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CarMax (KMX) is driving higher today after beating expectations on the top and bottom line in its Q2 (Aug) report this morning. EPS of $1.16 marked another large EPS beat, while revenue increased 19.5% to $7.9 bln, well above expectations. The results show early progress against its "Shift into GEAR" strategy, focused on improving price competitiveness and the customer experience while expanding transaction economics and driving greater efficiency.

• Unit growth: Comparable retail used unit sales increased 13.0%, a sharp acceleration from a 0.8% decline last quarter, aided by an easier comparison against a 6.3% decline a year ago. Combined retail and wholesale unit sales increased 14.7%, with retail units up 13.8% and wholesale up 15.9%.
• Progress points: KMX improved price competitiveness through lower reconditioning costs, dynamic GPU management and sharper pricing algorithms, while digital and customer-experience improvements supported conversion. Management estimated roughly half of the comp improvement came from internal initiatives, with the rest from increased FTC enforcement around transparent pricing.
• Margins: Total gross profit increased 11.4% to $799.5 mln, though gross margin contracted roughly 70 bps yr/yr to 10.1%. Retail gross profit increased 8.1% despite GPU falling $111 to $2,105, while wholesale GPU declined $135 to $858. KMX now expects FY27 retail GPU to fall less than its prior $200 per-unit outlook as it more effectively balances demand, margins and efficiency gains.
• CAF/consumer: CAF income increased 32.1% to $135.6 mln, helped by a lower loan-loss provision. Penetration declined to 40.9% from 42.6% as lower Tier 1 more than offset Tier 2 growth, though CAF remained the largest Tier 2 lender at 22% of volume versus 10% last year. Management described consumers as resilient, though higher rates pushed some prime borrowers toward cash or outside financing.

Briefing.com Analyst Insight

This was a solid quarter from KMX, with several indicators pointing to continued progress against its "Shift into GEAR" strategy. Comparable unit growth accelerated sharply, as improved price competitiveness and stronger conversion supported growth; management also noted that the percentage of KMX vehicles rated as great deals on Cars.com more than doubled yr/yr. Although margin declined, stronger volumes and dynamic GPU management allowed KMX to generate gross profit growth while reducing GPU by less than previously expected. Meanwhile, management attributed lower CAF penetration primarily to the higher-rate environment, particularly among prime borrowers, rather than a structural change in customer behavior, while continuing to describe the consumer as resilient. The key going forward will be whether CEO Keith Barr and KMX can sustain the recent unit momentum as it eventually laps the FTC pricing-transparency tailwind, while increasingly funding competitive pricing through internal efficiencies.