CarMax (NYSE:KMX) reported fourth-quarter financial results on Tuesday. The transcript from the company’s fourth-quarter earnings call has been provided below.
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Access the full call at https://events.q4inc.com/attendee/459575927
Summary
COMPANY NAME reported a 1% decline in total sales to $5.9 billion for the fourth quarter, with a combined total of approximately 304,000 vehicles sold across retail and wholesale channels, marking a 1% increase in volume.
The company focused on improving affordability and streamlined its cost structure, achieving a 5% reduction in SG&A expenses, excluding restructuring costs.
COMPANY NAME’s adjusted earnings per diluted share were $0.34, down from $0.64 a year ago, impacted by restructuring costs and a non-cash goodwill impairment.
Newly appointed CEO Keith Barr outlined strategic priorities, including enhancing digital capabilities, optimizing inventory, and maintaining competitive pricing to drive growth.
CarMax Auto Finance originated nearly $1.9 billion in loans, achieving a sales penetration of 42.8%. The company plans to expand more into Tier 2 lending.
The company plans to open four new stores in fiscal year 2027 and expects capital expenditures of approximately $400 million, down from previous years.
Management emphasized the importance of pricing competitiveness and cost efficiency in driving sales and profitability.
The company paused share buybacks with $1.1 billion authorization remaining, focusing on improving business fundamentals and maintaining leverage targets.
Full Transcript
OPERATOR
Ladies and Gentlemen, thank you for standing by. Welcome to the Fourth Quarter Fiscal Year 2026 CarMax Earnings Release Conference call. At this time, all participants are in a listen only mode. After the Speaker’s presentation, there will be a question and answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, David Lowenstein, Vice President, Investor Relations. Please go ahead.
David Lowenstein (Vice President, Investor Relations)
Thank you. Good morning. Thank you for joining our fiscal 2026 fourth quarter earnings conference call. I’m here today with Tom Folliard, Interim Executive Chair of the Board, Keith Barr, President and CEO Enrique Mayer Mora, 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 8K filed with the SEC this morning, our annual report on Form 10-K for fiscal year 2025 and our quarterly reports on Form 10-Q previously filed with the SEC. Please note, in addition to our earnings release, we have also prepared a quarterly investor presentation and both documents are available on the Investor Relations section of our website. Should you have any follow up questions after the call, please feel free to contact our Investor Relations Department at 804-747-0422 extension 7865. Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow ups. 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 and deploying an initial set of digital enhancements designed to drive conversion. We also continued 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 redesign. Before I get to Keith, I’d like to thank David McCrae for stepping into the role of interim president and CEO over the past several months as we search for 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 Barr (President and Chief Executive Officer)
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’s earned something rare, the trust of its customers. A customer and associate centric approach is central to how I lead and I recognize right away that it is central 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 this strong foundation and better serve our customers and unlock the significant opportunity ahead of us. Before joining CarMax, I spent my career in hospitality, holding numerous leadership roles in commercial operations and technology and ultimately serving for six years as CEO of IHG Hotels & Resorts. I led a successful transformation that created 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 by delivering the right products at the right price in the right way for the customer. My time in hospitality was defined by placing the customer at the center of every decision. The auto market is evolving quickly and 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. I believe there’s a tremendous opportunity ahead to better meet the needs of today’s consumer. CarMax’s scale, including the fact that we reach 85% of the US population, is a competitive advantage in this market. Paired 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, both 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 reconditioning, inventory, pricing, marketing and cats. 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 three things that matter most to customers. A competitive price they 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 make it 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. Third, act with more urgency and intention while ensuring there is alignment across the organization. We will change what is not working, double down on what is, and keep evaluating opportunities and risks as we move. We’ll be bold, hold ourselves accountable and move with the speed as we build a durable long term growth engine. These three priorities are where we will begin and I expect our work to evolve as I continue to listen, learn, engage with 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 Mayer Mora (Executive Vice President and Chief Financial Officer)
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 Fiscal Year 2027 exit rate targets we had previously set. Our EPS during the quarter was impacted by restructuring costs as well as by a non cash 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 $26,000 $19 a year over year, decrease of $114 per unit. Wholesale unit sales are 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 Edmund sales teams, 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 34 cents in the quarter compared with 64 cents a year ago. Our EPS this quarter was impacted by a few items. This includes a non cash 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 volumes. 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. Carmax 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 and A front 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 three 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 Edmonds 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 repurchase authorization remaining. As we look ahead into Fiscal Year 2027, 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 Fiscal Year 2027, 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 Fiscal Year 2027. We will ramp throughout the year driven by the rollout plan. Regarding SG&A, we expect Fiscal Year 2027 exit rate reductions of $200 million, an increase over the previous guidance of $150 million. However, the year over year savings within Fiscal Year 2027 are expected to be offset primarily as we annualize over the materially reduced corporate bonus and share based compensation in Fiscal Year 2026, which offsets approximately half of the Fiscal Year 2027 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 Fiscal Year 2027 when excluding the restructuring charges incurred in Fiscal Year 2026. Regarding capital expenditures, we anticipate approximately $400 million of spend in Fiscal Year 2027 down materially from the past two years. The largest 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 Fiscal Year 2027 we plan to open four new stores, two new off site reconditioning and auction locations and two 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 CAF 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
John Daniels (Executive Vice President, CarMax Auto Finance)
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 three 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 CarMax Auto Finance Penetration in the fourth quarter reflects our continued focus on 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 FY27. Cap 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. CarMax Auto Finance’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 $453 million, or 2.78% of auto loans …
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