CarMax Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 12, 2022

There are 13 speakers on the call.

Operator

Thank you for standing by. Welcome to the 4th Quarter Fiscal Year 20 22 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, Mr. David Lowenstein, AVP Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, Jess. Good morning. Thank you for joining our fiscal 2022 4th Quarter Earnings Conference Call. I'm here today with Bill Nash, our President and CEO Enrique Mayer Mora, our Senior Vice President and 2019 and John Daniels, our Senior Vice President, CarMax Auto Finance Operations. Let me remind you, our statements today regarding 20.

Speaker 1

Future business plans, prospects and financial performance are forward looking statements we make pursuant to the 6th quarter provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management's 2019. We are pleased to announce that our 2019. In providing projections and other forward looking statements, the company disclaims any intent or nineteen. For additional information on important factors that could affect these expectations, 2019.

Speaker 1

Please see the company's Form 8 ks issued this morning and its annual report on Form 10 ks for the fiscal year ended February 28, 2021, 2019 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 740seven-four twenty two extension 7,865. Lastly, let me thank you in advance for

Speaker 2

16. Bill?

Speaker 3

Great. Thank you, David. Good morning, everyone, and thanks for joining us. For the Q4 of FY 2022, our diversified business model delivered total sales of $7,700,000,000 up 49% compared with last year's 4th quarter, 2019, driven by growth in average selling prices and wholesale volume gains, partially offset by a decline in used units sold. 2019.

Speaker 3

Net earnings was $159,800,000 for the 4th quarter and $1,200,000,000 for the fiscal year. 4th quarter net earnings per diluted share was $0.98 3% from a year ago. During our call in December, we shared that we were pleased with our sales performance at the start of the 4th quarter. 2017. However, we began to see pressure after the holidays that continued through the end of the quarter.

Speaker 3

In our retail business, total unit sales in the 4th quarter 25.2 percent and used unit comps were down 6.5% versus the Q4 last year. We believe several macro factors weighed on market wide used 18.5% of our sales, including consumer confidence, vehicle affordability, the omicron COVID surge and lapping stimulus benefits paid in the prior year period. While the Q4 used market was challenging, we are extremely proud of our accomplishments for fiscal 2022, and 18. And we believe we are well positioned for continued long term success across our retail and wholesale business and CarMax Auto Finance. 2019.

Speaker 3

Our full year results reflect significant growth in sales, market share and earnings as well as solid progress on our strategic initiatives. In fact, our retail market share growth this past year was the highest it's been during my tenure as CEO And is a reflection of our focus on delivering the most customer centric experience in the industry. Our market share data indicates that our nationwide share of 0 to 10 year old vehicles grew 13% from 3.5% in calendar 2020 to 4.0% in 2021. 2017. Despite posting a decline in sales during our fiscal Q4, comparing our results to published used vehicle SAAR data suggest that we continued to take share during the quarter.

Speaker 3

We believe we are well positioned to deliver profitable market share gains in any environment. Across our retail and wholesale channels, we sold approximately 343,000 cars in total during the Q4, up 11% versus last year's period. For the fiscal year, we sold approximately 1,600,000 retail and wholesale cars combined, up 38% year over year. We continue to be the nation's largest buyer of vehicles from consumers. We bought approximately 324,000 cars from consumers During the quarter, up 69% versus last year's period.

Speaker 3

For the fiscal year, we bought approximately 1,400,000 cars from consumers, percent, up 95% year over year. Self sufficiency continued to be strong during the 4th quarter, remaining above 70%. We reported 4th quarter retail gross profit per used unit of $2,195 up $109 per unit 2019. With used car prices remaining elevated, we chose to pass along some of our self sufficiency acquisition cost savings to consumers via lower prices. We believe we struck the right balance between covering inflationary costs, maintaining margin and keeping our vehicles more affordable.

Speaker 3

2019. Our approach reflects our continuation of our commitment to doing what's right for the customer, which ultimately drives the growth

Speaker 4

of our business.

Speaker 3

Wholesale unit sales were up 43.8 percent from the Q4 last year and gross profit per unit was $91 compared to $9.90 a year ago. The strength in wholesale units was primarily driven by the ongoing 6th of our instant online appraisal offering. Wholesale valuations remained historically high during the quarter, which supported margin relative to the Q4 last year. CarMax Auto Finance, for CAF, delivered income of $194,000,000 up from $188,000,000 during the same period last year. In 2019.

Speaker 3

In a few minutes, John will provide more detail on customer financing and CAF contributions. But at this point, I'd like to turn the call over to Enrique, who We'll provide more information on our Q4 financial performance. Enrique?

Speaker 5

Thanks, Bill, and good morning, everyone. 2019. Total gross profit was $711,000,000 up 11% from last year's 4th quarter. This increase was driven primarily by wholesale vehicle margin of $177,000,000 which was up 73%. 2019.

Speaker 5

The continued growth of the wholesale business is providing us with a strong gross profit lever. Used vehicle margin of $427,000,000 2019. Was relatively flat over last year's Q4, with the decrease in units largely offset by an increase in margin per unit. Other gross profit was $107,000,000 down 4% from last year's 4th quarter. This decrease reflected a $33,000,000 decline in service profit, primarily due to the deleverage driven by the reduction in sales 2019 and the staffing and efficiency impacts from the Omicron COVID surge in the 4th quarter.

Speaker 5

Our intent continues 22B to operate service as a profit center, which from quarter to quarter can be impacted by sales trends and staffing disruptions. Partially offsetting this decline was favorability in EPP and third party finance fees, as well as $20,000,000 of margin 3rd quarter contribution from Edmunds. PPP grew by $6,300,000 or 5% year over year for the quarter with penetration stable 18% at approximately 60%. This favorability was driven by an $11,000,000 year over year net benefit from eighteen. We are pleased

Speaker 3

with the progress

Speaker 6

we made in the quarter.

Speaker 5

Recall from our Q2 call in September, 1 of our providers implemented a timing shift in their performance period for profit sharing revenues. All of our providers now utilize the same timing, which 18th July. 3rd party finance fees improved by 4 point $7,000,000 with income of $1,800,000 compared to a cost of $2,900,000 last year. 20. This improvement was driven by lower Tier 3 volume compared with last year's 4th quarter.

Speaker 5

On the SG and A front, expenses 20. For the Q4 increased to $621,000,000 up 23% from the prior year's quarter Q4. Due to continued investment in our strategic initiatives and in marketing, the consolidation of Edmunds and growth costs 2019 related to the increase in appraisal buys, new stores and customer support at our customer experience centers or CECs. 2019. SG and A as a percent of gross profit deleveraged to 87.3% from 79% during the Q4 last year.

Speaker 5

2019. This deleverage was primarily due to the decline in sales that occurred in the quarter. The increase in SG and A dollars over last year was mainly 2. Due to three factors. First, a $43,000,000 increase in total compensation and benefits driven by our continued strong ramp in staffing, including proactive staffing in anticipation of tax season and wage increases.

Speaker 5

Additionally, we had a $16,000,000 increase in 2 annual bonus related compensation, plus the inclusion of Edmund's payroll this quarter versus a year ago. 2019. Partially offsetting this increase was a $42,000,000 decrease in stock based compensation. 2nd, a $40,000,000 increase in other overhead. The primary drivers of this increase include investments to advance our technology platforms and strategic initiatives as well as growth related costs.

Speaker 5

3rd, a $19,000,000 increase in advertising expense to our ongoing plan to drive customer 18.5% and amplify the CarMax brand by continuing to build awareness of our omni channel offerings. 2019. For the full year, SG and A as a percent of gross profit was 70.7%, leveraging approximately 1 point over last year's percentage of 18.6%. Our approach to SG and A and costs heading into next year remains consistent. 2017.

Speaker 5

We will continue to invest in our business. At the same time, we remain committed to ensuring that we are efficient and effective in our spend 2019. We continue to target areas of focus that we expect will deliver results over time. We expect to require an increase beyond the 5% to 8% range of gross profit growth to lever in FY2023. 2019.

Speaker 5

This is largely driven by the timing of strategic investments and growth related costs as well as heightened inflationary pressures. 20. While we expect to remain in investment mode over the next few years, we expect our leverage point to go back down after FY 'twenty three. Our capital allocation philosophy remains consistent. We will continue to invest in our core business, 22nd quarter.

Speaker 5

Consider new growth opportunities through investments, partnerships or acquisitions and return excess capital to our shareholders. In

Speaker 6

2019. In regard to our

Speaker 5

share repurchase program, we repurchased approximately 872,000 shares in the quarter for approximately $102,000,000 For the full year, we repurchased approximately 4,500,000 shares for $561,600,000 And 2017. As of March 31, 2022, we had $721,700,000 of authorizations remaining. 2019. As communicated today, our Board of Directors has expanded our share repurchase authority by $2,000,000,000 with no expiration timeline. The Board's authorization reflects CarMax's ongoing commitment to long term shareholder value creation through growth and return 2.

Speaker 5

For capital expenditures, we anticipate approximately 500,000,000 23. This increase in spend is driven by long term growth capacity initiatives for our auction, sales and production facilities in addition to continued investments in technology. In FY 'twenty three, we plan to open 10 new locations, 18, including our first three stores in the New York City metro market. Our extensive nationwide footprint and logistics 6 network continue to be a competitive advantage for CarMax and we remain committed to an appropriate level of investment on these differentiated assets. 2019.

Speaker 5

Now I'd like to turn the call over to John. Thanks, Enrique, and good morning, everyone. Our CarMax auto finance business delivered strong results once again. For the Q4, CAF's penetration, net of 3 day payoffs, was 41% compared with 43.5% last year. And Tier 3 accounted for 6.7 percent of sales compared with 9.5% a year ago.

Speaker 5

The year over year reduction in caps penetration is attributed to a larger percentage customers coming in with outside financing. Our Tier 2 partners continue to provide highly competitive credit offers as they compete for additional volume within the CarMax channel. These strong offers along with the decrease in conversion in the lower portion of the credit spectrum driven by higher average selling prices and corresponding monthly payments contributed to the swap and penetration between tiers 2 and 3. During this year's Q4, CAF's net loans originated was nearly $2,100,000,000 2018. The weighted average contract rate charged to new customers was 8.2%, down from 8.5% a year ago and 8.3% in the 3rd quarter.

Speaker 5

2017. The difference in APR is primarily a result of the credit mix of customers booking with CAF. CAF income for the quarter was 100 $94,000,000 an increase of 3% or $6,000,000 from the same period last year. Quarter. Total interest margin increased $64,000,000 driven by $42,000,000 in higher interest and fee income from our continued growth in receivables $22,000,000 in lower interest expense from the past ABS deals that continue to provide value over time.

Speaker 5

2019. This improvement in cash margin and the growth in average managed receivables more than offset the substantial increase in the provision for loan losses, which was a more normalized $54,400,000 in the current year's 4th quarter versus $4,600,000 in the prior year's 4th quarter. In the prior year's Q4, the provision for loan losses benefited from the continued reduction in the reserve 2019 that was established at the start of the COVID pandemic. The current quarter's provision of $54,000,000 results in an ending reserve balance of 430 $3,000,000 or 2.77 percent of managed receivables. This is largely consistent with the 2.75% at the end of the 3rd quarter and includes a 3 basis point adjustment for additional Tier 2 and Tier 3 volume originated by CAF.

Speaker 5

I also want to take the opportunity to highlight a few of 8.5% of our customers begin their financing process on carmax.com, applying for credit on any vehicle in our inventory or simply a requested dollar amount. 2017. Our unique finance based shopping engine available to most of our customers allows for multiple lenders to decision a single customer or co applicants This tool is incorporated into the search page within carmax.com, allowing the user to sort and filter not only on the vehicle's characteristics, 18. No impact to your credit score feature along with the streamlined application process that provides real time credit decisions on our full inventory. We We believe that our differentiated multi lender platform coupled with these and additional enhancements that are on the horizon will further strengthen our digital shopping experience.

Speaker 5

Now I'll turn the call back over to Bill.

Speaker 3

Great. Thank you, John. Thank you, Enrique. As I mentioned earlier in this call, I am very proud of how we performed in fiscal 2022. We We bought and sold more vehicles than ever before through our retail and wholesale platforms.

Speaker 3

We've continued to innovate, to aggressively invest in core areas of our business 2017 and to pursue new growth opportunities. As a result of these efforts, we've achieved double digit year over year growth in our market share,

Speaker 6

fiscal year. And we believe we are well positioned to take even more share.

Speaker 3

We have continued to build out new and enhanced capabilities. And as those capabilities 2. We have continued to see positive returns. Some highlights from this year that will have a lasting impact are: 1st enabling online self progression capabilities currently available to approximately 90% of our customers with full availability for every customer 18 months ended by the end of this Q1. Next, leveraging our online instant appraisal offering to buy a record number of cars directly from consumers, which enabled us to nearly double our self sufficiency as we drive as well as drive sustainable wholesale unit growth.

Speaker 3

Also, transitioning CAPP's legacy auto loan receivable servicing system to brand new technology, which provides CAPP 2017. We're pleased to announce our customer experience and finally, rolling out the finance based shopping capabilities that John just 2019. Our e commerce engine, combined with our unparalleled nationwide physical footprint, is a key value to our customers 18 and helped us provide what we believe is the best experience

Speaker 6

in the

Speaker 3

used car industry. Our ability to offer seamless integration across digital and physical transactions 2019. Gives us access to the largest total addressable market and is a key differentiator, one that we will continue to enhance. In regard to our Q4 online metrics, approximately 11% of retail unit sales were online, up from prior year's quarter of 5 percent. Our wholesale auctions remain virtual.

Speaker 3

So 100% of wholesale sales, which represents 23% of total revenue, are considered online transactions. Total revenue resulting from online transactions was approximately 31%. This is up from 17% in last year's 4th quarter. Approximately 55 percent of retail unit sales were omni sales this quarter, up from 51% in the prior year's quarter. In the Q4, we bought approximately 162,000 vehicles from customers through our online instant appraisal.

Speaker 3

2019. That represents about half of our total buys from consumers. The fiscal year, we bought approximately 707,000 cars through this channel, 2017, again representing roughly half of our total buys from consumers. Going forward, we will continue to evolve our online and in store capabilities to enable a more seamless experience for our associates and customers. I would like to highlight 4 key areas of focus for FY2023.

Speaker 3

21st, as John mentioned earlier, we're deploying a more sophisticated version of our finance based shopping capability that enables real time decisions 18. Adding self-service capabilities to enhance in store interactions, including appraisals and express pickups 3rd, 2019. Growing vehicle acquisition through attracting new customers and pursuing partnerships as we expand our appraisal offering to dealers and other businesses. And finally, continuing to leverage data science, automation and AI to improve efficiencies and effectiveness across our buying organization, 20 business offices and CECs. Again, we're very proud of the strong results for fiscal 2022 2.

Speaker 3

And we'll continue to invest and innovate to achieve profitable market share growth. During our Analyst Day last May, We announced long term targets of achieving $2,000,000 combined retail and wholesale units sold and $33,000,000,000 of revenue in FY 'twenty six, up from 1,200,000 $19,000,000,000 respectively during FY 2021. Though we don't anticipate updating our targets annually, our strong performance in FY 22 has given us new perspective on these targets that we believe is appropriate to share at this time. We're revising our FY 'twenty six targets to reflect a range of 2,000,000 to 2,400,000 combined units with revenue between $33,000,000,000 $45,000,000,000 These ranges reflect the macro factors we We will expand it beyond 5% by the end of calendar 2025. Last, but most importantly, I want to thank all of our associates 18 months for the work that they do.

Speaker 3

They are truly the keys to our success. Just yesterday, Fortune Magazine named CarMax as one of its 100 Best Companies to 4 for the 18th year in a row. I'm incredibly proud of this recognition as it is due to our associates' commitment to supporting each other, We'll be happy to take your questions.

Operator

Thank you. Your first question comes from Craig Kennison with Baird. Your line is open, sir. Please go ahead.

Speaker 7

Good morning. Thanks for taking my question. I guess I'm curious about the Online instant appraisal tool. Just a number of questions about that. How would you assess your competitive positioning and the competitive landscape in that market?

Speaker 7

How are you different? Are you putting enough marketing spend behind that effort while you have this competitive advantage? And then Bill, I think you mentioned plans for fiscal 2023 to roll this out to other dealers. Maybe you could shed some light on that.

Speaker 3

Sure. Good morning, Craig. There's a lot in that question. So first of all, I feel really great about our IO success. I think it's really been so successful because of a bunch of reasons.

Speaker 3

One, I think It's really the experience and the ease of use of the product. I think it also has the backing, the brand recognition of CarMax. And I mean, let's not forget, This is what we do. We've been buying cards from consumers since 1993. We have started advertising obviously for it.

Speaker 3

If I look at The Q4 and think about our advertising spend, we break it down between kind of brand awareness 18. I would tell you the acquisition awareness, we spent a little bit more on vehicle acquisition awareness this past quarter than we have in previous quarters. So we feel good about the 2019. Now I think obviously, I think everybody in the marketplace is benefiting a little bit from higher valuations, but I think that's the minority of The bump that we've seen. So we're excited about that.

Speaker 3

As far as my comments earlier, yes, look, first of all, we're going to continue to Improve the experience for our consumers. But we're also we've been testing and we'll continue to roll this out to make it available to other dealers as It's an easy way to get rid of inventory that they're looking to get rid of as well as we'll look for other partnerships where we

Speaker 6

can leverage this.

Operator

Our next question comes from Sharon Zackfia with William Blair. Your line is open. Please go ahead.

Speaker 8

Hi, good morning. Good morning. Thanks for all the color on the long term plans. I'm sure everyone's interested in Kind of how you can pivot in the current consumer environment, particularly with used car prices where they are. And you talked a little bit about 2019.

Speaker 8

Kind of passing on some better prices to consumers in this quarter, but I'm wondering, first, I guess, if you have any Kind of additional insight on how the stimulus might have benefited you in the year ago period, both in the Q4 and in March now that you've lapped that. If there was any distinct Omicron impact that was isolated to the Q4, I think that would be helpful to know. And then just given where 18. Gas prices are and used car prices. Are you seeing any kind of fall off in demand for SUVs?

Speaker 8

How are you pivoting for that? And then are you shipping average ages of your inventory somewhat older to try to make the price points more affordable? I know there's a lot there, but I think it's important to kind of cover all of that, sorry.

Operator

It's like a 12 part, one part question.

Speaker 3

Yes, that's a creative way to get like 18 questions into the first one. But look, I'm happy to take all of them. So let me start first of all just on your The last year. The gas prices, look, for the quarter, we really didn't see much of an impact on gas prices as far as a shift. If I look Gas Cuzzlers from a sales standpoint, very similar year over year.

Speaker 3

So I do think that's an area that we need to continue to monitor as we go forward. We have seen an 2. Take, for example, and things like EV searches and Edmunds has seen that as well. But we've certainly navigated that before and been very successful. As Consumers want something different.

Speaker 3

We're right there for them. So I'm really not worried about that and we'll be able to pivot on that. Your 18. Question on average age of vehicles. We did from a retail standpoint, we did see a shift to a little bit older car, which Obviously, it's a little bit cheaper.

Speaker 3

I think the mix, if I'm looking at 0 to let's see, 0 to 4 year over year. I think there was about 2 points with change from that bucket into the little bit higher maybe the 5% to 7% bucket. So we have seen a little bit of shift there. And again, Yes. The beauty of our business is as we see customers looking for different types of inventory, we make sure we get that inventory out there.

Speaker 3

So we feel good about that. As far as just commentary around the comps, look, I highlighted a whole bunch of different things that are macro factors that I think are weighing on the overall used car Industry. If I had to rank in order of magnitude, and again, this is it's hard to exactly quantify each one, but 2020. I would probably say the high prices are at the top of the list, followed by the COVID surge. We did see a COVID surge in 20.

Speaker 3

January. And then I think coming out of the COVID surge, I think it kind of transitioned into this whole lower consumer confidence. And then I also think the lapping of the federal stimulus. There's Stimulus came out last December, January timeframe, primarily more in January, and then there was even more stimulus coming out in March. So I think That certainly weighed in on the quarter.

Speaker 3

And I think it's also probably just adding to the softness

Speaker 6

18 months as we look into the Q1

Speaker 3

as well. How did I do? Did I get all your questions?

Speaker 8

Yes, I think so. I'll get back in the queue. Thank you.

Speaker 3

All right. Thanks, Sharon.

Operator

Our next question comes from Rajat Gupta with JPMorgan. Your line is open. Please go ahead.

Speaker 9

Great. Thanks for taking the question. Maybe just on the SG and A run rate, the $130,000,000 in overhead 18. Is that kind of like a good baseline to view for that particular line item going forward? Just curious 2.

Speaker 9

How does that toggle with any changes on the volume side given things are a little weaker in the near term? 2. And then maybe if you could comment on CAF. Given like the somewhat worsening affordability environment, How confident are you in terms of being able to pass through any benchmark rate increases Or widening in ABS markets, how confident you in terms of being able to pass that through to the consumer in this 2 kind of environment. And if you're not able to do that, how should we think about the implications to the gas business?

Speaker 9

Thanks.

Speaker 3

Yes. I'll let Enrique talk about the SG and A and then the CAF business, we'll let John answer that.

Speaker 5

Yes. So Rajat, I just want to make sure I understood your question. Are you talking specifically about other overhead or just SG and A as a whole?

Speaker 9

Other overhead.

Speaker 5

Yes. So other overhead this quarter really was it's a continuation of our investment in our technology spend and also costs related to growth. So you got to keep in mind The tremendous amount of cars that we're buying through the A lane, through the Prizal lane, as well as an increase in our wholesale business. So I would say that was certainly up this quarter. I would 2.

Speaker 5

I think taking a step back though and taking a look at overall SG and A and all its components. Heading into next year, we do

Speaker 6

expect, as I mentioned in my

Speaker 5

prepared remarks, to 2. And in my prepared remarks to need in excess of the 5% to 8% growth in gross profit in order 2. And that really has to do with the timing of our investments this year. We were successful in staffing the business up. As you recall at the beginning of the year, 2017.

Speaker 5

We had some staffing challenges and we ramped up that staffing throughout the year and that will comp into next year. So really when we look at that higher 3% to 8% gross profit for next year. It's driven primarily by that timing of that staffing investments that we need to continue to grow this business. Yes, Richad, I can take the affordability question. Appreciate that question.

Speaker 5

Yes, I think we've mentioned before in the kind of the non 2. For the lower credit spectrum customers, certainly we feel affordability is maybe often priced them out of the market. You can see that probably reflected 2. And our Tier 3 percentage of sales. But if you look at the CAF customer, I think there's impact there as well.

Speaker 5

If I look at kind of the microlast bacteria, customer last year was coming in purchasing a $20,000 car, maybe putting $1,000 down. Now they're coming in and they're financing $19,000 in that case. They're coming in and they're borrowing $28,000 and 2023. If they saw that same $1,000 down, they're asking for $27,000 CAF has a decision make as all lenders do. Are they going to let that person borrow that much more money?

Speaker 5

So So there is an affordability question there. I think what we're seeing is in the case of CAF and it will speak to our penetration this quarter, CAF was not necessarily just allowing someone to borrow that 27 $1,000 Potentially their income didn't increase at the same level as their requested amount. So there are other lenders out there that maybe were willing to provide that larger dollar amount. 2. So that did affect our penetration.

Speaker 5

People are taking longer terms out there. Right now, you see a much higher prevalence of used 6. Car loans higher than 72 months. It's clear, it's market year over year. CAF actually does not provide 2.

Speaker 5

Alone greater than 72 months even though people are trying to manage that affordability through term. That may or may not be the right decision for them, but Macapa is exacerbating that. So So I think there's a couple of things that affected penetration and are clear impacts of affordability for the customer. Last thing to your point on rates, we clearly have seen a signaling that rates are going to go up. 2017.

Speaker 5

They've gone up initially. They're going to probably continue to go up this year. The back half of this quarter, CAF actually did do some price testing 18. We've often shared where we will price test down or up randomly. We did a movement up this quarter.

Speaker 5

We did see that clearly impact our penetration, but we think it's the right thing to do as we manage our margin. We think as prices go up, we will continue to do that testing And we think other lenders will follow in kind or be compressed. So we will pass that along as we see fit. We want to remain Highly competitive in the marketplace, but yes, we want to make sure that we are managing margin as well. 2.

Speaker 5

Hi, Rida.

Speaker 3

I was

Speaker 6

going to

Speaker 5

expand a little bit on the SG and A. I think it's important to remember as well that we're focused 2019. On capturing the opportunities in our transforming and fragmented industry, right? So whether it's the right time to invest 4. And whether it's periods of strong industry performance or more challenged industry performance like we faced in the Q4, our goal is to take profitable market share, which as Bill talked about in his prepared remarks, we do believe in the Q4, despite sales being down, that we still market 2.

Speaker 5

And again, that is our objective as we continue to move forward, which means we're going to continue to invest. It's just a huge opportunity for us and that's where we're going to continue.

Operator

We'll take our next question from Brian Nagel with Oppenheimer. Your line is open. Please go ahead.

Speaker 7

Hi. This is William Dossett on for Brian Nagel. Good morning.

Speaker 6

Good morning.

Speaker 5

Good morning.

Speaker 7

So the question that we wanted to ask Was on the nature of the deceleration in the used car business from fiscal Q3 to fiscal Q4, you spoke about the factors previously. How should we think about the fact of declining consumer confidence? When did it come about in Q4? And how should we consider this dynamic into fiscal Q3?

Speaker 3

Yes. I think, as I said earlier, 2. Consumer confidence was obviously one of the factors. I think we actually right after we saw the COVID surge, I think as we were kind of transitioning out of that, we started to see kind of just lack of quarter. And I think that's a very similar situation that we're in right now just for the reasons that we've talked about from 2.

Speaker 3

From an affordability standpoint, you've got interest rates going up, inflation, you've got the Ukraine, Russia war. There's just a lot weighing on the consumer right now. So as far as When that turns around, I don't know. But again, I think to Enrique's point earlier, I mean, we're going We've managed through cycles like this before, and we think we're in a position to do it in a way that we can continue to gain market share.

Operator

We'll go next to John Healy with Northcoast Research. Your line is open. Please go ahead.

Speaker 10

Bill, just wanted to ask

Speaker 11

kind of a big picture question. You're talking about affordability kind of being a headwind to the business, which makes sense, which Makes us all kind of realize that with higher rates, maybe values need to come lower. So maybe you can give us your thought in terms of the relationship between unit And ASP and maybe how you think ASPs in the used car market kind of maybe fluctuate over the next 6 to 12 months. And with that, is there still a lot of confidence that you guys are going to protect GP Potentially at the expense of same store sales and is the $2,100 GP 6. Kind of benchmark, in your view, achievable even in a kind of softening used car market where Maybe values and what you have in inventory maybe are pressured a little bit.

Speaker 3

Yes. Good morning, John. Thank you for the question. 20. First of all, the affordability, while you're right, it's a headwind for retail.

Speaker 3

It's actually good for wholesale, as you saw our wholesale margins. And I think that's one of the benefits of having 2. The diversified business because as you saw our GPU for wholesale was up. I think the unit ASPs, if you'd asked me Probably 3 or 4 months ago, I would have said, I was hoping later this year we'll see some relief. I'm just not sure.

Speaker 3

Especially given the war in Ukraine eighteen. Russia, I'm not sure. New car supply is going to come around later this year. That's to be determined. I think that's a big factor that will help mitigate just some of the overall price inflation in both new and used cars.

Speaker 3

What I will tell you is though to your question 2017. And about GPU, I think that we're in a great spot. I mean, if you look at the benefit that we've got with self sufficiency, and I talked a little bit about that, we 2. Everybody is seeing inflationary pressures. Well, the nice thing is we have a lever that's offsetting those inflationary pressures.

Speaker 3

So if you didn't have a lever offsetting inflationary pressures, that's obviously Leftover beyond that to pass along to the retail consumers. And I think our self sufficiency benefits are still Kind of maturing. I think there's more potential there in how we manage that and how we do our offers, that kind of thing. So as I think about future. Even if you get into a depreciating environment, which we've shown over time in a depreciating environment, we're still able to maintain very consistent GPUs.

Speaker 3

I think with 2. Self sufficiency, I think with our diversified business, with the cash profit that can be generated, wholesale additional wholesale profit that can be generated, I think we can maintain Very good margins per unit as well as having great retail front prices. So I think we're well positioned for However the market that it's going for.

Speaker 11

Great. Thank you, guys.

Speaker 3

Thanks, John.

Operator

We'll go next to Daniel Imbro with Stephens. Your line is open. Please go ahead.

Speaker 2

Yes. Hey, thanks guys. I wanted to ask one just on tax refund season. I mean, I think they started earlier this year and total dollars paid are actually up. Enrique, I think you mentioned you hired proactively ahead of tax season.

Speaker 2

So I'm curious, did you guys see the expected pickup maybe in transit as those got paid out? And 2019. Have the trends you've seen as tax refunds got paid out changed your opinion of the underlying health of the consumer kind of as you look for the rest of fiscal 2023 ahead of

Speaker 3

Yes, Daniel. I think when I look at the tax season this year, I think it's very representative of what we saw last year. Now 2017. Remember last year, it was a late tax season in comparison to what we normally see. So this year was Timing wise, it was very similar last year.

Speaker 3

I do think the refunds are a little bit higher this year versus last year. But I think the other 18. The only factor that you don't have this year that you had last year was the stimulus that was paid out in January March. So it's really hard to decouple All of that. I would just go back to my comments on the consumer confidence earlier, which is which I think Regardless of the kind of the tax season, I just think the consumer isn't in a strong position as they were a year ago.

Operator

We'll go next to Michael Montani with Evercore ISI. Your line is open. Please go ahead.

Speaker 12

Hey there. Good morning. Thanks for taking the question. Good morning. I wanted to ask if I could, on the capacity front, if you could just bring us up to eighteen.

Speaker 12

Now in terms of some of the incremental hires that you were looking to do and the ability to recondition the vehicles in light of some COVID disruptions, etcetera. 2. Do you feel that you all are kind of appropriately staffed and now able to get kind of the full recon work through that you would have hoped for? So So that was kind of the first question.

Speaker 3

Yes. So we feel great about both our capacity, production capacity and our staffing at this point. 20. Pretty much the whole year, 1st, 2nd, 3rd quarter, as I talked about trying to get staffing ramped up. I tried I talked about lower inventory.

Speaker 3

And 2. Coming out of the Q3, I had made comments that look, we're well on our way to getting inventory to where we need to be. I don't think inventory was necessarily A big topic for the Q4. When I look at our inventory levels, I always look at it on a kind of a per average store. And I've always said historically on average It's about 3.20.

Speaker 3

We're not quite at the 3.20. But I would tell you, I don't think it was a big story. I do feel like we've got The capacity we need, we obviously can right currently, we have we can build more than 1,000,000 cars a year. And the capital expenditures that Enrique talked about earlier. That's all part of our natural planning process as we look out to the future.

Speaker 3

We already have some production facilities we're working on, but these are additional production facilities as well as just given the success of our wholesale business, we want to make sure that we can accommodate all the space. 2017. So really, it's just us doing business as we normally do it.

Speaker 5

Yes. From a CapEx perspective, we're really just matching our Capacity to the longer term demand. And like Bill said, it's just natural kind of steps we're taking, just being very thoughtful in our approach to capacity expansion to make sure that over We can meet the longer term targets that we've set out there.

Speaker 3

Yes. I think the only difference in the capital expenditure, which Enrique has called out on a couple of different calls now, is just the stepped 6th of investment in technology. Just it's a bigger percent of our overall CapEx spend. Yes, it's actually

Speaker 5

fairly interesting. And I talked about this in Analyst Day, but if you go back a few years, 6. About 15% of our CapEx spend was on technology. And now that we've been transforming our business, as we look to this year and next year, we're looking at about 2 percent of our overall CapEx spend is related to technology. So certainly, a nod in the direction of becoming an omnichannel retailer.

Speaker 12

And then one of your major competitors did an acquisition in the wholesale channel recently. And I guess what I wanted to do Build on the comment you just made. So do you feel that given the step up in CapEx spend towards tech and then given some of the alternative profit opportunities you have, do 2. Do you think that there's enough in house or is there potentially an opportunity set to kind of bolster the core capabilities inorganically?

Speaker 3

Are you talking about from a production capacity?

Speaker 12

I think one is just in the wholesale business, right? You guys have done a great job this past year there. Is there an opportunity to potentially grow that platform even faster inorganically? And then also as it relates to the tech side, given the stepped up investment in CapEx, is that kind of adequate? Or 2017.

Speaker 12

Potentially, is there some inorganic capabilities that you might be targeting as well?

Speaker 3

Yes. No, look, we feel great about the auction business. 2. As you know, we continue to run that 100 percent virtual right now. When you think about the CapEx, your auction expense is a lot less than your overall production 6.

Speaker 3

Because production, you're building out facilities, they're expensive. Auctions, you just essentially need space at this point. I mean, there is eighteen. Some build out on some larger auction facilities, but to hold this inventory. But we feel great about the plans and are very comfortable with How we've been operating and the fact that we can continue to grow the wholesale business really at a quicker pace than just Kind of along with the normal growth that it sees when it's growing as we sell more retail cars.

Speaker 7

2019. Thanks a lot, and good morning. There's been a fair amount of talk about market share on this call. And I know you don't measure market share on On a quarterly basis, but in the fiscal Q4, according to Cox's Day, the used vehicle retail saw a decline 4%. Your unit sales on retail basis declined more than that.

Speaker 7

So you would have lost market share. Can you please give us some sense as to Is that because you're protecting GPU? Or are there other reasons why you might have lost market share in the quarter?

Speaker 3

Yes. Seth, when When we look at market share and even in the Q4, we had great market share growth and we go off of pulp data, which is title data. 14. The reason we only look on an annual basis is because it was really like a 2 to 3 month lag there. So we are very confident that we gained Not only market share for the whole year, but we gained it for the Q4.

Speaker 3

And as my comments said earlier, we feel really good about market share gains In the Q1, despite what's going on in the macro factors. And when I look at the market share, it doesn't matter if you break it down 0 to 4 year old cars, 5 to 7, 18% to 10%. We got double digit growth in all those buckets. So we feel great about it. And the other thing I'd point out is that market share growth is Primarily, it's coming through comps.

Speaker 3

It's not like we've opened a whole bunch of new markets and that's what's driving the market share, which again, we're excited about.

Speaker 7

Got it. Okay. And then just a follow-up on the CAF business, if you don't mind. Your loan loss provision was in a normal range, I guess, you claimed it, John. 3.

Speaker 7

And as you think about the credit environment now and the go forward, we have seen deterioration. But from your perspective, you don't expect Any further deterioration, so there's no need to further increase your loan losses going forward?

Speaker 5

Yes, fair comment, 20. Yes. No, I would say if we just point to our reserve to receivable ratio, steady from last quarter to this quarter. Yes, we mentioned we felt like we were kind of returned to pre pandemic levels. We think we're there.

Speaker 5

We feel real good about our reserve right now and we have Good handle on the business. So if all things perform as we expect, really the focal point on the future provision will be on the new originations. And then obviously there's a mix of Tier 1, Tier 2, Tier 3 and the volume we originate. But yes, I think we're pretty steady and in a good spot.

Operator

We'll move next to Chris Bottiglieri of BNP Paribas. Your line is open. Please go ahead.

Speaker 10

Yes. Thanks for taking the questions. 18. So first question is on the EPP, obviously, you have kind of a cure up given the change in accrual status.

Speaker 12

How do we think about

Speaker 10

for next year? Should we just take like a 4th quarter average and that's kind of like the new run rate? Or is it going to be kind of like this year where it's Q4 weighted from EPP?

Speaker 5

Yes, I think there were different considerations in EPP, right. There's the kind of the core business, which is driven by sales and then attach rate Our ESP and EPP products and then there's a year end profit sharing that we have with our partners. I think on the prior, I think 2.

Speaker 6

Growing

Speaker 5

our business, growing our penetration, that will continue to grow. And then the consideration in the Q4 this year We had more profit sharing revenue than we did last year in Q4. Just our profit sharing was higher. And So given the timing of when we recognize that, if you recall last year, we actually had one of our partners in profit sharing 2 that was in the Q2. They were recognized on a quarterly basis.

Speaker 5

They have moved in fiscal year 'twenty two 2, an annual basis. So now all of our recognition of profit sharing is in the 4th quarter, which is why we saw a little bit higher this year of profit sharing in the 4th quarter. 6. But taking a look at our business again, you take a look at the core sales, you take a look at EPP attachment rates, we've just been going really well. We're stable at about 60% 3.

Speaker 5

And we would expect that to continue moving forward as well.

Speaker 3

Yes. The only other thing I would add to that, Chris, is our goal isn't to generate a bunch of profit sharing. I mean, we want to have these things Price fairly for the consumer. We got some profit sharing. I think it was more driven by people just lack of driving things like that.

Speaker 3

But our goal is not to necessarily drive a Big revenue recognition at the end of the year.

Speaker 10

Got you. And then a bigger picture question on customer sourcing. So you talked about the instant appraisal business and growth in customer sourcing.

Speaker 6

18. I know it's difficult to tease

Speaker 2

out, but based on

Speaker 10

like the age profile of the vehicle that you're buying from those, how much of 6. Incremental purchases, do you think would have come from the private party market as in the statement of TAM versus do you think you're coming from other dealers like indirectly the cars that would have gone to auction or Q4, what has been traded in retail. Is there a way to do you make sense internally for what like how much the pain you're growing versus taking share? And lastly, can you give us a perspective on buy rates? Like Once you appraise a car, what's the buy rate like today versus where it was pre COVID?

Speaker 3

Okay. So Chris, just on Kind of incremental share. We're in the process of developing kind of a buy share that looks at vehicles that Originally, we're with the consumer. The last person that they were with was essentially with the consumer. And so we're working on a metric there.

Speaker 3

We feel great about We've certainly increased that buy share. We know that. And now we're just trying to be able to quantify more. So that's something we're looking at. But we certainly are comfortable that The bulk of this is coming from other consumers.

Speaker 3

As far as the buy rate, historically, the way we talked about buy rate before 18. And offer was how many people came into the store and ended up getting an appraisal and then what did we what percent of those cars did we actually buy. Then we added the instant online appraisal. The way we buy we measure buy rate now is you take because we're issuing probably A couple of the 3,000,000 instant offers in a quarter. And there's a lot of folks who just kind of shop and to see what their So the way we calculate buy rate now is on the instant offers when they show up at the store, how much of those actually convert in addition to the traditional way that we looked at it.

Speaker 3

And 6. We're in the 40% on buy rate. If you look at it the more traditional way that we used to look at it, it's probably in the low percent. 30 ish percent. So hopefully, that's the color that you needed.

Speaker 10

Yes, far more complex. I appreciate it. Thank you. That's helpful.

Operator

We'll go next to David Whiston at Morningstar. Your line is open. Please go ahead.

Speaker 4

Thanks. Good morning.

Speaker 3

On cash penetration, more

Speaker 4

3 day payoffs, compared to say fiscal 'seventeen or so, it is down. 2.

Speaker 3

And I'm just curious, it

Speaker 4

looks like obviously Tier 2 is taking more business. And is that just an essential thing on your part? Or is there something else driving that decline? And then By roughly mid decade, where do you want your penetration either gross or net to be?

Speaker 5

Yes. I appreciate the question, David. As I 3. I mentioned in earlier comments around affordability, let's just talk about penetration and appreciate you going back to pre pandemic levels. Historically, Q4 is not going to be one of the highest cap penetration 18 quarters, obviously being wedged up against tax time.

Speaker 5

But that being said, it is down. We are losing penetration to outside financing. 2019. I mentioned previously, we really believe this is an affordability aspect. People are coming in looking to borrow more money given the 6.

Speaker 5

ASPs that are out there. As a lender, we have a decision to make, which is that we can ask for more money down. We're going to let them borrow that full amount. In some cases, we're not letting them borrow that 18. Maybe not.

Speaker 5

We've gone up at the same level. So we think we're losing in that case. I also mentioned around the longer terms. People are clearly managing affordability through extending term that is far more impactful to lowering the monthly payment than any rate adjustment. So we do not provide 6.

Speaker 5

A greater than a 72 month term on a used loan right now. PATH does not actually in fact at CarMax, none of our lenders do. So we think there are people out there that are absolutely providing that. That's been shown in the data. So I think those two things are contributing to penetration.

Speaker 5

I also mentioned we did price testing up, which 2017. Again, trying to be in line with where interest rates are headed and manage our margin. So we did see some impacts there. So I think that's what's changing the actual penetration for this quarter. Your question of where do we want it to be, I think we probably think more about it as we want to be highly competitive.

Speaker 5

There are ebbs and flows All the time based on what external folks do, but we want to remain highly competitive and provide our higher end customers 5. An opportunity to finance internally, but that's what we love about our platform. You can do a 3 day payoff. We do have other lenders to Pick us up if we don't want to extend the full amount and we could still sell the car in CarMax. So I don't think we're targeting a penetration and I would I think approaching our cat business that way is really what leads us to have a really strong portfolio Receivables out there and a really strong and consistent performing business in CAF.

Speaker 3

Well, and I think it's also the reason percent. Having other lenders there in the in in CarMax's camp is a great thing.

Speaker 4

And let me just clarify something you said. Did you say not only CAPP and also Tier 2 and Tier 3 partners do not use over 72 months?

Speaker 5

2. But right now, that is not what we're doing across CAF or our other lenders.

Speaker 4

Okay. And do you think inevitably you're going to have to go over 72?

Speaker 5

We have chosen not to. Again, we're trying to make the right decision for the customer. We're not necessarily convinced that 84 months is best on a used car. 20. So we'll see what the market dictates and we obviously know that prices are increasing in terms of increasing, but we also expect prices to probably normalize as well and it might not be necessary.

Speaker 5

But again, We want to make the best decision for the customer, and we feel like we're still able to sell vehicles without providing that today.

Speaker 3

All right. Thank you, guys. 2. Thank you.

Operator

Next, we'll go to Sharon Zackfia with William Blair. Sharon, your line is open. Please go ahead. Hi, I just had a

Speaker 8

quick follow-up. I know that you have planned more investments in marketing, but CAC really I think it ended up at around 350 for the full year. Is 350 like a right run rate? And I'm wondering How you think about the guardrails around marketing in an environment where the consumer just may be incredibly distracted?

Speaker 3

20. Yes. No, great question, Sharon. And look, if I think back on kind of pre pandemic, if I look at our overall advertising spend, we're spending As we said we would, we said we're going to spend more. We're spending about 70% more than pre pandemic, which if you look at it on a unit basis, it's probably about

Speaker 4

18. We talked

Speaker 3

about being this year. We started out this year in that mid-three 100 per unit. And I would tell you, I think we're at a point where There are certain things we want to make sure that we advertise and get out there, especially as we have new functionality. And I can't see us necessarily taking a step back 2020. On our advertising.

Speaker 3

Now to your question, do you continue to step up? That's where we'll figure out what's going on with the dynamics, where is the Right now to figure out if we go beyond that. But I think a good way to think about it is the spend on a per unit basis this year will be similar to what it was for last year.

Speaker 8

Thank you.

Speaker 3

Thank you.

Operator

We'll go next to Daniel Imbro with Stephens. Your line is open.

Speaker 3

Please go ahead. Yes. Thanks so

Speaker 2

much for taking the follow-up question. I just want to follow-up on the instant offer with consumers. Right now, consumers having Positive equity in their cars. I would think that makes it easier to buy from them just because they're making money on each one. But as we return to negative equity in vehicles over the coming years, Do you think that will make it harder for you guys to customer source?

Speaker 2

Or how do you anticipate that impacting your ability to source and kind of have success with instant offer as we return to negative equity? 2. You just rolled out into financing or how do you handle that?

Speaker 3

Yes. So Daniel, I mean, surprisingly, there's still folks that have negative equity out there today, albeit it's down just because the prices are up 5. But that's an environment that we have lived in for the last almost 30 years. We have consumers coming in with negative equity. Now you've got fiscal year.

Speaker 4

Obviously, it's this price appreciation. Is there

Speaker 3

a risk down the road that some customers, it may be harder for them because they can't come up with a big enough down payment or whatever. But again, the way I think about it is, and John talked a little bit about this, if you look at loan to values, loan to values have actually gone down. People are putting more down payments down. So 6. I think that's a good sign.

Speaker 3

I think the other thing is all these customers are buying today. It's not like they're going to all decide to trade in a year from now or 2 years from now or 3 years 2. They're going to be sprinkled throughout time and we'll manage the business just like we have in the past with other customers that have negative equity. So we feel like we'll be able to manage it both Sales standpoint, but also to your point on the buy standpoint as well.

Speaker 2

Great. Thanks so much. Best of luck. Thank

Speaker 6

18. Thank you.

Operator

Thank you. And we don't have any further questions at this time. I'll hand the call back to Bill for any closing remarks.

Speaker 3

2. Great. Thank you, Jess. Well, listen, I want to thank all of you for joining the call today and your questions and your support. I look back, FY 'twenty two was a great year.

Speaker 3

It was

Speaker 6

a great sales, it

Speaker 3

was great 18. It's great earnings. It's great market share. We've been making investments and those investments are paying off. And we're really excited about the opportunities ahead of us As we continue to be that positive and disruptive force within the used car industry.

Speaker 3

And again, I want to thank all of our associates Because they are the reason for our success. I appreciate everything that they do on a daily basis and we will talk again next quarter. Thank you again for your time.

Operator

Thank you. Ladies and gentlemen, that concludes the Q4 fiscal year 2022 CarMax earnings release conference call. You may now disconnect.

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Earnings Conference Call
CarMax Q4 2022
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