CarMax Aktie

Ladies and gentlemen, thank you for standing by, and welcome to the CarMax Strategic Update Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Mr. David Lowenstein, Vice President, Investor Relations. Please go ahead, sir.

Good morning. Thank you for joining our strategic update webcast. I'm here today with Keith Barr, President and CEO; 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, our annual report on Form 10-K for fiscal year 2026 and our quarterly reports on Form 10-Q previously filed with the SEC. Please note, the presentation from today's webcast is available on the Investor Relations section of our website.

Our commentary today may include non-GAAP financial measures. Reconciliations of these measures to the comparable GAAP measures are available in the investor presentation. 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.

Keith will start today's webcast with a brief overview of the used auto market and how CarMax is structurally positioned to deliver sustained growth. He will then frame our Shift into GEAR growth strategy, and Jon will highlight CAF's competitive differentiation and full credit spectrum strategy. Finally, Enrique will detail the financial targets we have set through fiscal year 2030 and our capital allocation approach. We'll save plenty of time after our presentation to take your questions.

With that, I'll pass it over to Keith. Keith?

Good morning, everyone, and thank you for joining us. I want to start today by sharing again why I came to CarMax. Looking at CarMax from the outside, I saw a very strong foundation, an iconic brand, an award-winning culture, a differentiated business model with unmatched scale and an irreplaceable platform. I believe these assets could be leveraged better to drive consistent growth, gain market share and generate strong return for shareholders.

A little more than 7 months in, I'm more confident than ever in our ability to capture the tremendous opportunity ahead of us. In order to do this, we need to have a clear strategy, and I've spent meaningful time across our business, engaging with our associates, listening to our customers and working with our leadership team to develop our strategy for growth, Shift into GEAR. The work in front of us is focused on turning our advantages into stronger performance.

Our second quarter results showed that when our pricing is right, customers choose CarMax at a rate that outperforms the industry. We are building on this early momentum with our Shift into GEAR strategy, which is designed to strengthen the core of our operations by focusing on the fundamentals of what we do every day at CarMax, helping our customers buy, sell and finance cars with ease and confidence, however they choose to do it. Shift into GEAR is a clear actionable plan to drive sustainable market share gains and earnings growth, enabling us to consistently reward our shareholders. But it will do more than just drive our near-term results. It will establish the foundation for accelerated growth in the long term.

Let me start with talking a little bit about the market we are competing in and the strength of our platform. The used car industry is one of the largest consumer markets in America, a roughly $1 trillion market that is incredibly fragmented. The 10 largest retailers together hold only about 10% share of the total market, with CarMax having only a 4% share today of the aged 0 to 10 market. The opportunity in front of us is substantial, and we are well positioned to leverage our national and unique scale to win customers and grow faster than the market.

In this industry, a company with the right operating model and customer offer has a tremendous opportunity to take share, and we have both. The hallmark of our market position is that the operating model CarMax has built over the last 30 years aligns with the way customers actually shop for and buy vehicles. Industry research as well as our own shows that customers want digital convenience combined with an in-store connection. While most customers intend to utilize both online and in-store steps in their car buying journey, the vast majority consistently choose to complete their purchase in store. We can meet the customer however and wherever they want to be met. This is why CarMax is strategically advantaged.

We start from a position of strength since we've already built the combined digital and physical scale to deliver that experience nationwide. Our digital offering is backed by a store network that reaches 85% of the U.S. population. Customers can see and test drive the car they are considering, explore a wide selection in one place, trade in their vehicle, obtain financing and receive knowledgeable guidance along with the personal connection our associates offer. Additionally, our offering is underpinned by a national logistics network, scaled reconditioning operations and exceptional brand awareness.

The key advantage we see is not just any one of these things, but how they work together to drive growth inside one platform. These capabilities took decades and significant capital to build and our long-term differentiators when we deliver on the fundamentals. This is where the pieces come together to create our competitive advantage.

First, customers know and trust the CarMax brand, which is backed by 30-plus years of bringing transparency to the car buying process. Second, we deliver the best of both worlds, the convenience of digital backed by a network of over 255 stores and 28,000 associates. Third, we have structural advantages built over decades. Our scale and capabilities are nearly impossible to replicate. Fourth, we have a leadership team and a culture built to execute. I've seen that firsthand both in our corporate offices and with our associates in the field, and I continue to be impressed by the capability and commitment of our associates.

Fifth, the largest opportunities in front of us are within our control, and our growth is not dependent upon market acceleration. I'll share examples a bit later in the presentation. And most importantly, we have a clear plan to strengthen the core of our operations, Shift into GEAR is how we convert these advantages into stronger growth and financial returns.

Now I'm going to talk to you in more detail about our Shift into GEAR strategy. Our strategy is built around 4 fundamental pillars. Great offering is about giving customers every reason to choose CarMax. Easy experience is about making it easy to do business with us. Add value is about maximizing the value we create on each transaction, and run lean is about unlocking efficiencies so we can fund a better offer and generate stronger returns.

These 4 pillars do not work in silos, but as one system. Let me walk through each beginning with great offering. Great offering is built around 2 things that matter most when a customer is buying a used car, price and selection. On price, our objective is straightforward: deliver highly competitive prices to customers and use that advantage to take share. We intend to take hundreds of dollars of cost out of each car across reconditioning and logistics over the coming years, and we intend to reinvest those savings back into price. That gives us a sustainable way to compete harder for the sale without structurally sacrificing retail margins.

At the same time, we are getting more precise about how we price. Each year, we price more than $20 billion of retail vehicles and have augmented our pricing models to use more local and real-time market signals with the goal of pricing more dynamically, so we can win the sale while earning the right margin.

Selection is the other half of the offering. We're adding more inventory while continuing to ensure our mix matches the cars customers want to buy. But just as importantly, we're unlocking the inventory we already own. Saleable inventory is up materially from a year ago, driven in part by freeing up more of our existing inventory for customers to purchase through better management of local holds and transfers. We know that having more saleable inventory leads to more sales.

But having the right car is only part of the equation. We also have to get it to the customer quickly. Early results have been encouraging in the markets where we have tested faster delivery. In those markets, we are making more cars available to customers faster, within days, and this is driving more sales. Customer feedback is validating our efforts, and we see this as a meaningful lever to drive more share gains. We plan to scale it up in a disciplined way in step with what the results and the economics tell us.

In addition to having the right car at the right price, making it easy to complete the purchase journey drives stronger conversion. We are focused on the end-to-end customer journey. When I joined, I saw a clear opportunity to bring our digital capabilities and stores closer together, and that is where we're putting our energy.

Let me walk you through our progress. It starts with finding the right car. We have improved search and made car pages more intuitive with clearer highlights and more personalization, so shoppers find the right car faster. The new experience is already outperforming our prior pages with more upside as we optimize. And as AI changes how consumers research and shop, we will be ready with a robust generative engine optimization strategy and digital properties that support agentic commerce. Once they find the car, we're making it easier for customers to move forward. Our redesigned reservation flow puts financing and trade information upfront, so customers are better prepared and more reservations convert to sales.

Next is the handoff to the store. Today, a customer might hear from the store, our customer experience center and our automated systems, which can sometimes be confusing. We are testing a model where the store owns the relationship from the moment of the reservation, supported by our customer experience center and by automated communication. It simplifies the experience and draws on a real advantage, associates who know the customer, know the car and understand local dynamics. The test is underway in a handful of stores, and we are encouraged by the early results.

AI runs through every step of the journey. Our digital and voice agents work alongside our associates online, by phone and in-store. Early tests show improved conversion and efficiency. And our agents free up associates to spend more time on the moments that matter and where they can add the most value. The goal is one easy connected CarMax experience from the customer's first search to the moment they purchase their car.

We have multiple paths to create more value for the customer and capture more economics for CarMax. CAF has a proven prime lending platform, and we've been extending our platform across the credit spectrum in disciplined stages with a focus on Tier 2. CAF financed 10% of CarMax's Tier 2 volume in Q2 fiscal year 2026. In Q2 fiscal year 2027, that number has more than doubled, and our goal is to reach 40% by fiscal year 2030. As that expansion continues, it provides meaningful runway to capture more of the financing economics from our customers CarMax is already serving.

In tandem, we are broadening the way we fund CAF so we can grow responsibly, implementing the structure that gives us the best balance of return and risk. Our second residual sale, which included selling roughly $600 million of receivables in the second quarter, is one example of that flexibility. Jon will go deeper on our funding efforts in a few minutes.

Another opportunity to grow profitability is with our extended protection plan products. We reinvented MaxCare over the last year with more term and deductible options as well as optional wheel, tire and dent protection. That updated product suite is now available nationwide. Our objective going forward is to grow EPP profit per retail unit by more than 20% through fiscal year 2030, while putting relevant protection in more customers' hands. As we sell more cars, finance more customers and leverage expanded protection plan products, we create more profit from every customer we win.

The fourth pillar is run lean, unlocking efficiencies that fund a great offering and experience by taking cost and complexity out of the business. Our first focus area is on reconditioning. Much of that work still runs on a legacy store-based system supported by paper checklists and whiteboards. We are replacing it with a modern end-to-end best-in-class third-party Software-as-a-Service digital platform that will standardize processes across every store and centralize decisions on what work to do, where to do it and which parts to use.

It will also enable better data and analytics to show us what is working and help us improve.

Specifically, we plan to optimize our reconditioning processes with several key enhancements, including digital inspections to efficiently capture an accurate profile of each car's condition, digitized repair order management to enable smart and consistent decisions on what to repair, work management systems that improve productivity by refining how we route work to our associates, part and tire selection tool upgrades that broaden automated ordering, sublet management to improve decisioning on when and what repairs facilitate across our partner network.

The result is that we deliver the high-quality cars our customers know us for, and we do so with more efficient operations, more work done in-house and a lower cost embedded in every car. We expect to begin piloting next year and will scale from there.

Our second focus area is on logistics. Our model today is largely point-to-point, connecting our 255-plus stores. To better leverage our national scale, we are reengineering the network toward a hub-and-spoke design with plans to expand that model over time. Fewer, smarter moves should lower costs and get cars to customers faster. We're also putting a modern technology foundation underneath the network so we can make better decisions and continuously improve cost and experience. Across reconditioning and logistics, we have a clear line of sight to hundreds of dollars per car savings through fiscal year 2030, allowing us to self-fund sales growth through competitive pricing.

Our third focus area is acquisition. Buying directly from consumers is the lowest cost source of inventory, and we see a very tangible opportunity to do more of it. Today, more than 20% of customers who come to us to sell their vehicle cannot receive a truly instant offer online and instead are sent through a more time-consuming process. Our goal is to increase instant offer eligibility to over 95%, so almost all customers can get an instant appraisal on their car through CarMax. We plan to begin testing changes in December that will move us toward that goal over time.

The fourth focus area within run lean is SG&A. We remain on track for $200 million of run rate savings exiting fiscal year 2027. We will continue to look for more efficiencies in the business and maintain this cost discipline moving forward. We expect to build significant leverage into how we operate every year.

This is the simplest way to think about what we expect Shift into GEAR to deliver, 4 pillars: one system, driving sustained market share growth. Each pillar has its own work, but the value comes from the way they compound and create a flywheel of continuous growth. And every turn of the flywheel adds durable earnings growth. Better price, selection and experience brings more customers to CarMax and drives more sales. Each sale earns more with CAF and protection products adding profit. More volume runs through our stores, reconditioning centers and logistics network, which creates scaled efficiencies and lowers our cost base.

Those savings go back into the offer and into the operating leverage so we can compete harder for the next customer. Then the cycle repeats, and we keep taking share and building durable earnings. CAF is a big part of that cycle, and it scales with every customer we win.

I will now turn it over to Jon to walk you through how it works and where we are expanding. Jon?

Thanks, Keith. Good morning, everyone. As Keith discussed, the key part of our Shift into GEAR strategy is finding ways to add more value on each transaction. CarMax Auto Finance is central to that opportunity, and I'd like to spend a few minutes discussing the role CAF plays in our business, our opportunities to expand and how all of that translates into earnings.

CAF is one of the advantages that makes the CarMax model unique. Having such a well-established captive lender provides additional sales, a significant source of earnings and a sizable opportunity for added growth. CAF diversifies CarMax's earnings. It creates an additional profit engine beyond the economics of the vehicle sale and generates earnings over the multiyear life of the loan, helping to complement the immediate income recognition of that sale.

A captive lending business not only provides an opportunity to maximize finance income, but it is also fundamentally more integrated into the broader business ecosystem, both tactically and strategically. Unlike what occurs inside a more traditional third-party financial institution, CAF lending decisions are made with direct consideration for our customers and CarMax as a whole. We have a strong, long-standing track record of more than 30 years of underwriting, funding and servicing auto loans. That experience across multiple economic cycles gives us a deep base of lending knowledge and operational know-how specific to CarMax customers.

We have always run the business with discipline. We balance growth, credit risk and financial return and make decisions that are sustainable and in the best long-term interest of CarMax. This model is scalable. We see significant volume runway inside the customer base CarMax already serves and our funding capabilities continue to expand, giving us more ways to capture attractive economics while managing risk. Together, these traits make CAF a differentiated and integral part of the CarMax business model, positioning it to play an increasingly important role in driving growth and earnings over time.

Historically, CAF's core has been the more prime Tier 1 credit space, and that remains a strong proven business platform that continues to anchor our $16 billion portfolio. Full spectrum is about extending that proven platform into the Tier 2 non-prime lending space, where we see a compelling opportunity within customers CarMax is already serving. Tier 3 is not a near-term priority for CAF and, at this point, remains primarily a partner opportunity that drives incremental sales.

Why Tier 2? We have been successfully serving these customers through our retail business for decades, but much of the financing is captured by our long-term third-party lenders. By expanding CAF's participation in this segment, we have an opportunity to finance more of these transactions and retain more of the economics associated with these loans. As Keith mentioned, CAF continues to grow its volume, doubling our Tier 2 penetration in the second quarter versus last year, and the credit performance of the originated volume to date continues to track in line with our expectations. We are confident in our ability to succeed in this space.

Over 30 years, we've demonstrated a proficiency at adapting and refining how we underwrite and service CarMax customers. Paired with our newly enhanced funding capabilities and backed by our own customer and credit data, we can generate sizable income growth from Tier 2 segments that will provide us highly attractive risk-adjusted economics. We also believe it is valuable to keep the financing and servicing relationship inside CarMax for years after the vehicle sale, providing a meaningful customer loyalty benefit. The opportunity is both economic and strategic, serve more CarMax customers directly and capture more of the value created by the transaction.

In short, full spectrum builds on CAF's proven foundation, extending our capabilities to more customers, strengthening relationships and creating a meaningful opportunity for long-term earnings growth. As we expand into Tier 2, it's important to understand the mechanics of how lifetime earnings will change and ultimately grow. When we originate a loan that we hold for investments, we are required to reserve for lifetime expected credit losses upfront, but we earn the income on that loan over time. That timing impact is more pronounced in Tier 2 because expected losses and therefore, the upfront provision are higher.

As a result, as we meaningfully grow Tier 2 volume and retain a portion as held for investment, CAF income will initially be pressured by the provision associated with these new loans. However, on a per loan basis, Tier 2 is expected to carry a higher return than Tier 1 and to deliver sizable income over the life of the loan. This results in CarMax capturing substantially more cumulative value than the fee historically received when the customer financing was given to a partner lender.

In the case where we fund our growth through off-balance sheet transactions, we avoid this upfront provision, but instead receive a gain on the sale of the loan, ongoing servicing fees and retain the net interest margin up until the point at which the loan sale takes place. While the full lifetime value earned is less than had we held the loan for investment, there is substantially more value versus the current partner fee structure while also derisking the remaining portfolio.

We believe that for each point of sales attributed to Tier 2 that we retain, there is between $8 million and $20 million of additional lifetime pretax income to be captured beyond the partner fees provided today, depending on our funding approach and corresponding terms of a deal. We see the potential of our blended held-for-sale and held-for-investment strategies generating in excess of $100 million of lifetime pretax income annually from the Tier 2 space as CAF pushes towards financing 40% of this volume or roughly 8 points of total sales by fiscal year 2030.

Two factors squarely within our control will be the keys to realizing the full potential of this growth effort. First, we will be growing in stages. Rather than scaling originations all at once, we will methodically originate and evaluate each segment within the Tier 2 space and use those results to inform our next phase of growth. This allows us to refine our underwriting and servicing approach and maintain the discipline that has been fundamental to CAF's success.

Second, we will continue to refine and leverage our new funding capabilities. Having the flexibility to retain loans on our balance sheet or utilize off-balance sheet funding channels allows us to balance risk, capital requirements and the opportunity to capture attractive lifetime economics as we grow. Ultimately, we are focused on building a larger, more profitable CAF business over time and are doing so in a controlled and thoughtful manner.

With that, I will turn it over to Enrique. Enrique?

Thanks, Jon. I'm going to bring the operating strategy into the financial framework. The goal is to show you what we expect Shift into GEAR to produce through fiscal year 2030, the key building blocks underneath those targets and how we will allocate capital as performance improves. Using fiscal year 2026 as the base period and assuming a stable operating environment, we expect to deliver mid-single-digit compound annual growth in used retail units through fiscal year 2030, as we strengthen the core of our operations.

At the earnings level, we expect to deliver mid-teens compound annual growth in adjusted EPS over the same period. These targets are grounded in the work Keith and Jon just described. Great offering and easy experience drive share gains. Add value increases the economics of each transaction. Run lean lowers the cost structure, funds a stronger offering and enhances operating leverage. When those pieces work together, we are confident CarMax can sustainably outperform the industry.

I want to highlight the 5 key drivers of achieving our financial targets. First, as I just mentioned, we are targeting a mid-single-digit CAGR through fiscal year 2030 for used retail units. We expect the work we are doing under great offering and easy experience, along with greater industry price transparency that helps customers see the value of our offer more clearly will drive market share gains.

We are assuming retail GPU stays generally consistent from fiscal year 2027 with some expected fluctuations from quarter-to-quarter, while hundreds of dollars of per unit savings in reconditioning and logistics costs are reinvested in price. Our recent trends have proven that when our pricing is right, we gain market share.

Second, we are targeting low double-digit EPP margin dollar CAGR led by unit growth and increased per unit margins. The increase in unit margins will be driven by the rollout of new and enhanced products, heightened focus on store execution and improved provider economics through a redesigned profit-sharing arrangement.

Third, expanding Tier 2 originations drives higher loss provisioning upfront, which will impact the growth trajectory of CAF income. We, therefore, expect CAF income to be down slightly in fiscal year 2027 and flattish year-over-year in fiscal year 2028. From the fiscal year 2028 base, we are targeting an accelerating high single-digit growth through fiscal year 2030 as more of the lifetime economics flow through reported income.

Fourth, we are targeting low single-digit SG&A growth over the plan period, while units grow at mid-single-digit rate. We are on track for a $200 million run rate savings target exiting fiscal year 2027. We will reallocate savings to self-fund growth, and we will continue to look for additional efficiencies. The combination of controlled spending and higher volume creates strong operating leverage.

Finally, when you add up unit growth, EPP acceleration, CAF growth over time, SG&A leverage and disciplined share repurchases, we expect to deliver mid-teens adjusted EPS growth. We expect share repurchases to contribute low single-digit EPS growth within that framework, with the majority of the growth driven by our operating performance.

That brings me to capital allocation. Our framework has 3 priorities. First, maintain financial strength. We plan to preserve a strong balance sheet and manage within our long-term leverage target of 1.5 to 2x. That gives us the flexibility to operate through cycles and supports efficient access to capital for CAF and the broader business.

Second, investing to grow the core business. Our current viewpoint is that we will allocate approximately $500 million per year for capital expenditures starting in fiscal year 2028 to fund the areas that increase long-term earnings power and strengthen the customer proposition. The 2 largest buckets of these expenditures are expanding physical locations, including stand-alone reconditioning and auction centers, and investing in technology modernization and AI capabilities to enhance operational effectiveness and efficiencies. We will also take a measured approach to funding CAF expansion as we grow into Tier 2 credit.

Third, we plan to continue to return excess capital to shareholders. Disciplined share repurchases remain an important part of the framework. We will continue to balance those returns against the needs of the business and the relative returns available across other uses of capital. Overall, Shift into GEAR built a strong financial framework that we expect will deliver a mid-teens EPS CAGR and increase our capacity to return capital to our shareholders, which we will utilize to compound growth over time.

With that, I will turn it back to Keith for a few closing thoughts. Keith?

Thanks, Enrique. Let me close by bringing the story back to why I joined CarMax and where we are headed. I came to CarMax 7 months ago because I saw a great company with assets that are nearly impossible to replicate and a growth opportunity much larger than recent results reflected. The time I've spent with our associates, customers and inside the business has only increased that conviction. We are operating in a large fragmented market with a long runway for growth. The largest players hold a small share. We have roughly 4% of it, and we intend to take more.

We are starting from a position of strength, a truly trusted brand, a national physical footprint larger than the competition, scaled digital capabilities and an integrated retail, wholesale and CAF model. We know that customers want digital convenience paired with an in-store experience. We are built to deliver both at scale.

Shift into GEAR puts all of our advantages to work. We are strengthening our price positioning and broadening our selection. We are making the experience of buying and selling a car easier for our customers. We are expanding CAF and our protection products and taking out structural costs so we can reinvest in the offering and create leverage as we grow. This strategy will also deliver strong financial results. Through fiscal year 2030, we are targeting mid-single-digit retail unit growth and mid-teens adjusted EPS growth.

Most importantly, the work is already producing results. We are seeing how sharper prices drive share gains, how greater inventory availability and access improves conversion and sales and how extending proven capabilities like CAF creates new earning opportunities for the long term. Those early results give us confidence in the strategy, our ability to execute and the opportunity ahead. When we execute on the Shift into GEAR growth strategy, and we will, we strengthen the core of our operations, grow market share and create value for shareholders.

But this is only the starting point. We have confidence that the foundation we are building today will unlock even more growth in the future. We are moving with focus and at pace. We are holding ourselves accountable and we'll be transparent about our progress. We know what we need to do, and we have the assets and the team to do it. Thank you for your time and continued interest in CarMax.

With that, we are happy to take your questions. Operator?

[Operator Instructions] We'll go first this morning to Sharon Zackfia with William Blair.

I was hoping you could talk about maybe what your longer-term market share opportunity is, maybe framing that in terms of what you see in some of your oldest markets and where you are now? And then secondarily, it's encouraging to hear about all of the opportunities for more consistent earnings growth, but the margins are down significantly from where they were pre-pandemic. Do you think there is an opportunity over time to recapture pre-pandemic margins more in the mid- to high single-digit range? Or are there structural elements that make that more difficult to achieve?

Thanks, Sharon. Really appreciate your questions. Yes, in terms of market share, like I said earlier, we have a 4% market share of the 0 and 10 (sic) [ 0 to 10 ] market today. And we basically see the opportunity for us to continue to gain market share every single year moving forward when our pricing is correct. If you look at Q2, market was just broadly flat, and we had a 13% comp. We've seen that momentum continuing for the remainder of the year into future fiscal years, too. So we will gain market share every single year by posting mid-single digit comp growth going forward, too. So I'm really excited about the opportunity, and we'll talk more about it as the call goes on, but how we're going to go ahead and do that.

In terms of margin, it's an excellent question. I think one of the challenges of CarMax when I got here was we protected margin at the expense of sales over a number of years. Right now, we're focusing on how do we make sure that we take cost out of the business from things like reconditioning and logistics, reinvest that back into price to then have sustainable comparable sales growth and continue to find more efficiencies and leverage SG&A. Not saying that there isn't margin opportunity potentially in the future, but right now, we're making sure that we're protecting our existing margins so we can drive comparable sales growth going forward.

Ms. Zackfia, did you have anything further, ma'am?

Sorry, I thought I did my 2 at once. Can I ask one follow-up then? On the pricing, so you talked about taking hundreds of dollars of reconditioning out. Is there a linearity there? Or is there lumpiness? Like how should we think about that ability to reinvest back in pricing going forward?

Yes. So we talked a little bit about both of those areas in reconditioning and logistics. And so we are in the design phase right now of the new reconditioning system. We'll be piloting that early next year, and then we'll be scaling that up over fiscal year '28 and '29. And so that will create reconditioning savings, which we're going to reinvest back into price to make sure we can continue to drive comparable sales.

Additionally, we just finished, I think it was a 16-week engagement, redesigning our logistics network, rolling that out in terms of piloting later on this year, early next year and then be scaling up that new hub-and-spoke design logistics network over the coming years, too. So we'll take cost out probably quarter after quarter, year after year and reinvest that back into price. But you won't be seeing it come in through margin because we're going to, again, reinvest it back into price to make sure we can protect sales and have those comparable sales growth.

And Sharon, I'd say while those bleed into next year, those specific examples of digitizing, reconditioning and logistics savings as well in the nearer term, so kind of like in the here and now in the nearer term, we have taken costs out, as we talked about last quarter, going from a 90-day warranty to a 30-day warranty, improvements in sublet and also by accelerating part of that digitization of our reconditioning through a part selection tool that we've already rolled out.

So there are some nearer-term opportunities that we're executing on. But as Keith mentioned, certainly, as we look out over the scope of these 4 years, we do think that there is material opportunity to drive down costs and then give it first and foremost to -- back to consumers to drive sales.

We'll go next now to Rajat Gupta at JPMorgan.

I just want to follow up just on the previous question. Clearly, you've seen really nice elasticity this year with the initial price cuts. With some of the savings that you expect within the hundreds of dollars bucket around recon logistics, is there a way to think about how the elasticity should look like? Because you're -- the way I see it is you're looking to maintain your retail GPU, but you can still remain price competitive with those -- investing those savings into price. I'm curious if anything has changed in terms of how you do elasticity, why wouldn't you see higher growth with those savings? And I have a follow-up.

Sure. It's a great question, and I'll Enrique chime in as well, too. But again, we're going to continue to find costs taking out of the business over time to reinvest back into price. And again, we're seeing, again, Q2, 13% comp against the flat industry, that momentum continuing on for the rest of the year into the following fiscal year. So we think there's more opportunity. And again, when I think about Shift into GEAR, this is about strengthening the core of our operations. It is about modernizing parts of our business and leveraging some of our core competitive advantages to take a solid foundation and then continue to accelerate growth over time. So again, we see this as a starting point for the next few years, which gives us an incredibly strong business that can deliver comparable sales growth, mid-teens EPS growth and then continue to accelerate going on from there. So Enrique?

I think what I'd add is like the elasticity versus what we saw in the past is very similar. So it's not like the elasticity has changed. And in our second quarter call, what we did talk about in terms of driving our comp performance of 13% comp kind of split between items that we control directly that was pulling costs out of reconditioning, right, as well as lowering GPUs, but then also supported by the FTC enforcement. So it's roughly half-half split between what drove our comps that we had talked about last quarter. But overall, the elasticity hasn't really changed versus what we had seen beforehand.

Understood. Got it. And just on CAF, I appreciate all the color around increasing the Tier 2 penetration. It all makes sense. I didn't see anything on like total CAF penetration. It took a bit of a step back last quarter. But I'm curious, is that 40% based on maintaining the current level of total CAF penetration? Or is that going to drive -- also drive incremental total CAF penetration? Just curious to get an update there.

Yes, Rajat, this is Jon. Thanks for the question. Yes, I think total CAF penetration still remains a focus. We said we wanted to target 50% by FY '30. That is still absolutely in the cards. We wanted to highlight the specific percentage of Tier 2 metric because we really think it just shines a spotlight on really what we're focusing on and what we're going after, capturing an appropriate share of the Tier 2 percentage. And clearly, you've seen we've made great strides there, and we'll continue to do so into FY '30.

We highlighted during the Q2 call that for Tier 1, while we absolutely can control how much we take, it is cyclical and a function of the economic environment with interest rates going up, you will lose some to cash, you will lose some to credit unions. So we didn't want that to really not hide how much we're taking in Tier 2. So we will -- we will absolutely highlight both metrics going forward, but we really want to localize in on the Tier 2. We think that's important to track our progress on the growth.

We'll go next now to Brian Nagel of Oppenheimer.

So the first question I want to ask, just within the, I guess, the context of the new longer-term financial plan you're outlining today. And how should we think about, I guess, the linearity of that plan? And the reason I'm asking is having followed CarMax for a while, there have been -- in the past, there have been other algorithms that have been put forth, but it's -- there's been a lot of choppiness within those algorithms, meaning that the company has only really operated on algo in a very short amount of time. So as you're looking about this new financial plan, do you think there's -- should we think about this as more linear? Is there going to be more consistent growth in CarMax going forward?

Yes. Thanks, Brian. That is absolutely our focus, and that's why we pushed -- positioned the algorithm the way it is. We believe fundamentally, we can have sustainable, consistent levels of comparable sales growth going forward by maintaining our pricing correctly and by taking cost out of the business. And what gives us confidence in that, Brian, is, and as Enrique commented on earlier, every year, we see opportunities to take cost out of our business in terms of logistics and reconditioning, finding ways of making us more and more efficient and just keep our pricing, again, competitive within the broader marketplace, too.

And also going back on the FTC piece earlier, that clearly is a tailwind for us for the foreseeable future. I also see it as a longer-term structural tailwind for CarMax because really, the lack of compliance to FTC guidelines was a bit of a headwind for CarMax. We were always being transparent in our pricing when the industry wasn't. And it's going to just reaffirm to our customers the strength of the CarMax value proposition and the CarMax brand. And two, so again, to your point earlier, we expect to have a much higher level of consistent growth going forward and less variability, again, assuming that there's a generally stable macroeconomic environment and no major exogenous events.

That's helpful. And then my follow-up question, in the presentation, you talked about the 250 or so stores you currently operate. The question I want to ask is, as you look at the operating model today, I mean -- and to get to the financial goals we're talking about today, a, is there any needed investment or then -- or b, is there any type of restructuring? Do you have the right number of stores? Are the stores configured correctly, et cetera?

Yes. It's an excellent question, Brian. And I think I would call this as an evolution, not necessarily a revolution for CarMax. We have an amazing geographic footprint, but the model is going to need to evolve to have consistent delivery of comparable sales growth and higher efficiencies. And so we are building stand-alone reconditioning centers. We're moving to a hub-and-spoke logistics network. We're digitizing reconditioning.

We've guided from a capital perspective about $500 million a year to reinvest in those technologies and in that physical footprint, and we'll evolve and change it every year to deliver consistent levels of performance. So I wouldn't say there has to be a massive transformation overnight. It will be an evolution of the model in the most efficient way possible as we kind of roll out reconditioning centers, as we roll out the new logistics network, if that makes sense.

We'll go next now to Jeff Lick with Stephens.

I'll echo what Brian said. Keith, now that you've been there for a little while, and obviously, you were new to the used car business, but not new to running businesses. I'm just curious if you can maybe just talk about where some of the lowest hanging fruit is that you've seen or where you see the biggest changes to kind of how the Keith Barr regime will run CarMax versus how it was run previously?

Yes. Thanks, Jeff. I'll say this. The car business is a very simple business and a very complex business. It's very simple. It's like if you get your pricing right and understand how that flywheel works, you will drive sales and you will drive EPS. And so I understand that really, really well. How you do that consistently is the hard part about this business. How do you consistently take cost out? And I think the biggest thing I'd say, Jeff, what's different is I think about leveraging our scale, centralization, digitization, just becoming a more efficient business.

For 30-plus years, this was built as a fairly decentralized business. Logistics was point-to-point. Stores were doing reconditioning and doing it different ways, still using clipboards, still using whiteboards. There's so much opportunity here, Jeff, to leverage technology, data, analytics, AI, centralization and leverage scale to just drive performance and scale is what wins at the end of the day. So we're well positioned from a physical footprint perspective, and we have the financial capacity to invest in the things that will help us win in the longer term.

And actually, that's the upside opportunity for CarMax, right? There's a lot of things that we haven't invested in to the degree that we needed to, and we're going to do that now within our capital guidance and really that will drive sustainable performance. And so digitization, centralization and just how we leverage scale in a very different way and moving away from being such a decentralized business.

And as a follow-up, I just -- I wanted to ask this question kind of in a respectful intellectual curiosity way as opposed to a sell-side analyst smarty pants way. But with respect to the -- when you highlight that customers want a store connection with digital convenience, I'm just curious your theory as to if that's the case, why has Carvana's growth rate -- on a big base now, they're not growing high percentages on small units anymore. Why do you think that's the case? I'm just wondering if it's possible that there's a subsector of used car buyers that don't want -- don't really care about the store and if that subsector has vastly different kind of psychographic and economic characteristics attached to it?

It's a great question. I'll approach it 2 ways. I think there are going to be 3 types of customer journeys going forward, and I'll talk a little bit about the competitive landscape. I believe there are a subset of customers who will be end-to-end digital, who want to start digitally and want to complete digitally and don't want to come to a store. There are a set of customers who actually just kind of almost start at the store, and there's the ones that are in between where they progress digitally and then they want to complete in the store.

I was just looking at some of the most recent consumer insight data we have. What was interesting to me was how many customers, even though they complete digitally, actually test drive either at an OEM or at CarMax or at another used retail dealer. So customers are -- even though they say they're digital, the truth is the vast majority of them are still going to a store to test drive it. Even then they may complete it digitally, too.

And so I think that's why CarMax is so advantaged, right? We can do the complete in store. We can do the end-to-end digital, and we can do the combination of the best of both worlds, too. And so we have to improve. We're going to get better in a lot of those areas. But again, we are structurally advantaged to be able to take advantage of the growth opportunities here.

We'll go next now to Daniela Haigian with Morgan Stanley.

I think my first one is kind of digging into this reconditioning theme. Keith, you made a very clear connection between having more salable inventory and the ability to grow market share. So if you think about how you're adding more reconditioning or stand-alone reconditioning centers, you're kind of reorienting some of your stores moving to this more in-store. How do you -- what are some numbers you can share around that in terms of annual throughput at your stand-alone reconditioning centers, the number that you want to add, the percentage you want to in-source or any other kind of goals internally around that initiative?

I think when thinking about sellable inventory, there's multiple ways to increase our sellable inventory, right? So there's adding off-site production and auction centers and think about those as like the largest of our large reconditioning centers. So think of like a Murrieta in San Diego, you're looking at about 500 a week. And so you're looking at a very strong capacity to recondition.

But there's also taking a look at our hold policy, taking a look at our transfer policies, right, and making sure that for the inventory that we do have, that we're being as efficient and we're maximizing the speed at which they're moving. And so we're taking a look at all 3 of those different items. And that's part of the journey as well, right, which is how to make sure it's not only adding off-site production capacity, but it's also maximizing again, the efficiency of the inventory that we have.

And just to expand on that a little bit. I mean, we're looking at how long should the hold be allowed. Should we be doing free transfers, should be paid transfers, understanding which vehicles should be able to be held, which vehicles should be able to be transferred. I think we were doing a lot of things that were great for our customers, but we're actually making us less productive as a business sometimes and not having the payback that we need to.

And so we're really encouraged by the early tests we're seeing on faster transfers. We're really encouraged by how we're seeing the impact of paid transfers and shorter holds. All these things effectively just give us more saleable inventory without having to just buy more vehicles. So more and more efficient. I talked to the team about making our existing assets just work harder for us day in and day out.

Got it. That's really helpful. My second one is on CAF. You had a really helpful slide, Slide 22, where you kind of show the unit economics or profitability of held for investment versus held for sale versus kind of these origination fees for third parties. Your target is for 40% penetration in Tier 2. What -- is there some reason that, that's kind of an optimal number? Would you prefer to have more penetration? Is that a better economic outcome for you? Or is there some benefit to kind of leaving some Tier 2 originations for third-party lenders?

Yes, Daniela, I appreciate the question. So the reason we offered 40% is, again, time-bound exercise here, we're giving you FY '30. So we feel like -- and we stated this on the prepared remarks, we want to have disciplined structured growth here. We're growing our funding capabilities. We're learning about our underwriting. We're continuing to iterate. So that's just the trajectory that it takes us and want to time bound that on FY '30. But yes, beyond that, we absolutely believe there's more value to gain.

Now what I will say is our partner -- our overall credit platform that includes our long-term partners that we value tremendously, they will always be a part of our platform. The question will be what's the optimal amount for cash to take versus the partners and how much we have. That is something that we will continue to evolve. But 40% is FY '30. But beyond that, we definitely see there's more opportunity.

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

I just wanted to see if you could sort of contextualize the level of price investment we should expect? Like maybe sort of benchmark us how much did you sort of take like-for-like pricing down this year? What would be the expectation moving forward? And then what is the price gap you see versus some of the other franchise players and digital players? Like how much price needs to be taken to be more in line or to drive that higher volume?

Yes. Thanks, Alex. I mean I think the team has done an exceptional job, I think, about how we think evolving our pricing. So first, it was, yes, we did lower GPU a year ago. Then we've also taken more cost out to be able to us to price competitively. We've also updated our algorithms now. We're bringing more local market data, and I'm going to continue to iterate those algorithms to be more dynamic in our pricing and really understanding how we compete at the unit level and at the market level, too.

And so it's not like there's a set number of, hey, we have to reduce price by another $100. It's really understanding how do we price the individual vehicle sharper and smarter in individual markets based upon what's happening there. Then continue to take cost out every single year. So as inflation comes in, we take cost out to make sure we can maintain our relative price positioning.

So CarMax deserves a premium. We provide just an exceptional experience, a great trusted brand and so forth. But we have to make sure that there's a sensitivity to how much of a premium we should charge. And we're quite clear about that actually. We don't publicly disclose it, but we actually really understand exactly where we need to be positioned in the market, and I think you're seeing that flow through in our results now.

And then I just wanted to ask about the algo and the timing of the algo on the unit side. I guess, does the mid-single-digit growth rate hold into next year? It sounds like some of the more chunkier significant initiatives won't come online until next year. So I just wanted to make sure that sort of mid-single-digit rate would hold through next year, especially when you have some of the difficult comps from the initial price investments and FTC tailwinds as well.

Yes. As Keith mentioned, our goal is to drive sustainable and kind of predictable performance, right, year-over-year-over-year. And so I would say that quarter-to-quarter, there can be some variation, right, certainly within the span of 3 months. But from a year-over-year-over-year standpoint, we are looking to drive kind of predictable, sustainable performance. So I would think about our guidance kind of within that context.

We'll go next now to Craig Kennison with Baird.

In the past, you've talked about online sales penetration, which has been a metric that really has been stuck in the 14% range. Is that a number you focus on? And is it something you can move the needle?

Yes, Craig, thanks for the question. Definitely an area we're focused on. I mean, what I've been focused on with the team, though is just maximizing comparable sales growth, depending on whatever channel it comes through. And again, we're seeing that the vast majority of our customers do want to come to the stores and complete in stores. What we're really focused on, Craig, is having those customers be further progressed digitally, so we'll be much more efficient at converting them in our store operations.

And so we talked a little bit about it now, how we're leveraging our AI agents to help customers progress further digitally so they show up in the store ready to be able to transact to. And so again, an area that we're focused on, but really overall focusing on total comparable sales irrespective of what channel they come through and what experience they have.

And you mentioned your AI agents. I'm wondering what you're doing more broadly to prepare for an agentic commerce world and maybe what your vision is for CarMax to play a role there?

Yes. No, it's an excellent question. So we were having conversations the other day. Clearly, we -- as an industry, we started off on SEO for the longest time, right? And now we're into the GEO world. So making sure that we have the right content and data, and it's organized the right way so that when consumers are using LLMs, to search for vehicles, CarMax shows up exceptionally well. And we know how to do that, too. So we're great at SEO, we're great at GEO.

agentic shopping hasn't really taken off yet, and we're going to make sure that our systems are set up to understand exactly what is the consumer journey going to look like with agentic shopping, when they're leveraging Muse or what other agent they build or choose to use and how is that going to interact with CarMax? And what do we want customers to be able to do and what do we not want customers to be able to do.

And so we've got an entire team working through and thinking about that from purchasing vehicles through also our EPP products through our financing pieces right now, too. And so more work to do, but it's still just early, early days for agentic shopping. And I think shopping for vehicles is going to be one of the more complex use cases for agentic shopping versus kind of traditional CPG.

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

It's Scot Ciccarelli. I believe CarMax's management team has historically talked about having dynamic pricing really for years because you're the biggest buyer in seller of vehicles and had the best industry intelligence on market price. So do you have any examples of what's different now in your dynamic pricing efforts versus what you were doing previously?

Yes, I'm happy to chime in, and then I'll probably look to Enrique since he's more of the historian here than I am. So I think historically, we had incredible data -- well, we still do today, but we had incredible data on what was happening in the marketplace based upon what we were doing, what we were buying vehicles for, what we were selling vehicles for, how things are being priced in the marketplace overall. But it was still a fairly margin-based pricing model at the end of the day with limited external data actually driving variation in dynamic pricing. What we've done now is brought in a lot more external data to help us make -- have more variability in terms of how we're going to price vehicles.

And that's why, as Enrique pointed out, we may have some variation quarter-to-quarter in terms of GPU, still be committed on a full year basis to what we're guiding, but we're going to make sure we're maximizing sales by having the most competitive pricing possible, too. And so it's just more dynamic and the algorithms are getting much more targeted on individual vehicles and individual markets versus more kind of archetypes it's historically how would go.

So I don't know if, Enrique, you want to add.

Yes, I think you're spot on. I think in the past, outstanding algorithms really based off of our own data, right? And what we're incorporating now is external data at a market level. So it allows us to be much sharper on pricing. That's exactly correct, Keith.

Yes. I think that's a natural evolution when you think about CarMax's history. CarMax was the marketplace. I mean there was really nothing at the scale of CarMax for the longest time. The industry has evolved and changed. It's a lot more easy for price discovery across third-party channels through competition and so forth. And so we have to make sure we really understand all that external data to make sure our vehicles are priced competitively, so we can continue to deliver that level of comparable sales growth on a sustainable basis.

And then secondly, historically, when you guys added lenders to any of your tiers, it led to incremental sales. And I would assume a more aggressive positioning like you're doing in Tier 2 right now would provide something similar. So what kind of assumptions are you making for incremental sales growth from your Tier 2 expansion?

Yes. I appreciate that question, Scot. So I just want to frame from where we sit today versus incremental sales, and I'll make this clear. In Tier 1, CAF has always been the sole lender. Obviously, we've talked about it in the prepared remarks even that CAF makes decisions in the best interest of the broader CarMax, the customer, what have you, and we absolutely drive incremental sales there. If you had solely a third-party institution or a lender sitting there making the only offer, we make, we believe, just interest far better in the interest of the broader organization.

In Tier 2, we have always had a multi-lender platform, 3, 4, 5 lenders at any given time buying for that customer. If you add a sixth, absolutely, you will drive sales. What CAF is actually doing is we have spent the last few years honing our strategy and optimizing how we show our offer. But in some cases, we are competing. And in some cases, we are the sole lender. So going from 5 to 1, we are capturing all of the finance income. There is tremendous value there. We are winning all the deals, but there are fewer offers made to the customer. That's where you might not see necessarily added sales, but tremendously more finance income captured.

So I want to draw that distinction between adding a sixth lender versus adding CAF and how we're operating in Tier 2 today versus how we would assume CAF benefits the company in Tier 1. Does that make sense?

Okay. Yes. I appreciate it.

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

I guess just, first of all, you talked about having the stores owner relationship. And I was wondering how that's worked so far? And also, what are the hiccups that have arisen to date so far in that approach?

Yes. No, great question. Thanks, John. Early -- still early days of testing it and mapping out the customer journey. Let me frame up the challenge. We created some fantastic digital platforms, great customer experience centers and really, really engaged associates at the store level. Every one of those individuals had the opportunity to engage with a customer, which may sound like a good thing, but it can be a bit of a confusing thing sometimes. So that customers are starting on the website, they are then actually being engaging with the customer experience center, then actually the store is contacting them.

What we've done is just really streamline the customer contact strategy. We're also leveraging AI and things like Sierra now, handling all the inbound calls to our stores and to our CECs, so they're getting routed correctly and faster the information that customers want. So we're just making it just smoother and easier for the customer and having less points of contact coming from different parts of our organization, too.

We're still going to have to refine it, but I'm definitely encouraged by the initial thinking that the team has done on it and being crystal clear about wanting the store at the right point to own that customer because they know the local market, they know the vehicle. They can answer those questions that somebody digitally probably couldn't do to the degree of specificity that we really want to be able to handle.

Okay. And then next one on CapEx, I think you mentioned potentially about $500 million. Was that annually, I think, in fiscal '28 and beyond. How much of that investment do you plan to make in technology and AI? And then also, how do you see AI helping on the cost side?

Yes. No, absolutely. Yes. So that's correct. So it's $500 million kind of way to think about FY '28 through FY '30. This year for FY '27, we're still sticking to the guidance we had given at the beginning of the year, which is about $400 million for this year. But think about the $500 million is largely driven by capacity and options to the off-site locations there that we plan to grow to make sure that we can meet our sales targets moving forward.

The second largest chunk of spend, I'd tell you is within technology, right? So think about the platform, the digital platform we're rolling out for reconditioning, think about logistics and the investments we'll be making there. Think about the investments in AI that we'll be making, really exciting investments that we think will drive performance, sales, bottom line kind of moving forward. So we're really excited about that outlook and what it's going to drive.

And in terms of driving efficiencies, we do think there's even more efficiencies to be had. You can see it in our strong operating leverage outlook that we're providing, mid-single-digit retail growth and low single-digit SG&A growth. That is really driving operating leverage moving forward, and that contributes to the really strong flow-through that we're projecting, right?

So you're looking at, again, mid-single-digit unit growth and 3x the EPS growth. That is really strong operating leverage that we're predicting and margin leverage as well. So we're excited about it, and we think it's a robust framework to roll out there to the market.

John, just to add on to that, why should investors have confidence in this plan at the end of the day? Because again, it's easy to put forward numbers and show a great algorithm. It's just there is so much opportunity in CarMax to just drive better performance and leveraging technology. And I'll just make it real for you. Right now, if you go to one of our reconditioning centers, it's a clipboard being then -- somebody writing down what they think needs to be done on that vehicle. In the future, it will be a digital picture. That individual is determining what parts to order. The system will tell you what it does.

We can't compare and contrast how each store is performing against one another at a real level of detail. I mean there's so much opportunity to leverage technology that will just drive efficiencies into this business and let us reinvest back into price and drive comparable sales too. And so the logistics network is the same thing, looking at it the other day, moving from point-to-point to hub and spoke, it's just going to be materially more efficient for us. We'll have fewer moves. We'll have better load capacity on trucks. I mean it's like all these things are just upside for us to take cost out of the business, which again, we reinvest back into price and drive comparable sales, which is why I hope our investors have confidence in what we're doing moving forward.

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

The first one would be just on the low single-digit expense algorithm. We think kind of just like base wage and fixed asset inflation and advertising probably gets you to that low single. So implicitly, it assumes you're getting 0 cost growth on units. So can you just talk about to what extent that's operating leverage versus cost takeouts and how you guys think about that over that multiyear planning horizon?

Look, it's a mix of the 2, right, Chris. And so we've said -- we have said very clearly, we're taking costs out. We expect to take out $200 million by the end of this year in terms of savings opportunities. We will hit that number. But we've also said we're going to take a portion of those savings to reinvest back into the business to make sure that we can then hit our growth numbers. And so that's what you're seeing play out in the guidance. You're also looking at year-over-year, you're going to have inflationary pressures that we're going to be offsetting in addition to the cost takeouts that we're going to have. So I would tell you it's a mix of the 2.

Got you. Okay. And then I was hoping just to provide a little more context on the recon and logistics at hundreds of dollars. Is there a way to frame like what percentage of costs that would represent of the company? And then also, how does that level of cost out compared to the past? So the company is perpetually taking cost out of recon. So just a sense of like how this hundreds of dollars would have compared to historical cadence also would be helpful.

Yes. I mean hundreds of dollars at this point in time, as we're going to be rolling out the digitization next year, from a logistics standpoint, we're piloting at the end of this year, rolling it out next year over the next kind of 12 to 24 months. We're going to stick to kind of the more qualitative hundreds of dollars in terms of outlook, what we're going to pull out.

To Keith's point, we think there's tremendous opportunity. When you think about where we're starting from, from papers, clipboards, right, to digitizing our processes, modernizing our systems, all within the context and framework of our CapEx guidance and our SG&A guidance, you're looking at just a lot of opportunity. And I think the point more, Chris, is like we know there's a ton of opportunity in terms of bringing costs out of the business, and we recognize how incredibly powerful that is to support our sales, right?

And to pass those savings on to customers. We have seen firsthand here the impact of improving our price competitiveness, the relationship to driving our comp performance, and that is really the goal in terms of pulling costs out of the system, which is to drive our performance.

Yes. And we just got amazing associates across the entirety of our business. And what we need to do is help them do their jobs better. Use technology need to be an enabler and then leverage the data and analytics to find out where there are continued more opportunities for us to get find cost savings in the business, too. And so we start from a position of strength with great associates. Now we just need to put the right tools into their hands literally and figuratively so they can really continue to drive our growth going forward.

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

First question on testing faster delivery times. Can you talk about the uptake in conversion rates you've seen so far? That's been an area where CarMax has arguably been behind peers. How quickly can this capability get scaled up? And how does that faster delivery contribute to the mid-single-digit retail sales CAGR you're outlining today?

Thanks, David. Again, we are now probably a couple of months into the test for fast transfers in a couple of different markets. We're determining what's the optimal balance of cost versus speed and what's the impact going to be on comparable sales versus cost. And so we're really encouraged by what we've seen so far. We haven't landed on exactly what we think we want it to be, and we want to scale it up to a few more markets, but we definitely see faster transfers coming into the mix and how we're going to operate the company moving forward and being a tailwind for comparable sales.

But it's not as if, hey, we have to do faster transfers to get to this mid-single-digit comp growth. We're confident with the pricing we have right now with the opportunities we have from our sales associates, we can deliver that even if we don't have faster transfers, but we do see that coming into the mix as another one of the levers that we're going to be able to pull.

Got it. Okay. And I also wanted to follow up on the agentic commerce comments from earlier. I don't think you mentioned the Skye agent much on this call, but agentic may be a good proof point on some of these higher consideration purchases such as a used vehicle.

So I know it's very early, but can you help us think through this? And maybe does agentic get consumers to progress more through digital channels, just given more content and context behind the purchase? And then second is, does this also make the logistics network and the store network of CarMax even more of an advantage if we get an agentic world?

Thanks. I think CarMax is really going to be advantaged in an agentic world for a variety of reasons. I think first, though, it's, as you said, in the shopping experience, making sure we've got our content right from SEO and from a GEO perspective. Then it's making sure we're leveraging our agents through Sierra and through Skye, our internal agent with ROADS, helping our associates have the information they need. We're actually using AI in scoring and CAf now and analytics. So there's huge opportunities there.

Then I think it's understanding like how do we want to have agents who are actually going shopping, engaging with CarMax. Clearly, our Skye agent helps people progress further. How are agents going to engage with agents in the future as well, too. And so I think there's a lot of opportunity for us, but we're still kind of very, very early days, David.

I would tell you at a high level as well, just building on that, like there's undoubtedly our digital infrastructure puts us in a really strong place relative to others in the marketplace as well as just the amount of inventory that we have. When you look at the LLMs and what they're looking for, having more inventory is good. It will drive business to your site. And as you know, we have a tremendous amount of inventory, and we've invested heavily in our digital infrastructure. Those are 2 key items when thinking about the impact of the Gen AI on our -- on us moving forward.

We'll go next now to Michael Montani with Stifel.

I wanted to ask, if I could, about first off, on store count. I was wondering how many stores you guys plan to build out per year and what you think the right number is ultimately to kind of realize the goals you've outlined? And then I had a follow-up.

Yes. Thanks for the question. I'd tell you in our outlook, we have much as this past couple of years here, a small handful of stores, new stores that we're going to be building out similar in profile, meaning they're going to be our cross-functional smaller footprint stores, but that's the kind of the underlying assumption within our CapEx guidance. So yes, think about it as a small handful of stores that we have.

Just to build on that a little bit to what we've been talking about as a leadership team is how to make our existing assets work harder and better for us. So how can we be selling more and more vehicles faster, more vehicles on the existing footprint, pushing it through the pipe faster effectively, too. And so -- and there's significant opportunity for us to do that as we think about building our reconditioning network, our logistics network that frees up parking spaces at stores, hence, we have more sellable inventory in stores. There's just a lot of opportunity to sweat our existing assets a lot harder than we do today to drive sales growth.

Got it. And then the other question I had was around operating margin, and this has been asked a couple of different ways. But when you look at the prior operating margin, say, circa 2019, it used to be in the mid-single digit, like 5%, 6% realm. I'm kind of coming to

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Overall, a strong acceleration of our per unit margin in EPP as well as just increasing from volume growth. We're taking a look at overall CAF performance and accelerating that -- it's an investment that happens in the near term this year, next year, but then really positioning us for FY '29 and beyond to accelerate our growth there. And you're looking at an SG&A model that does lever and it provides a lot of operating leverage when it comes to the business.

And that really helps us drive what I think is a very robust financial framework of mid-single-digit unit growth to drive an EPS CAGR of mid-teens. That's a 3x factor when you're looking at volume to flow through, right? And the majority of that is going to be coming from operating performance.

We do have an assumption around our share repurchase program. As I mentioned in the presentation, low single-digit accretion there that we expect to support EPS. But you're looking at an operating model moving forward. starting from today, really, that is delivering robustly on margins, on EPS and on retail units.

We'll go next now to Rob Saltzman with UBS.

Just one quick one on my end. So you highlighted the low double-digit growth in EPP for the financial targets. However, given the increased focus on consumer affordability, and historically, the first thing that consumers tend to pull back on when feeling affordability pressure tends to be some of these warranty and protection plans. So given that macro backdrop, what gives you confidence in those low double-digit targets given what might be a more pressured consumer than 6 to 12 months ago?

Yes, Rob, this is Jon. I'll take the initial part of that question and let Enrique weigh in. We talked about this on the Q2 call. The product that we've implemented, the refresh product that we implemented that has been so successful and we're so proud of is it really focuses on providing actually, frankly, a more affordable product for customers. Historically, our plan was 5 years long.

Obviously, there comes with the cost there. We felt like there was an opportunity to provide 2- and 3-year products, different. Obviously, we've always looked at different mileage bands and different deductible amounts, but we think we're providing a much more affordable product. So if customers just want a 2-year plan to get confident with their initial purchase, we make that available to them. That clearly comes at a lower cost. So we are seeing a better take rate on that. It has proven itself out, and we think we're very attuned to the affordability needs of the consumer.

Yes. I think in addition to that, we've also gone back to our third-party partners, and we've narrowed down the number of partners from 3 to 2 and negotiated a better deal for us, if you will, with those 2 partners, whereby we expect to get profit sharing from those partners. So that's -- it's not only from driving performance in the stores. It's also an increasing penetration and margins. It's also from on the back end sharing in the profitability of the program.

And we're seeing the results flow through already.

Yes. And as you saw in the second quarter, in the first quarter, you saw some of the benefits from increased penetration and margin. In the second quarter, clearly a step forward. And our guidance for the full year clearly points to our confidence in what we've rolled out.

Gentlemen, it appears we have no further questions this morning. Mr. Barr, I'd like to turn things back to you, sir, for any closing comments.

Thank you, operator. I want to thank everyone for your time and your continued interest in CarMax today. It's been a robust conversation. Hopefully, you have a better insight into our strategy and how we're moving the business forward. We're really, really encouraged by our results to date and really have confidence in the road ahead. So look forward to catching up with you when we update you on Q3, and I hope you have a great remainder of the week.

Thank you very much, Mr. Barr. Again, ladies and gentlemen, this brings us to the end of today's meeting. We do appreciate your time and participation. You may now disconnect.

Ladies and gentlemen, thank you for standing by. Welcome to the Second 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 your speaker today, David Lowenstein, VP, Investor Relations. Please go ahead.

Good morning. Thank you for joining our Fiscal 2027 Second Quarter Earnings Conference Call. I'm here today with Keith Barr, President and CEO; Enrique Mayor-Mora, Executive Vice President and CFO; and 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, our annual report on Form 10-K for fiscal year 2026 and our quarterly report 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.

Our commentary today may include non-GAAP financial measures. Reconciliations of these measures to the comparable GAAP measures are available in the investor presentation.

Should you have any follow-up questions after the call, please feel free to contact our Investor Relations department at (804) 747-0422, Extension 7865.

Lastly, let me thank you in advance for asking only 1 question and getting back in the queue for more follow-ups. Keith?

Thank you, David. Good morning, everyone, and thanks for joining us. As I reflect on my first 6 months at CarMax, I am proud of the progress we have made in strengthening the business. Last quarter, I introduced our strategy for growth built around 4 pillars that place the customer at the center of everything we do and that are designed to meaningfully improve how we operate at scale and support consistently strong performance. Our strong second quarter results reflect solid execution and the initial benefits we are seeing as we deliver on the strategy. Used unit comps grew 13%, driven largely by improved price competitiveness with total units across used and wholesale growing 15%. Earnings per share grew 81% year-over-year to $1.16, supported by robust comp growth other gross profit expansion through the performance of our extended protection plan products, an increase in CAF contribution and continued SG&A leverage.

I want to thank all of our associates for their hard work, which has underpinned these results. Enrique and Jon will speak to our second quarter performance in more detail in a few moments.

Our improving performance has been driven by the speed and focus our teams have put into delivering our strategy. We have named our strategy for growth Shifting Gears and have rolled it out across our corporate offices and entire field organization. Our associates are highly engaged with the steps we are taking to strengthen our core operations, which are designed to deliver robust financial results over the years to come.

We have a lot to be proud of, and I want to highlight a few examples of the progress we made across each of our 4 pillars this quarter. While we speak to the pillars individually, like many aspects of our business, they are interconnected and many overlapping benefits exist. As a reminder, Shifting Gears starts with a great offering. We will give customers every reason to choose CarMax by offering a great car at the right price. During the second quarter, we further strengthened our price competitiveness to support retail sales growth. We did this by continuing to drive efficiencies and reconditioning, dynamically managing GPUs and then passing savings on to customers.

In addition, we continue to improve our pricing algorithms to ensure we remain more competitive across demand cycles. We did this by incorporating local market insights more granularly and by expanding comparison points across a broader set of vehicles. These enhancements resulted in sharper pricing that resonate well with our customers and supported our sales.

Our second pillar is easy experience. We will make it easy to do business with us, both online and in our stores. This quarter, we enhanced the customer experience to better support the purchase journey from digital to in-person. We scaled AI voice technology to 100% of both inbound store and customer experience center calls which enables customers to quickly resolve their increase through our agent AI tools or directly connect to the right associate for help. Additionally, we improved our digital experience by redesigning our car detail page to make it easier for customers to find and buy the right car for them. Recent updates include providing greater visibility into our inventory selection, incorporating personalized monthly payments and communicating next steps in the purchase process more clearly. The enhancements we made this quarter supported sales conversion, and we anticipate further gains over time.

Our third pillar is add value. This pillar focuses on growing profitability by maximizing value across all aspects of our business. This will be done by connecting customers with valuable offerings and by capturing a larger portion of customer financing through CAF. During the second quarter, we grew our extended protection plan unit margins materially year-over-year as we continue to launch our redesigned offering. Additionally, we increased our Tier 2 penetration and recorded a gain on the residual sale related to our 26 nonprime securitization.

Our final pillar is run lean. We will unlock efficiencies to enable a great offering meaningfully improve how we operate at scale and support strong returns for our shareholders. During the second quarter, as I noted earlier, we continued taking costs out of our reconditioning operations and maintained our approach of passing savings on to customers to more competitive pricing to drive sales. Also, from an SG&A perspective, we took additional steps this quarter to solidify achieving our commitment of $200 million in fiscal year 2017 exit rate savings. To support advance shift into gear, we are strengthening our leadership team. Today, I am pleased to announce 2 key appointments that will help us build on the momentum we are seeing as we begin to deliver on our strategic plan. First, effective October 5, Elizabeth Bergens will join CarMax's Executive Vice President, Chief Digital and Customer Officer. In this newly created role, Elizabeth will own and unify the end-to-end customer experience from customer acquisition through vehicle transaction. In this capacity, she will oversee our marketing, product and Edmunds team.

With more than 2 decades of digital product and customer experience leadership, Elizabeth comes to us from Volkswagen Financial Services, where he served as Chief Digital Officer for the North American region. Second, Jeff Campbell, who has been with CarMax for over a decade, joined our senior leadership team in August as Senior Vice President, Strategy. Jeff is leading a newly centralized function designed to accelerate key decisions by bringing together all of our strategy, data science, AI and pricing teams. Jeff has held leadership roles at CarMax spanning Product, Strategy and Transformation. Elizabeth and Jeff both bring skills, experience and focus we need as we build a faster, more connected company that puts the customer at the center of everything we do. Both positions will report directly to me.

Our customer promise is to deliver a great car at the right price with an online and in-store experience that our customers love. All the steps we have been taking are in service of that promise and to create confidence for the road ahead for our associates, customers and investors. We have a clear strategy, a solid foundation and a team that is committed to delivering strong unit and earnings growth that enables us to consistently reward our shareholders.

Based on our second quarter performance, continued momentum and improving leverage, we intend to resume share repurchases at a modest level in the third quarter.

Now I'd like to turn the call over to Enrique to discuss our second quarter financial performance in more detail. Enrique?

Thanks, Keith, and good morning, everyone. We are encouraged by the recent growth across the business as our Shift Into Gear strategy is yielding strong financial results, highlighted by the continued improvements in our year-over-year sales and earnings trends. During the second quarter, we delivered total sales of $7.9 billion, up 19% compared to last year. Across our retail and wholesale channels, we sold approximately 388,000 vehicles, up 15% versus the second quarter last year. In our retail business, used unit comps increased 13% and total used unit sales grew by 14%.

Sales performance this quarter was primarily supported by more competitive pricing. As Keith discussed, we continue to realize efficiency gains and cost of sales, and we dynamically manage GPUs, passing those benefits on to customers.

Together with the enhancements we are making to our pricing capabilities, these actions supported a significant improvement in our year-over-year sales trend.

In addition, we benefited from enhanced FTC regulatory focus that has brought greater transparency to advertise vehicle pricing industry-wide by requiring fees to be included. Given our long-standing commitment to transparent no haggle pricing, this brings more clarity to the strength of the CarMax consumer offer by enabling customers to make more direct price comparisons and is a tailwind to our business.

Average selling price was $27,623, a year-over-year increase of $1,630 per unit. Wholesale unit sales were up 16% versus last year's second quarter. Average wholesale selling price increased by $145 per unit to $8,036. We bought approximately 310,000 vehicles during the quarter, up 6% from last year. We purchased approximately 262,000 vehicles from consumers, relatively flat to last year's second quarter.

With the support of our Edmunds sales team, we source the remaining approximately 48,000 vehicles through dealers, which was up 54% from last year.

Second quarter net earnings per diluted share was $1.16 versus $0.64 last year, an 81% increase, a strong positive change in year-over-year trend relative to the preceding 4 quarters.

Total gross profit was $799 million, up 11% from last year's second quarter. Used retail margin of $479 million increased by 8%, driven by higher volume and partially offset by lower profit per used unit of $2,105, which was down $111 per unit from last year's second quarter.

In managing margins more dynamically, we lowered GPUs by less than the full year $200 per retail unit outlook we provided previously as we balance demand, margins and efficiency gains in our reconditioning processes to support sales.

We expect FY '27 full year retail margins will be down less than the $200 per unit as compared to FY '26.

Wholesale vehicle margin of $138 million was flat to a year ago with higher volume offset by lower gross profit per unit of $858, which was down $135 per unit.

Other gross profit was $183 million, an increase of $46 million or 33% from last year's second quarter. EPP margin dollars were up $27 million, driven by growth in both unit volume and unit margins, which are up $46 per unit in the second quarter. We have been encouraged with the impact from our EPP product redesign, focused on providing our customers with more affordable options and from our new real tire and dent product offering.

We remain on track to drive approximately $35 per unit in incremental EPP margin for the full fiscal year.

Service margin increased by $22 million, driven primarily by efficiency gains and cost of sales and leverage from unit volume growth.

CarMax Auto finance income of $136 million was up 32% year-over-year. Jon will provide detail on CAF in a few moments.

On the SG&A front, expenses for the second quarter were $629 million, up 4.6% from the prior year. SG&A levered robustly by $157 per total unit or 9% to $1,621. SG&A dollars for the second quarter versus last year were mainly impacted by the 2 factors. First, compensation and benefits, excluding share-based compensation expense increased by $11 million. This year-over-year comparison reflects materially lower corporate incentive compensation in the prior year and strong performance this year. Excluding this impact, compensation and benefits would have decreased by over $14 million, primarily reflecting lower field and corporate payroll, partially offset by variable costs associated with higher sales.

We expect the year-over-year corporate incentive compensation dynamic to remain similar in the third quarter and to moderate in the fourth quarter.

Second, share-based compensation increased by $7 million, driven by upward movement in our stock price.

Regarding SG&A, we remain on track to deliver on our $200 million in identified savings as an FY '27 exit rate target, and we continue to drive toward expense efficiencies. As part of these efforts, we recently took additional actions to further streamline our corporate cost structure, which we expect will result in approximately $6 million in severance expense in the third quarter.

Also worth noting in this quarter's P&L, other income increased by $15 million compared to the same period last year, primarily reflecting unrealized gains on a small number of equity investments. As we have noted previously, we maintained a modest portfolio of investments across the used auto ecosystem. Separately, we are completing the termination of our legacy pension plan and expect it to be materially complete by the end of the fiscal year. As part of this process, we estimate approximately $50 million in total settlement-related noncash nonrecurring charges will be recorded in other expense with relatively similar amounts expected to be recognized in the third and fourth quarters of this fiscal year. Our expectation is that the assets in our pension trust will fully fund the settlement of the pension liabilities.

Further, the plan's termination will eliminate potential future corporate funding requirements.

Regarding capital structure, as Keith mentioned, with a strong second quarter, a positive outlook on the balance of the year and traction on our strategy, we intend to restart our share repurchase program in the third quarter. We expect to begin our buybacks at a modest pace, below the average quarterly pace prior to our pause. Our objective is to appropriately manage our net leverage to maintain financial flexibility and to efficiently access the capital markets for both CAF and CarMax as a whole, while also returning capital back to our shareholders.

As of the end of the quarter, we had $1.31 billion of repurchase authorization remaining.

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. Good morning, everyone. During the second quarter, CarMax Auto Finance originated $2.3 billion, resulting in sales penetration of 40.9% net of 3-day payoffs versus 42.6% last year. The weighted average contract rate charged to new customers was 11.8%, up 60 basis points from the prior year. Third-party Tier 2 penetration was 15.9% versus 16.5% last year. And third-party Tier 3 was 7.6% versus 7.3% a year ago.

We continue to make meaningful progress, expanding across the credit spectrum. During the quarter, CAF was once again the largest Tier 2 lender, financing 22% of Tier 2 volume as compared to 10% a year ago. The observed credit performance in this space continues to be in line with our original expectations, reinforcing confidence in our decision to expand.

Despite this growth in Tier 2, overall CAF penetration declined year-over-year, reflecting lower Tier 1 penetration. Increased funding costs driven by the interest rate environment resulted in CAF increasing rates in Tier 1 where customers have more funding alternatives, including cash or financing through credit unions. We view this as a normal response to the higher interest rate environment versus a structural change in behavior from CarMax customers.

CAF income was $136 million, up 32% from the prior year's second quarter, driven by a $29 million decrease in the loan loss provision to $113 million. During the second quarter of the prior year, we recorded additional provision due to the worsening performance of older vintages at that time, whereas performance this year has been in line with expectations. This was partially offset by provisioning related to Tier 2 originations in the quarter from our full credit spectrum expansion.

Additionally, CAF income benefited from a $17 million gain on sale recorded during the quarter and a $6 million increase in servicing fees year-over-year. This was partially offset by impacts from a $1.2 billion year-over-year reduction in outstanding receivables related to the combination of selling the residual interest for 2 nonprime securitization and lower sales during fiscal 2026. Please note, the timing of our receivable sale differs from last year when we recorded a $27 million gain on our 25B transaction during the third quarter.

Our total reserve balance at the end of the quarter was $497 million or 3.07% of receivables held for investment. Net interest margin on the quarter was 6.6% and consistent year-over-year. As we reflect on another solid quarter, our multifaceted strategy to enable CAF income growth is hitting the mark. First and foremost, credit losses were within our expectations across both the Tier 1 and Tier 2 portfolios. Second, the refinement of our nonprime credit underwriting strategy continues to build momentum with origination volume up substantially compared to just a year ago. Third, we continue to benefit from flexibility in how we fund our receivables. Our ability to retain assets on our balance sheet when prioritizing attractive longer-term economics is now well complemented by our evolving method of utilizing off-balance sheet transactions to more quickly monetize cash flows and reduce future risk. This funding flexibility is an important advantage as we continue to grow CAF.

The timing and mix of these transactions may create near-term variability in reported income and provision expense from quarter-to-quarter. However, as our evolving mix of funding strategies begins to mature and becomes more routine over the next 12 to 24 months, we would expect the variability to decrease.

To provide you into our near-term performance, we anticipate CAF's FY '27 income will be slightly lower than FY '26, all while planning to originate nearly $1 billion in Tier 2 by year-end. It is disciplined scaling in Tier 2, along with an appropriately sized loss reserve that should lead to significant CAF income growth over time. We plan to share more details during our upcoming strategic update.

Now I'd like to turn the call back over to Keith. Keith?

Thank you, Jon. Before we open the line for questions, let me leave you with a few final thoughts. We are encouraged by our performance this quarter and the progress we are making across the business. While we're still early in our journey, the results we are seeing reinforce our confidence in our strategy and the opportunity ahead. Shifting to gear is focused on strengthening our core business in getting CarMax back to sustained growth. We are steadfast in our focus on delivering the right cars at the right products, making it easier for our customers to do business with us, capturing more value from each transaction and operating more efficiently at scale.

This quarter's strong unit and earnings growth reflects solid execution against these priorities. What encourages me most is that we are delivering these results while much of the work across our 4 gear pillars is still ahead of us.

We have a solid foundation, an exceptional team, and we are adding leadership in key areas to accelerate our progress. I am confident in our ability to build on this early momentum, continue to improve our business and create long-term value for our shareholders.

None of this happens without our associates, and I want to thank them again for their hard work in embracing our new strategy to create a stronger CarMax. I look forward to sharing more about our strategy, including key initiatives and milestones during our upcoming strategic update, which will take place virtually on November 3.

Thank you for your continued interest in CarMax. Operator, we are ready to take questions.

[Operator Instructions] Your first question comes from the line of Daniela Haigian with Morgan Stanley.

So GPU, along with a lot of other areas of the business came in really strong this quarter and you're now trending better than that down $200 year-over-year full year guide. How would you characterize that strength? What was the impact from greater efficiencies in COGS per unit versus maybe some of this FTC uplift or retail wholesale spread?

Daniella, thank you for being here. I'll let Enrique respond to that.

Nil, we've been really pleased that we've been able to come in better than our previous outlook on GPU, certainly, now expecting the year to be below a $200 decrease year-over-year. And we've done that while maintaining strong sales as we've effectively balanced demand we're seeing in the marketplace for our cars, margins as well as efficiency gains. And it's really the balance of all 3 of those things that has allowed us to come in better, if you will, on our GPU. And specifically around cost efficiencies that we're seeing in the business, the teams have done tremendous work around rolling out different tools for our operators. We have a new part selection tool that's benefiting the organization. We switch, as we've talked about before, from a 90-day warranty to a 30-day warranty for our customers and actually given that back in terms of lower pricing for our customers as well, and that supported our sales. But overall, really pleased that the demand we're seeing in the marketplace and our ability to, again, come in better than our GPU previous outlook.

And maybe the macro part, the impact of spreads or FTC?

Yes. The FTC impact definitely is a tailwind. When we take a look overall, like our comp performance, right, on the quarter, I would say it's evenly mixed between items we control directly, so COGS efficiencies, the GPU decrease, pricing algorithm improvements, customer experience improvements. So those items that we control directly, we think is about half of the comp performance, while the other half is really coming from what we think is the SEC enforcement benefits that we're seeing.

Yes. And just to build on that a little bit. I mean, I think there's 2 aspects as Enrique said, having a really clear strategy that focuses on the core of this business is going to drive performance. And also really the strength of the CarMax brand that price transparency, which have been known for disproportionately benefits us now going forward. So that FTC is focused on compliance to their guidelines, we've always had more transparency and it's helping us with price competitiveness too. So it's execution of strategy and also the strength of the CarMax customer value proposition.

That's really helpful. And then maybe, Keith, just a broader question for you. I know it's early days here, but how do you think about CarMax's omnichannel architecture and brand positioning in this future of agentic AI, right? Where these agents are doing searching and comparing on the consumers behalf. Maybe more to hear on this in November, but curious to hear how you think about it.

Sure. Yes. I mean we'll talk a little bit about AI. Again, we have an AI center of excellence here at CarMax, which basically makes sure we're responsibly use AI and look at all the different use cases here we implement. And so things like our agentic voice call center now handling 100% of stores and our customer experience under calls and helping to do that. Your question is related to search. And I think that AI is going to be actually a real benefit to the consumer to be able to go there and really understand different vehicles and how those vehicles meet their needs. In terms of actually getting them to transactions, I think that was really difficult for the used car industry to be negatively impacted by it because every vehicle is an individual SKU. You can see how agentic AI e-commerce will impact more CPG faster. And we think it's a real benefit to our business here to drive us and become more efficient and deliver better customer experiences.

Our next question comes from Rajat Gupta with JPMorgan.

Congrats on the good execution here. I had a question on just comps for the rest of the year. If I look at normal seasonality in the business, based on the 13% comp in 2Q, normal seasonality would imply somewhere around mid-teens in the third quarter -- mid- to high teens in the third quarter? I'm curious like if you're seeing anything there in the macro or just a consumer backdrop that would deviate from that seasonality? That's question number one, and then I have a follow-up.

Yes. Thanks, Rajat. I'll talk about the consumer. I mean, affordability is on everyone's mind. It sees like every single discussion around that. And I think it speaks to the strength of the CarMax brand effectively and our focus on having incredibly competitive pricing. And the other word I would say about the consumer is resilient at the end of the day. Across all the different spectrums of the lower end consumer to the higher-end consumer we're definitely seeing resiliency there. I mean the broader industry is down 1% or flat to 1%, and we posted comps of 13%. So I think having great cars, great vehicles at great pricing and making it easy to work with will drive continued growth and performance in the business.

In terms of an outlook for the back half of the year, look, we captured it in our prepared remarks. And you can see it in our bullishness around the business. We're turning our share repo back on. we're seeing continued momentum into the business. And so we're really pleased in terms of where we are and kind of what we're seeing in front of us.

Got it. And then once you lap -- you're going to lap the price cuts here in December. Do you believe like the business has gotten to a place where there's enough efficiency you're able to drive to remain competitive on price to sustain the share gain? I'm curious how you feel about that based on what you've observed over the last 6 months.

Yes, absolutely. I mean, again, when you think about our strategy, Shift into Gear and running lean being that pillar and that running lean make sure coal we can have a great offering. And we've committed to saying we want to self-fund our price competitive moving forward to continue to find efficiencies in the business so that we can deliver great vehicles at exceptional prices, but not having the lower GPU moving forward. So that's the focus of the business, and I'm really confident in the team.

Yes. And I would say, certainly from FY '28, that is the intent, right, as we've talked about before, to sell fund any kind of GPU investments and lower price. Think for this year, for the guidance we've given here, the outlook, we do expect to be lower, less than $200 year-over-year in a reduction in GPU, and I would expect some decrease in the third quarter and in the fourth quarter as well. We'll be comping over a record quarter in FY '25 in terms of GPU. So we are maintaining some flexibility in the business. We're running the business more dynamically, and that includes some flexible. So I would expect GPUs for this year as a whole and by quarter to be down year-over-year in support of driving sales.

Our next question comes from Jeff Lick with Stephens.

Congrats on the great results. Enrique, maybe for you, the EPP gain was probably a little more than people were expecting. I was wondering if you could unpack that a little bit and just the dynamics of where that's coming from?

Yes. I would say that we're very pleased on the execution as a pool in terms of EPP and the incremental margin we're seeing from product redesign from our new product, wheel, tire and dent, all that is in line with our expectations. And I would say our full year guidance of $35 an incremental EPP for the full year is pretty much in line, I would tell you with where we ended this quarter being at unit recognizing that in the first quarter, we are still rolling out nationally. We had a lot less than that. So I would tell you it's very much in line with what we had expected and where we expect to be for the year.

Yes, Jeff, this is Jon. I'll just add to that kind of qualitatively. Look, I think this is something we signaled. We knew that we could make progress here. We saw an opportunity to really refresh our product. We've gotten this in the stores. It will be naturally rolled out by end of the year just with getting in California. Our stores have done an outstanding job at selling this product. It's a more affordable product for our customers. We've tacked on what we think is a fantastic cosmetic protection product, wheel, tire and dent, like we saw it come in, we knew that we could deliver in the stores have done so...

And then just a quick 1 for Keith. Keith, on the last call, we talked about dynamic pricing that seems -- is it related to your previous career. And I'm just curious -- I mean, the big question as we get into the next year and we get through easy comps as people are going to look at, okay, can they comp positive and they continue to hold GPU. Just any high-level thoughts as you've kind of been observing the data in the business on how you might give investors comfort that this just isn't an easy comp phenomenon.

Yes. No, thanks, Jeff. And that's everything about Shift into Gear is about making sure we have sustainable growth. And that's the complete focus of the team here right now is making sure that, again, we have the right level of saleable inventory, we can maintain competitive pricing so we can price dynamically depending upon where demand is and by segments, and we're continuing to evolve our pricing algorithms every single month, sharpening up, pulling in external data to make sure we have those local market pricing points, too. So we have a lot of confidence that this should be a growth business and we show positive comps and outperforming the industry moving forward.

Our next question comes from Craig Kennison with Baird.

Keith, I'm wondering, could you provide examples of how you are taking friction out of the digital journey in order to impact conversion?

Yes, absolutely. Part of it is just really understanding what customers are looking for and making sure we're providing that information in the most easy way possible. And so a couple of examples we've used was like car details page, sharpening up like what consumers are doing in terms of search and making sure we're putting those pieces of information front and center, putting forward monthly payments, taking steps out of the purchase process and simplifying it. I think I mentioned previously, we had our EPP. We had a super complex matrix. And now the way that we're serving it up to customers, it's really self-driven by them, putting in a bit of information and serving up the exact right offerings to them too. So it's really understanding everything from search all the way through transaction and then how we communicate with customers, just make it easy to do business with us.

We're still early days in some parts of the journey. There's things that we can continue to sharpen up, but I'm really excited about having Elizabeth Bergens join us as our new Chief Digital and Customer Officer. She's got 20-plus years in product in financial services and in automotive. And so she's the perfect person to join our team here and really own the customer journey looking forward.

Our next question comes from David Bellinger with Mizuho.

I have a couple of strategic ones. Following up on the GPU outlook being down less than $200 per unit for the year. That would put you at around $2,100 and still within, call it, the legacy guardrails that govern the business for a while. Why not be more aggressive there? Or is there some optionality to further push GPU down beyond this fiscal year if you are seeing the proper payoff in terms of unit growth?

Yes. Look, I think we -- as we've talked about, we can largely self-fund those movements, right? So shifting to focus, focus on sustainable comp sustainable EPS growth. And we recognize at the same time, we need to self-fund and find efficiencies in the system. We believe those efficiencies to be had in the system where we don't necessarily need to go down that route as the first selection, if you will. And we're going to focus on driving efficiencies in COGS and logistics business and so on and so forth in order to actually not have to go with margins lower than our initial guidance.

And I think, in our November strategic update, we'll be walking through each one of the pillars of the strategy. and understanding really the run lean piece and the great offering piece, how interconnect those are and talk about the initiatives we have that will deliver the self-funding, which would deliver the price competitive and protect GPU moving forward.

Got it. I also want to touch on inventory levels. CarMax has been operating pretty consistently with about 80,000 to 90,000 vehicles in any given week. Is there an opportunity to compress that number and get some more efficiency on the inventory base, maybe add another source of GPU upside, if you can bypass some of that natural depreciation from holding on to vehicles?

Yes. So that is a definite area of focus that we have. So like I was just talking about in terms of efficiencies in our COGS, and our logistics. An area of focus for the teams are basically inventory, right? And how can we turn our inventory faster, how do we have less unproductive transfers, unproductive holds, things like that, that will slow down your [indiscernible] that will actually drive slowing down returns. Those are items that we think are ahead of us in terms of opportunity and are definitely part of the purview of Shift into Gear. So absolutely on our list of opportunities.

And we're regularly testing, understanding how this impacts the consumer. So understanding if we -- how we handle holds, is that driving sales, but slowing down our inventory turns? Transfers. We transfer over 2 million, close to 2.5 million vehicles a year. How do we make those tranches more productive and have fewer of them over time? So it's really understanding again, have a decision to make on holds and transfers impact sales, but also impact inventory productivity. And we got a lot of work underway there right now as part of our strategy.

Our next question comes from Joe Spak with UBS.

I know you mentioned you're seeing resiliency across consumers of all income, but I was wondering if you could provide any detail if you had in terms of your traffic or conversion however you sort of tier your customers, whether it's deciles or quintiles. And I guess just if rates stay high, some other macro pressures persist, I know the goal is eventually to sort of get to self-funding that growth. But in a tougher macro environment, sort of how do you think about the strategic plan? Is GPU still a driver to help drive that growth in a tougher macro?

Yes. I mean, I'll talk about consumers because we look at our consumers by different cohorts, effectively on income levels. And again, resilient is the word I would use. So even at our lowest income cohort, we basically have the same number of customers year-over-year. And then as you move up the income cohorts, we had those growing year-over-year, too, which is how our inventory developed during the quarter as well, too. So we sold more newer vehicles, higher-priced vehicles in this quarter because of the strength of that cohort. Again, that was just for this quarter, and that could change in future quarters, and we can manage our inventory dynamically based upon where we're seeing demand come from too.

So again, across all the different spectrums, we saw basically either the same number of customers or a growing number of customers in a tougher macro environment. And again, I think our price transparency and our price competitiveness is a real, real strength of CarMax.

In terms of GPU moving forward, we believe we can find the efficiencies in the business to make sure we can protect our GPU. Again, it will go down a bit in Q3 and a bit in Q4 as we've already signaled. But going forward, in the future fiscal years, we'll fund the GPU savings that we need to find in this business.

Our next question comes from John Babcock with Barclays.

Just quickly on that last comment about the GPUs being down in 3Q and 4Q. And I know you also mentioned that earlier. Can you just talk about what's driving that?

So you broke up a little bit. Did you ask what's driving them?

Yes,Yes. So why are you expecting GPUs to be down in 3Q and 4Q?

Yes. So consistent strategy this year, right, which we've communicated like in support of sales we are lowering our GPUs for the year, right, in order to support our sales performance. We're driving efficiencies in the business. And as we talked about, we also have a tailwind from FTC, mix all those things together, and we're, I believe, very effectively balancing demand, efficiencies and in order to support sales. So I mean that's why it's very consistent with what we've said. I think the benefit has been really that we haven't had to lower our margins by as much we initially provided an outlook for because of that mix of benefits that we're actually seeing.

Got you. And then next question, I noticed in going back and looking at some of the historical data that the percentage of vehicles you've been buying from dealers has trended higher over the last couple of years, and you obviously had a pretty sizable increase this quarter. Just kind of curious, like, is that availability driving that? Or is there something else? And then also, can you talk about the profitability on those vehicles that you're buying directly from dealers versus if you buy a vehicle from customers?

Yes, absolutely. So we've been really pleased, really since inception of our acquisition of Edmunds, and they have a sales force out there that partner with our organization, and they've been driving our Max offer, buying cars from dealers for a few years now. This quarter is just continued testament to the strength of that product that we have out there, where you saw a 54% growth year-over-year in the quarter.

Now I will say in terms of profitability, the most profitable buy that we'll have is directly from a customer, right? That is the most profitable buy, as we've always talked about. The least profitable is going to an auction house and buying a car in axon house, all you know there is that you paid more than anybody else for the car, but you got the car. And in between there, I'd tell you is buying a far from a dealer. So kind of midway between buying a car from a customer and going to an auction. So definitely accretive to the organization is another contributor to that allows us to be more competitive on our pricing as well. So very pleased with our performance this quarter.

Okay. And then just my last question. Obviously, we've seen diesel and transportation costs rise up pretty sharply. I'm just kind of curious if you could talk a bit more about how that's impacting your business, how you're managing through that?

Yes. It's another component within our cost of sales. And -- but as we talked about this quarter, we've -- effectively, the teams have done a great job in driving efficiencies outside of that impact that have allowed us to be even more price competitive moving forward here, certainly in the quarter and our outlook moving forward. So we've been able to absorb it, the increase in price and diesel. But definitely, it's impacted our costs. But again, our efficiencies elsewhere have allowed us to offset it.

We'll go next to Scot Ciccarelli with Truist.

So I know you've put up a few different ways. But when you look at the sharply improved sales rate, can you help us better understand how much of it was driven more by what you guys have historically called top of the funnel, more people coming into your stores and digital channels versus how much was driven by better conversion rates?

Yes. I would say that overall in the quarter, our web traffic actually was down by a couple of points. So -- but what we absolutely saw was our sales opportunities being up and our engaged customers being up and our conversion of those engaged customers being up as well. So what we're seeing is better quality customers coming through, if you will, right? So web traffic down, but overall kind of quality customers coming through the digital door and the physical door is up and our conversion of those customers are up as well.

Yes. I think our marketing team has done an exceptional job of really driving efficiencies in the marketing funnel. And so even though that the web traffic is down a bit, again, the quality of that traffic is significantly improved, which led to all of those factors as Enrique just pointed out to. So again, a great job by the marketing team.

SP30463510 That's helpful. And then I know it's a little difficult to tease out, and there's obviously some substitutability. But do you think your Tier 2 penetration were all incremental sales? Just trying to figure out there's a sales impact, if any, as you guys have moved a little bit lower into the credit pool on a direct basis.

Yes, I appreciate the question. Yes, the short answer is no. I would say it is not all incremental sales. There's always going to be some incrementality. I think we've provided an outstanding offer out there. But no, this is really about us being opportunistic and moving down to the volume where, again, our credit partners are great. They have always provided great offers to our customers. just taking the opportunity to take some of that volume for ourselves, that's above and beyond what they would typically pay us. So no, not incremental largely at all.

[Operator Instructions] We'll move next to Alex Perry with Bank of America.

I just wanted to get your thoughts on how the FTC regulation could affect the GPU profile longer term? Do you think that dealers start to alter their prices with now having to include the dock fees? And then how long should we expect the FTC tailwind to last for you? And what are you seeing sort of in terms of compliance in the overall market?

Sure. I mean, I can give you an example of the FTC benefit for CarMax. And I can't comment on specific to what other companies are going to do with their pricing. But when you think about our competitive pricing overall versus the broader industry, the percentage of vehicles rated great deals on cars.com for CarMax more than doubled this quarter compared to Q2 the previous year. So that's just significant, right? And so customers out there digitally shopping for vehicles and seeing the fact that, again, the number of great deals on third-party sites like cars.com, we've doubled there. So that's going to be a great, great tailwind for us for the remainder of this year. Compliance really started kind of in the May time frame. And so you probably think about it ramped up into May. So that's probably going to last that sometime...

Yes, there was a bleed in actually, not everybody complied certainly right away, and there's still some migrates, I'm sure. But really May is when we saw actually a movement there. So again, we have until May and then certainly thereafter the benefit...

And I think the FCC sent out like 97 letters to different companies. And back in March, telling that we're going to -- again, these aren't new guidelines. These guidelines have existed. This is basically saying they were going to enforce compliance. And so the vast majority of the industry is headed in that direction, again, which is a tailwind for CarMax because we've already spent more transparent.

And just a follow-up on that. What impact do you think that has on pricing longer term as dealers move to include just the dock fees into a sort of all-in more transparent pricing? What impact do you think that has on sort of GPUs and the overall pricing environment?

I think it's just going to continue to show how price competitive we are. I think Interestingly, the noncompliance by the broader industry actually was a disadvantage for CarMax. Our customer value proposition being no haggle and being transparent to customers, again, it was exactly the right thing for CarMax to do in terms of building this brand. Now that people have to comply with this, it basically shows again how price competitive we're going to be in being able to maintain our pricing and our GPUs moving forward, and we'll see again how other people choose to price.

Our next question comes from Chris Pierce with Needham.

You kind of just hit on it. I really wanted to get a sense of these third-party sites, if we assume a lot of people start there. I'm just kind of curious the tie-in between marketing and pricing? And does it really just come down to price? And I kind of love to get your thoughts on what you're seeing from those sites and the conversion of customers you're seeing from those sites that I just have 1 of the consumer?

Mean again, we don't really talk about it in that level of detail. I mean what we think about is our research is that 90-plus percent of customers start their search for a vehicle online. I have to believe it's probably almost 100% in reality. And again, they're going to be searching at multiple sites. They're going to come to carmax.com, and they're going to the. There going to look at third-party sites. They're going to really understand kind of what vehicles are out there. And then, again, our marketing team does an exceptional job through SEO and GEO to be able to attract the right customers to our site and then convert them through the funnel too. So again, it's making sure that you are priced competitively and that you're showing up in all the right channels and that's how you maximize again the customer acquisition, the customer conversion.

Okay. Perfect. And I think you talked about rates up 60 bps on average maybe across the quarter and probably gone up through September here. I mean, how should we really think about the consumer being impacted here because it's just like you've got consumers dropping down from new corn to use that are better credit quality because the new car prices like a 1% move in rates, I think is like cost is like $12 to $15 in monthly payments like. Is this something investors are sort of overreacting to? Or what's sort of the right reaction or what level of rates is something that changes the dynamic for you guys? I just want to sort of kind of level set how investors -- how we should think about this?

Sure. Yes. I'll kind of initially answer that question. When I think about it from the credit lens, I think the consumer -- you're certainly going to have -- it will be bifurcated the higher-end prime consumer, right? They have options. They're going to go to cash. The credit unions just have obviously an advantage there where they can keep rates low. So for CarMax in particular, CAF, you're going to see probably some leakage from using the internal financing to those channels. Now CAF in particular, we have options there, right? We can choose, and that's the benefit of a captive. We can choose at any given point to keep the rate low or raise the rate as -- and protect our finance margin. So it happened this quarter, we chose to raise rates, and we saw great comps that were coming in place. So that's an option we have in any given quarter. But I think overall, in the prime consumer, they're just going to switch to a different financing mechanism.

As you get further down the credit spectrum, that's where can that payment will be $12, $15, that might mean a lot. Terms are already extended. Can they find a way to fit that into their budget, there can be a challenge there. Our goal here is to make sure that we have a great competitive front lot price, provide great credit offerings and make it as affordable for them as possible even in the face of macroeconomic changes.

We'll now take a follow-up from John Babcock with Barclays.

Sorry for the follow-up here. Just wanted a clarification though, on the GPUs because you said down 3Q and 4Q. Is that sequentially or that's year-over-year?

Year-over-year.

We don't have any further questions at this time. I'll hand the call back to Keith for any closing remarks.

Thank you, operator, and thanks, everyone, for joining the call today. And I appreciate all your questions and all your support. And we look forward to talking to you next quarter and seeing you in November.

Thank you. Ladies and gentlemen, that concludes the Second Quarter Fiscal Year 2027 CarMax Earnings Release Conference Call. You may now disconnect.

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.

Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter Fiscal Year 2026 CarMax Earnings Release Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Lowenstein, VP, Investor Relations. Please go ahead.

Thank you, Angela. Good morning. Thank you for joining our fiscal 2026 fourth quarter earnings conference call. I'm here today with Tom Colillard, Interim Executive Chair of the Board; Keith Barr, President and CEO; Enrique Marmora, Executive Vice President and CFO; and John 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. Our annual report on Form 10-K for fiscal year 2025 and our quarterly reports on Form 10-Q previously filed with the SEC. Please note, in addition to our earnings release, we have also prepared our quarterly investor presentation, and both documents are available on the Investor Relations section of our website. Should you have any follow-up questions after the call, please feel free to contact our Investor Relations department at (804) 747-0422, extension 7865. [Operator Instructions]. Tom?

Thank you, David. Good morning, everyone, and thanks for joining us. Today, I'm going to provide some brief commentary on our performance during the quarter. I'll also introduce our new President and Chief Executive Officer, Keith Barr, before turning the call over to him to say a few words. After that, Enrique and John will speak to our fourth quarter results in more detail as well as highlight a few key expectations for fiscal year '27 before we open the line for your questions.

During the fourth quarter, we made solid progress on the priorities outlined last call to strengthen the business. We improved sales trends by lowering our prices, investing in acquisition marketing and deploying an initial set of digital enhancements designed to drive conversion. We also continue streamlining our cost structure and lowering the cost to bring cars to market, helping us offer more affordable vehicles. Concurrently, we made meaningful progress on our SG&A reduction goals, CAF, full spectrum ambitions and extended protection plan redesigns.

Before I get to Keith, I'd like to thank David McCray for stepping into the role of Interim President and CEO over the past several months. As we search the right leader to guide CarMax through its next phase of growth, David's leadership was critical in strengthening the business in the near term and solidifying the foundation for growth ahead. David will continue to be a tremendous asset to the company serving as an independent Director of the Board.

Well, the Board and I are thrilled to welcome Keith to CarMax. In searching for a CEO, we were looking for several attributes. First and foremost, a people-first leader who will fit well with CarMax's award-winning culture, an established proven leader with experience leading a complex business, someone with a strong customer focus and a track record of driving growth and strengthening brands, experience maximizing the benefits of an integrated omnichannel model and finally, experience leading digital transformation.

Keith embodies each of these characteristics, making him the right choice to lead CarMax through a critical juncture and drive the company's next chapter of growth.

I'll now turn the call over to Keith to introduce himself and say a few words. Keith?

Thanks, Tom, and good morning, everyone. I want to thank the Board for their trust in me. I am honored to join CarMax and lead this iconic organization alongside our talented associates. For more than 30 years, CarMax has helped shape the way people buy and sell used cars. And in doing so, it earn something rare, the trust of its customers. A customer and associate-centric approach is central to how I lead and I recognized right away that it is essential to CarMax as well. This is one of the many things that attracted me to this team. CarMax has built something truly exceptional, a beloved brand. The combination of an unmatched physical footprint and strong digital infrastructure and an award-winning people-first culture.

I am confident that we can build on the strong foundation and better serve our customers. and unlock a significant opportunity ahead of us. Before joining CarMax, I expect my career in hospitality, holding numerous leadership roles in commercial, operations and technology and ultimately serving for 6 years as CEO of IHG Hotels & Resorts. I led a successful transformation that create value for shareholders through empowering associates and pioneering a better experience for customers that has become the industry standard. On the surface, hotels and used cars may seem different, but at their core, both businesses succeed delivering the right products at the right price and the right way for the customer.

My time and hospitality was defined by placing the customer at the center of every decision. The auto market is evolving quickly. I believe a fresh outside perspective can be a real advantage, especially when it's grounded in respect for the complexity of the industry, a deep understanding of the competitive landscape and a clear focus on changing customer expectations. Best population is a competitive advantage in this market. [ Paper ] with our brand and culture, we are well positioned for success. Our recent performance has not reflected our potential, and closing that gap is exactly what we are focusing on.

I have been spending my first few weeks deeply familiarizing myself with every aspect of the business. This has included meeting many talented associates across the organization in our corporate offices and in the field. Studying our customer and associate experience in both the buying and selling journeys, assessing our omnichannel capabilities and understanding our approach to recondition, inventory, pricing, marketing and cash.

In addition to the actions that Tom and David initiated during the fourth quarter, we're working hard to identify where we can improve. And when we have more detail, we will communicate our plans with you. What I can already say with absolute certainty is that we will put the customer at the heart of every decision we make to drive better performance. Through that lens, this is what we will prioritize. First, make CarMax the obvious and easy choice. That starts with consistently delivering 3 things that matter most to customers. A competitive price, the trust is fair. Access to a broad selection of high-quality vehicles, and an end-to-end experience that meets the needs of today's consumer.

Second, use technology to drive more differentiated experiences and efficiencies. We use software, data and AI in practical ways that that make even easier for customers to buy and sell cars and easier for our associates to serve them. That means reducing friction across the journey, personalizing the experience, improving how we match inventory and pricing to meet customer demand and ensuring a great experience both in our stores and online. [indiscernible] act with more urgency and intention while ensuring there is alignment across the organization. We will change what is not working to double down on what is and keep evaluating opportunities and risks as we move, will be bold, hold ourselves accountable and move it to speed as we build a durable long-term growth engine. These 3 priorities are where we will begin. And I expect our work to evolve as I continue to listen, learn, engage our teams and investors. We have a meaningful opportunity ahead of us as we strengthen the business and improve our execution to drive growth and returns. I look forward to sharing more about our strategy and long-term objectives in due time and I'm confident in what we can accomplish.

Now I'd like to turn the call over to Enrique to discuss our fourth quarter financial performance in more detail. Enrique?

Thanks, Keith, and good morning, everyone. During the fourth quarter, we improved our sales trends and made progress toward our SG&A reduction goal, which we now expect to be greater than the FY '27 exit rate production targets we had previously said. Our EPS during the quarter was impacted by restructuring costs as well as by a noncash goodwill impairment, while our margins decreased from the prior year quarter as we continue our focus on targeted price reductions and driving sales. .

During the quarter, we delivered total sales of $5.9 billion, down 1% compared to last year. Across our retail and wholesale channels, we sold approximately 304,000 vehicles combined up 1% versus the fourth quarter last year. In our retail business, total unit sales declined 0.8% and used unit comps were down 1.9%. This marked a strong positive change in trend relative to the second and third quarters, which saw used unit comps of negative 6.3% and negative 9%, respectively. Sales performance in our fourth quarter was supported by the actions that Tom noted. Average selling price was [ $26,019, ] a year-over-year decrease of $114 per unit.

Wholesale unit sales were up 3% versus the fourth quarter last year. Average wholesale selling price declined by $268 per unit to $7,776. We bought approximately 270,000 vehicles during the quarter, up slightly from last year. The actions that we implemented also supported a strong positive change in trend as compared to the third quarter, which was down 12% year-over-year. We purchased approximately 229,000 vehicles from consumers, with approximately half of those buys coming through our online instant appraisal experience. With the support of our Edmond sales team, we sourced the remaining approximately 41,000 vehicles through dealers, which is down 9% from last year.

Fourth quarter net loss per diluted share was $0.85 versus $0.58 in earnings in the fourth quarter of last year. Adjusted earnings per diluted share, a non-GAAP measure, was $0.34 in the quarter compared to 60% a year ago. Our EPS this quarter was impacted by a few items. This includes a noncash goodwill impairment of $0.99, driven by a combination of a decline in our market capitalization which coincided with a prescriptive impairment measurement period and pressured financial performance; and restructuring charges of $0.20 related to corporate workforce reductions and the early abandonment of the underutilized space associated with our Edmonds office.

Altogether, these items reduced EPS by $1.19 this quarter. Total gross profit was $605 million, down 9% from last year's fourth quarter. Used retail margin of $383 million decreased by 10%, driven primarily by lower profit per used unit of $2,115 which was down $207 per unit from last year's record high fourth quarter. Wholesale vehicle margin of $115 million decreased by 7% from a year ago with lower wholesale gross profit per unit of $940, a decline of $105 per unit, partially offset by higher volume.

Other gross profit was $107 million, down 11% from a year ago. This was driven primarily by service. In line with the outlook we gave in the third quarter call, service was pressured by seasonal sales and the annualization of cost coverage levers taken last year.

For the full year, service returned to profitability despite sales headwinds. [indiscernible] auto finance income of $144 million was down 10% year-over-year. John will provide detail on CAF in a few moments. On the SG&A [indiscernible] expenses for the fourth quarter were $611 million. When excluding the previously noted restructuring costs, SG&A was $577 million, down 5% from the prior year. SG&A dollars for the fourth quarter versus last year were mainly impacted by 3 factors: First, total compensation and benefits increased by $31 million, driven by lower corporate bonus and stock-based compensation as well as lower CEC payroll following the actions taken last quarter, these savings were partially offset by $12 million in restructuring charges tied to our SG&A cost reduction efforts; second, occupancy costs increased by $27 million, including a $21 million charge related to the exit of our Edmond office lease, that action will support lower SG&A moving forward, the balance of the increase was primarily timing related; third, advertising expense increased by $6 million, reflecting higher acquisition marketing spend.

Turning to capital allocation. During the fourth quarter, we repurchased 1.3 million shares for a total expenditure of $50 million. As of the end of the quarter, we had $1.31 billion in repurch authorization remaining. As we look ahead into FY '27, I'll highlight a few key areas. We expect to take a more dynamic approach to margin management as we run the business. As a guidepost for FY '27, we currently expect used margins for the full year to decline at a rate broadly in line with our fourth quarter year-over-year trend, although actual results may vary as we continue to optimize performance.

We expect the first quarter to reflect the largest year-over-year decline at closer to $300 per unit as we lap record margins. This outlook reflects our pricing actions and our ongoing efforts to reduce logistics and reconditioning COGS in support of more competitive pricing and stronger sales. We have completed our EPP product redesign and testing and have begun our national rollout, which we expect will drive approximately $35 per unit in margins in FY '27. We will ramp throughout the year, driven by the rollout plan. Regarding SG&A, we expect FY '27 exit rate reductions of $200 million, an increase over the previous guidance of $150 million.

However, the year-over-year savings within FY '27 are expected to be offset primarily as we annualize over the materially reduced corporate bonus and share-based compensation in FY '26. which offsets approximately half of the FY '27 in-year savings, inflationary pressures and new location growth. With our focus on lowering vehicle pricing through lower GPUs and COGS efficiencies, we will be transitioning our SG&A efficiency metric to a per total unit ratio, which will consist of retail plus wholesale units.

We expect SG&A to lever in FY '27 when excluding the restructuring charges incurred in FY '26. Regarding capital expenditures, we anticipate approximately $400 million of spend in FY '27, down materially from the past 2 years. The large portion of our CapEx investment continues to be related to the land and build-out of facilities for long-term growth capacity in off-site reconditioning and auctions. In FY '27, we plan to open 4 new stores, 2 new offside reconditioning and auction locations and 2 new off-site auction locations. Regarding capital structure, our priority remains funding the business and maintaining financial flexibility. We continue to take a disciplined approach to our capital structure, including managing our net leverage to preserve efficient access to the capital markets for both CAP and CarMax overall, with leverage slightly above our targeted range and as we focus on improving the business during this transitional period, we have paused our share buybacks.

Our $1.1 billion authorization remains in place, and we remain committed to returning capital to shareholders over time.

At this time, I will now turn the call over to John to provide more detail on CarMax Auto Finance and our continuing focus on full credit spectrum expansion. John?

Thanks, Enrique, and good morning, everyone. During the fourth quarter, CarMax Auto Finance originated almost $1.9 billion, resulting in sales penetration of 42.8% net of free day payoffs versus 42.3% last year. The weighted average contract rate charged to new customers was in line with last year at 11.1%. Third-party Tier 2 and Tier 3 penetration in the quarter combined for 25.6% of sales, which was also in line with last year. The year-over-year increase in CAF penetration in the fourth quarter reflects our continued focus when expanding in Tier 2 supported by our flexible funding strategy and newest underwriting models.

We expect our penetration growth targeting the top half of Tier 2 will accelerate in FY '27. CAF income for the quarter was $144 million, down $16 million from the same period last year. The loan loss provision was $74 million as compared to $68 million last year. Net interest margin on the portfolio was up slightly both sequentially and year-over-year at 6.3%.

Consistent with the third quarter, credit losses in the fourth quarter were in line with our expectations. CAF's $74 million loan loss provision largely reflects expected charge-offs on newly originated loans including those tied to our credit spectrum expansion primarily into the top half of Tier 2. Total reserves ended the quarter at $453 million or 2.78% of auto loans held for investment. We also designated a $100 million pool of nonprime loans as held for sale during the quarter, which does not require a loss reserve. As signaled previously, we anticipate leveraging future off-balance sheet funding transactions strategically as it supports our full spectrum growth strategy by balancing income and future provision risk. While cap income was down year-over-year in the quarter, this is largely reflective of a reduced held-for-investment receivable base impacted by the $900 million 25B transaction executed in Q3, coupled with lower origination dollars over the last few years.

CAF realized approximately $5 million in servicing fees during both the third and fourth quarters. The third quarter also included a $27 million gain on sale as a result of the 25B transaction. As we grow our volume in Tier 2, we will continue refining our funding strategy and earnings model throughout the year. We believe a diversified funding approach gives us flexibility to optimize returns beyond traditional third-party lender fees while maintaining appropriate risk discipline. More broadly, we see CAF penetration growth as a contributor to the larger strategic goal of retaining a higher percentage of finance income. As always, we will carefully consider the current state of the economy and consumer as we shape our strategy. I also want to provide an update on our redesigned extended service plan MaxCare, which focuses on mechanical coverage and our new MaxCare Plus offering, which adds cosmetic protection. The redesign of these products is aimed at increasing penetration by improving affordability amid higher vehicle prices and has shown encouraging results across multiple markets to date.

As Enrique mentioned, we have completed our product enhancement testing, and expect to achieve nationwide rollout by Q2 of FY '27. Now I would like to turn the call back over to Keith. Keith?

Thank you, John. Before we open the line for questions, let me leave you with a few final thoughts. I want to thank Tom, David and all our CarMax associates with the foundation they have built. We made progress in the fourth quarter to improve affordability and streamline our cost structure. The time I expect with associates in our offices and in the field has only reinforced my confidence in the opportunity ahead. We have a strong foundation, a powerful brand, and our focus is clear. The CarMax the obvious choice for customers, use technology to create more differentiated experiences and efficiencies and operate with greater urgency and intention. If we do that well, we will build a stronger, more efficient business with the customer at the center of every decision we make take.

Before I close, I want to recognize a point of pride for CarMax. We were once again named by Fortune as 1 of the 100 best companies to work for, marking 22 consecutive years on that list. Even in my first few weeks here, I have seen the culture behind that recognition first hand. The trust Care and Support Associates show for one another every day are real strength of this company. I'm honored to be part of this team. I look forward to updating you on our progress in the quarters ahead. be sharing more about our strategy and long-term objectives in due time. Thank you for your continued trust and confidence in CarMax. With that, we will open the line for questions. Operator?

[Operator Instructions] Your first question comes from the line of Craig Kennison with Baird.

Congratulations on the new role. I guess I'd start with what are your general observations after the first few weeks in the role and then more specifically, as you draw upon your experiences in the hotel industry, what are your thoughts on how to streamline the click-through experience at CarMax? It feels like that's an area where you lag the best-in-class experience.

Thanks, Craig. And yes, I'm thrilled to be here, and it's a pleasure to meet you. I think it's been great to get to know the team in the first few weeks. And what really stood out to me so far has been the caliber of our associates, both in the corporate office and in the field and the culture that's really, really palpable. I mean there's an amazing culture here in the company. And right now, we're focusing on sharper execution on the fundamentals of the business about pricing, about selection, availability and experience. And so it's an amazing team. I think you're right on the hotel experience, one of my rallying cries in my old role was how do we reduce friction in the customer experience.

If it takes us 6 clicks to do something, how can we make it 3? What are the things that really matter most to customers and really understanding that end-to-end customer journey, both online and in-store and how we can streamline those processes. That's going to be one of my main focuses in the omnichannel experience is just streamlining the experience and really making it easier for our customers.

Our next question comes from Brian Nagel with Oppenheimer.

Keith, welcome. Look forward to working with you.

So my question, just looking at this quarter, I think one of the big efforts here has been the price -- I guess, price investments, so to say, in the used car business. So maybe you can discuss further what you saw in terms of elasticity and demand as you adjusted prices?

How much of the -- while used car unit comps were still down, they did improve rather significantly from the prior couple of quarters. I mean how much of that could you attribute to these price investments? And I know you gave us the guidance for at least some guidance for the first quarter. But I mean, how should we think about these price investments going forward?

Yes, Brian, thanks for the question. The impact that we had on the quarter was really -- there were several things that we did, right? So we took our prices down. You can see that in the GPU. We increased our acquisition marketing spend as well. And we also made improvements to our online selling capabilities just through our website experience. I would tell you, out of those 3 things pricing, certainly, we believe had the biggest impact, although we think all of those levers impacted our trend positively. And I'd tell you the results that we saw this quarter were pretty much in line with what we had expected given the actions that we took.

And so we are really pleased with the change in direction. We are able to -- coming out of the third quarter, we made it very clear, like our objective right now is to get the sales yield going, and we're pulling these levers and that's exactly what we saw. And we have those levers in place here and moving forward as well.

So could I follow up quickly, David, on that topic. I mean just -- is there a way to quantify, again, looking at the improvement, so to say, that we saw in used car unit comps here in fiscal Q4 versus 3 and 2. Is there a way to quantify, I mean, how much of that was a direct result of these efforts you took?

Yes, [indiscernible] we haven't really talked externally about the pricing elasticity. We have a very deep understanding of price elasticity. It's not something we've necessarily communicated externally exactly what it is. Again, what I tell you is that change in the trend and that change -- a positive change in direction, those 3 items drove it, lower prices, increased marketing, better selling capabilities online.

But of those items, we do believe that our lower pricing had the biggest impact on the quarter.

[indiscernible] of last quarter, we kind of let our prices drift up where we weren't as competitive as we'd like to be. And so as Enrique mentioned, we took several actions immediately at the beginning of the fourth quarter. And as you noted, we saw a significant change. But Clearly, the biggest one was price. And now as you've heard the team talk about cost, if we could get sales moving in the right direction, and we can address some of the cost issues behind it, whether it's COGS or SG&A we're going to have a fantastic business, but price really managed to consumer.

Our next question comes from Rajat Gupta with JPMorgan.

I look forward to working with [indiscernible]. I have initial question just a follow-up on Enrique commentary on SG&A., how much of the $200 million you expect to hit this year's P&L? And just to double click a little bit more on some of the commentary around accruals and stock-based comp and how we should think about the magnitude there? And maybe on any of the [ grid ] rails around SG&A with respect to expense per year, that would be helpful.

Yes. No, absolutely. So a couple of things. I think one way to think about it is the exit rate dollars we have coming out [indiscernible]. And as we said, we have a line of sight to another [ $100 ] million exit rate FY '27. So some of those will be recognized within FY '27. But really, you're looking at a full realization in FY '28 for a full annualization. What I would though, and as I said in my prepared remarks, in FY '27, the in-year savings, we do expect to be offset as we annualized over the materially reduced corporate bonus and share-based compensation, and that's about half of the actual expectations we have for savings in FY '27.

Now in normal course of business, we don't expect those items to actually be around, right, have the same magnitude of impact. So that's really where you look at FY '28 and you say, okay, that would be a full annualization of the savings. So that's how to kind of think of FY '27 and the exit rate savings. Like look, we are laser-focused. And just to be absolutely clear, we are laser-focused on running as efficiently as we can.

I think us taking up our target from $150 million to $200 million is a sign of that intent. And so we're certainly following forward and excited about those savings. But again, the full impact will really be in FY '28. And the second part of your question, Rajat?

I just a quick follow-up for Keith. .

Sure.

Yes. So I was just curious like you've had a chance to look at the portfolio a little bit. Would you consider taking a look at just your store down as well? And maybe think about pruning the number of locations you need, the density you need. I'm curious like how that would fit into how you're thinking about rationalizing and just creating more efficiency.

It's Enrique, again. As we go through our strategic planning process here with he's new leadership, it's certainly something that we're going to be assessing look, we're going to go through a strategic plan outlook. We're going to come back.

And as Keith mentioned in his prepared remarks, we're going to come back at you appropriate time and communicate what those longer-term objectives or what the goals are and the key underpinnings of that strategy. So at the current moment, I think that a lot is on the table. And that's something that we'll be assessing as part of the strategy. Understood.

Our next question comes from Sharon Zackfia with William Blair.

I guess as you think about kind of improving affordability and clearly taking this GPU hit currently. Are you also kind of considering maybe relaxing some of CarMax standards, and I don't mean on the mechanical side, but on the cosmetic [ ablumishment ] side, is there an opportunity to sell a few cars with gain your modest scratches, where it might be more affordable to the consumer and could be clearly disclosed, given that most of the research is done online.

Yes, Sharon, thank you for the question. Certainly, if you look over the past year, we have taken what we internally call, but I think everyone kind of externally knows as well, like ValueMaxcars, so our older cars. We've taken the mix of our Value Max cars up pretty considerably this year, which is really a signed towards like we recognize, as Tom mentioned, pricing is key, affordability is key. And so that's one way of thinking of us meeting the customer where they want to be met on price is just increasing our mix of Value Max.

I think at the same time, taking a harder look at what -- how exactly can we even better do that is something that is part of our strategy, we're going to consider. Because clearly, over the past year, sales have not been where we want them to be. And so we need to consider all potential levers when it comes to to go into market. I think the one thing that we will not change though is absolutely the overall relevant quality standards that we have and that we're known for CarMax is known for a quality car and that will continue.

But there's probably items around the edges that we can take a hard to look at and make sure that we meet today's customers' demands today, right?

And Enrique, can I follow up? I know Keith's been there for like a minute, but is there any kind of time frame when we should expect kind of the strategic plan and then some maybe more concrete benchmarks on SG&A per car and things like that?

Yes. You're right. Keith has been here in a minute. And so we'll be -- we have our planning sessions that are underway here, and that will take we'll start doing those over the next quarter here. I think in June, you'll probably start to see some headlines maybe. I don't expect by June, there will be a full strategic path forward. But in June, you'll start to get a sense of where we're going. And then certainly after that -- shortly after that, I would expect that we'd have a strong point of view on where we're going and the key metrics that go along with that and our outlook for the future, which we're really excited about. .

Our next question comes from Scott Ciccarelli with Truist.

So 2 strategic questions, if I may. First, on sales. If price reductions in a $300 GPU drop were to accelerate comps to the positive range, would you expect it to push it even further because it's working? Or is there a floor on GPU levels that you're kind of thinking about -- and then secondly, on the SG&A side, it sounds like you have an expectation to improve the customer experience, especially with online transactions. But can you help us reconcile like you're also expecting OpEx pretty significantly and presumably some of those things cost money.

Yes. Maybe just to start with SG&A. And so we have increased our target, right, from $150 million to $160 million to $200 million. and we'll continue to assess this at the right number. I think the key point here is that it's critical that we balance our cost reduction goals with our ambitions to grow the business, right? And to your point, there's a little bit of tension between the 2. And I fully expect as part of our strategic planning deliberations, that's going to be a topic, right? We want to make sure we're running as efficiently as possible, but we also want to make sure that we're actually funding the business appropriately, and that may be reallocating certain resources at may be producing certain resources and in certain areas, perhaps increasing resources, right?

But that's going to be a key point of attention as we build out our strategy in moving forward. And then when it comes to price, I think the other lever to consider, right, that we're always focused on, but I think we'll take on heightened importance is COGS and reducing our box and logistics costs. Because when you do that, you actually then have multiple choices ahead of you. you can either just take it straight and give it to the customer. You can take it to margin to help offset some of that pressure or you can do a combination of the 2. And that's really something that we're laser focused on kind of moving forward. And that certainly will be a key tenet of our strategy moving forward as well.

Scott, I'm going to build on what Enrique that. In my past experience, becoming a more efficient business and lowering SG&A, it doesn't come at the expense of a great customer experience. You can actually improve quality, leverage technology and become a more efficient business at the same time. I think that's what we're going to be very focused on spending time with the team in the stores there's a number of opportunities for us to, again, make it easier for us to serve our customers and give a better experience for our customers to put in store online more efficiently. So we have done that before and looking forward to working with the team to do it again.

Our next question comes from Daniela Haigian with Morgan Stanley.

Keith, congratulations on the role. Looking forward to seeing what you and the team will accomplish here. So I appreciate the overview on goals and understand we'll have to wait until June for the full strategic update, but I guess in the first 90 to 100 days here, what are the specific changes or low-hanging fruit that you've prioritized to simplify that digital experience and improve conversion? And what are, I guess, areas or metrics that we can track against those goals.

Well, thanks for the question. Again, been here 4 weeks, which has been an amazing experience has been comment it in the stores in the office and with the teams. And so I'm really enjoying learning about the car industry and understanding our strengths. And I guess I'll start there because I think the company has made great long-term investments in the digital platform and the geographic footprint. And the thing that we're focusing on is how do you connect that digital innovation with physical retail to create something that's really powerful that we can leverage to drive growth.

The team right now is incredibly focused on the customer experience, particularly in digital, and understanding how we can more efficiently move customers through the funnel, produce friction. And to one of the earlier questions, like if it's taking us 10 clicks to do something, how can we do it in 7 or 5, really understanding what are the features and benefits that matter most. And so really making sure that we're driving customer acquisition, but then also more effectively moving customers through the experience, both online and in and stores. In regards to specific metrics, I think we're going to have to come back to you once we have a clearer view on the long-term strategy because the metrics that are going to be most important in this business has to be aligned to those outcomes. So I don't know if Enrique you want to add anything else?

No, I think that's absolutely correct. And again, in June, maybe some signals in terms of where we're going, due is really not that far away, but I think thereafter is when we'll come back with kind of point of view on our strategy, the metrics to hold this accountable by that we'll hold ourselves accountable to. And again, we're really, really excited about where we are and our path forward to you. .

Our next question comes from David Bellinger with Mizuho.

Keith, congrats on the new seat. Two areas where we were looking for a bit more detail. First one on conversion. I know you just talked about this a second ago, but how do you assess the level and quality of traffic that's coming into your site and your app and just how you benchmark against others in the sector on conversion? And then second piece on vehicle inventories.

Looking at your app, you've got 55,000 cars in there right now. that's been as high as 60,000 or 70,000. So as you implement some of these new tools, even some AI tools, is there an opportunity to operate the business with simply less inventory while still giving that core customer, the breadth and depth that they need.

Yes, I think on the inventory piece, I think, look, certainly is a key aspect that we need to consider and we need to balance what is the right amount of inventory kind of by market how quickly can we get it to customers. And I expect that will be a key component of our strategic deliberations as well, making sure we have the right amount of inventory. Is it less? Is it more?

We'll end up seeing what that looks like? And in regards to conversion, I think as well, that's going to be a key point of view. Like this past quarter, I would tell you, conversion was relatively flat. We're selling opportunities were actually relatively flat as well. Our web traffic was up like 14% this past quarter. And for the first time in 5 quarters, we saw selling opportunities actually relatively flat as opposed to being down year-over-year. So positive movement there. And again, conversion was relatively flat. But I think the items that Keith has pointed out in terms of getting the customer through our website to buy a car in an easier way in a faster way, undoubtedly is going to help our conversion rate when folks land on the website. And so pretty immediately, he's been here a hot minute, but already identifying, I think, the key areas of opportunity for us moving forward. And look, our goal is to drive selling opportunities and to also drive conversion as well.

Our next question comes from Jeff Link with Stephens Inc.

Question, Tom, this is probably going to be your last call, I would get the benefit of your wisdom. I was wondering if maybe you could just give a little -- any granularity or color on just as you drop prices, obviously, you didn't drop every price, $207, some you drop, some you might even have increased. Any color on where you do see more elasticity in terms of cohorts, age of car where you're getting more traction versus where you're getting less or where it's not worth it to try to play the price game.

I think Enrique talked earlier about kind of optimizing the first stage he talked earlier about optimizing the price and cost differences. As I mentioned, clearly, when we lowered price, it changed our -- changed the trajectory of our sales. And as you just rightly pointed out, when we say our margins are down $200, they're not down $200 on every car. You see all of our cars practically end to [ 998 ]. That means we're more likely to drop a car 1,000 -- like 20% of the cars $1,000 to achieve the $200 price drop. And we are very analytical about that and how we approach it and do it in a way that we think will maximize the the change in sales. The backdrop of that is we have to run a profitable business. And as Enrique mentioned, some of the things on cost we felt like lower the prices, get sales moving in the right direction and then pay for it by taking cost out of the business. And I think that will be a theme for this team going forward as well, which is figure out how to grow the company. There's no reason we shouldn't be able to grow the business with our current footprint and do it in a profitable way. And that's a combination of pricing, margins, CAF, all the ancillary products that we sell, but look, I think it was great to come out of the quarter with a change in sales trajectory and we believe that price was a factor there.

And then just a quick follow-up and maybe, Keith, if you could chime in on your thoughts. I mean, Tom, if I think back, call it, when the world was really all brick-and-mortar. I think the thought -- the strategy was you're trying to have a used car lot that was a little more customer-friendly than your typical use car [indiscernible] lend itself to selling newer cars. And it seems like there's less competition, relatively speaking, in the -- your Valumax. I wonder is culturally, would you -- are you more willing now to explore that 7-, 8-year-old 9-year-old sale and kind of mixed the person who's coming in, looking for that 3-year-old get versus the person that's coming in, looking for the 8-year-old Ford Explorer. .

Again, we're a demand-driven business, and Enrique mentioned earlier about internally, we call it ValuMax. It's really just an older car with higher miles, but we want to keep it at the same quality standard. I believe Enrique inventory is around 50%, Value Max, that was 15%, 20%, 10 or 15 years ago. So...

Yes. And again, this year, we have absolutely increased our sale -- inventory and sales of older cars to drive -- to meet the customer where they want to be met on affordability to help support sales. But at the same time, Jeff, clearly, overall, if you take a look at the entire year, we're not where we want to be, right?

And so I think it's -- we need to continue to assess from a sales standpoint. So we need to continue to assess what is the right level of inventory? What is the age of inventory and the price points, and that will be part of our deliberation certainly.

Yes. And Jeff, it's a double-edged sword. You buy older cars with higher miles, they cost more to recondition and they take longer to recondition. So it's not -- as Keith said it earlier, it's the right car in the right place they're at the right price. And so it's a combination of those variables. .

Our next question comes from Michael Montani with Evercore ISI.

I wanted to ask if I could, John, if you could unpack a bit more some of the trends that we're seeing on the credit side with respect to roll rates and both in terms of -- on a like-for-like basis of credit quality and applicants as well as given some of the mix changes that have occurred, maybe towards more [indiscernible] of year 2?

Sure. Yes, I appreciate it. The questions, Michael. With regard to roll rates and delinquencies, I think across the kind of the auto lending industry, lenders would say customers maybe absent exception of maybe the highest credit quality, the 800-plus FICO they certainly are feeling the stress of affordability, inflation, et cetera. So those customers from mid-Tier 1 all the way down to deep subprime our feeling distress.

Delinquencies are higher, roll rates are higher. And for us as a lender, our job is to support them, help to service them and then set accordingly in preparation for that. And I think we've done that over the last -- at the end of Q3, we've hit our losses right on the market in Q3 and Q4. So we feel good about where we sit. But there is a stressed customer out there, and we are thoughtful on that. That being said, again, it's a highly profitable business. We provide a fantastic car and a fantastic experience. So that's why we are willing to go into the Tier 2 space, and we are growing that space. you've got loans value of $3,000, $3,500 on top of the Tier 1 business.

So we look forward to growing that. So we have shifted our focus Obviously, we will always take all the Tier 1 volume, but we're growing in Tier 2. We signaled that. We're 43% penetration this quarter. We anticipate that accelerating over the course of FY '27. We've made market changes to grow that across the last year, including Q4. And so we will look forward to booking those -- that Tier 2 volume. We were approximately less than 10% of Tier 2 a year ago. We were closer to 20% in this quarter of Tier 2 and actually exiting the quarter were actually a little higher than 20%. So we look forward to taking on that volume, servicing that customer reserving accordingly, nailing that and obviously generating more income for CarMax.

Our next question comes from John Babcock with Barclays.

I just have two quick ones here. I guess just first of all, on capital spending, you talked about how that's going to be down over the last couple of years. Are you able to provide any color in terms of where you're reducing spending, whether that's on the maintenance side or the growth side?

Yes. It's actually a little bit of both. And so number one, on the growth side, we're taking new stores down as I talked about in my prepared remarks. So that's one of the drivers. At the same time, from an off-site reconditioning and action standpoint, we have spent the past several years buying the actual real estate when it comes to those sites. And so what you see this year is a little less on real estate spend as well.

And then overall, just for our stores as well, just a little bit more heightened focus just a little bit there, a little more having focused on prioritization of resources there. So you kind of see it across the board really.

Okay. That's very helpful. And then also, just given everything that's going on in the Middle East right now, I was wondering, I know you've talked about or in pricing and marketing spend and everything else you're doing to really try to drive more traffic, drive more consumer interest in CarMax. Just kind of curious though, I mean, how have the Middle East tensions impacted what you're seeing? And do you think that's going to have a notable impact on your overall year-over-year growth trends? Or do you think that you can grow through despite that?

That's a great question. What I know is what I point you to really is more of the industry. right, for the month of March. And in the month of March, the industry actually supported by a pretty strong tax season was pretty healthy. We're not going to talk about our intra-quarter performance. I'd tell you the industry is help is actually pretty healthy coming out of March or into March. And I'd tell you, moving forward, yes, I do think it's something that we need to watch between inflationary pressures between what has now been on record, the lowest consumer sentiment on record here. So it's something we're watching, right?

But at the same time, we are focused on what we can control and what we can control especially given now that we have a much more dynamic approach to margin management is we can react to what's happening in the market pretty quickly. And so we're excited to have that approach a little bit more dynamic, as I mentioned. And we'll control what we can control.

So just to add one more thing there. What I've been really impressed about is how the team has been talking about what's happening in the market. And so thinking about on the supply side as well, talking about face have more -- bring more EVs inventory, do we bring in more gas efficient vehicles as well, too. So constantly thinking about what does the customer want and how we make sure we can deliver that to them to drive sales.

Our next question comes from Chris Pierce with Needham.

If we just fast forward a year from now, and we were looking at would we -- I just want to sort of understand, is it lower prices, lower SG&A per unit and structurally lower retail GPU? Or are there levers you can pull on the retail GPU side of the world as well? And I'm just sort of asking because you've got a customer being aggressive on at a customer, a competitor being aggressive on financing rates to customers. Like what would happen if that competitor got aggressive on pricing as well? I'm just sort of curious how you can kind of could you pull this lever again and drive growth again? Or is this like a onetime lever and retail GPU needs to sort of move higher over time?

Yes, I don't think it's a onetime [indiscernible]. Look, I think a year from now, yes, we are laser-focused on affordability for customers that does move the needle. And so we need to now go back and figure out how to deliver on that. And as I mentioned earlier, certainly, a focus on COGS logistics cost is going to take a heightened focus in our strategic planning process because, again, that is a lever that you can either give to the customer you can either take the margin or you can do a combination of those 2 things.

That is a very powerful lever. And it's one where we think we have opportunity and 1 that we're laser-focused on. But what I think is nonnegotiable is having being more price competitive. And we've actually seen that. We do track our relative price competitiveness on pretty much on a weekly basis here. And what we have seen is that, that price competitiveness has gotten better, and pretty much in line with what we expected for the quarter. And so we've been pleased with that movement, and you saw the results.

And Chris, I'll just add to -- as Enrique mentioned about, you talk about the retail side and the retail margin, we've signaled and clearly have shown in what we're doing in the CAF side of it, there is a clear opportunity in the finance margin. and we're going to go after that. We're excited about the EPP product and the added margin there. So we look at it holistically, we're going to look at it dynamically, and I think we can really support in those 2 buckets as well.

Okay. And then just Enrique help me kind of if I think about logistics as part of retail GPU, what kind of like lever are we talking about? Is that a couple of hundred dollars or like just kind of bucket it a little bit. So if you did decide to take that back and pass some on how much of a lever is that on retail GPU to the extent you can say?

Yes. No, I mean our overall spend on logistics is north of that, right? So -- but in terms of like where the actual dollars were coming from, logistics is an opportunity we know just the actual labor that goes into reconditioning and all of the costs associated with that parts, everything is an area of opportunity.

But there -- we believe there's plenty of opportunity there to further increase and improve our price competitiveness.

Our last question comes from John Healy with North Coast Research.

Great. Keith, wanted to get a big picture question. I know we've talked a lot about the retail approach. But your view on the financing business? Are you fans of it? Are you liking the approach to kind of maybe reach down a little bit deeper in that category? And then secondly, just as you look at the capital structure of the business, I always felt that CarMax is unique in that it doesn't floor a lot of its inventory or much of it all.

Is that something that you'd consider to do to maybe take advantage of maybe raising some capital to maybe recapitalize or buying a lot of stock? Or how would you think about maybe even the the need to have CAF and maybe trying to be creative with that asset as maybe some other entities have recently done. So would just love to get your thoughts if that is something that's also on the table for you guys?

Thanks, John, and a pretty wide range of question. I'll take the first part, and then I'll let Enrique talk about kind of capital structure. I was with the cat team last week, and it was absolutely fantastic to spend time with John and his team to see just the caliber of talent we have there and how we're thinking about the business. And as we build our strategy moving forward, which we'll come back and talk more about in June, it's really understanding all the levers we can pull to make this a growth business and drive return for shareholders. And so CAF is going to play a key piece in that. That's going to be in the lending environment. It's also going to be in the other products that we can sell. And then how does that pair into our overall selling strategy for the business and giving the right price, right cars, improving logistics, too. And so CAF is going to be a critical lever for profit growth for this company moving forward, and we're kind of really kind of see how it fits into the broader strategy overall. But I'll let Enrique talk about capital structure. .

Yes, a couple of things. And certainly, the capital structure, reporting CAF funding and all that is very dynamic, and it's a very exciting area for us. I think, number one, on for floor plan the revolver that we have is the most efficient use of capital when it comes to funding the CAF business.

And so I would not expect that to change. What I'd tell you, though, is from an overall cap funding opportunity, we are looking at -- as we've talked about before, at alternative funding vehicles, right? So last year, we executed our first residual sale, which allowed us to have a gain on sale in the third quarter. So that's something that we intend on continuing to lever. We are really pleased with the execution of that deal and the recession that we had in the marketplace in that deal.

But alternatively, we're also looking at different levers, too, such as a [indiscernible] sales. Is that an opportunity, right? And there's multiple ways to access capital to support CAF and we're exploring them all. We have a strong portfolio of banks and capital providers that we've been dealing with for years and years that are supportive of us. We also had some new potential partners as well out there that we're exploring those options with as well. So I would expect as the year unfolds here, you'll see us kind of exploring new ways to find the gas business.

Great. I think operate last question. So thank you for joining the call today for your questions and for your support, and I look forward to getting to know all of you better in the quarters to come, and we will talk again next quarter.

Thank you. Ladies and gentlemen, that concludes the Fourth Quarter Fiscal Year 2026 CarMax Earnings Release Conference Call. You may now disconnect.

Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter Fiscal Year 2026 CarMax Earnings Release Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, David Lowenstein, Vice President, Investor Relations. Please go ahead.

Thank you, Nicki. Good morning, everyone. Thank you for joining our fiscal 2026 Third Quarter Earnings Conference Call. I'm here today with Tom Folliard, Interim Executive Chairman of the Board; David McCreight, Interim President and CEO; 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, 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 free to contact our Investor Relations department at (804) 747-0422, extension 7865.

Lastly, let me thank you in advance for asking only 1 question and getting back in the queue for more follow-ups. Tom?

Thank you, David, and good morning, everyone. Thanks for joining us. Today, I'm going to provide some perspective on our leadership changes and CEO search. I'll then turn the call over to David, who will review our initial observations and the actions we are taking in response. After that, Enrique and Jon will speak to our third quarter results before we open the line for your questions.

As many of you know, I've been part of CarMax for more than 30 years. Over that time, we we've developed a beloved brand with national scale, unmatched physical and digital infrastructure and an award-winning culture. However, recent results have been unacceptable and did not reflect the company's potential. As a result, even though the Board was already working on a succession plan, we determined that more immediate change was required and that direct involvement from David and myself was the best approach to strengthen the business in the near term. The Board has been searching for a permanent CEO with urgency. We are seeking a proven leader who can drive sales, maximize the benefits of our omnichannel experience, strengthen our brand, improve operations and champion our culture. Conversations are underway, and we have some promising candidates.

What is most important is that the next CEO captures the tremendous opportunity that we have in front of us. As Interim Executive Chair of the Board, I'm focused on supporting David and the leadership team. David is in Richmond 5 days a week, and I'm spending a significant amount of time here myself. We are operating with a new sense of urgency to drive the business forward. I want to thank David for stepping into the interim President and CEO role. As you know, he has served on our Board since 2018. David has more than 20 years of executive leadership experience at prominent retail brands in highly competitive and fast-paced markets. He has led several successful brand transformations new omnichannel strategies and growth initiatives for digitally native brands. What made him a great addition to our Board has also been a tremendous asset in this transition.

And before I turn it over to David, I also want to thank Bill Nash for his more than 30 years of service with CarMax. David?

Thanks, Tom, and good morning, everyone. I'm honored to serve as the Interim President and CEO at this important juncture in CarMax's history. While our top priority is to find a terrific next leader, in the interim, Tom and I are committed to lead and take the steps needed to set up the next CEO for success.

After 3 decades in the retail industry and having led multiple companies through turnarounds, I am familiar with the rigor and critical thinking required to succeed. The good news is CarMax already possesses many of the vital attributes needed to turn the business and regain momentum for growth including a well-known and trusted brand, a strong culture, supported by a base of 28,000 talented associates and an expansive digital and physical infrastructure, including over 250 premium locations that put us near 85% of the U.S. population. Despite these advantages and after decades of industry leadership, based on recent results, it is clear CarMax needs change.

And while it has been only a few weeks in our interim roles, here are some of our observations. Prices. Our average selling prices have drifted upward and appear to be less attractive to customers. To ensure that CarMax is a preferred choice, we will work to shrink the gap between our offering and the marketplace. We are lowering margins and supporting this action with marketing spend while also building out more effective ways to communicate our value to the consumer. We are also comprehensively reviewing all the costs associated with bringing a car to market. We're going to find ways to eliminate the unproductive while maintaining our reputation for having a high-quality fleet.

Around the consumer, we need to bring an even sharper focus on the customer throughout the organization. In guiding decisions, we will reawaken our intellectual curiosity and challenge long-held institutional beliefs as we work to discover the most important elements to the customer in closing the sale. We will emphasize customer inside decision-making rooted in fact-based consumer research.

Digital. We have the opportunity to incorporate a clear and more effective selling voice in our digital experience. While we have spent several years building out capabilities for customers to shop, how they want and where they want, we must now focus our energies on making the digital shopping experience easier and shift our digital voice from one that earnestly delivers abundant information to one that focuses on delivering sales. This will drive conversion and further improve customer satisfaction, just as we do so successfully in our stores.

SG&A. Similar to our approach in tackling the cost of bringing our cars to market, we believe our expense structure is too high. It is clear that we have the opportunity to leverage our technological platforms and process enhancements to reduce our spend. We are committed to sharpening our business model and eliminating unproductive costs. And in just a moment, Enrique will provide a progress update on the decisive actions we are taking to reduce at least $150 million in SG&A.

Profitability. We will more aggressively tap into opportunities in the selling experience to enhance our profitability. We're excited about the outstanding growth potential we have across CAF and our ancillary products. You will hear more from John today about our progress in full spectrum lending as well as the steps we are taking to capture incremental flow-through in our extended protection plan business.

Culture. We've always been a company intensely focused on operations. But with the advent of disruptive technologies, we now need to reignite the entrepreneurial spirit that made CarMax the industry leader for decades. Simply put, we will move faster and operate leaner while taking smart risks. We are optimistic that our immediate pricing and marketing actions will improve our sales performance, but pressure earnings in the near term. As we consider the business model more holistically moving forward, we anticipate that earnings pressure will be offset by unit growth, expanded profitability in CAF and ancillary products and through [indiscernible] reductions in SG&A and COGS.

Tom, the board and I believe that CarMax has many of the requisite attributes for a successful turnaround. We are confident the actions we're taking will begin to strengthen performance while the Board identifies the right permanent CEO to lead CarMax for the future. Now I'd like to turn the call over to Enrique to discuss our third quarter financial performance in more detail. Enrique?

Thank you, David. During the quarter, we delivered total sales of $5.8 billion, down 6.9% compared to last year, reflecting lower volume. In our retail business, total unit sales declined 8% and used unit comps were down 9%. Pressure performance across our age 0 to 5 inventory was partially offset by increased sales of older, higher-mileage vehicles, which represented over 40% of our sales for the quarter, an increase of approximately 5 percentage points compared to the second quarter and last year's third quarter.

Average selling price was $26,400 a year-over-year increase of $230 per unit. The increase was due to higher acquisition costs driven by year-over-year increase in market prices, partially offset by the increase in -- toward older, higher-mileage vehicles. Wholesale unit sales were down 6.2% versus the third quarter last year. Average wholesale selling price declined by $40 per unit to $8,100. We bought approximately 238,000 vehicles during the quarter, down 12% from last year. We purchased approximately 208,000 vehicles from our consumers with more than half of those buys coming through our online instant appraisal experience.

With the support of our Edmunds sales team, we sourced the remaining approximately 30,000 vehicles through dealers, which is down 9% from last year. Third quarter net earnings per diluted share was $0.43 versus $0.81 a year ago. This quarter was impacted by $0.08 of restructuring expenses related primarily to our CEO change and the workforce reductions in our customer experience centers. Total gross profit was $590 million, down 13% from last year's third quarter. Used retail margin of $379 million decreased by 11%, driven by lower volume and profit per used unit of $2,235 in line with historical averages, though down approximately $70 per unit from last year's record high. Wholesale vehicle margin of $115 million decreased by 17% from a year ago, with lower volume and wholesale gross product per unit of $899, a decline of approximately $120 year-over-year. Both wholesale volume and margin were impacted by steep depreciation.

Other gross profit was $96 million, down 16% from a year ago. This was driven primarily by the impact of lower retail unit volume on EPP. CarMax Auto Finance income was $175 million, up 9% over last year. Jon will provide detail on CAF's growth in a few moments. On the SG&A front, expenses for the third quarter were $581 million, up 1% from the prior year, driven by our previously communicated investment in marketing as we supported our new brand positioning launch and the restructuring expenses that I previously noted. These were partially offset by a reduction in the corporate bonus of growth.

As David noted, we are on track to achieve at least $150 million in exit rate savings by the end of fiscal year '27. We took our first significant step toward these savings this quarter with an approximately 30% reduction in our CEC workforce. This reduction was supported by our continued process and technology enhancements which are making our associates more efficient as well as empowering our customers to perform more of their shopping activities themselves.

Turning to capital allocation. During the third quarter, we continued our share repurchases, buying back 4.6 million shares for a total expenditure of $202 million. As of the end of the quarter, we had approximately $1.36 billion of our repurchase authorization remaining. Looking forward, I'll cover 2 items. We are optimistic the actions of lowering margins and increasing marketing will improve our sales performance trends, but may pressure near-term earnings. We expect marketing spend on a total unit basis to be up year-over-year in the fourth quarter, though to a lesser degree than during the third quarter, with a focus on investing acquisition to drive buys and sales.

Secondly, we expect pressure on our service margins in the fourth quarter due to seasonal sales and as we annualized over cost coverage leverage taken last year.

At this 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 third quarter, CarMax Auto Finance originated $1.8 billion, resulting in sales penetration of 42.6% net of 3-day payoffs versus 43.1% last year. Weighted average contract rate charged to new customers was 11% versus 11.2% last quarter, as we continue to adjust consumer rates in reaction to the broader interest rate environment. Third-party Tier 2 volume for which we collect a fee and Tier 3 volume for which we pay a fee combined for 24.9% of sales versus 24.4% last year. Weakness in Tier 2 application volume, along with the impact from CAF's expansion in the Tier 2 space was more than offset by growth from our Tier 3 partners.

CAF penetration continues to benefit from underwriting and pricing adjustments implemented since the beginning of the fiscal year, estimated to be 100 to 150 basis points in the quarter. However, this volume has been offset primarily by lower application volume in the prime credit segment, along with the aforementioned Tier 3 partner lender overperformance. CAF income for the quarter was $175 million, up $15 million from the same period last year. Included in the quarter is a $27 million gain on sale, along with an additional $5 million of servicing fees attributed to the closing of the 25-B deal in September. Note that while the gain on sale is fully recognized at the time of sale, servicing fee income will continue over the remaining life of the deal and will be proportional to the receivable volume remaining.

Net interest margin on the portfolio was flat year-over-year and down to 6.2% from 6.6% last quarter and largely reflects the higher margin receivables removed from the balance sheet as a part of 25-B. CAF had a loan loss provision of $73 million resulting in a total reserve balance of $475 million or 2.87% of auto loans held for investment. Losses observed during the quarter were in line with our expectations upon which we based our reserve at the end of Q2. With regard to growing the CAF business, I'm immensely proud of our accomplishments today. Over the last 18 months, we have greatly expanded our funding options, including this quarter's off-balance sheet transaction, which have been critical prerequisites to this growth. In addition, we continue to add underwriting capabilities and modeling refinements that will support profitable expansion.

Separately, I am also excited about the significant future earnings potential from both our redesigned MaxCare plan which focuses on mechanical coverage and our new MaxCare Plus plan, which focuses on cosmetic protection. These products have already migrated from test phase to pilot in multiple markets, we expect to achieve near nationwide rollout during Q1 of FY '27.

Now I'd like to turn the call back over to David. David?

Thank you, Enrique. Thank you, Jon. Today, we outlined our initial observations and near-term priorities to drive improvement, shrinking the price gap between our offering in the marketplace with a stronger focus on customer experience, increasing digital monetization capabilities, reducing costs, enhancing profitable growth drivers and improving the speed of decision making. And while we are realistic about the near-term challenges, CarMax's competitive foundation remains strong.

We have a trusted brand, national scale that is difficult to replicate leading omnichannel capabilities and growing digital infrastructure, a strong financing platform in CAF and an award-winning culture. Our execution has not matched the potential of these assets, but that's what's changing. Tom, the board and I are focused on strengthening performance and creating a solid foundation for the permanent CEO to build upon. We appreciate your continued confidence in CarMax and are committed to being transparent about our progress.

With that, we'll open the line for questions. Operator?

[Operator Instructions] Your first question comes from the line of Sharon Zackfia with William Blair.

Good to hear you again, Tom, on a conference call, and welcome David to the world of CarMax conference calls. Yes. I guess maybe if you could give some color on the magnitude of the GPU reset that you're looking to see here in the February quarter? And then as you look at the business kind of, I guess, with a fresher perspective, are there any customer cohorts that you can delve into where you think somehow CarMax has become a bit less competitive or a bit less attractive? And what's the game plan to win those customers back?

Yes. Sharon, it's Enrique. Let me jump in. The margin reductions which are going to be supported with acquisition spend on marketing will be meaningful in our design just to narrow the gap that we talked about with the broader marketplace, and we're optimistic that those can actually improve our retail sales trends into the quarter. But they're big enough for us to talk about. And we're going to see how they roll out. We're going to see the impact within this quarter. And then when we have our year-end call in April, we'll provide insight and an outlook on what those margin reductions and marketing spend increase mean to us.

Yes. Sharon, this is Jon. I'll jump into your customer cohort question. Yes, I think there's obviously a places across the spectrum that we're looking to improve and grow sales. One in particular that stands out for me is if you look at maybe the higher FICO segments, we mentioned in the prepared remarks sort of in CAF and the Tier 2 section that maybe 650 to 750 space feels like we've lost volume there. We can track that through application volume coming through the door and then progression further on. So a lot of speculation around what that could be. Certainly, we're going to look at all things.

David mentioned a number of things pricing. Obviously, we try and keep our rates competitive. Just overall, the offering that we provide the consumer. But I think that's one spot in particular that I think there's a lot of chance to recapture and fuel our growth.

Can I ask a follow-up? You have a competitor who will be kind of lowering finance rates proactively in the current quarter to reinvest some of the -- their GPU to the customer. I think historically, you followed the market on finance rates. Would there be something you're willing to do on interest rates to be -- to kind of weaponize that a bit more to get a more conversion?

Sure. I appreciate that question. Yes, I think we're always keeping the pulse on the markets, looking at how we compare to, obviously, credit unions and banks and what have you and certainly competitors as well. So the degree we can measure that. Yes, I'm not going to speak to what they're going to do. But we think our APRs are quite competitive with the Fed making the moves that they've had to make, we will adjust accordingly. We always have a test-and-learn methodology there. I'm not going to say we're going to try and get further ahead of the market. But I still think in maybe the space, there is a gap in interest rates that still exist, although it might be closing, but I think it's the broader offering question.

How do we compare from an interest rate standpoint, certainly, it may be term but obviously couple that with what's the price of the car and all the other fees associated with that. So I think the bigger offering picture is the one that's really going to be the focus here.

And Sharon, what I'd say, looking at it a bit more broadly as well is that the reductions in SG&A. So these levers that we've talked about, the reductions in SG&A, the focus on COGS, growth opportunities and CAF full spectrum as well as EPP products that Jon talked about and we're happy to elaborate on. Those are all levers that bring to bear and ability to be more competitive in the marketplace. At the same time, we're reevaluating, as David talked about, reevaluating how we go to market, right?

And how we go to market, as Jon mentioned, it's the kind of cars, the price of the cars. It's how we communicate on our website. It's all those items. And so we do think we have levers at this point that are lining up to be materially more competitive and to go to market with.

Our next question comes from Scot Ciccarelli with Truist.

So historically, I'm going to take another shot at this GPU question. Historically, I believe the management teams have talked about needing to lower prices by about $500 per unit to see a real inflection in the sales pace. So that would obviously be meaningful to use Enrique's words. So is that in the range of how you guys are thinking about reducing your GPU?

Yes. What I'd say is I don't think we've said $500 is a meaningful or a needed amount to drive sales. We do price elasticity testing. We're always in the market doing price elasticity testing. I'd tell you the number to move sales is well south of that.

And in terms of what we're doing this quarter, look, we're trying different things. We are going out. It was again, sizable for us to talk about on this call. We're going to test the impact on sales, again, in combination with an increase in marketing to kind of get a boost there overall. And we're going to report out in the fourth quarter call in April and communicate what we saw in the market. We're optimistic it's going to change the trend in sales. But I wouldn't say that $500 is what we need to move sales, if that's what you're saying.

Got it. And then just a follow-up, if I can. I guess it's a bigger picture question for Tom and David. What do you think CarMax represents to consumers today like in late 2025, given some of the alternatives that are out there? And where do you think you would like to end up in, call it, 2 to 3 years?

Hey there, nice to talk to you, David here. We think many of the things that CarMax has meant to the customers in the past can continue to be. We believe we're a leading used car destination for customers. We've invested a lot of money and time and effort in building and broadening those capabilities to be able to let them shop where they want and how they want. And ultimately, we believe we're the most trusted brand out there. The difference is in where we've been and the performance we need to adjust to and adjust our model towards getting to and have confidence we're going to be able to get there in the near term.

Scot, it's Tom. Good to talk to you again. From my perspective, and I'm a little biased. Over the last 30 years, we've built an iconic brand, and I don't think that's changed at all. I think the consumer knows what we represent. They know the quality that we represent. I think our associates in our stores and in our CECs and across the board are completely engaged and ready to serve the customer. We've spent a lot of money investing so that we could serve the customer however they want to be served, whether it's online or in our stores.

And I just think we need to activate that. We need to do a better job of presenting that to the customer upfront. But in terms of the brand and the strength and the quality of our vehicles, all that stuff is fully intact, and I think it's the basis for us moving forward and a basis from which we can grow again.

We will move next with Craig Kennison with Baird.

On the SG&A topic, what is the baseline SG&A from which you expect to cut $150 million? Just curious so that we can track your performance against that goal?

Yes. No, absolutely. And so when we talked about our SG&A goal of $150 million reduction, it's a reduction of SG&A opportunities. That's really comparing it to last year, if you will. So if you want to use -- our base was $2.5 billion, right, roughly. And so that's what we're using as a baseline, and those are the reductions that we're going after.

And that is an exit run rate as of Q4 of fiscal '27?

Exactly.

Our next question comes from Rajat Gupta with JPMorgan.

Thanks for the candid assessment on the prepared remarks. I had a follow-up on just the margin versus same-store expectation. Can you give us like any sort of quarterly read because we've got the sense that last quarter also, there was some effort to become more competitive. Anything you can give us in terms of like early reads in December and how those actions have already started to show some results? Or is it still very early? Or have you not implemented them yet? And what kind of like equation are we looking at in terms of dollar versus same-store volume trade-off, dollar GPU versus same for volume trade-off. Any more insights you can give us on how you see this equation playing out? And I have a very quick follow-up.

Rajat. So we just rolled out the price changes. So it is too early to provide any kind of insight into that. And again, we will provide a view into that in our Q4 call, but we literally just rolled out those changes.

They're underway.

Yes, they're underway. Actually, they're not, that's a good point. They're not fully rolled out. They're underway, but we just started this week. So...

Is there hope to go back to share gains or positive unit growth and what kind of the expected outcome in the near term?

Yes. Look, like we are optimistic that this lever that we're pulling. And again, it's really the combination, right, of having lower margins, lower prices out there, being more price competitive, supporting it with acquisition marketing right? So think of like paid search, other direct levers like that, like directly to support sales is going to change the trend of our performance. So we just reported a negative 9% comp. Last quarter was a little better than that, but not great. And our goal is to change the trend and to get the sales flywheel going, and that's what we're looking to do.

And at the same time, we're working really hard on getting other profitability metrics or levers, I should say, in place. And again, those things are SG&A reductions, COG reductions, ETP growth, capital spectrum, so CAF income growth over time. These are all levers that we're pulling because our goal is to drive sales over time, absolutely, and to drive earnings power over time as well.

Understood. Just a quick follow-up on CAF. It looks like, as you mentioned, like third-party Tier 3 penetration went up. Is this -- is there anything like any meaningful like tightening effort going on right now? I'm curious how those reserves will change. going forward once you go back to having more in-house Tier 3, Tier 2 type penetration? Or maybe like any color you can give us on this CAF provisions in the fourth quarter would be helpful as well.

Sure. Yes, I appreciate the question, Rajat. Yes, I don't think there's a tremendous story in the Tier 2, Tier 3. We always just provide the numbers and provide a little guidance at the delta there. But there's always swapping between maybe a Tier 2 lender that is choosing to be a little more aggressive or doing tightening. Again, they're going to make their own individual decisions versus the Tier 3 partner that, again, may be the recipient of that tightening higher upstream again, being a little looser on their side. So I don't think there's a meaningful story there, just to clarify, just really providing the numbers.

And ultimately, to your second question, I don't think that -- I wouldn't read much into that in terms of CAF provision. Again, we are, as we stated, very, very excited about our opportunity as we go down into the Tier 2 spectrum, just for a point to note, this is -- we were over 10% of the Tier 2 volume came to CAF this quarter we went after. And so we're really excited about that.

And as we continue to go further spectrum, we're generally operating in that higher 50% of Tier 2 but we think we can get the entirety of that credit spectrum as we methodically roll out refinements to our model. We're excited about the funding solutions we have in place. And so we will reserve for it accordingly, and we will enjoy the income and we will get there.

Our next question comes from Brian Nagel with Oppenheimer.

Tom, welcome back to the calls. Look, this is going to be a potentially repetitive -- I want to make -- get this point out. So we're talking about pricing and be more aggressive in pricing here. For as long as I can remember, I [indiscernible] come back for some time now when you've done these pricing tests. And the message from CarMax has always been the same is that they really lower prices, that the net result has not been favorable. So I guess the long asked is we're talking about, once again, either testing or moving forward with lower prices, I think, lower GPUs. What's different this time? Why do you think this will -- this time around going to differ than in the past, which is actually going to drive better unit volume.

Yes, I think in the past, look, when we've lowered our prices, and we do price elasticity all the time, right, Brian we talked about that. I think the equation in the past has been you lower your prices and then when you're flowing through to the business, do you make enough money to offset the lower margin with increased sales, it absolutely drives sales, right?

The equation as well, it didn't always drive enough profit. I think the difference, absolutely right now, there's a clear difference. The clear difference is that we have strong levers that are now supporting to look at the business more holistically.

So again, think of the reduction in SG&A that aggressive test that we're going after. You think of COGS and the -- how aggressive we're going after cons, you think of EPP growth, you think of CAF full spectrum income, these are all levers that are going to offset that pressure we had seen when we looked solely at the impact of lowering prices. So there's absolutely a difference. And we're just looking at the business a bit more holistically, and we have those levers at hand here.

Yes. And Brian, I would just add that as Enrique mentioned, we've always talked about it in terms of total profitability. But when we do price changes, we definitely see some sales movement. And then we've always had kind of the guardrails around what total profitability is I would just tell you that our focus in the near term, given our current performance is to drive sales and to get things with in the other direction. The other thing to remember is when we say we're at lower prices of $100 or $200, it doesn't mean we're taking $100 across the board on cars. It's more like if we say $100, think of it as 10% of our cars are $1,000 or 5% of our car is $500. So it meaningfully impacts the trajectory of sales because of the way we execute price changes. But back to our near-term priority is to get things turned around and get sales moving in the other direction.

And then just a follow-up, sorry, David. But with regard to marketing, so you talked about, if I understand correctly, you stepped up marketing now, so to say, [indiscernible] on the gas, a little bit more. Is it -- when you think about it, is it more of the same? Or is CarMax really working on coming to market with a new marketing message?

Yes, good question. Thank you. So what we're doing is taking -- the new campaign was launched recently as the team took you through. And what we're focusing on now in the near term is sort of optimizing the campaign we have with the results and tests we have. So shifting things that are going into driving more conversion, messaging, perhaps some of the -- and dialing back perhaps some of the brand longer-term spend on it. But ultimately, we think the review and positioning of the campaign is really something for the new CEO who's going to align it with the new strategy, and we're working with the existing campaign and resources we have right now. But the team has been working to optimize the results based on media, based on geographies and based on messaging.

Our next question comes from Daniela Haigian with Morgan Stanley.

My first question is on that digital -- redefining the digital platform. what specifically within that needs to change to drive more of a selling experience? And how does that impact the operating cost structure with your store base? What would be early indicators of progress in that redefinition?

Yes. So I'll take the first part of the question first. We have worked very diligently and over the years to build the capability set. But we have not been as focused yet on the next stage, which is to make it easier.

Look, shopping online with us is not easy. We have ways to streamline it, and we have ways to make the digital selling voice really, just like our sales associates in the stores, make it easier to bring to get them to the ultimate sale and the ultimate satisfaction is finding a car they like that they can afford. And we recognize that with all the good work that's been done, it's still not an easy experience. And so in our earnest efforts to provide information and countless options, we still have opportunity to streamline and bring it there.

And then in terms of the impact to downstream, we'll work in lockstep with the organization in the field. to figure out what those best options are, as both Jon mentioned and Enrique mentioned earlier, we have an opportunity to look holistically at our business model from our COGS, our SG&A, our messaging and all those components, and that includes how we make decisions, not necessarily individually, but more holistically and what that means for an offer for the customer. So we don't lose sight of what's most important to them. But I would expect you're going to see some of the changes. Tom and I would expect you'll see some of the changes. And it will be iterative in the next month or 2, you'll see it, and we'll continue after that. But you should see the efforts are underway and the team is very excited about this next step in that digital journey and how important it is in linking with the field team, very symbiotic.

Got it. Got it. That's helpful. And I appreciate your transparency there. My follow-up is on COGS, right? You and Enrique, you keep calling out COGS as a key lever. What's the strategy with reducing that line item? And are you still progressing towards that regional reconditioning center approach?

Yes. I would tell you, look, we have been focused on COGS for -- I mean, we're always focused on COGS, what we've done is, so we've called it out over the past couple of years. Like last year, we communicated a goal of $125 per unit. We hit that goal this year. We had communicated again another goal of $125 per unit.

I would tell you, given where sales have been for the past few quarters, we're probably a little bit behind that goal, not because the initiatives aren't there and the teams aren't doing great work is just because you delever in tough sales environment. But we will continue to put even more accelerated goals internally to go after COGS opportunities. Some of that is through the reconditioning centers, right?

Some of that -- I'll give you a real example. We just rolled out a parts selection tool in our stores. We're already seeing benefits from that, right, really kind of forcing our associates in the stores to take balance speed with quality, with cost and making it really easy for our associates to do that. and we're seeing results fairly immediately. And that's just an example of items we're focused on in COGS.

In terms of the reconditioning centers, yes, we've rolled out at this point in time, 5. Only 2 of them have been open for about a year. So it's still kind of early to tell what the goals are. I mean the ultimate goal is absolutely to get them more efficient. We're already seeing logistics savings in the system because we've rolled these things out and we expect that those will perform in line with some of our larger reconditioning units that we have in stores like Marietta in L.A. that we've seen there, highly efficient store because of the volume that we come through. We have the same expectations with these more regional reconditioning centers. But again, we've only rolled out a few at this point in time.

Our next question comes from David Bellinger with Mizuho Securities.

Tom, nice to talk to you again. In the prepared remarks, you guys mentioned reassessing the cost of bringing a car to market. What about the time to turn vehicles? Because CarMax has been a leader in that area for a long time. Looks like some competitors have increased their speed to market pretty dramatically. Is there anything you guys can do around AI implementation to cut down that time line, use your 30-plus years of data and potentially avoid some of those sharper depreciation swings that have disrupted the business over the last few quarters. How should we think about that opportunity?

Yes. I think look, we're always focused on reconditioning, on speed, on lowering our WIP. For example, this quarter, we increased our sellable inventory and decreased our overall inventory, right? So that's really a strong focus on WIP that actually this quarter helped returns relative to last year despite comps being down 9%. So you can see the organizational focus on just getting better in terms of turning vehicles. I think our offsite reconditioning locations will help as well because it will be even more efficient. So just a couple of examples there in terms of the focus moving forward.

And then Enrique, maybe a second question. Just can you update us on the real estate strategy? Anything that's changing there? You guys own a lot of your real estate. Is that a potential area where you can monetize and use that to fund more investment in the business if you need to?

Yes. Look, I think it always is a potential. We own a lot of our sites out there for our store locations. I tell you, we have better sources of capital versus doing like a sale leaseback or something. So we have great banking relationships, great partners out there, capital providers and we have a revolver, a $2 billion revolver, we can dip in there and just more efficient ways to get capital for us rather than kind of monetize our stores or the land under our stores.

Our next question comes from Chris Bottiglieri with BNP Paribas.

First one more clerical, I suppose, and just a bigger question. Did you give the service profit. I think it was $4 million last quarter. Just curious what that was for Q3? Is that a good run rate for Q4 given volumes are pretty similar in Q4 versus Q3? And then my actual -- can you just elaborate on what's happening with the credit penetration. It sounds like the prime side, I suppose, you're seeing less appraisal traffic or less traffic coming in? Is there -- I would think that with a K-shaped economy, that's probably the healthier side of the market? Just kind of curious what's causing that what you're seeing there.

Yes, that's fine. Chris, this is Jon. I'll take your -- the credit side. Yes, as we've noted in the remarks and even reflecting on Sharon's question, when we look across the credit spectrum, we really can gauge who's coming and shopping with us through our pre-qual product is a great place to do it. Customers love it, they take full advantage of it, 80-plus percent of our customers start with credit online. I think we see definitely an opportunity in that sort of 650 to 750 credit space. As I mentioned earlier, hard to speculate what's driving that is that we think our rates are quite competitive there. But it's always a question of inventory price availability, all of that.

I think as we mentioned on this call, holistically, all of that is up for discussion, and we're going to look at improving our overall offering there. So while you would say K-shaped economy, ultimately, we do see the other folks probably are less stressed by affordability. We want to make sure we have the right product at the right price at the right time for them when they're in to purchase. So I think there's improvement there. That's really what the comments, I think, are in that space are.

Yes. And regarding the service in the quarter, there definitely was pressure in services, as you know, and as we've talked about, it is a line item service margin that deleverages when sales are more challenged.

But look, like over the past couple of years, the teams have made material strides service margin over the past couple of years. And we had even talked at the beginning of this year that we expect it to be, I think, slightly positive for the year in service margins. Certainly, our sales expectations at that point in time. We're not where we are currently actualizing. But I'll tell you, for the full year, our outlook right now is maybe a little unprofitable or a little profitable depending on sales performance in the fourth quarter. And that just tells you the incredible work the teams are doing in for service margin there. But we did have a negative margin in the third quarter.

And we do expect, as I talked about in my prepared remarks, some pressure in the fourth quarter. We'll be comping over some cost coverage that we took last year. But again, if I take a step back and I look more holistically at it, the teams have done tremendous work. It's going to be borderline whether or not we hit the margin for the full year. But again, sales have been definitely more pressured than what we had anticipated versus the beginning of the year.

We will move next with John Babcock with Barclays.

I guess just first of all, I was wondering if you could talk a bit more about what the Board is looking for in its next CEO and also how we should think about timing in terms of when something might be announced there, recognizing that might be variable.

Yes. I would just tell you it's the Board's highest priority right now. It's my personal single highest priority as I'm leading the search along with the rest of the search committee. We're looking for somebody that has led a complex business with a diverse set of assets. We're hoping to find somebody that's also led some type of a digital transformation doesn't have to come from automotive necessarily. It doesn't necessarily have to come from retail. But one of the most important things is that somebody who understands our culture and can lead this team onto the next phase of our success. In terms of timing, we're moving as quickly as we can, but I don't really have an update on timing.

Totally fair. And then next, at least based on the work that you've been doing over the last couple of months and even knowing the business. I was just wondering, how are you thinking about the omnichannel business? I mean do you think this is kind of a setup that you want to keep longer term? Do you think you want to shift more towards digital over time? What's the benefit of omnichannel versus digital or pursuing more of a brick-and-mortar strategy?

I think for us, it's really -- it's all of the above. Over the last several years, as the team has been communicating, we've spent hundreds of millions of dollars in our infrastructure and giving us the capabilities to meet the customer wherever they want to be. I think having a national physical footprint is an advantage for us. Over 250 locations, as David mentioned in the beginning of the call, near 85% of the U.S. population.

So I think it's more of an all of the above strategy. I think some of the comments you've heard today is that we're not happy with how we present to the customer from a digital standpoint. And I think we're going to -- you'll see us make some significant improvements there. But we think our stores are extremely valuable and our store team is doing a great job meeting doing -- converting customers once we get them in the store. But we clearly need to get better on the digital side.

Yes. And just to add a little color to Tom's comments on that. We, again, CarMax has built out so many capabilities. And now when we are talking about holistically looking at our business model, we've built out so many potential capabilities, and many of them are helpful, but some of them probably are adding clearly, decisions we've made, things we're trying to do and our best efforts to please everything for every customer. We have an opportunity to streamline, make some decisions, prioritize some things based on real quantified insight from the consumer in ways that we can streamline and optimize the advantages that omni should provide versus getting caught in some of the complexities that omni also provide.

So we think you'll see that in the near term as team sort of finishes that infrastructure buildout, but then get to really sharpen it and hone it into a competitive advantage.

We will move next with Jeff Lick with Stephens Inc.

So listen, David, a question for you. You've been a senior leader at retail organizations that were digitally native and also retail organizations that are kind of a hybrid physical business and a digital business. I was wondering if you could speak to the challenges of CarMax as a hybrid business where there are people that are went into the physical part of the business and there's some natural tension, which makes it more difficult to have an ideal digital business.

Yes, Jeff, great insight, and thank you for that question. Yes, there are examples of that. And that's a little bit of what I was alluding to.

Now I recognize Tom and I have been in the chair for 2.5 weeks or so. But what the most important things I see is that it's a really -- team is very excited about breaking through and it's an incredibly talented and dedicated group. We just need to work across those channels to make sure we're putting the customer at front of those decisions and not having the operational biases or legacy approaches come through. So there is not a battle between one version versus another. But what we need to do is provide some leadership and focus to the team so we can start executing more with that. what's most important to the customer, streamline, make sure it's a competitive offer because we know we own the brand, and we know we own the trust in a great part of the American consumer.

But you're absolutely right. Many organizations, omni causes them to trip up. I would say we're just going through finishing sort of like an awkward adolescence and we'll be moving into a much more refined effort in the coming time. Now that being said, you want to confirm that answer with the new CEO when they come in. But in the interim, we -- that's why we're so optimistic about the improvement because we have so many of the components already in place.

And I was just wondering if we could quickly double back to Sharon's first question about potential cohorts that you might have lost or been be less effective with. I don't think she was thinking about necessarily the by FICO score. It kind of gets into the advertising strategy. And Tom, just wondering back in the day, it always seems like you over-indexed with that young professional likely a female that didn't want to go into the franchise dealer and to battle you provided a more easy professional experience. Do you think that your prime competitor has maybe cut you off at the past and has even done a better job of providing an experience for that person, where it's like, look, now it's super easy? Is that what...

Your question about cohorts, the second quarter, we were down 6%. Last quarter, we were down 9%. So we need to improve across the board. I would just go back to the comments we've already made. We're not as easy as we need to be for the consumer. We need to simplify our processes. We need -- it's so easy to buy stuff online. It doesn't matter what it is these days. And it's true for automotive. It's not just true for 1 or 2 competitors, it's across the board. And again, we've invested the money to put ourselves in a position to be the best at this, and we've got some work to do to get there. But we need to simplify for the consumer, how they go through the process with us, whether it's on our website or in our app or in our stores.

We will move next with Chris Pierce with Needham.

Sort of following up on Jeff's thought there. I guess -- do you think you have the customer base that wants to do more of the work online to sort of drive an OpEx offset in GPUs? Or do you need to reposition the brand to get younger? Or would you sort of reject that framing?

Can you say that again, sorry?

Sorry, we missed that.

Yes. I'm just curious, do you think you have the customer base that wants to do more of the work online? Like do you think you need to get younger with this new ad campaign? Or do you think it's just about pricing and the experience you're offering?

I absolutely think we have the customer base that wants to do more of the process online. By the way, the younger you go, the less money you have and the less likely you are to have the credit required to buy a car that's $26,000. So -- but yes, I think we have plenty of customer flow and we need to take better advantage of it.

And as David and Tom talked about, look, we have enviable assets, right? We have an awareness level that's off the charts. We have consumers that are extremely loyal and that love our brand. We have associates that are outstanding. We have more than 250 stores across the country that operate extremely well. We have a strong -- we've invested in the digital capabilities. We just need to kind of fine-tune how those things mesh together.

But in terms of whether or not we have customers out there that want to buy us, I would tell you, absolutely, that's not the concern that we have the opportunity that we have is to make our offering based on the consumer, the most compelling that we can make it, and that's what we're focused on.

We will move next with Michael Montani with Evercore.

Just wanted to dig into, I guess, it's a 3 parter, but it's kind of all related, which was depreciation trends, just some incremental color about what you're seeing in the competitive backdrop is the intensity ratcheting up? And then lastly was on the reinvestment into GPU. Just how much of a reinvestment we ought to be thinking about moving ahead?

Yes. For depreciation, my comments were really in the wholesale area, right? We did see very sharp depreciation within the quarter, a greater than 10% depreciation within the quarter, so very sharp and that impacted performance within the quarter as that abates, then we would expect that performance would have been run.

In terms of GPU, we did talk about that. Look, it's material in that for us to talk about it on the call. But at the same time, we've just rolled out different levels of pricing changes, we're going to see kind of how it performs within the quarter. And then in our Q4 call, we'll come back and we'll talk about what we saw and also what that means for our plan moving forward. I say that, but we're also optimistic that it's going to change the sales trend that we've had either negative 6%, negative 9% comps sequentially, and that's what we're looking to change. We're looking to change that trend. And we'll come back with that. I forget your number 2 question, but then...

Just the competitive intensity.

Let me add to the pricing part, which is our pricing is not -- it's not like we have a static pricing model where we just lower all of our prices and leave them there. This is going to be very dynamic throughout the quarter. I think one of the things David and I and the rest of the team here assessed in a short period of time is if you want to get things moving in the other direction, there's some significant levers that you can push, but the 2 biggest are clearly pricing and marketing.

So we're making moves there to try to get the trend moving in the other direction, but it will be very dynamic throughout the quarter. It's why -- we're not trying to be evasive with what we think the margin impact will be, but we're trying to be as impactful as we can. And again, we're 18 days into the quarter. So this will be a dynamic process throughout the next 3 months.

We don't have any further questions at this time. I will hand the call back to David for any closing remarks.

Thank you. We'd like to thank the thousands of CarMax associates who helped build the business that we have today and will be part of our next leg of growth in the future. Thank you all for joining our call today. And then before we sign off, Tom has some closing remarks.

Yes. I just thank all of you guys for your support. Many of you I know and have heard your voice in the past. And although it's good to be back, I wish it was under slightly different circumstances. But what I would tell you is from the Board perspective, we are absolutely committed to getting this right. David is the perfect person to sit in this role while we search for our next CEO. I'm happy to spend more time on the business.

What I've been most enthusiastic about over the last 2 weeks is how engaged all of our employees are and how excited they are to win. And as we've mentioned multiple times and Enrique just kind of covered in total, we have incredible assets in this company. We have a great balance sheet. We have an iconic brand. We have 250 locations. And most importantly, what has always separated us from everybody else is the engagement of our more than 28,000 associates. And none of that has wavered.

So I just wanted to close by saying the Board is absolutely committed to getting this right. And I wanted to also thank David for the role that he is playing while we're in the middle of this search. And lastly, I wish everybody a happy holiday season. Thank you for joining us, and we'll talk to you next time.

Thank you. Ladies and gentlemen, that concludes the Third Quarter Fiscal Year 2026 CarMax Earnings Release Conference Call. You may now disconnect.