eighty comes through the door. They convert it tremendously different rates.

Yeah. In high quality, is that down even at the very high end of prime. Right?

Well, yeah. What we're seeing is that the the higher FICO customers, the app volume is down. So and that, you know, that's a that's a core customer of of ours. And really, you're seeing that kind of and John, 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 five fifty and and and below. Right. And and and I think, again, I don't think we're alone there. We can talk to other, you know, other lenders other dealers. You can see it in the credit bureaus. It's it's apparent.

Okay. Thanks, guys.

Thank you. Our next question comes from Jeff Lick with Stephens Inc. Please go ahead. Your line is open.

Good morning. Thanks for taking my question. Bill, I was wondering if we could talk about the concept of the reserve inventory that you guys do, my understanding is it's any it's at the most, seven days, it's usually around seven, but not not always seven. But you know, our records or just our analysis shows that you know, roughly about 40% of your inventory at any given time online is reserved. And it know, it appears that you know, let's just take, you know, a unit that is probably attractive because someone's reserving it, so someone else who wants it doesn't see it. Or it's, you know, at the back of the queue. I'm I'm wondering your thoughts there you know, in terms of how that's affecting sales and if that's a policy you're looking at changing.

Yeah. No. I look. I think there's both reserve inventory and there's that that can't be transferred. I think the the reserve inventory generally is is inventory that has a customer that's basically interested in that that inventory. And, you know, that's obviously when you've got a customer in Richmond that's interested in a car and Pennsylvania, we think that's a a huge benefit that that customer can actually get that car. So that plays into our transfer. You know, 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's the the the transaction is progressing. On the the vehicles that are labeled not transferred, only reason they're not transferred at that time is because that's generally related to title issues. In some states, you can sell them, you'll see it on our website, hey. This can't be transferred because you can sell that car without a title in that state. There's other states you cannot sell a car without the without the title, so we're not gonna transfer that car in that case. And then once the title becomes available, it certainly can be open for transfer it's still around. So it's those are the two buckets we think about that would bring just kind of your overall available inventory down.

And do you you know, I'm assuming you won't disclose this, but in terms of the amount of sales you know, 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 kinda sits out of out of view of the next potential buyer for seven days.

Yeah. I mean, we haven't gone into the specifics, but, obviously, there's you know, we look at the economic 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 doesn't does not actually pan out with that that customer. Keep in mind, you think about the reserved inventory, you know, a third 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. You know, can we add a little extra friction just to make sure that cars aren't held for reserve over, you know, three days? Sure. But that's a that's a a small enhancement.

Okay. Great. Thanks for taking my question. Best of luck.

Thank you.

Thank you. Our next question comes from Michael Montani with Evercore ISI. Please go ahead.

Yes. Hi. I just had two 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, you know, for provisions into the third quarter. And then the other question, let's do that and hopefully get to the other one.

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

And, Mike, I think part of your question too was just on the the kind of provision as we as we go forward. And I I think the way I think the way to to think about that I mean, you saw what our provision was for our origination this quarter. You saw what the what we're calling the true up is. The way you should think about it is the provision this quarter for the new originations, I think, you know, that's pretty representative. You know, we'll we'll just with the stuff that we're going into, it it might be a little bit higher. But you know, we feel good about the true up. So the provisions, John, and, you know, you certainly speak up, but we would expect it to to be more You saw the $71,000,000 this quarter. Again, you you can go back and look at where we didn't have outsized strips where it was probably lean a little higher considering that we are, again, going after, yeah, a little bit lower in the credit spectrum. So that's gonna require a higher upfront provision. But, yeah, a hopefully, the the true ups are going to be minimal. That is our goal through this. We feel like that older stuff is rolling off. So, yeah, I would think you'd you'd see more in that $70.80 certainly south of a 100 thou a $100,000,000 range from a provision standpoint.

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

Okay. And then the the follow-up question that's helpful was just around some of the cost savings. So you had called out 150,000,000 you know, which could work out to somewhere around $200 a 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 could be another 100 or $200 there as well. I just wanted to understand, you know, you know, is that separate and distinct? Am I kind of in the ballpark there in terms of some of COGS opportunity? And then kinda bottom line, if if it does require several $100 of reinvestment in into sharper pricing, you know, is that something that you all are committed to doing in order to kind of reinvigorate the top line?

Yeah. So okay. A lot of neck questions. Let me tackle the the the COGS and the SG&A. You're thinking about that the right way. They're they're separate. Separate initiatives. So on the COGS side, if you recall last year, we were going after over a couple years, we were going after $200 in cog savings. Last year, we actually got a 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. 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 we don't wanna get those two muddied up. To your question about, hey. If if you know, would you be willing to reinvest all that back in to be you know, to make sure that you're competitive? What I would tell you is yes. But would also tell you I don't think that's necessary. I think that we'll be able to take some to to the bottom line. Absolutely, but we'll invest some of them back in appropriate amount. And as I said here 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 and and to price. But, again, I also want you to know that we're gonna we're gonna continue to be price competitive.

Thank you. Thanks, Mike.

Thank you. Our next question comes from Chris Pearce with Needham. Please go ahead. Your line is open.

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

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

Okay. Thank you for that. And then just I might get my years wrong here, but at the '22, I believe, 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 kinda took you longer to work through because you wanted to hold margin versus pricing. And it there was sort of a longer reset to your inventory level. I I just wanna confirm that's sorta not what we're talking about here because of kinda your commentary around September and this being more onetime, or I guess I'd just love to hear you kinda talk through that, and apologies if I got the dates wrong given your system for line up the quarters.

You actually did get the date wrong. It's it was it's really which I think what you're referring to is the the the big depreciation event. Which we saw in calendar '23 and twenty four. I believe there was one in '23, and there were two in '24. That that we worked through. And and just to 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 was different back then. Than it is here. And this this event, a couple different things. One, it was a thousand dollars over about a month period, and then you saw some stabilization. And then we're also going into a period where you know, you're gonna see generally seasonal depreciation. So we wanted to make sure we get we got through that. But yeah, those events that you're talking about, basically, at those times, you know, you look at that elasticity with all the things that we talked about earlier that go into that equation. And, you know, we held our margins a little bit more because at the time that that made sense. This one actually, it made sense. Let's get this stuff through. And so, again, we'll we'll tackle these things as as they come up.

Okay. Thank you, good luck.

We have a follow-up from Rajat Gupta with JPMorgan. Please go ahead.

Oh, hi. Thanks. Just wanted to follow-up on CAF. Just going back to the commentary, I'm still expecting flat to slightly down Could you help us a little bit more around the third quarter? You're going to get the gain on sale the 900,000,000 but you're also gonna lose, a quarter of net interest income. On that 900,000,000. So it almost feels like a wash. Is that is that the right way to think about it? If if you could give us a little more color on how you'd get to you know, still flat income even if you have, like, 80,000,000 provisions in the April and maybe the fourth quarter. I just want to bridge that. Thanks.

Sure. Yeah. I I think you've got a a couple things going on there. First, yes, you've got the income, but you're gonna realize that you know, all upfront. Whereas, again, the receivables, you're gonna no longer have there. You were gonna gain that income over time. So that's a bit of a a pull forward. Your overall NIM will will be impacted. There's no doubt about that, Rajat. You're you're correct. But, yeah. 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 that's 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 Yeah. I think you got servicing income. You have the 5% retention. Right. So there there are things that, you know, should provide a tailwind.

Yeah.

And, again, I'd probably say it's more slightly down a lot a lot plays into what's the origination provision, where's the NIM, where the losses go. Ultimately. But, yeah, I'd say probably slightly down more than flat. For the full year? For the full year. For the for the third quarter. No. No. For the full year. So take last fiscal year, this fiscal year. That's what I'd refer to.

Understood. Okay. Thanks for the color.

Thank you. We do have another follow-up from Brian Nagel with Oppenheimer. Please go ahead. Your line is open.

Hey, thanks for slipping me back in here. So my follow-up question and I think we've discussed this in the past, but did you notice anything with regard to I'm I'm I'm looking at used car unit demand. Anything notable with regard to kinda, you know, the the different type vehicles? I mean was there a stronger trend, high end, low end, that type? And did anything shift as we push here through the fiscal year?

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

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

Yeah. Look, we've obviously, Brian, been focused on this. I think if we look at the what we call that value max sale, let's call it six years and older or more than 60,000 miles. We had you know, 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 you know, we had more of that that available. I think our goal will be 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 know, you can't go to at some point, you have, you know, the the benefit that you get of having older, higher higher mileage, will be offset because you don't have some of the vehicles that, you know, the core car customer is looking for. So we'll we'll walk that we'll walk that line.

I appreciate it. Thanks.

Sure. 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 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 in our communities and 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.