Q3 2025 Earnings Summary
- Accelerating sales momentum: CarMax is experiencing strong sales momentum, with comps improving sequentially each month, and December's month-to-date performance accelerating beyond the third quarter comps, indicating a strong growth trajectory into the fourth quarter, despite headwinds like losing a Saturday and Leap Day.
- Significant SG&A leverage driving profitability: The company achieved SG&A leverage of 640 basis points, driven by growth in gross profit and continued expense efficiency actions, moving towards their goal of a mid-70% SG&A to gross profit ratio. CarMax is now pivoting from building capabilities to leveraging and enhancing them to drive growth and efficiencies.
- Diversified vehicle sourcing strategy: CarMax's ability to source vehicles from both consumers and dealers allows them to secure hard-to-find inventory despite industry-wide supply shortages, supporting strong same-store sales comps and overall sales performance.
- Persistent weakness among lower-income consumers is impacting demand, with sales from customers making less than $3,000 per month still at half of their previous levels.
- Flat web traffic indicates potential challenges in attracting new customers, suggesting growth is reliant on improved conversion rather than increased demand.
- Future cost savings are being passed on to consumers rather than boosting margins, potentially limiting profitability upside.
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Sales Momentum & Comps | Q2 FY25: +4.3% same-store sales, improving trends from Q1. Q1 FY25: Slightly positive comps in June, no detailed mention of Q4 FY24 negative comps turning positive. Q4 FY24: No mention. | Positive shift from negative comps in Q4 FY24 to two consecutive quarters of positive growth; further acceleration into December | Recurring discussion, stronger optimism in Q3 |
Cost Efficiency & Margins | Q2 FY25: 4 percentage point SG&A leverage, COGS reduction, logistics centralization. Q1 FY25: Targeting ~$200/unit reconditioning savings, disciplined SG&A. Q4 FY24: Cost management with RFID tracking, maintaining flat SG&A. | Emphasized 640bps SG&A leverage, ~$200/unit cost-out progress in reconditioning/logistics, AI-driven efficiencies | Consistent emphasis, continuing improvements |
Lower-Income Consumers | Q2 FY25: Affordability issues driving lower Tier 3 penetration to ~7%. Q1 FY25: No direct mention, but acknowledged affordability challenges in lower-credit tiers. Q4 FY24: Sales to sub-$3k/month fell by half, citing affordability. | Still at half of prior participation under $3k/month income; macro factors persist | Consistent challenges, no improvement indicated |
Loan Losses & Delinquencies | Q2 FY25: $113M provision, including $52M adjustment to lifetime losses; subprime delinquencies at 8%. Q1 FY25: Flat $81M provision, new non-prime securitization. Q4 FY24: $72M provision, 19% YoY income growth. | Provision down to $73M (from $113M in Q2), reserve ratio at 2.70%. Extended payment policies tested; still cautious | Elevated but moderating in Q3 |
Vehicle Sourcing | Q2 FY25: 50% more active dealers, stable sourcing despite off-lease shortage. Q1 FY25: Record 35k dealer purchases (70% YoY), managing supply constraints. Q4 FY24: 45% YoY dealer-sourced growth, ~70% self-sufficiency. | 47% YoY increase in dealer-sourced vehicles, stable mix of older/newer units, higher sub-$20k share | Consistent dealer engagement gains |
Non-Prime Lending | Q2 FY25: Testing full-spectrum scoring; first non-prime ABS deal completed, cautious scaling. Q1 FY25: Introduced non-prime securitization program ($2–3B funding), early-stage rollout. Q4 FY24: No mention. | Initial Tier 3 model testing in November, still touted as growth opportunity, no broad rollout yet | Introduced in Q1, ongoing tests but not heavily reiterated |
MaxOffer | Q2 FY25: Brief reference to dealer engagement and appraisal tools. Q1 FY25: No direct mention after Q4 FY24 enhancements. Q4 FY24: Program enhancements cited, 45% dealer-sourced growth, 50% more active dealers. | Not mentioned in Q3 FY25 | Highlighted in Q4 FY24, minimal mention afterward |
Late-Model Used Car Decline | Q2 FY25: No mention. Q1 FY25: No mention. Q4 FY24: No mention. | Newly noted ~18% drop in 0–4-year-old segment vs. ~12% overall used market decline; impacts core business | Emerged as a Q3 issue |
Sentiment | Q2 FY25: Encouraged by Q2 performance, no explicit shift from Q4 FY24. Q1 FY25: No mention. Q4 FY24: No mention. | Strong optimism on sales momentum and earnings (double-digit EPS growth), positive comps outlook | More positive in Q3, contrasting prior caution |
Credit Tightening & Cost Initiatives | Q2 FY25: Major $52M provision adjustment, used price declines but stable environment, SG&A synergy. Q1 FY25: Reconditioning/logistics savings, market correction, building full-spectrum underwriting. Q4 FY24: Tightened credit, cost mgmt, volatility. | Credit tightening still impacting lower-tier sales, more normalized provision, stable used pricing; half of $200/unit cost-out achieved | Key ongoing factor shaping strategy |
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Sales Momentum and Comps
Q: What's a normalized used car unit comp for CarMax?
A: It's hard to pinpoint a normalized comp, but we're pleased with the sales momentum. Throughout the quarter, comps improved sequentially each month. December's performance month-to-date has accelerated beyond the third quarter's comp. We believe the fourth quarter will be stronger from a comp performance than the third quarter, despite headwinds. -
Expense Leverage and SG&A
Q: How should we think about expense leverage as comps improve?
A: We're making progress toward our goal of hitting a mid-70% SG&A to gross profit ratio. With improved sales volumes and our cost management efforts, we're confident in our ability to leverage SG&A more effectively. We're past the heavy investment phase and are now focusing on enhancing capabilities to drive growth and efficiencies. -
Supply and Sourcing Strategy
Q: Are you changing sourcing to lower-priced or older vehicles due to supply shortage?
A: There's no significant change in our age mix; we've maintained a similar vehicle mix year-over-year. The notable difference is an increase in sales of vehicles under $20,000, which grew from 25% to 30% of sales year-over-year. Our diversified sourcing from consumers and dealers allows us to obtain hard-to-find vehicles, helping us navigate supply challenges. -
Cost Reduction Initiatives
Q: Update on $200 per unit cost-out initiatives and use of savings?
A: We've realized about half of the $200 per unit cost reduction, equally split between reconditioning and logistics, with the remainder expected in upcoming quarters. We're passing most of these savings to consumers while ensuring solid margins. -
Market Share Gains
Q: Are you back to gaining market share as prices stabilize?
A: While we prefer to measure market share annually, we feel great about our sales momentum and our ability to gain market share. We'll provide an update at the end of the year, barring any major price swings. -
CAF Allowance and Provisions
Q: What led to the cut in the allowance for loan losses?
A: Our provision reflects expected losses on new originations and any necessary true-up on existing receivables. This quarter's provision is at a more normalized level, with less true-up needed compared to last quarter. We originated $1.9 billion this quarter; tightening in Tier 1 is offset by testing in Tier 2 and Tier 3. -
Payment Extensions Impact
Q: Provide more color on payment extensions and their P&L impact.
A: We've adjusted our extension policies to help customers facing temporary hardships, allowing them to make partial payments to qualify for extensions. This helps customers stay in their cars and potentially lowers losses. We've reserved accordingly for any potential impact, which is reflected in our provision and reserve. -
Wholesale Business Growth
Q: How sustainable are the gains in wholesale growth?
A: We aim to increase wholesale volumes as much as possible. Our focus is on buying more cars, both retail and wholesale. Our partnership with Edmunds has helped sign up more dealers, and we see plenty of opportunity to expand. We offer dealers an additional avenue to sell unwanted cars, complementing traditional auctions. -
Omnichannel Experience Improvements
Q: Has the omnichannel experience shift significantly benefited this quarter?
A: Improvements in the omnichannel experience are a continuous build over recent quarters. We're seeing continued benefits from enhancing the customer experience, reducing friction, and improving conversion rates both online and in-store. Customers doing more remotely leads to better conversion, and our stores are leveraging tools for seamless customer interaction. -
Store Expansion Plans
Q: Is there an opportunity to reach 300 stores, or leverage multichannel?
A: We have 249 stores and believe we can go beyond 300 stores in the long term. We review our pipeline annually and see plenty of opportunities for expansion. While the omnichannel experience allows consumers to do more remotely, we believe a strategic physical footprint remains critical. -
Earnings Growth Expectations
Q: Should low single-digit comps yield double-digit earnings growth?
A: Our objective is robust top and bottom-line growth. With the investments we've made, we're positioned to leverage these as the operating environment improves. We've had two positive quarters of comps, with acceleration into the fourth quarter, and we're excited about our growth path moving forward. -
Inventory Build-Up and Tax Season
Q: Is inventory build-up for tax season affecting cash flow?
A: Inventory increased slightly as we're preparing for the upcoming tax season, which is a normal seasonal pattern. Our team has managed inventory well, improving turns year-over-year, and we're in good shape for tax time. -
Consumer Mindset and Demand
Q: Has there been a change in consumer mindset driving demand?
A: We haven't seen a significant change in consumer mindset. Improvements are largely due to our internal efforts to enhance the customer experience and reduce friction, as well as prices being down year-over-year. Some consumers are still financially pinched, particularly those with monthly household incomes below $3,000. -
Lending Partner Stance
Q: Any noticeable changes from lending partners recently?
A: Our lending partners remain steady, without significant adjustments. They love the CarMax business and are supportive in various conditions, but they're being prudent as any lender should be. We haven't observed major changes in their lending appetite. -
Impact of Consumers Shifting from New to Used
Q: Are you gaining new customers shifting from new to used vehicles?
A: Overall used car volumes have declined, especially in the 0- to 4-year-old segment, which is our sweet spot. Consumers are financially pinched, impacting the used car industry, particularly late-model sales. We believe consumers will return as economic pressures ease. -
EPP Penetration and Margins
Q: Was EPP growth due to penetration or price increases?
A: We raised prices on our Extended Protection Plans starting in the fourth quarter of last year, leading to higher margins. While penetration has decreased, we're overall making more money. We'll be lapping over that increase in the upcoming quarter. -
Used Car Pricing Trends
Q: Are used car prices rising year-over-year?
A: We feel good about our pricing due to actions taken and diversified sourcing. Off the top of my head, we're probably running a little lighter year-over-year in December, but we'll see how it pans out.