CarMax Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
June 23, 2023

There are 15 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the FY 'twenty four Q1 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.

Operator

I would now like to hand the conference over to your speaker today, David Lowenstein, AVP, Investor Relations. Please go ahead.

Speaker 1

Thank you, Chelsea. Good morning. Thank you, everyone, for joining our fiscal 2024 Q1 earnings conference call. I'm here today with Bill Nash, Our President and CEO Enrique Mayer Mora, our Executive Vice President and CFO and John Daniels, Our Senior Vice President, CarMax Auto Finance Operations. Let me remind you, our statements today that are not statements of historical fact, Including statements regarding the company's future business plans, prospects and financial performance are forward looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Speaker 1

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 that could affect these expectations, please see our Form 8 ks filed with the SEC this morning and our annual report on Form 10 ks for the fiscal year ended February 28, 2023, previously filed with the SEC. Should you have any follow-up questions after the call, please feel free to contact our Investor Relations department at 804 747-0422 extension 7,865. Lastly, let me thank you in advance for asking only one question and getting back in queue for more follow ups.

Speaker 1

Bill?

Speaker 2

Great. Thank you, David. Good morning, everyone, and thanks for joining us. Although the Q1 remained challenging due to the same factors we cited in fiscal 2023, we're seeing sequential quarterly improvements across our business. We are focused on controlling what we can as we take deliberate steps to support our business for both the near term and the long run.

Speaker 2

This quarter, we reduced SG and A independent of the legal settlement. We delivered strong retail GPU. We increased used salable inventory units, While driving down total inventory dollars 13% year over year, we drove strong wholesale GPU as our unit volume continued to recover. And finally, we grew CAF's penetration even as we raised CAF's consumer rates to help offset higher cost of funds and tighten lending standards in reaction to the current environment. For the Q1 of FY 2024, our diversified business model delivered total sales of $7,700,000,000 down 17% compared to last year, driven by lower retail and wholesale volume and prices.

Speaker 2

In our retail business, Total unit sales declined 9.6% and used unit comps were down 11.4%, which reflects an improvement from down 22.4% and 14.1% year over year during last year's 3rd and 4th quarters. Average selling price declined approximately $1600 per unit or 5% year over year. 1st quarter retail gross profit per used unit was $2,361 consistent with the $23.39 last year. Historically, margin tends to run higher during the Q1 compared to the rest of the year. In the current environment, we expect this year's that we spoke to last quarter.

Speaker 2

As always, we'll continue to test price elasticity and monitor the competitive landscape. Wholesale unit sales were down 13.6% versus the Q1 last year, which reflects continued improvement from the 36.7% and the 19.3% year over year declines during last year's 3rd Q4. Average selling price declined approximately $2,000 per unit or 18% year over year. Wholesale gross profit per unit was 10.42 in line with 10.29 during last year's Q1. We bought approximately 343,000 vehicles from consumers and dealers during the quarter, down 5% from last year and an improvement from the 40% and 22% year over year declines during last year's 3rd and 4th quarters.

Speaker 2

Of these vehicles, we purchased approximately 323,000 from consumers in the quarter With a little more than half of those buys coming through our online instant appraisal experience. As a result, our self sufficiency remained above 70% during the quarter. We sourced the remaining approximately 20,000 vehicles through dealers, up 20% from last year supported by our Edmund sales team. In regard to our Q1 online metrics, approximately 14% of retail unit sales were online, up from 11% last year. Approximately 54% of retail unit sales were omni sales this quarter, which is consistent with the prior year.

Speaker 2

Nearly all of our Q1 wholesale auctions and sales, which represents 20% of total revenue remain virtual and are considered online transactions. Total revenue resulting from online transactions was approximately 31%, which is in line with last year. CarMax Auto Finance or CAF Delivered income of $137,000,000 down from $204,000,000 during the same period last year. John will provide more detail on customer financing, the loan loss

Speaker 3

Thanks, Bill, and good morning, everyone. Our continued focus on managing what is in our control drove another quarter of sequential improvement and year over year performance across key financial metrics, including unit sales, SG and A leverage, gross profit and EPS. 1st quarter net earnings per diluted share was $1.44 down from $1.56 a year ago. Included in our EPS this quarter was the equivalent of $0.28 or $59,000,000 related to a legal settlement. Total gross profit was $817,000,000 down 7% from last year's Q1.

Speaker 3

Used retail margin $515,000,000 and wholesale vehicle margin of $168,000,000 declined 9% 12%, respectively. The year over year decreases were driven by lower volume across retail and wholesale. This was partially offset by strong margin performance With both retail and wholesale per unit margins up slightly from last year's numbers. Other gross profit was $135,000,000 up 12% from last year's Q1. This increase was driven by service, which delivered $4,000,000 in margin, A $26,000,000 improvement over last year.

Speaker 3

As we communicated in our Q4 FY 2023 year end earnings call, Our expectation is that service will deliver improved year over year performance in FY 2024, driven by the efficiency and cost coverage measures that we partially offset by reductions in extended protection plan or EPP revenues and third party finance fees. EPP revenues were down $5,000,000 primarily due to lower sales, partially offset by stronger margins that were implemented at the end of last year's Q1. 3rd party finance fees were down $3,000,000 to last year's Q1. Lower volume in Tier 2 for which we receive a fee was partially offset by a reduction in Tier 3 volume for which we pay a fee. On the SG and A front, expenses for the Q1 were $560,000,000 down 15% from the prior year's quarter.

Speaker 3

Excluding the benefit from the legal settlement, SG and A was down 6% from the prior year's quarter as we SG and A as a percent of gross profit was 68%. Excluding the benefit from the settlement, our SG and A leverage was 76%, roughly flat to last year's Q1. The change in SG and A dollars over last year was mainly due to the following factors. First, other overhead decreased by $79,000,000 of which $59,000,000 was due to the settlement. The balance of year over year favorability was driven by several factors, Including favorability in non CAF uncollectible receivables, which benefited partially from timing, Favorability and costs associated with lower staffing levels and a variety of other smaller costs.

Speaker 3

2nd, we reduced advertising by $17,000,000 While our advertising expense on a total dollar and per unit basis was Lower year over year on the quarter, our investments for the quarter on a per unit basis remained aligned with last year's second half spend level. 3rd, total compensation and benefits, excluding a $13,000,000 increase in share based compensation, decreased $15,000,000 This decrease was primarily driven by our continued focus in stores and CECs on aligning staffing levels to sales and driving efficiency gains. As I noted in our Q4 FY2023 year end call, we expect to require low single digit gross profit growth To lever SG and A for the full FY 2024 year, well below the levels we guided to during the investment heavy phases of our omni transformation. As a result, we expect to deliver a stronger flow through of gross profit to profitability. Our 1st quarter performance has us on track to deliver on this goal.

Speaker 3

While we delivered SG and A leverage point in the mid-seventy percent range In the Q1, it is important to remember that the Q1 is typically our strongest for SG and A leverage as it's historically our highest used unit volume and margin per unit quarter. Regarding capital structure, our first priority remains to fund the business. While our adjusted net debt to capital ratio was slightly below our 35% to 45% targeted range, given ongoing market uncertainties, We continue to appropriately manage our net leverage to maintain the flexibility that allows us to efficiently access the capital markets for both CAF and CarMax as a whole. In keeping with this goal of maintaining flexibility, we continue to pause our share buybacks in the Q1. Our $2,450,000,000 authorization remains in place as does our commitment to return capital to shareholders over time.

Speaker 3

Additionally, post quarter calendar end, we plan to file on Monday. Now I'd like to turn the call over to John. Thanks, Enrique, and good morning, everyone. During the Q1, CarMax Auto Finance originated $2,300,000,000 resulting in penetration of 42.7 percent net of 3 day payoffs, up from 39.3% observed during the Q1 last year. This growth in penetration came despite cash credit tightening within the higher risk, higher APR portion of Tier 1 as well as the reduction of cash targeted volume of Tier 3 that began at the end of Q4.

Speaker 3

Despite the decrease of volume in these higher APR segments, the weighted average contract rate charged to new customers was 11.1%, An increase of 20 basis points from Q4 and 200 basis points from the same period last year. Tier 2 penetration in the quarter was 20.4%, Up from Q4, but still down from the historically high 25.2% seen in Q1 of our high grade. Tier 3 penetration was 6.7 percent, down 40 basis points from last year. While CAF and other lending partners have tightened lending standards over the previous few quarters, Our robust multi lender credit platform was still able to approve approximately 95% of credit applications during the Q1. Cash income for the quarter was $137,000,000 down from $204,000,000 in the same period last year.

Speaker 3

This $67,000,000 year over year decrease is primarily driven by a $23,000,000 increase in loss provision as well as a $94,000,000 increase in interest expense, partially offset by growth in interest and fee income. Note our interest was impacted by a negative $9,000,000 fair market value adjustment from our hedging strategy versus a positive $9,000,000 adjustment seen in the same period last year. Within the quarter, total interest margin decreased to $258,000,000 down $40,000,000 from the same period last year. The corresponding margin to receivables rate of 6.1% continued to come down from the 10 year peak seen in last year's Q1, but has moderated in its decline from previous quarters as was expected and previewed during last quarter's conference call. The slowing in NIM reduction comes as a result of targeted rate increases on new originations executed over the last year that effectively manage cat penetration, finance margin and sales conversion to generate the most valuable outcome for CarMax as a whole.

Speaker 3

The loan loss provision in Q1 of $81,000,000 results in an ending reserve balance of $535,000,000 or 3.11 percent of ending receivables. This is compared to a reserve of $507,000,000 last quarter, which was 3.02 percent of receivables. The sequential 9 basis point adjustment in the reserve to receivable ratio reflects unfavorable performance within the existing portfolio as well as the uncertain macro environment. Despite this increase, the existing Tier 1 portfolio continues to trend within the targeted 2% to 2.5 percent cumulative net credit loss range and the recent tightening is expected to provide a reduction in loss rate for future originations. Regarding continued improvements in our best in class prequalification product, during the Q1, we began broadly scaling yet another of our large lending partners within FBS, our finance based shopping platform.

Speaker 3

This marks the 6th lender that is now capable of providing millions of additional Customized credit decisions in minutes to our online customers. While we continue to add enhancements to our online credit experience, We believe our FBS platform is currently an industry leader and truly empowers consumers by providing simple access to penny perfect Multi lender credit decisions in seconds, while having no impact to their credit score. Now I'll turn the call back over to Bill.

Speaker 2

Thank you, John. Over the past several years, we've built a leading omnichannel platform that enables us to deliver what we believe is the most customer centric experience in the industry. Our ability to offer integration across digital and physical transactions gives us access to the largest total addressable market and is a key differentiator. With our core omni capabilities now in place, we are continuing to prioritize projects that drive operating efficiencies and optimize experience for our associates and customers. We believe the steps we will be taking enable us to further expand our competitive moat and will position us well for the future.

Speaker 2

Some examples from the Q1 beyond what John just spoke about related to CASK include: 1, as we work to deliver a seamless Digital for shopping experience, we are increasingly leveraging Sky, our 20 fourseven virtual assistant. Sky enables us to efficiently assist Customers via chat functionality while taking work out of our CEC system. During the Q1, we expanded these capabilities to include workflows related to finance applications, vehicle transfers and appointment reservations. Since going live, we've had great success reducing CEC work volume routed Associates enabling us to provide a quicker response at a lower cost per transaction. We anticipate rolling out additional functionality to Sky throughout fiscal 2024.

Speaker 2

2nd, we are currently rolling out Express Drop Off, which enables customers with instant offer or store generated appraisals To progress the selling process from home, when utilized, this option offers customers the ability to complete their transaction in one of our stores in under 30 minutes And our research shows that customers and associates both love this experience. Finally, we're continuing to modernize our auction platform to enhance the experience for dealers. This quarter we launched an integrated check-in experience that enables single sign on across our systems and streamlines access to the information that dealers Rely on the most when bidding on vehicles. Additionally, we initiated proxy bidding capabilities in a limited number of markets. This allows dealers to bid on vehicles in advance, so they don't have to participate live during each auction.

Speaker 2

It also unlocks the ability to take Part in multiple auctions and bid on multiple vehicles simultaneously. Feedback on both of these capabilities has been positive. We plan to expand proxy bidding to additional markets as well as launch other enhancements in upcoming quarters. With our focus on improving experiences and gaining efficiencies, We believe we are well positioned to emerge from the current environment an even stronger company. We're confident in the future of our diversified business model and believe that the deliberate steps that we are taking will enable us to drive robust growth as the market improves.

Speaker 2

With that, we will be happy to take your questions. Chelsea, can you remind folks of how to enter the question portal?

Operator

Thank And we please ask that you limit yourself to one question and then reenter the queue. Our first question will come from Brian Nagel with Oppenheimer. Your line is open.

Speaker 4

Hey, good morning, everyone. Thank you for taking my question.

Speaker 2

Good morning, Brian.

Speaker 4

So the question I'll ask, one question, but I'll have 2 parts of it. Just maybe you could talk about The market share dynamic you witnessed here early in I guess so far in the year. And then secondarily, as you talked about in your script, we are seeing this Improving trending in used car sales, obviously still down year on year, but better than it had been in the prior two quarters. As you look at the drivers behind Is that more what CarMax is doing or you've seen an extra solidifying backdrop within the sector? Thank you.

Speaker 2

Yes, great. Thank you for the questions, Brian. First of all, on the market share question, Brian, you might remember that last quarter, given the Title data that we had, we thought we'd bottomed out in the December, January timeframe. We actually have title data now through April and We did bottom out in December. And although we aren't growing it year over year yet, we're pleased that January through April, We saw some good sequential growth and we did that while maintaining strong margin.

Speaker 2

So we feel good about the trajectory we're on. And if I compare it to Previous times when we had given up market share, again, we talked about that last quarter, COVID in 2008, 2009. I would tell you the coming out of it is more similar The COVID period than the 2008, 2009. As far as your second question on just the used car sales, yes, I mean the overall used market obviously is still depressed. I do think, while depreciation is a little bit of headwind on parts of the business, so for example, wholesale, I think it's good for the overall industry.

Speaker 2

So having vehicles depreciate during the quarter, I think was a good thing. It was a little unusual quarter because it first started off Appreciating and then it ended up actually depreciating a little bit. So I think that's good for the industry. But I think there's also things that are specific to CarMax and how we're managing our inventory, how we're managing our margin, the right cars out there that are unique to CarMax. So I think it's probably a combination of both.

Speaker 4

I appreciate the color, Bill. Thank you.

Speaker 2

Sure.

Operator

Thank you. Our next question will come from Craig Kennison with Baird. Your line is open.

Speaker 5

Okay. Good morning. Thank you for taking my question as well. I'm trying to anticipate Down the road when student loan payments are required again, do you have a feel for the percentage of your buyers that are also making Student loan payments, and whether that could be a significant impact on demand?

Speaker 2

Yes, it's a great question, Craig. It's one that we've actually Talked about internally both from a sales standpoint and from a finance standpoint. I think from a sales standpoint, it's hard to tell because Folks have been taking consumer loans out for longer periods of time. And I would think probably the majority of our customers are outside of the student loan. The majority of our retail customers are outside of that period.

Speaker 2

I think when you think about the CAF business and John you might have some different thoughts on this, but when you think about the CAF business Because we skew to a higher credit customer that probably puts us in a little bit better position. But I don't know if you have any additional thoughts beyond that.

Speaker 3

Yes, I agree Bill. I mean certainly the prime customer is probably a little bit older. But I think when we are looking at our underwriting platform, our underwriting criteria and our models, we're always going to take into account total outstanding debt For the consumer, evaluate the things that are most predictive of auto loan payback. And so that would be contemplated in our underwriting criteria. So

Speaker 6

Thank you.

Speaker 2

Thanks, Craig.

Operator

Thank you. Our next question will come from Daniel Imbro with Stephens Inc. Your line is open.

Speaker 7

Yes. Hey, good morning, everybody. Thanks for taking my questions.

Speaker 2

Good morning. Good morning.

Speaker 7

I wanted to start our focus on the SG and A Results obviously impressive in the quarter, maybe 2 parter related to that. First, within other maybe overhead, Historically, I thought a lot of that was IT kind of e commerce investment. Other than headcount reductions, can you maybe talk about, Enrique, Some of the operational changes you made to drive that improvement in that line item and then with the sustainability. And then related, I think you said there was a one time benefit From the timing of some cash receivables in the quarter, could you quantify that just to help investors underwrite that outlook as well as in the SG and A line? Thanks.

Speaker 3

Sure. Great. Thank you for the question. Yes, let me take it kind of 1 by 1. So let me first define non cash finance receivables.

Speaker 3

We haven't talked about it too much in the past. We have a little Not too much. So those are primarily loans that our financing partners issue to our customers that we end up writing off either due to title processing issues We're down payment obligations. And if you go back to when we emerged from COVID, we had low staffing, we had high turnover and there are a lot of DMV delays, Right. And emerging from that, we've restaffed, we've trained up our stores, DMBs are moving faster.

Speaker 3

So we're actually able to kind of catch up on these non cat finance And execute better. Our stores are executing. Our home office is executing. And again, the DMVs are executing as well better than they were. And as a result, we've seen some favorability in that line.

Speaker 3

I did talk to some favorability due to timing. So part of that is due to timing. What I'd tell you, that's Not timing that will come back and hit us in the future. It's more of a change in estimates that we have on what we think we'll be writing off. So it's a little bit more of a hindsight Change, so it won't hit us moving forward.

Speaker 3

So that's number 1. That was kind of the biggest favorability we saw on the quarter year over year. As well, we did see some favorability related to headcount, which I mentioned, related to staffing levels. Specifically, as we've staffed down and rightsized, We have favorability in relocation expenses, as you'd imagine, in recruiting expenses, as you'd imagine, but then also in casual labor. And all of those hit the other bucket.

Speaker 3

So we see favorability there. We are still seeing a little bit of pressure from decisions we made in prior quarters on our technology and strategic So that's still growing a little bit within that bucket, but it's being offset pretty materially by the other areas.

Speaker 7

Thanks for all the color guys.

Speaker 3

Thank you. Thank you.

Operator

Thank you. Our next question will come from Sharon Zackfia with William Blair. Your line is open.

Speaker 8

Hi, good morning. I wanted to actually ask some questions about Sky, but I don't recall you talking about Sky previously. So how I mean how far do you think you can take, I guess what I'll call an AI technology to help Kind of makes the CECs more efficient. And how should we think about if there's any Kind of step up in investments that would be related to kind of enhancing or optimizing Sky further, if that makes sense.

Speaker 2

Yes. No, great question, Sharon. First of all, just AI in general, I think we're bullish on AI in general. We've been using OpenAI for a period of time now. We think about it as there's lots of opportunities to enhance our associates work, maybe take some of the more mundane stuff out.

Speaker 2

Particular to Sky, we've talked about Sky, I can't remember if we've Named it Sky in the past that we talked about our virtual assistant. So that's what our virtual assistant is called is Sky. And We're really pleased. One of the things that we've been on a path to is really making our CECs as efficient as possible and leveraging our associates for the really value added work. And this With the improvements that we saw with Sky, we really deflected a good amount of calls to the CEC that Sky was able to handle Independent of calling in.

Speaker 2

And the areas that we put in there were the pre qual, the transfer process and appointment setting. And the way that it's working right now, which I think is really kind of the first version of it is, Sky hooked them up with a link. We see a world where Sky will actually interact back and forth and not even necessarily have to hook up with a link. So I think that's an enhancement. Another enhancement we'll be looking at is just integrating IO with Sky.

Speaker 2

So I think there's opportunity, still a lot of opportunity just in the CECs With Sky, but I also think there's a lot of opportunity just AI in general. We've used it in training our CEC consultants and we think there's additional possibility There we've used OpenAI to assist in our vehicle reviews and customer reviews, really allowing our content team to focus on more insightful stuff. And like I said, we're working on proof of concept, knowledge proofs of concept for our CECs to allow them to access Very specific state information. So again, we're excited about it.

Speaker 3

What I'd say as well just building on that is Sky has been a pretty strong contributor to helping us get our operating model even more efficient than where we've been in the past. We've Showing sequential improvements now in quarter over quarter costs when it comes to the CECs and the operating model and that's on a per retail unit basis. And when you consider total units, so used and wholesale or even gross margin dollars, we the progress has been even stronger. So it has been a pretty material it's had a pretty material impact to the efficiency of our model and it's contributing to the SG and A gains that we're seeing.

Operator

Thank you.

Speaker 1

Thank you, Sharon.

Operator

Thank you. Our next question will come from John Murphy with Bank of America. Your line is

Speaker 9

open. Good morning, guys. I just one very quick follow-up. Is there a way to quantify the timing That you got from or tiny benefit you got on SG and A from the non CAF uncollectible receivables just in a dollar sense?

Speaker 3

Yes. I would say the timing was not All that material in the scope of things? Yes, I'll give you a dollar number, but it's not all that material in the scope of things. The majority of the benefit really was from that improvement in execution From our stores, from our home office and from the DMVs as well.

Speaker 9

Okay. And then just a question, Bill, as you think about The same store sales comps, I mean, it's tough to call exactly when things will inflect. I'd love to hear your opinion about when you think they may inflect. But if they don't, is there an opportunity to potentially get more aggressive on SG and A costs through headcount reduction Or other areas, in case we're in an environment where affordability and supply remain a pretty material issue.

Speaker 2

Yes. So John, what I would say on the cadence as far as being able to flip that, the really the only thing I can point to, which is what I've talked about in the Just when we've seen this in the past, how long has it generally taken? And I think if you go back to 'eight, 'nine, I think it took us about 7 to 8 months Before we flatten and then started growing it year over year. You look at COVID, it was more in the 4 to 5 month range. So again, I feel good about the progress we're seeing there.

Speaker 2

Now as far as your second part of the question, which is the SG and A reduction, look, I hopefully hopefully, we made it Very clear that we are very focused on this SG and A, so reduction. So whether wherever the market share goes, we're going to continue to move that. But regardless Of that, we're going to continue to focus on continuing to prove SG and A with things like we've been talking about with Sky and becoming more efficient in the CECs, becoming more efficient in the stores. There really isn't one piece of the business where we don't have efficiency plays that we're currently looking at. So it doesn't matter if it's business office, service operations, merchandising, Every single department we have internal goals that we're going after.

Speaker 2

So regardless of the market share, we're going after continued efficiency.

Speaker 9

And that target of low 70%, I mean is that a 1 or 2 year target or is that an eventual? How should we think about getting there or timeframe?

Speaker 3

We want to get there as fast as we can. It's also going to require that gross profit improves as well. So it's critical that the underlying business and the macro environment improves as well. Then we'll get there. This quarter was particularly strong.

Speaker 3

The Q1 again is usually the strongest quarter for the reasons I mentioned in my prepared remarks, right? But we do expect the rest of the year to Continue to deliver on our commitment for this year, which is a low single digit gross profit in order to lever, which is a material difference from where we've been Over the past few years in our heavy investment phase. But 70% is our next step is what we mentioned. And from there, we can hopefully even lever even more In the years beyond, but 70% is our next step.

Speaker 2

Yes, John, I think we talked about last quarter that, well, for this year, we'll need the macro conditions to

Speaker 6

If that doesn't happen this

Speaker 2

year, we wouldn't expect this to be a 2 year thing. We would expect to get back there next year.

Speaker 3

And that's in the mid-seventy percent range, right?

Speaker 10

Yes. Great. Thank you very much.

Speaker 2

Thanks, John.

Operator

Thank you. Our next question will come from John Healy with Northcoast Research. Your line is open.

Speaker 11

Great. Thank you for taking my question. We haven't heard the word affordability used on this call compared to the last couple. And my thought is that your performance probably reflects you guys Changing and adjusting the merchandise you have on the lots and decide to meet retail demand. Can you talk about how maybe the mix And the age or the mileage and of the vehicles that you're selling today looks versus a few months ago.

Speaker 11

And Maybe just the multiyear outlook for supply because I think there's some concern in the market about your ability to source vehicles Kind of in that late model category given the fact that they might not exist for the next couple of years. So just love to kind of hear your thoughts about What you're selling today and what you think your merchandise mix might look like for the next year or 2?

Speaker 2

Yes, great. Thank you for the questions, John. So I think from affordability, look, there's still an affordability issue out there. Even though our average selling price is down, it's still up substantially over where it used to be. And I think in the previous calls we've said, hey, if you think about the affordability, 85% has been driven by the vehicle price, 15% is driven by the interest rate.

Speaker 2

I think we're probably more in a 70 five-twenty 5, which is more driven by the prices coming down, Which automatically gets your interest rates and it makes a little bit more. But I think we've knock on wood, I think we've kind of peaked on what The increase in payments, I think we're running if you look at just the CAF business, we're running about 150 monthly higher than pre normal And I think we're probably down to 130 or so. So there is still absolutely an affordability issue. I think your question is great when you think about the mix. Our prices were down roughly $1600 but the interesting thing while your acquisition price is down almost And that was more than 50% of the price swing.

Speaker 2

There's also a bit of an age mix thing here as well. And what I mean by that is if you look at the 0 to 4 year old cars that we sold a year ago compared to the 0 to 4 year old cars that we sold this year, we had less percent of those. So we dropped a few points, Which means less of those newer cars and what you've shifted to is we've actually seen a little bit of uptick in the 8 plus And so That obviously is going to drive down your overall selling price. It's also a little bit of a tailwind for us on margins as well, which played out in the I think the last part of your question, which was the supply, we've gotten this question in the past. And what I would tell you is, The fact that the new car sales rate has been off of what it traditionally is, That's not an environment that we're unfamiliar with working in because if I think back in the past, we've seen that before back in the 2000 eight-nine, The reduction in new car sales was actually more dramatic than it is now.

Speaker 2

If you look at the new car sales that we've been experiencing here more recently, We

Speaker 6

still haven't hit some

Speaker 2

of the numbers that you saw back coming out of 2008 and 2009. So and we were able to manage through that period Very well. And I would tell you, we have a better tool in the toolbox this time with self sufficiency being so high. So we're not worried about The availability of inventory, just like we haven't really been worried about it over the last year.

Speaker 3

The only piece I'd add to that from an inventory mix standpoint is like Over 25 percent of our cars are less than $20,000 and last year in the Q1 that was closer to 20%, Right. So now we're up over 25%. So in terms of customers, we are mixing the right inventory to make sure we're being as affordable as we can.

Operator

Thank you. Our next question will come from Scot Ciccarelli with Truist. Your line is open.

Speaker 10

Good morning, guys. Can you help us understand what the exit comp rate was in the quarter? And then related to that, your 95% credit approval rate, is that actually higher on a year over year basis? In other words, did traffic drop more than what you Saw or what we saw in the comp results?

Speaker 2

I'll take the comps and I'll pass it over to John to talk about the other question. So The way I think about the kind of the comp cadence, it was pretty steady throughout the whole quarter. I mean, there wasn't any remarkable difference month to month. If you look at The quarter as a whole, that's kind of how each month basically performed. And then John, I'll toss it to you on the credit.

Speaker 3

Yes. On the 95% credit approval, right, again, that's anybody Applying for credit whether it be online or directly in the store where they start. That's similar to what we've stated before and I think frankly in this environment with the Tightening that we've seen from the partner lenders and CAF, I think it just speaks to the robustness of our platform to maintain that level. So we feel real good about that number.

Speaker 8

Can I ask

Speaker 10

a follow-up question on that? Sure. If everyone's tightening credit, how does the approval rate stay Glad. It's just fewer and fewer people and it's better qualified people coming in? Like is that the way to interpret that?

Speaker 3

Sure. Yes, fair question. And that speaks to the uniqueness of the platform. So let's say Perhaps, the approval is still there, but it's at a higher interest rate where you're asking for a little more money down or it can get moves from lender A to lender B further down the platform, but again that's the benefit of having those multiple lenders and those multiple tiers is we're at least still able to provide some level of credit to the consumer To at least contemplate purchasing the car.

Speaker 10

So the approval includes changes in what those terms are. So I think we'll still preview

Speaker 3

That's correct.

Speaker 2

It does. So it

Speaker 3

might not be as strong of an approval and that's sort of the tightening as opposed to maybe a single lender platform where it's just look I can't approve you period. We've got other lenders to provide alternatives.

Speaker 10

Got it. Super helpful. Thank you.

Speaker 2

Thanks, Carr.

Operator

Thank you. Our next question will come from Michael Montani with Evercore. Your line is open.

Speaker 12

Hey, thanks for taking the question. Just first off, I was wondering if you could discuss at all comp trends quarter to date and then So what you're seeing in terms of inventory levels, we had seen I think an increase now year over year to start the quarter. I just wanted to understand that and then I had a follow-up.

Speaker 2

Yes. So I think as far as comp trends quarter to date, I would look at Similar to where we ended the quarter, I think on the inventory levels, look, I was Really pleased. The team has done a phenomenal job. As I said in my opening remarks, we actually took the total dollar amount down, yet we increased our saleable. And they're doing a great job making sure that we're getting cars through Even with delays on parts that kind of thing.

Speaker 2

So we typically go down a little bit of inventory. This quarter we actually when you go from Q4 to Q1 and this year we actually went up a little bit. So we feel good. We're still if I think about the traditional stores, We're a little bit lighter than where we normally are, but I think that's appropriate in this type of selling environment. So I think from an inventory standpoint, we're in good shape.

Speaker 4

Okay.

Speaker 12

And then just to follow-up on the share components, understanding historically, it could be like a 7 to 9 month type of issue. But If that continues to persist, should we anticipate incremental investments either from GPUs Or potentially ad expense or headcount, or do you think that basically that's not necessary because, it's more industry Demand dynamics that are driving it?

Speaker 2

Yes. I feel good about where we are right now. And obviously, you've got to continue to monitor the competitive landscape. You've got to We continue to monitor price elasticity, especially when it comes to the GPUs. But as I said earlier, we're working This is regardless of market share, but again, I would just reiterate that I feel good about the growth that we're seeing so far and I'm Positive about the outlook in front of us.

Speaker 6

Got it. Thank you. Thank you.

Operator

Thank you. Our next question will come from Seth Basham with Wedbush Securities. Your line is open.

Speaker 13

Thanks a lot and good morning. My question is really around GPU and the Better performance in retail GPU for the quarter. Can you give us a sense of how much of that was driven by market pricing dynamics relative to other internal factors?

Speaker 2

Yes. What I would say is the as far as our price elasticity test goes, it really hasn't changed much, which is why we continue to see strong margins. We continue to have great self sufficiency. We continue to have a mix of older vehicles, which Are more profitable, all those certainly help. In my prepared remarks, I heard that I said that since last quarter we were talking about if you think about the full year $2,100 to $2,200 we're actually updating that a little bit to Between $2,200 $2,300 more similar to last year, especially as you look at the Q2.

Speaker 2

So again, I feel good about where we are. We'll The bottom line as well as continue to pass to the customers, so we feel great about our prices.

Speaker 13

And as a follow-up, do you think you can hit that $2,000,000 Unit sales goal for fiscal 2026 with retail GPUs in that 2,100 to 2,200 normalized range?

Speaker 2

Yes. As we said in the last quarter, we're going to stick by those long term ranges. We'll update it at the end of the year. A lot can happen in 1 year. But yes, We're not changing that guidance at this point.

Speaker 13

Fair enough. Thank you.

Speaker 2

Thanks, Seth.

Operator

All right. Thank you. Our next question will come from Rajat Gupta with JPMorgan. Your line is open.

Speaker 14

Great. Thanks for taking the questions. Just had a couple of quick ones. 1 on the other gross profit line, the services I should say that you mentioned, is there a way to give us a little more granularity on the $25,000,000 year over year improvement there? Because revenue did not go up that much, does it come primarily from reduced headcount or any other areas that you can flag?

Speaker 14

Thanks.

Speaker 3

Yes. Thanks for the question, Rajat. So really two things drove that right within the bucket of service. Service is really where we saw the year over year increase about $26,000,000 And actually, we're able to deliver profitability and service, which we haven't done in a couple of years in a quarter here. So we're really pleased with the progress that we've made.

Speaker 3

2 things have driven that. Number 1 Yes. We took cost coverage metrics measures, I'm sorry. So as you recall, we've been hit by inflation for a good period and amount of time here. And we took increase in rates in labor, we took increase in rates in parts and that has allowed us to cover the inflationary pressures that we've been facing.

Speaker 3

That's number 1. Number 2, really strong focus on efficiency. It's still a headwind year over year, especially with sales still being challenged, But we've shown now sequential improvement in driving efficiency in the service department. So we've reduced labor along with retaining our techs, which is critical, Right. But we have been able to reduce labor.

Speaker 3

We're also in a little bit more of a stable sales environment, which allows for more effective scheduling. And so those are the primary reasons why we've seen that benefit. I would expect that year over year benefit to continue for the rest of the year. Whether or not Service will be profitable for the year, we'll see, right? But what we do know is that we do expect from a year over year basis to show pretty considerable improvements year over year for the rest of the

Speaker 14

year. Got it. That's helpful. May I just ask one quick one on CAF Since there hasn't been much asked yet, just on the provisioning improvement on a year over year basis For more on a sequential basis, is there an element of recoveries Maybe you can talk about that might have benefited sequentially or if you could just generally talk about what you saw from a recovery standpoint either frequency or severity

Speaker 3

And any way

Speaker 14

to think about provisions over the next couple of quarters? Thanks.

Speaker 3

Sure. Yes, I appreciate the question, Rizat. Yes, I'll just talk about the provision sequentially quarter over quarter. I think that's driven primarily by Some of the tightening that we've done, obviously, you're going to provision for your new originations within the quarter. So if you tighten in, that's going to come in at a lower loss rate Then there's just less money that you need to put towards those receivables.

Speaker 3

I mean, obviously, we then make adjustments on the existing portfolio accordingly. So I think that's somewhat you're seeing there. With regard to your recovery rates, I'll just speak in general around that. Historically, we're between 40% to 60% On our recovery rate, obviously, with vehicle values very high, we enjoyed recovery rates in the 70 range. Year over year, we're probably down 13 points 12 to 13 points were actually up sequentially.

Speaker 3

So yes, I don't think recovery rate that was playing a large piece of that. I think units still carry the day here. And again, hopefully that explains the provisioning down quarter over quarter.

Speaker 14

Got it. Just to clarify, you mentioned 70% on the recovery in the quarter?

Speaker 3

So the recovery rate for the quarter Was and I think the numbers were let's see, I think we'll show it about 59% to 60% when all is counted. So Which we were 73% to 74% last year. We were about 57% last quarter. So Just, yes, obviously down year over year, but a tick up quarter over quarter.

Speaker 14

Great. Thanks for all the color. Sure.

Speaker 2

Thanks, Rajat.

Operator

Thank you. Our next question will come from Chris Pierce with Needham. Your line is open.

Speaker 6

Hey, Bill, you talked in your remarks about feeling better about the macro as wholesale prices come in quicker than they normally do at this time of the year, if I Understood that right. Is your are you feeling better about the used car macro environment returning to a 40,000,000 unit number At a sooner rate than you had previously thought based on kind of what you're seeing out there? Just wanted to get a sense of how you're thinking about bigger picture.

Speaker 2

Yes. No, I don't I think it's too early to make that call. My comments around the depreciation, I think what we're seeing now is depreciation, which you would normally see. If you go back to The old normal the normalized environment, which is hard to remember back then, typically you see depreciation this time of the year into the fall. So I think we're seeing that.

Speaker 2

And again, while it can be a bit of a headwind for the wholesale business, I think overall it's good for the industry because it just makes Those cars more affordable, especially for consumer that budget pinch. So I think it's still a little too early to say we're going to get back to $40,000,000 right away. But I think The more prices move down, the better that is for the industry.

Speaker 6

Okay. And then on used GPU, The question was asked about lack of new car sales leading to lack of used car sales and you guys retailing older vehicles, if I understood that right. You're going to be retailing older vehicles for the next multiple years, is that a multiyear tailwind for used GPU? I know you raised it to 2200 to 2,300, We just saw it come in above 23 at 23.61. So I'm just curious if there would be upside to that number even if you're retailing more aged vehicles than you normally would prior?

Speaker 2

Yes. No, I wouldn't think of it as more upside. I mean, as Enrique said in his comments and in the script, the Q1 is generally Your strongest quarter from a margin standpoint, the turns on inventory, less markdowns, that kind of thing. So, while the older vehicle mix Absolutely helped us from a margin standpoint. We've been seeing this play out over the last year because we've had a higher mix of older vehicles we've been selling and really that's being determined by the customer.

Speaker 2

So if the customer wants to continue to see older vehicles, we'll make sure we have plenty of that inventory out there. If pricing comes back in line Over a period of time and all of a sudden your later model vehicles are more affordable, especially in comparison to new cars, Then some consumers may migrate there. I think that's the beauty of the business model is that we can put out on the lot whatever customers are looking for. And we have the capability to go older we have the capability to go newer. It just depends on what the customer is looking for.

Speaker 3

Thank you.

Speaker 2

Thank you.

Operator

Thank you. Our next question will come from David Whiston with Morningstar. Your line is open.

Speaker 3

Thanks. Good morning. Just curious on electric vehicles with such a huge surge in demand on the new vehicle side, are you seeing that on the Used vehicle side 2 or is affordability kind of muting that EV demand for used buyers?

Speaker 2

Yes, David, thank you for the question. So I think if you think about CarMax as a whole and the number of EVs we actually sell, it's a very small percent. I think by last quarter it was Roughly on pure EVs around 1% maybe a little bit more and we've seen that number tick up a little bit. As you can imagine there just hasn't been a lot of EVs out there in the marketplace for use. Obviously, all the manufacturers are putting out more EV product.

Speaker 2

I do think I mean, you point out a good thing on the affordability. I think they have to become a little bit more affordable for the average But that being said, just like we're the retailer of used vehicles, we want to be the retailer, the largest retailer of used EVs. And so we're preparing for that. While it's a small percentage of our sales now, we think that that will grow over time. And so we're already taking steps to make sure that we can be prepared for that.

Speaker 3

Okay. And just one thing on FBS. Can an FBS customer's loan eventually go into a cap securitization? Or does it have No. Cap is one of the 6 lenders that are currently operating on FBS.

Speaker 3

And again, that's the Online shopping tool. So yes, absolutely, all lenders all those lenders are participating and CAF loans We'll absolutely underwrite folks in FBS and it will go through our normal funding channels.

Speaker 2

Yes. David, that's the beauty of Yes, it's all the different lending partners. It's a very unique product out in the marketplace because it's not only CAF, but it's our additional lending partners that have been with us forever. And At the end of the day, that's what gets consumers, especially ones that are conscious about their monthly payments, it gets them the best rate.

Speaker 4

Did you give an FBS penetration number?

Speaker 2

You mean as far as how many consumers are leveraging FBS?

Speaker 3

Yes. I think what we would say is of the people that apply for credit, 80% plus Are starting online and leveraging our online platform.

Speaker 2

Yes. And everybody can do an FBS experience. It just depends on how they want to shop. Yes.

Speaker 14

Okay. Thank you.

Speaker 2

Thank you.

Operator

Thank you. We have no further questions at this time. I'd like to hand the call back to Bill for closing remarks.

Speaker 2

Great. Thank you. Well, thanks everybody for joining us and your questions and your support. As always, I want to thank our associates for what they do, taking care of each other and the customers. They are absolutely our differentiator.

Speaker 2

I also would like to remind everybody that's on the call. We recently published our 2023 responsibility report and I encourage everybody to listen to it. I mean, read it that's listening today. It provides some great updates on some key initiatives including climate related and the tangible impact that we're having on community. So again, we're proud of The value is that we're living every day and think we're well positioned to drive long term sustainable value for all of our shareholders.

Speaker 2

So again, thank you for your time today and we'll talk again next quarter.

Operator

Thank you, ladies and gentlemen. This does conclude the FY 'twenty four Q1 CarMax earnings release conference call. You may now disconnect.

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Earnings Conference Call
CarMax Q1 2024
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