CarMax (NYSE:KMX) released second-quarter financial results and hosted an earnings call on Tuesday. Read the complete transcript below.
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Summary
CarMax reported strong second-quarter results with used unit comps growing 13% and total units across used and wholesale increasing by 15%. Earnings per share surged 81% year over year to $1.16.
The company introduced its 'Shift into Gear' strategy focused on improving price competitiveness, enhancing customer experience, maximizing value, and operating efficiently. This strategy is yielding positive outcomes across its four strategic pillars.
CarMax's total sales grew 19% to $7.9 billion, driven by competitive pricing and efficiency gains. The company plans to resume modest share repurchases in the third quarter, reflecting confidence in its strategic direction.
The company has made key leadership appointments to drive its strategic initiatives further, including a new Executive Vice President, Chief Digital and Customer Officer, and a Senior Vice President, Strategy.
CarMax Auto Finance (CAF) income was up 32% year over year, reflecting a decrease in loan loss provisions and gains from credit spectrum expansion.
Full Transcript
OPERATOR
Ladies and gentlemen, thank you for standing by. Welcome to the second quarter fiscal year 2027 CarMax earnings release conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Lowenstein, VP, Investor Relations. Please go ahead.
David Lowenstein, VP, Investor Relations
Good morning. Thank you for joining our fiscal 2027 second quarter earnings conference call. I'm here today with Keith Barr, Chief Executive Officer; Enrique Maymora, 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, 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 one question and getting back in the queue for more follow-ups.
Keith Barr, Chief Executive Officer
Thank you, David. Good morning everyone and thanks for joining us. As I reflect on my first six 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 four 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 Shift into Gear 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 four 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, Shift into Gear 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 in 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 resonated 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 inquiries through our agentic 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 continued to launch our redesigned offering. Additionally, we increased our Tier 2 penetration and recorded a gain on the residual sale related to our 26B non-prime 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 through 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 27 exit-rate savings.
To support and advance Shift into Gear, we are strengthening our leadership team. Today I'm pleased to announce two 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 Durgans will join CarMax as 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 two decades of digital product and customer experience leadership, Elizabeth comes to us from Volkswagen Financial Services where she 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 the 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 Maymora, Executive Vice President and CFO
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 in 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 advertised vehicle pricing industry-wide by requiring fees to be included. Given our longstanding 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 sourced 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 four 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 FY27 full-year retail margins will be down less than the $200 per unit as compared to FY26. Wholesale vehicle margin of $138 million was flat to a year ago with higher volume offset by lower gross profit per unit at $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 were 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 wheel, 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 margins increased by $22 million, driven primarily by efficiency gains in cost of sales and leverage from unit volume growth. CarMax Auto Finance income of $136 million was up 32% year over year. John will provide detail on GAAP 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 leveraged 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 two 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 FY27 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 $50 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 maintain 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 non-cash, non-recurring charges and these 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 John to provide more detail on CarMax Auto Finance and our continuing focus on full credit spectrum expansion.
Jon Daniels, Executive Vice President
Thanks, Enrique, and good morning, everyone. During the second quarter, CarMax Auto Finance originated $2.3 billion, resulting in sales penetration of 40.9% net of three-day payoffs versus 42.6% last year. 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. GAAP 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 two non-prime securitizations and lower sales during fiscal 2026.
Please note the timing of our receivables 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%, 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 non-prime 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 a view into our near-term performance, we anticipate CAF's FY27 income will be slightly lower than FY26, 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. Thank you, John.
Keith Barr, Chief Executive Officer
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. Shift Into Gear is focused on strengthening our core business and getting CarMax fast sustained growth. We are steadfast in our focus on delivering the right cars at the right price, making it easier for our customers to do business with us, capturing more value for each transaction, and operating more efficiently at scale.
This quarter's strong unit and earnings growth reflects solid execution against these priorities. What encourages us most is that we are delivering these results while much of the work across our four 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 and for 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 3rd. Thank you for your continued interest in CarMax. Operator, we are ready to take questions.
OPERATOR
Thank you. If you'd like to ask a question, press star one on your keypad. To leave the queue at any time, press star two. Once again, that is star one to ask a question. Your first question comes from the line of Daniela Haigian with Morgan Stanley. Your line is open. You may now ask your question.
Daniela Haigian, Analyst at Morgan Stanley
Thank you for taking the question. The 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 those FTC uplifts or retail-wholesale spreads?
Keith Barr, Chief Executive Officer
Hey, Daniela, thank you for being here. I'll let Enrique respond to that.
Enrique Maymora, Executive Vice President and CFO
Yeah. Hey, good morning, Daniela. Yeah, 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 three 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 switched, as we 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 at the demand we're seeing in the marketplace and our ability to again come in better than our GPU.
UNKNOWN Analyst
Previous outlook, maybe the macro part, the impact of spreads or FTC.
Enrique Maymora, Executive Vice President and CFO
Yeah, the FTC impact definitely is a tailwind. When we take a look overall at our comp performance in the quarter, I would say it's evenly mixed between items we control directly—so cost 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 FTC enforcement benefits that we're seeing.
Andrew McMonigle, VP Finance and Treasurer
Yeah, thanks. And just to build on that a little bit, I mean, I think there's two 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 we've been known for, it disproportionately benefits us now going forward so that the FTC is focused on compliance to their guidelines. We always have more transparency and it's helping us with price competitive too.
So it's execution of strategy and also the strength of the CarMax customer value proposition.
UNKNOWN Analyst
Andy, that's really helpful. And then maybe Hugh, 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 consumer's behalf. Maybe more to hear on this in November, but curious to hear how you think about it.
Hugh
Sure, yeah. 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 responsibly use AI and look at all the different use cases we implement. So things like our agentic voice call center now handling 100% of stores and our Customer Experience Center calls helping to do that. Your questions relate to search and I think that AI is going to be actually a real benefit to the consumer to be able to go out there and really understand different vehicles and how those vehicles meet their needs in terms of actually getting back to transactions.
I think it will be 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 to become more efficient and deliver better customer experiences.
UNKNOWN Analyst
Great. Thanks team.
OPERATOR
Thank you. Our next question comes from Rajat Upta with J.P. Morgan. Your line is now open.
Rajat Upta, Analyst at J.P. Morgan
Great. Excellent execution. I had a question on just comps for the rest of the year. If I look at normal seasonality of the business, based on the 13% comp in 2Q, implies somewhere around mid-teens in the third quarter, mid to high teens in the third quarter. I'm curious if you're seeing anything there in the macro or just the consumer backdrop that would deviate from that seasonality. That's question one. I don't have a follow-up. Thanks.
Keith Barr, Chief Executive Officer
Yes, thanks, Raja. I'll talk about the consumer. I mean, affordability is on everyone's mind. It seems like every single discussion's 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 at 13%. So I think having great cars, great vehicles at great pricing and making it easy to work with will drive growth and performance in the business. In terms of an outlook for the back half of the year, we captured it in our prepared remarks. You can see it in our bullishness around the business. We're turning our share growth back on. We're seeing continued momentum into the business.
So we're really pleased in terms of where we are and kind of what we're seeing in front of us.
Rajat Upta, Analyst at J.P. Morgan
Got it. Andy, once you lap the price cuts here in December, do you believe that 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 six months.
Keith Barr, Chief Executive Officer
Yeah, absolutely. You think about our strategy shifting to Shift Into Gear and running lean, being that pillar, and that running lean makes sure that you have a great offering. And we 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 a lower GPU moving forward. So that's the focus of the business and I'm really confident in the team.
Enrique Maymora, Executive Vice President and CFO
Yeah. And I would say certainly for FY28, that is the intent, right. As we talked about before, to self-fund any kind of GPU investments and lower price. I 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. I would expect some decrease in the third quarter and in the fourth quarter as well. We'll be topping over a record quarter in FY25 in terms of GPU.
So, you know, we are maintaining some flexibility in the business. We're running the business more dynamically, and that includes some flexibility. So I would expect GPUs for this year as a whole, in my order, to be down year over year in support of driving sales.
Rajat Upta, Analyst at J.P. Morgan
Thanks for covering the book.
OPERATOR
Thank you. Our next question comes from Jeff Lick with Stephens. Your line is now open.
Jeff Lick, Analyst at Stephens
Good morning. Thanks for my question. Congrats on the great results. Enrique, maybe for you, the EPP gain was probably a little more than people were expecting. I wonder if you could unpack that a little bit and just where that's coming from.
Enrique Maymora, Executive Vice President and CFO
Yeah, I would say that we're very pleased on the execution as a pool in terms of EPP and 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 incremental EPP for the full year is pretty much in line. I would tell you with what we ended this quarter being at $46 a unit, recognizing that in the first quarter we were 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 what we expect to be.
Keith Barr, Chief Executive Officer
Yeah, Jeff, 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 it in the stores. It'll be nationally rolled out by end of 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 got one we think is a fantastic cosmetic protection product—wheel, tire and dent—like we saw it coming and we knew we could deliver, and the stores have done it.
Jeff Lick, Analyst at Stephens
So just a quick one for Keith. Keith, on the last call we talked about dynamic pricing. That seems related to your previous. And I'm just curious. I mean the big question as we get into the next year and we get through easy comps is people are like, okay, can they comp higher and can they continue to hold GPU? Just any high-level thoughts as you've been observing the data in the business on how you might give investors comfort that this just isn't an easy comp phenomenon?
Keith Barr, Chief Executive Officer
Yeah, thanks, Jeff. And, you know, that's what 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. 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 show positive comps and outperform the industry moving forward.
Jeff Lick, Analyst at Stephens
Great. Thanks for taking my questions and best of luck the rest of the year.
OPERATOR
Thank you. Our next question comes from Craig Gunnison with Baird. Your line is now open.
Craig Gunnison, Analyst at Baird
Hey, good morning. Thanks for taking my question. Keith, I'm wondering, could you provide examples of how you are taking friction out of the digital journey in order to impact conversion?
Keith Barr, Chief Executive Officer
Yeah, 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 examples we've used was like car details page, sharpening up 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 a bit of information in, part 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 to make it easier to visit with us. We're still early dates on parts of the journey.
There's things that we can continue sharpening up. And I'm really excited about having Elizabeth Durgins join us as our new Chief Digital and Customer Officer. She's got 20-plus years in product in financial services and automotive, and so she's the perfect person to join our team here and really own the customer journey moving forward.
Craig Gunnison, Analyst at Baird
Thank you.
OPERATOR
Thank you. Our next question comes from David Bellinger with Mizuho. Your line is now open.
David Bellinger, Analyst at Mizuho
Hey, good morning. Thanks for the questions. 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, you'll call it, the legacy guardrails that have covered 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.
Keith Barr, Chief Executive Officer
Yeah, look, I think we, as we talked about, largely self-fund those movements, right. So Shift Into Gear focuses on sustainable comps, sustainable EPS growth. And we recognize at the same time we need to self-fund and find efficiencies in the system. We believe there's 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 in our logistics business 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 interconnected those are, and talk about the initiatives we have that will deliver the self-funding which will deliver the price competitiveness and protect GPU moving forward.
UNKNOWN Analyst
Got it. I also want to touch on inventory levels. CarMax has been operating pretty consistently with about 80 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 and bypass some of that natural depreciation from holding onto vehicles.
Keith Barr, Chief Executive Officer
Thank you. That is a definite area of focus that we have, like I was just talking about in terms of efficiencies in our COGS and our logistics. You know, an area of focus for the teams is basically inventory. And how can we turn our inventory faster? How do we have less unproductive transfers, unproductive pulls, things like that? That'll slow down your width; that'll actually drive slowing down your turns. Those are items that we think are ahead of us in terms of opportunity and are definitely part of the purview of shifting to gear.
So absolutely on our list of opportunities, and we're regularly testing, understanding how this impacts the consumer. So, understanding how we handle holds — is that driving sales but maybe slowing down our inventory turns? Transfers — we transfer over 2 million, close to 2.5 million vehicles a year. How do we make those transfers more productive and have fewer of them over time? So it's really understanding again how the future makeup, holds and transfers impact sales but also impact inventory productivity.
And we’ve got a lot of work underway there right now as part of our strategy.
UNKNOWN Analyst
Thank you.
OPERATOR
Thank you. Our next question comes from Joe Zuck with UBS. Your line is now open.
Joe Zuck, Analyst at UBS
Thanks so much. Good morning. Thanks for taking the question. 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 customer base, 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, how do you think about the strategic plan?
Is GPU still a driver to help drive that growth in a tougher macro?
Keith Barr, Chief Executive Officer
Yeah, I mean, I'll talk about consumers because we look at our consumers by different cohorts, effectively on income levels. And again, resiliency is the word I would use. 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. 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 on 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 future fiscal years, we'll fund the GPU savings that we need to find in this business.
Joe Zuck, Analyst at UBS
Thank you.
OPERATOR
Thank you. Our next question comes from John Babcock with Barclays. Your line is now open.
John Babcock, Analyst at Barclays
Thanks for taking my questions. Just quickly on that last comment about the GPUs being down in 3Q and 4Q — I know you also mentioned that earlier — can you just talk about what's driving that?
Enrique Maymora, Executive Vice President and CFO
So you broke up a little bit. Did you ask what's driving them?
John Babcock, Analyst at Barclays
Yeah, yeah. So why are you expecting GPUs to be down in 3Q and 4Q?
Enrique Maymora, Executive Vice President and CFO
Yeah. So, consistent strategy this year, which we communicated — in support of sales, we are lowering our GPUs for the year 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. You mix all those things together and we're, I believe, very effectively balancing demand and efficiencies 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 as what we initially provided an outlook for because of that mix of benefits that we're actually seeing.
John Babcock, Analyst at Barclays
Gotcha. Thank you. And the next question — you know, 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?
Enrique Maymora, Executive Vice President and CFO
Yeah, 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, you know, 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 54% growth year over year on the quarter. Now, I will say in terms of profitability, the most profitable buy that we will have is directly from a customer.
Right. That is the most profitable buy, as we've always talked about. The least profitable buy is going to an auction house and buying a car at an auction 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 car 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 and another contributor that allows us to be more competitive on our pricing as well.
So very pleased with our performance this quarter.
John Babcock, Analyst at Barclays
Okay, thanks. 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.
Enrique Maymora, Executive Vice President and CFO
Yeah, it's another component, you know, within our cost of sales. But as we talked about this quarter, we've — you know, 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, you know, moving forward here, certainly in the quarter and our outlook moving forward. So we've been able to absorb the increase in price of diesel, but it’s definitely impacted our cost.
But again, our efficiencies elsewhere have allowed us to offset it.
John Babcock, Analyst at Barclays
Right. Thank you.
OPERATOR
Thank you. We'll go next to Scott Ciccarelli with Truist. Your line is now open.
Scott Ciccarelli, Analyst at Truist
Good morning, guys. So I know you've cut it 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 the digital channels — versus how much was driven by better conversion rates?
Enrique Maymora, Executive Vice President and CFO
Yeah, I would say that overall in the quarter, our web traffic actually was down by a couple points. 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 is up as well.
Keith Barr, Chief Executive Officer
Yeah, I think our marketing team has done an exceptional job of really driving efficiencies in the marketing funnel. And so even though the web traffic is down a bit, the quality of that traffic has significantly improved, which led to all those factors, as Enrique just pointed out too. So again, great job by the marketing team.
Scott Ciccarelli, Analyst at Truist
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 CAF penetration were all incremental sales? Just trying to figure out if there's a sales impact, if any, as you guys have moved a little bit lower into the credit pool on a direct basis.
Enrique Maymora, Executive Vice President and CFO
Yeah, appreciate the question. Short answer is no, I would say it is not all incremental sales. There's always going to be some incrementality. I think we 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. We're 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.
Scott Ciccarelli, Analyst at Truist
Got it. Thanks, guys.
OPERATOR
Thank you. And as a reminder, if you would like to ask a question, please press star and one on your keypad. Now we'll move next to Alex Perry with Bank of America. Your line is now open.
Alex Perry, Analyst at Bank of America
Hi, thanks for taking our question here. I just wanted to get your thoughts on how the FTC regulation could affect the GPU profiles longer term. Do you think that dealers alter the prices without having to include the doc fees? And then how long should we expect, you know, the FTC tailwind to last for you, and what are you seeing sort of in terms of compliance in the overall market? Thanks.
Keith Barr, Chief Executive Officer
Sure. I mean, I can give you an example of the FTC benefit for CarMax, and I can't comment on specifically 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 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 — you know, we'll lap that sometime.
Enrique Maymora, Executive Vice President and CFO
Yeah, there was a bleed-in — actually not everybody complies just right away, and there's still some migration here — but really May is when we saw a movement there. So again, we have until May and then certainly thereafter in benefit.
Keith Barr, Chief Executive Officer
And I think the FTC sent out, like, 97 letters to different companies back in March telling that — 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 been more transparent.
Alex Perry, Analyst at Bank of America
Just a follow up on that. What impact do you think that has on pricing longer term as dealers move
Keith Barr, Chief Executive Officer
To include the doc fees into a sort of all-in, more transparent pricing? What impact do you think that has on GPUs and the overall pricing environment? I think it's just going to continue to show how price competitive we are. I think. You know, 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 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, being able to maintain our pricing and our GPUs moving forward. And we'll see again how other people choose to price.
UNKNOWN Analyst
Really helpful. Best of luck going forward.
OPERATOR
Thank you. Our next question comes from Chris Pierce with Needham. Your line is now open.
Chris Pierce, Analyst at Needham
Hey, you kind of just hit on it. I really wanted to get a sense of these third-party sites. We assume a lot of people start there. I'm just kind of curious, you know, 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 the other sites and conversion customers you're seeing from those sites.
Keith Barr, Chief Executive Officer
And I just said one to consumer. I mean again, we don't really talk about it in that level of detail. I mean what we think about is our research shows 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 search at multiple sites. They're going to come to CarMax.com and they're going to look there. They're 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, 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, customer acquisition to customer conversion.
Chris Pierce, Analyst at Needham
Okay, perfect. And I think you talked about rates, you know, up 60 bps on average maybe across the quarter and probably gone up, you know, through September here. I mean, how should we really think about the consumer being impacted here? Because there's just like you've got consumers dropping down from new car to used that are better credit quality because of new car prices. Like a 1% move in rate I think is, like Cox said, it's like 12 to 15 dollars in monthly payments.
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 level-set how investors, how we should think about this?
Andrew McMonigle, VP Finance and Treasurer
Sure, yeah. I'll kind of initially answer that question. When I think about it from the credit lens, you know, I think the consumer, you're certainly going to have, it'll be bifurcated. The higher-end prime consumer, right, they have options. They're going to go to cash. They, you know, credit unions just have obviously an advantage there where they can keep rates low. So, you know, for CarMax in particular, CAF, you know, you're going to see probably some leakage from using the internal financing to those channels.
Now, you know, 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 and protect our finance margin. So happens 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 wallet be 12–15 bucks? That might mean a lot. You know, 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.
Chris Pierce, Analyst at Needham
Okay, thank you and good luck.
OPERATOR
Thank you. We'll now take a follow up from John Babcock with Barclays. Your line is now open.
John Babcock, Analyst at Barclays
Hey, sorry for the follow up here. Just wanted a clarification though on the GPUs because you said down 3Q and 4Q. Is that, is that sequentially or that's
Andrew McMonigle, VP Finance and Treasurer
Year over year.
John Babcock, Analyst at Barclays
All right, thank you.
Andrew McMonigle, VP Finance and Treasurer
Thank you.
OPERATOR
We don't have any further questions at this time. I'll hand the call back to Keith for any closing remarks.
Keith Barr, Chief Executive Officer
Thank you, operator, and thanks everyone for joining the call today and appreciate all your questions and all your support, and we look forward to talking next quarter and then seeing you in November.
OPERATOR
Thank you. Ladies and gentlemen. That concludes the second quarter fiscal year 2027 CarMax earnings release conference call. You may now disconnect.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.
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