CarMax Q2 2026 Earnings Call: Contradictions Emerge on Subprime Strategy, SG&A Management, and Pricing Approach

The above is the analysis of the conflicting points in this earnings call

Date of Call: None provided

Financials Results

• Revenue: $6.6B, down 6% YOY
• EPS: $0.64 per diluted share, down from $0.85 in the prior year

Guidance:

• Expect marketing spend per unit to increase in H2, especially Q3, to support new brand campaign.
• Service margin to face pressure in H2; full-year service margin still expected to be positive.
• Target at least $150M in SG&A reductions over 18 months; majority reflected by FY2027 exit rate.
• CAF: full-year income likely flat to slightly down; Q3 gain-on-sale of ~$25–$30M from non-prime securitization; additional $40–$45M servicing/retained income over life.
• Provision for new originations expected roughly $70–$80M per quarter; minimal further true-ups; 2024/2025 vintages tracking to plan.
• Retail and wholesale GPUs in Q3 expected near historical averages (below record Q3 last year).
• Inventory and price competitiveness improved; no longer intentionally slowing buys; expect Y/Y buy improvement in Q3.
• Management still aims to gain market share for the full year.

Business Commentary:

* Sales Performance and Market Dynamics: - CarMax reported total sales of $6.6 billion in the second quarter, down 6% compared to last year, with a decline in total unit sales by 5.4% and used unit comps by 6.3%. - The decrease was partly due to a planned inventory ramp ahead of the second quarter and a pull forward of demand into the first quarter, leading to excess inventory and lower price competitiveness. Additionally, pressure from macroeconomic factors such as rising interest rates contributed to the slowdown.

• Inventory and Pricing Strategy:
• CarMax saw about $1,000 in depreciation affecting price competitiveness, particularly in the second quarter.

• The company intentionally slowed buys to balance inventory with sales, aiming to improve price competitiveness and sales performance heading into the third quarter.

• CarMax Auto Finance (CAF) Adjustments:

• CAF originations were over $2 billion, with a 42.6% sales penetration, a 60 basis points increase over last year.

• The increase in penetration was partly attributed to downward rate testing, but adjustments to underwriting criteria also played a role, enhancing penetration in the top half of the Tier 2 space and recapturing Tier 1 segments with reduced risk.

• Financial Outlook and Efficiency Initiatives:

• CarMax reported net earnings per diluted share of $0.64, down from $0.85 last year, primarily due to lower volume and a CAF loss provision adjustment.
• The company is committed to reducing SG&A expenses by at least $150 million over the next 18 months, focusing on technology infrastructure modernization and automating manual processes to enhance efficiency and drive sales growth.

Sentiment Analysis:

• Management acknowledged results “fell short of our expectations.” Total sales were $6.6B, down 6% YOY; EPS was $0.64 vs $0.85. Retail unit comps fell 6.3%. However, they cited improved price competitiveness and inventory entering Q3, at least $150M SG&A reductions planned, and continued market share ambitions. CAF expects a Q3 gain-on-sale of ~$25–$30M, with newer credit vintages performing as expected.

Q&A:

• Question from Brian William Nagel (Oppenheimer): Can you size the demand pull-forward impact and update sales cadence and current run-rate?
  Response: Q2 weakness was driven more by rapid depreciation after inventory ramp than demand pull-forward; each Q2 month worsened YOY, but September is stronger than Q2 months, albeit still slightly soft YOY; pricing and inventory positions are improved.

• Question from Brian William Nagel (Oppenheimer): Are you getting more aggressive on price due to competitive dynamics?
  Response: Pricing was less competitive during Q2 due to depreciation; actions have restored competitiveness; the plan is to stay nimble and adjust pricing quickly in an aggressive market.

• Question from Rajat Gupta (JPMorgan): Update on full-year CAF income outlook and why provision rose so much sequentially?
  Response: Full-year CAF income now expected flat to slightly down; provision increased mainly from higher expected losses in 2022–2023 vintages after extensions rolled off; newer 2024–2025 vintages are tracking to expectations.

• Question from Rajat Gupta (JPMorgan): Detail the $150M SG&A cuts and impact on growth and marketing spend?
  Response: Savings will come from tech modernization, automation, AI (e.g., Sky), contract reductions, and eliminating redundancies; not expected to hinder growth; a portion will be reinvested in sales-driving areas like marketing.

• Question from Sharon Zackfia (William Blair): Will you reinvest most of the $150M in price/selection to drive share, and is there price elasticity to exploit?
  Response: They will reinvest some savings and other profit levers into competitiveness; elasticity exists and is actively tested, but decisions factor variable costs, capacity, and attachment rates.

• Question from Christopher James Bottiglieri (BNP Paribas Exane): Economics of servicing income from the 25B deal and stance on subprime expansion?
  Response: Servicing and retained interest will contribute over time, with costs embedded in operations; expansion is not into deep subprime—focus is Tier 1 recapture and upper Tier 2, with prudent pricing, provisioning, and servicing.

• Question from David Bellinger (Mizuho): Path to positive comps; is market worsening or consumer weakening vs competition?
  Response: Environment remains aggressive; higher-FICO app volume is softer industry-wide; CarMax still targets full-year share gains; older vintages are the credit issue, while 2024–2025 vintages are performing to plan.

• Question from Josh Young for Scot Ciccarelli (Truist): Is sales slowdown a top-of-funnel issue or conversion problem?
  Response: Web traffic is up and conversion down the funnel is improving; the gap is fewer actionable selling opportunities at the top, which they aim to improve via site engagement.

• Question from David Lowenstein (Morningstar): If traffic and conversion improved, why are units down—consumer sticker shock?
  Response: Selling opportunities from traffic are down and higher-FICO customer engagement is weaker; once opportunities arise, conversion improves, but fewer high-quality prospects are initiating.

• Question from Jeffrey Francis Lick (Stephens): Does reserved inventory (often ~7 days) hinder visibility and sales?
  Response: Reservations support transfers (about one-third of sales) and reflect active customers; they manage hold durations and allow interest capture; non-transferable units are typically title-related.

• Question from Michael David Montani (Evercore ISI): How did delinquencies/provision trend and what to expect for Q3?
  Response: Delinquencies follow seasonality; newer/seasoned cohorts are in line; expect originations provisions roughly $70–$80M per quarter with minimal additional true-ups.

• Question from Michael David Montani (Evercore ISI): Are SG&A and COGS savings distinct, and will you reinvest heavily into price if needed?
  Response: COGS and SG&A programs are separate; still targeting $125 per-unit COGS savings this year and at least $150M SG&A cuts; they’ll reinvest some but don’t expect to deploy all savings into price.

• Question from Christopher Alan Pierce (Needham): Should GPU expectations be reset lower given pricing actions?
  Response: For FY26, retail GPU targeted similar to prior year on average; Q3 retail/wholesale GPUs should be nearer historical averages and below last year’s record Q3.

• Question from Christopher Alan Pierce (Needham): Is this a repeat of prior big depreciation events delaying resets?
  Response: No; recent depreciation was ~$1,000 over about a month (vs ~$3,000 events previously); they moved faster to sell through and are entering Q3 better positioned.

• Question from Rajat Gupta (JPMorgan): How to bridge Q3 CAF with gain-on-sale vs lower NIM on sold receivables?
  Response: Gain-on-sale is upfront while NIM is foregone over time; near-term NIM dips, helped later by higher-NIM new receivables and servicing/retained income; full-year CAF likely slightly down.

• Question from Brian William Nagel (Oppenheimer): Any notable demand shifts by vehicle type or price band?
  Response: Older/higher-mileage vehicles are outperforming industry-wide; in Q2, under-$25k mix grew as a percent of sales; CarMax will expand value inventory while maintaining late-model selection.