Michael Montani

Michael Montani asked for incremental color on depreciation trends, the intensity of the competitive backdrop, and the expected magnitude of reinvestment into GPU.

Answer

Enrique Mayor-Mora (EVP and CFO) noted very sharp wholesale depreciation, greater than 10%, within the quarter, impacting performance. He and Tom Folliard (Interim Executive Chair) reiterated that the GPU reinvestment is material and dynamic, aiming to change the negative sales trends observed in recent quarters, with more details to be provided in the Q4 call.

Michael Montani inquired about current depreciation trends, the intensity of the competitive backdrop, and the expected magnitude of reinvestment into GPU moving forward.

Answer

Enrique Mayor-Mora, EVP and CFO, noted very sharp wholesale depreciation (over 10%) in the quarter, impacting performance. He reiterated that GPU reinvestment is material and dynamic, with specific impacts to be discussed in the Q4 call, but is aimed at changing the negative sales trend. Tom Folliard, Interim Executive Chair of the Board, added that pricing will be very dynamic throughout the quarter.

Michael Montani asked for more detail on credit trends, including the progression of delinquency rates throughout Q2 and expectations for CAF provisions in Q3. He also inquired if the $150 million SG&A savings and potential $100-$200 COGS savings are separate initiatives, and if CarMax is committed to reinvesting several hundred dollars into sharper pricing to boost the top line.

Answer

EVP of CarMax Auto Finance Jon Daniels noted that delinquency rates follow seasonal trends, and while 2022-2023 vintages required adjustments, 2024-2025 vintages are performing as expected. President and CEO Bill Nash clarified that the $150 million SG&A and $125 million COGS savings (for this year) are separate initiatives. Nash stated that while CarMax would be willing to reinvest savings into pricing if necessary, he doesn't foresee needing to reinvest all of it, expecting some to flow to the bottom line while maintaining price competitiveness.

Michael David Montani asked about the progression of credit trends throughout Q2, including delinquency rates, and the outlook for provisions into Q3. He also inquired about the distinctness of the $150 million SG&A savings from the $100-200 COGS savings, and CarMax's commitment to reinvesting these savings into sharper pricing to boost top-line growth.

Answer

Jon Daniels, EVP of CarMax Auto Finance, noted seasonal delinquency trends but stated newer and older vintages are performing as expected. He projected Q3 provision for new originations to be in the $70-80 million range, with minimal true-ups. President and CEO Bill Nash clarified that COGS savings (targeting $125 million this year) are separate from SG&A reductions. He affirmed a willingness to reinvest some savings into pricing but doesn't expect all to be necessary, aiming for both bottom-line impact and competitive pricing.

Michael David Montani asked about the progression of credit trends, specifically delinquency rates, throughout the quarter and the outlook for loan loss provisions in Q3. He also inquired about the $150 million SG&A and $100-$200 COGS savings as potential reinvestment fuel, and CarMax's commitment to using these for sharper pricing to boost the top line.

Answer

Jon Daniels, EVP of CarMax Auto Finance, noted seasonal delinquency trends and stated that delinquency for newer and older vintages is in line with expectations. Bill Nash, President and CEO, and Mr. Daniels indicated that the Q2 provision for new originations is representative, and future true-ups should be minimal, with provisions expected in the $70-$80 million range. Enrique Mayor-Mora, EVP and CFO, confirmed 2024/2025 vintages meet expectations. Mr. Nash confirmed SG&A and COGS savings are separate initiatives, with CarMax on track for $125 million in COGS savings this year. He affirmed willingness to reinvest some savings into competitive pricing but doesn't believe all savings would be necessary, expecting some to flow to the bottom line.

Michael Montani of Evercore asked for details on the upcoming marketing campaign focused on omni-channel capabilities and questioned if the new credit strategy signals an intent to increase subprime loan penetration.

Answer

President & CEO Bill Nash explained the new campaign will highlight the optionality CarMax offers so customers don't have to 'settle' for a single path. EVP of Auto Finance Jon Daniels confirmed the company is looking to grow subprime and overall CAF penetration, citing a long-term goal of 50%, up from the current low-40s.

Michael Montani asked about the historical impact of appreciating used car prices on CarMax's market share and margins, and sought clarity on the timing and cadence of the company's EPS growth model. He later asked about the Edmunds lease impairment and when increased CAF penetration would become a net positive for profits.

Answer

CEO William Nash stated that an appreciating price environment generally helps margins and market share for all used car sellers. CFO Enrique Mayor-Mora explained the EPS model is driven by strong margins, growth in other GPU, SG&A leverage, and share repurchases. Regarding CAF, EVP Jon Daniels confirmed that CAF income is expected to grow in FY26, even with higher provisions, driven by strong net interest margins.

Michael Montani asked about the long-term store count potential and whether compensation costs would now grow slower than unit volume. He also followed up on tax season planning.

Answer

CEO William Nash confirmed the potential to grow beyond 300 stores, emphasizing the physical footprint's strategic importance. CFO Enrique Mayor-Mora expects stronger leverage on compensation costs due to efficiencies from the omnichannel model and AI tools. Regarding tax season, Nash said the key is planning for flexibility.

Michael Montani asked about the underlying performance of merchandise margin and its outlook for the next quarter. He also sought to understand the specific drivers, such as private label, supply chain optimization, and price optimization, that are offsetting the 30-40 basis point mix headwind.

Answer

CFO Jamere Jackson stated that AutoZone continues to execute its 'merch margin playbook' with intensity, focusing on alternate sources, new brands, and leveraging house brands to drive margin opportunities. He emphasized that the teams are working hard to mute or completely offset the significant headwind from the faster-growing commercial business.

Michael Montani of Evercore ISI questioned the annualization impact of the Inflation Reduction Act on pharmacy drug pricing for the next fiscal year. He also asked about potential offsetting tailwinds from initiatives like ExpressGrip, DoorDash, Uber Eats, and the media business, and whether the grocery industry should expect more sluggish growth in 2026.

Answer

CFO David Kennerley clarified that the Inflation Reduction Act's impact on Medicare drug prices, starting January 1, will lower Q4 identical sales by 30-40 basis points but have no margin or earnings impact due to manufacturer rebates. He mentioned tailwinds from improving core business units, price gap investments, and Our Brands. Chairman and CEO Ron Sargent expressed optimism for 2026, citing new store growth, e-commerce acceleration, fresh categories, and Our Brands performance as drivers, not anticipating a dramatic industry slowdown.

Michael Montani asked for a conceptualization of the potential profit impact from the e-commerce strategic review, inquiring if it could be in the hundreds of millions and whether this potential impact is already included in the current guidance.

Answer

Ronald Sargent, Interim CEO & Chairman, stated that Kroger would discuss the path to profitability and associated timeline in general terms, but would not disclose specific amounts as the review is still ongoing. David Kennerley, EVP & CFO, clarified that the potential profit impact from the e-commerce strategic review is not included in the current guidance.

Michael Montani requested a breakdown of Q4 identical sales into traffic versus ticket, the level of inflation during the quarter, and the specific impact of GLP-1 drugs on sales growth.

Answer

Interim CFO Todd Foley stated that Q4 identical sales growth was driven by both ticket and traffic, with a slight skew towards ticket due to a minor uptick in inflation. He did not quantify the GLP-1 impact but noted Kroger's experience was similar to the broader industry. He also reiterated the 2025 inflation forecast of 1.5% to 2.5%.

Michael Montani from Evercore ISI asked for the fuel cents-per-gallon (CPG) contribution for the quarter.

Answer

Interim CFO Todd Foley responded that Kroger no longer provides specific details on fuel CPG. However, he confirmed that both gallons sold and cents-per-gallon margin were down in the third quarter. He noted that for Q4, they expect fuel profitability to be more stable year-over-year based on recent trends.

Michael Montani asked for the key drivers behind the implied stable to slightly improved EBIT margin in the second half, focusing on shrink trends and any one-time OG&A costs from Q2.

Answer

Interim CFO Todd Foley expressed cautious optimism on shrink improvement but noted it's still a work in progress. He identified non-recurring Q2 costs, such as those from Hurricane Beryl, that will not repeat. CEO Rodney McMullen added that Fresh shrink has seen sustained improvement from technology and process changes.

Michael Montani asked about the dynamics of shrink in Q3, specifically if there was upside to the reserve, SG&A leverage given the strong comp, and the drivers of the expected 240 basis points of EBIT margin contraction in Q4.

Answer

CFO Dan Sullivan confirmed a 70 basis point tailwind from shrink in Q3, reflecting initial benefits from mitigation initiatives. He explained that Q4's expected EBIT margin contraction (240 bps) is primarily due to higher incentive costs (driven by strong Q3 comp) and tariff headwinds, which were slightly better than initially profiled. He noted that the incremental Q4 sales are flowing through at a healthy mid-30% rate.

Michael Montani from Evercore ISI requested a breakdown of the implied Q4 operating margin pressure between gross margin and SG&A, and asked if the tariff headwind would be similar to Q3's, also seeking color on the offsets.

Answer

Interim CFO & COO Kenneth Bull detailed the implied Q4 operating margin decline of approximately 320 basis points. He attributed about 225 basis points to net tariff impact and broke down the total deleverage as roughly 70% from gross margin and 30% from SG&A, with other factors being incentive comp and fixed cost deleverage.

Michael Montani of Evercore ISI sought more clarity on the EBIT margin pressure, asking how the deleverage beyond the 150 basis points from tariffs is allocated among incentive comp, marketing, and store labor.

Answer

COO Ken Bull reiterated the full-year deleverage breakdown, with about 60% impacting gross margin (primarily tariffs) and 40% impacting SG&A. He confirmed the SG&A pressure is driven by higher incentive compensation and investments in labor hours, partially offset by fixed cost leverage, but did not provide a more granular split.

Michael Montani asked for details on the 2018-19 tariff experience, including the tariff rate, the company's ability to offset the impact, and the current percentage of goods sourced from China.

Answer

Interim CEO Ken Bull recalled that tariffs peaked around 25%, primarily affecting tech and room products. He said the main mitigation strategy was vendor collaboration, which was effective until rates became too high, necessitating price increases above $5. He confirmed that current sourcing from China is near 60% and highlighted that the company is better prepared now with a playbook, an established Five Beyond concept, and an India sourcing office.

Michael Montani from Evercore ISI requested quantification on the increase in SKU count from pre-pandemic levels and asked for details on the store labor model, including average wages and the expected magnitude of investment in store hours.

Answer

Interim President and CEO Kenneth Bull declined to provide specific numbers but characterized the SKU growth as a "double-digit percentage increase" which the company now intends to reverse. On labor, he stated that wages will remain competitive on a market-by-market basis and that the reinvestment in hours will be determined by workload analysis to ensure a great customer experience, rather than being a predetermined amount.

Michael Montani inquired about the average selling price (ASP) in Q3 compared to a year ago and whether a similar level of price increase is anticipated to drive comp sales in fiscal year 2026.

Answer

CFO Stewart Glendinning stated the current average unit retail (AUR) is approximately $1.50. CEO Mike Creedon emphasized that multi-price penetration will naturally increase AUR, but this is driven by expanded assortment and customer value perception, not solely by price increases, ensuring continued 'wow' value for customers.

Michael Montani asked for Dollar Tree's average selling price (ASP) in Q3 compared to a year ago and whether a similar level of price increase could be achieved in 2026 to drive comparable store sales.

Answer

CEO Mike Creedon stated that the average unit retail (AUR) is currently around $1.50, emphasizing that customer response indicates Dollar Tree is hitting the right value points. He noted that the expanded, relevant assortment drives a higher ticket while maintaining 'wow' value. CFO Stewart Glendinning added that increased multi-price penetration also contributes to AUR growth, independent of direct price increases.

Michael Montani sought clarification on the previously discussed $0.30-$0.35 impact from Family Dollar in the first half of the year.

Answer

CFO Stuart Glendinning clarified that the figure referred to expected TSA benefits, which were initially projected at $95 million for the second half (approximately $0.30). The updated guidance is $55-60 million for the year (approximately $0.20), with other savings offsetting the current year's impact, but creating a shortfall for 2026.

Michael Montani asked for clarification on the expected advertising expense, specifically if it would increase quarter over quarter or on a per-unit basis. He also inquired about wholesale GPU, asking if it was signaling a sequential step down similar to last year, and if there were opportunities for improvement despite seasonality.

Answer

Mark Jenkins, Chief Financial Officer, stated that advertising expense for Q4 is expected to be similar to or slightly higher than Q3 on a dollar basis, as Carvana continues to invest in brand building. For wholesale GPU, he indicated that sequential changes on a per-unit basis are expected to be similar to last year, driven by typical Q4 seasonality, including higher wholesale depreciation rates and lower auction volumes.

Michael Montani asked for clarification on the expected advertising expense, specifically if it's projected to increase quarter-over-quarter or on a per-unit basis. He also inquired about the wholesale GPU, asking if it's expected to step down sequentially similar to last year, and if process enhancements could mitigate this, considering depreciation.

Answer

Mark Jenkins, Chief Financial Officer, stated that advertising expense in Q4 is expected to be similar to or slightly higher than Q3 in dollar terms, reflecting continued investment in brand building. For wholesale GPU, he indicated that sequential changes on a per-unit basis are expected to be similar to last year, driven by typical Q4 seasonality, including higher wholesale depreciation rates and lower auction volumes.

Michael Montani requested an update on Carvana's third-party marketplace initiatives and asked if analysts should model for ancillary revenue streams like third-party logistics or reconditioning services.

Answer

CFO Mark Jenkins reported that the wholesale and retail marketplace offerings are progressing well and represent a fundamental opportunity, but he emphasized that it is "incredibly early" in their development. He clarified that other potential ancillary revenues, such as third-party reconditioning or logistics, are "not a near-term focus," as the company is prioritizing growth in its core consumer auto retail business.

Michael Montani of Evercore ISI asked about the potential cadence for expanding into new markets and for an assessment of the current operating environment, including inventory availability, competitive rationality, and the strategy for balancing unit growth versus profit maximization.

Answer

CEO Ernie Garcia clarified that future growth will come from increasing market share in existing markets rather than entering new ones, as they already serve the vast majority of the country. He described the competitive market as rational and stable. Garcia emphasized that the focus remains on executing well and improving the customer offering to take share within the large, mature used car market, which has predictable economics.

Michael Montani asked about concerns regarding competition encroaching on Sprouts' core consumer, potential cyclical or temporal headwinds impacting the quarter, and how these factors might influence the fourth quarter. He also inquired whether the observed slowdown was primarily a function of competition or other underlying issues.

Answer

Jack Sinclair, Chief Executive Officer, responded that the moderation was due to lapping tough year-on-year comparisons and signs of a softening consumer. He emphasized Sprouts' strategy of differentiation through 7,500 new innovative products, robust new store openings (37 planned), and the positive impact of loyalty and personalization initiatives, expressing confidence in the company's future despite competitive dynamics.

Michael Montani inquired about concerns regarding increased competition potentially impacting Sprouts' core consumer, asking if the recent slowdown was due to competitive pressures or other cyclical/temporal headwinds.

Answer

CEO Jack Sinclair attributed the moderation to tough year-on-year comparisons and a softening consumer context, emphasizing Sprouts' differentiation through innovation, new store growth, and loyalty program, which he believes shields the company from competitive dynamics.

Michael Montani of Evercore ISI questioned if there were any margin impacts in Q2 from the UNFI supply chain issues or the loyalty program. He also asked for an update on new store performance and the opening cadence for the remainder of the year.

Answer

CFO Curtis Valentine confirmed the loyalty program had no Q2 margin impact as it was still in a pilot phase. He stated that while the UNFI disruption was challenging, the impact was minimal due to strong partnership and a smaller business portion affected. CEO Jack Sinclair reported that new stores are performing exceptionally well, with the V6 format showing consistency, and confirmed the company is on track for 35 openings in 2025.

Michael Montani asked for a breakdown of the Q1 comparable sales growth between transaction count and transaction size, and whether the Q2 guidance provides a cushion. He also requested more detail on the expected split between gross margin and SG&A leverage for the guided EBIT margin expansion in Q2 and the second half of the year.

Answer

CFO Curtis Valentine revealed that traffic drove approximately 70% of the Q1 comp. He confirmed that Q2 started well and that the company is comfortable with its guidance. For Q2 margin expansion, he expects the majority to come from gross margin. For the second half, he anticipates a more balanced contribution between gross margin improvement and SG&A leverage.

Michael Montani asked about potential partnerships with health care payers, the impact of potential SNAP changes, the duration of store closure costs, and any produce supply chain disruptions.

Answer

CEO Jack Sinclair noted that while health-related trends are important, the company is not actively pursuing healthcare partnerships, and that SNAP is a small part of their business. CFO Curtis Valentine stated that store closure costs from 2023 will taper off over time. President and COO Nick Konat confirmed there have been no material disruptions to produce supply.

Michael Montani asked about variations in behavior among different consumer income levels and sought more detail on the Q4 margin outlook and long-term margin potential.

Answer

CEO Jack Sinclair explained that customer behavior correlates more with education level and interest in health than with income, noting a trend toward younger consumers with specific dietary needs. CFO Curtis Valentine stated that Q3's gross margin strength was driven by improved shrink against an easy prior-year compare. He reiterated confidence in a stable bottom-line algorithm long-term, with levers in both gross margin and SG&A to manage performance.

Michael Montani asked about the current M&A backdrop for both small and large deals, and then inquired about seasonality and the sequential earnings cadence for the year, given the strong Q1 performance.

Answer

Darren Rebelez, President, CEO & Board Chair, described small deal M&A as 'business as usual' with strong seller interest, while larger deals involve ongoing conversations but are more opportunistic. Steve Bramlage, CFO, reiterated that the view on seasonality remains unchanged and that annual guidance will be updated on the Q2 earnings call, providing visibility into the first seven months of the fiscal year.

Michael Montani from Evercore ISI asked about the current M&A backdrop, specifically for both smaller deals and larger transactions involving 50-plus stores. He also inquired about the seasonality of earnings, seeking clarification on whether Q2 earnings power is typically similar to Q1, followed by a step-down in the back half, and any timing-related puts or takes to consider.

Answer

CEO Darren Rebelez described the small deal M&A environment as 'business as usual' with strong seller interest, while larger deals are opportunistic with ongoing conversations. Regarding seasonality, Darren Rebelez reiterated that the company's view remains unchanged, with guidance updates typically provided after Q2, which covers the majority of the fiscal year's largest months.

Michael Montani asked for a breakdown of same-store sales performance between traffic and ticket for the fourth quarter and the full year. He also inquired about the underlying traffic and ticket assumptions embedded in the 2% to 5% sales guidance for fiscal 2026.

Answer

CFO Steve Bramlage clarified that for Q4, traffic was slightly negative entirely due to a weather-impacted February, while March and April saw positive and improving traffic. The fiscal 2026 guidance assumes positive traffic growth, though ticket growth from both mix and price is expected to be a larger contributor. This reflects a prudent approach to offsetting inflation while maintaining the company's value proposition.

Michael Montani asked for a breakdown of same-store sales into traffic and ticket for Q4 and the full year. He also inquired about the underlying assumptions for traffic and ticket within the 2% to 5% sales guidance for fiscal 2026.

Answer

CFO Steve Bramlage explained that Q4 traffic was slightly negative, but this was entirely due to a challenging February; traffic was positive and improving in March and April. He stated that the FY26 guidance is built on an assumption of positive traffic, with a slightly larger contribution from ticket growth, which reflects both product mix and prudent pricing to offset inflation.

Michael Montani asked for management's perspective on the health of the consumer and Casey's value positioning against peers, including other dining options.

Answer

CEO Darren Rebelez noted some pressure on lower-income consumers (under $50k/year), who make up about 25% of their guest base, but confirmed this group is still showing positive, albeit slower, growth. He highlighted Casey's strong value proposition, particularly in pizza, where they are typically priced $1 or more below national brand competitors in markets where they overlap.

Michael Montani asked about potential headwinds that could impact the strong grocery and general merchandise margins in the second half of the year. He also inquired about any margin pressures in prepared foods beyond the cost of cheese.

Answer

CEO Darren Rebelez stated he doesn't anticipate significant headwinds for grocery margins, as mix evolution should remain a benefit. CFO Steve Bramlage added that there's some natural seasonality in the third quarter mix that could be slightly dilutive. For prepared foods, Bramlage confirmed there were no other significant headwinds to note besides cheese, which is currently less of a headwind than it was in Q2.

Michael Montani asked about the underlying health of Casey's consumer base and inquired about the potential to use hedging or pricing to offset rising cheese costs.

Answer

CEO Darren Rebelez stated that while lower-income consumers are modestly changing habits, the majority of the customer base shows no significant change in purchasing behavior. CFO Stephen Bramlage added that Casey's is about 25% hedged on cheese for the fiscal year and focuses on total inside store profitability, using strong grocery margins to maintain the value proposition in prepared foods without significant price hikes.

Michael Montani of Evercore ISI asked about the breakdown of the H2 comp guidance between pricing and elasticity and questioned the strategy for balancing large wholesale accounts with 'Main Street' Pro customers.

Answer

CFO Ryan Grimsland stated the H2 comp guidance includes low to mid-single-digit inflation with embedded elasticity impacts, noting a wide range of outcomes is possible. CEO Shane O'Kelly clarified the Pro strategy is an 'and,' not an 'either/or,' meaning the company continues to serve its large accounts while also increasing focus on prospecting smaller Main Street customers to cover the full market spectrum.

Michael Montani questioned why EPS guidance was unchanged despite a higher ID sales outlook and asked about trends in 'better for you' products and GLP-1 consumer behavior.

Answer

President & CFO Sharon McCollam explained that the ID sales guidance increase is driven by outsized pharmacy growth, which carries a lower margin profile, thus not impacting the EPS outlook. CEO Susan Morris noted that natural and organic categories are growing, driven by broad health trends and social media, which aligns well with the purchasing habits of GLP-1 users who favor items like protein and supplements.

Asked why EPS guidance was held flat despite a raised sales outlook and inquired about trends in 'better for you' products and their connection to GLP-1 user behavior.

Answer

The unchanged EPS guidance is due to the sales mix, with outsized growth in the lower-margin pharmacy business. 'Better for you' and specialty categories are growing, driven by broad health trends and specific popular items like cottage cheese and premium sparkling water. These trends align well with the needs of GLP-1 customers but also appeal to the broader consumer base.

Michael Montani of Evercore ISI requested a breakdown of the capital expenditure plan for the upcoming year, including the number of new stores and remodels. He also asked how the company would approach potential tariffs in terms of preserving margin dollars versus margin rate.

Answer

President and CFO Sharon McCollam indicated that CapEx allocation would be similar to the prior year, with about half dedicated to stores and the rest invested in digital platforms and AMC. Regarding tariffs, she emphasized that strategic priorities, like enhancing customer value, would guide its response. CEO-elect Susan Morris added that the ultimate focus is on driving dollars.

Asked about the outlook for ROIC and the role of store rationalization. Also inquired about sustainable free cash flow and the expected pacing of the $2 billion share buyback.

Answer

More detailed outlook will be provided in April, but the long-term algorithm (2% growth, EBITDA growing faster, $1.8-1.9B CapEx) remains consistent. The company plans to opportunistically repurchase shares with excess cash but is not executing an Accelerated Share Repurchase (ASR) program.

Michael Montani asked about the forward outlook for ROIC, the role of store rationalization, expected free cash flow, and the potential pacing of the $2 billion share repurchase authorization.

Answer

President and CFO Sharon McCollam pointed to the company's long-term growth algorithm and CapEx plans as indicators for future performance but deferred a detailed FY25 outlook to April. She confirmed the company plans to opportunistically repurchase shares with excess cash under the new authorization but is not planning an accelerated share repurchase (ASR) program.