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After stalling out despite a decent Q2 (Aug) performance today, including topping revenue estimates, CarMax (KMX +6%) is now kicking into gear. Alongside the used car dealer's top-line beat were in-line earnings, decent lifts in retail used unit sales, and comparable store unit sales growth. KMX's attention to margins over volume also kept gross profit per retail used and wholesale unit afloat.

What initially hurt today's sentiment? An increase in the provision for loan losses outweighed growth in receivables and a stable net interest margin in CarMax Auto Finance. Management noted that the estimate of lifetime losses on existing loans jumped by $52.2 mln, higher than a more typical $10-30 mln.

Headlines have crossed this year, announcing decade-high auto loan delinquencies as consumers struggle with the current inflationary environment. However, the industry has yet to express significant concerns. Last month, General Motors (GM) expected cyclicality surrounding its loan portfolio, but not for it to immediately translate into retail softness. Furthermore, America's Car-Mart (CRMT) noted that delinquencies dropped by 90 bps yr/yr during JulQ. On the banking side, the picture is slightly mixed. JPMorgan (JPM) remarked earlier this month that it has yet to see deterioration in auto delinquencies, while Ally Financial (ALLY) commented that credit challenges on its retail auto side intensified during July and August.

Nevertheless, after management expressed cautious optimism over its loan portfolio, investors feel better about shrugging off the rough spots in Q2 and focusing on the longer term, particularly as the Fed embarks on its rate-lowering campaign.

• Decent Q2 numbers are also helping today. KMX expanded EPS by 13% yr/yr to $0.85 despite delivering a 1% drop in total revenue to $7.01 bln. Retail used unit sales rose by 5%, and comps enjoyed a +4% jump. Easing interest rates may have provided some kindling during Q2. However, a nearly 5% drop in average selling prices for used vehicles likely proved to be a bigger boost.
• Retail gross profit per used unit of $2,269 represented a minor bump from $2,251 in the year-ago period. It also reflected KMX's commitment to margins over volume since it could keep its gross profits intact despite the compression of average selling prices. Wholesale vehicle gross profit per vehicle was also mostly unchanged yr/yr at $975.
• KMX does not typically issue formal guidance, so its comments can carry meaningful weight. Management stated that it was pleased with how sales have progressed thus far through Q3 (Nov), with comps sequentially improving. Meanwhile, KMX added that it feels good about the loans on its books following the tightening it has done but will remain cautious going forward.

KMX's loan losses climbing meaningfully above recent averages triggered wariness today. However, during its conference call, the company eased fears, conveying an uplifting tone surrounding its loan portfolio. Improving comp growth was also an added bonus. With the Federal Reserve beginning to slash rates, financing will become cheaper, potentially blanketing the nerves surrounding current and future auto loans and ultimately lifting KMX's future sales figures.