CarMax Q2 2023 Earnings Call Transcript

Participants

Corporate Executives

• David Lowenstein, Assistant Vice President, Investor Relations
• Bill Nash, President and Chief Executive Officer
• Enrique N. Mayor-Mora, Executive Vice President and Chief Financial Officer
• Jon Daniels, Senior Vice President, CarMax Auto Finance Operations

Analysts

• Craig Kennison, Robert W. Baird
• Brian Nagel, Oppenheimer & Co.
• Sharon Zackfia, William Blair & Company
• Michael Montani, Evercore ISI
• Adam Jonas, Morgan Stanley
• John Murphy, Bank of America Co.
• Chris Bottiglieri, Exane BNP Paribas
• Rajat Gupta, JP Morgan Cazenove
• Seth Basham, Wedbush Securities
• Joe Enderlin, Stephens
• David Whiston, Morningstar, Inc.

Presentation

[Operator]

Good day and welcome to the CarMax Second Quarter Fiscal Year 2023 Earnings Release Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to David Lowenstein. Please go ahead.

[David Lowenstein, Assistant Vice President, Investor Relations at CarMax]

Thank you, Sameera. Good morning and thank you everyone for joining our fiscal 2023 second quarter earnings conference call. I'm here today with Bill Nash, our President and CEO; Enrique Mayor-Mora, our Executive Vice President and CFO and Jon 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 we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. 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-K filed with the SEC this morning and our interim report on Form 10-K for the fiscal year ended February 28, 2022, 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 7865.

Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow-ups. Bill?

[Bill Nash, President and Chief Executive Officer at CarMax]

Great, thank you, David. Good morning everyone and thanks for joining us. Before I get started, I want to share that my thoughts are with our associates, their families and communities that have been impacted by Hurricane Ian. We have a significant number of stores in the storm's path and as always, the safety of our associates is our top priority. We've taken steps to support our associates and our communities and we will continue to monitor the situation and take actions to provide assistance as needed.

Now to our results, this quarter reflects widespread pressure, the used car industry is facing, macro factors including vehicle affordability that stem from persistent and broad inflation, climbing interest rates and low consumer confidence, all led to a market wide decline in used auto sales. In addition, wholesale values were affected by steep depreciation in the quarter. Despite the impact of these factors on our results, we continued to grow market share. We also continue to make progress on the key initiatives that will further strengthen our competitive differentiation over time.

We have weathered a number of difficult cycles in our history and each time we have successfully managed through them and have leveraged key learnings to further strengthen our operating model. We remain on track to achieve our long-term strategy and goals. For the second quarter of FY 2023, our diversified business model delivered total sales of $8.1 billion, up 2% compared with last year second quarter, driven by growth in average selling prices, partially offset by lower retail and wholesale volume.

In our retail business, total unit sales in the second quarter declined 6.4% and used unit comps were down 8.3% versus the second quarter last year. Our performance was impacted by the macro factors that I mentioned previously. We believe the industry sales were also impacted by a shift in consumer spending prioritization from large purchases to smaller discretionary items.

In response to the current environment and consumer demand, we have continued to offer a higher mix of lower priced vehicles. We began the second quarter with a low single-digit decline in comp sales during the June that reflected the continuation of softer, although improving sales which we discussed on our last earnings call. Comps then fell sharply at the beginning of July with August ending in mid-teen declines.

Last quarter, we reported market share data. We will do that again this quarter as the data provides additional context and highlights our performance relative to the industry. Based on external data, we continue to gain share through July the latest period which title data is available. We reported second quarter retail gross profit per used unit of $2,282, up $97 per unit versus the prior-year period, a reflection of our ability to manage huge margin in any environment.

We continue to focus on striking the right balance between covering cost increases, managing margin and passing along efficiencies to consumers to support vehicle affordability. Wholesale unit sales were down 15.1% versus the second quarter last year, partially as a result of our deliberate decision to reallocate some older vehicles from wholesale to retail to meet consumer demand for lower price vehicles.

We estimate that without this shift, our wholesale units would have been down less than 10%. Performance was also impacted by depreciation of about $2500 and as we intentionally slowed buys in reaction to rapidly changing market conditions. Wholesale gross profit per unit was $881, down from $1,005 a year ago and reflected softening market conditions, as well as our decision to retail a higher mix of older used vehicles.

Our ability to source these vehicles from consumers is a competitive advantage, but relative to younger vehicles more of them fall out during the reconditioning process as they are not able to meet our standards for consumer sales. When that happens we wholesale those vehicles often at lower than normal margins. In the third quarter, we have been focused on aligning our offers to current conditions and adjusting inventory to more efficiently incorporate older vehicles.

Buying vehicles at appropriate prices for market conditions is one of our core competencies. We bought approximately 343,000 vehicles from consumers and dealers during the second quarter, while down 8% versus last year's period. This is up approximately 50% from the second quarter of FY 2021 and reflects customers responsiveness to both our nationwide, online instant offer tool and our offers.

We purchased approximately 323,000 cars from consumers in the quarter, down 11% versus last year's record results. We also sourced approximately 20,000 vehicles through MaxOffer, our digital appraisal product for dealers. This was up 130% versus last year's period and up 18% compared to this year's first quarter. Our self-sufficiency remained above 70% during the quarter. We remain focused on providing the most customer centric experience in the industry, with a leading e-commerce platform that integrates buying and selling cars with our best-in-class store experience.

In regard to our second quarter online metrics, approximately 11% of retail unit sales were online, up from 9% in the prior year's quarter. Approximately 53% of retail unit sales were omni sales this quarter, down slightly from 55% in the prior year's quarter. Our wholesale auctions remain virtual, so 100% of wholesale sales, which represents 21% of total revenue are considered online transactions.

Total revenue resulting from online transactions was approximately 30%. This is up from 28% last year second quarter. CarMax Auto Finance or CAF delivered income of $183 million, down from $200 million during the same period last year. As a reminder, last year's quarter benefited from a reduced provision coming out of the pandemic. We will continue to provide strong credit offers to our customers as we move rates with the market. Jon will provide more detail on customer financing, the loan loss provision and CAF contributions in a few minutes.

At this point, I'd like to turn the call over to Enrique, who will provide more information on our second quarter financial performance, as well as the steps we are taking to further align our expenses to the current sales environment. Enrique?

[Enrique N. Mayor-Mora, Executive Vice President and Chief Financial Officer at CarMax]

Thanks, Bill and good morning everyone. Second quarter net earnings per diluted share was $0.79, down from $1.72 a year ago. Total gross profit was $737 million, down 9.6% from last year's second quarter. This decrease was driven primarily by wholesale vehicle margin of $141 million, which was down 26%. The year-over-year decrease was driven by both lower volume and margin per unit. As Bill noted, we faced sharp depreciation throughout the quarter and have been adjusting accordingly to better position ourselves to manage through the current environment.

Total used vehicle margin was down slightly at $495 million, a decrease of 2%. Total used unit volume of negative 6.4% was largely offset by higher margin per unit. Other gross profit was $102 million, down 15% from last year second quarter. This decrease was driven primarily by the effect of lower retail unit sale on service. Service results declined $13 million as lower sales and secondarily impacts from inflationary pressures drove the deleverage in results.

EPP fell by 3% or $3 million reflecting the combined effects of stronger margins, stable penetration at approximately 60% and the decline in retail unit sales. Third party finance fees were flat over last year's second quarter as lower volumes in fee-generating Tier 2 were offset by lower Tier 3 volume for which we pay a fee.

On the SG&A front, expenses for the second quarter increased to $666 million, up 16% from the prior year's quarter, reflecting a slowdown from the year-over-year increase during the first quarter. Approximately three points of the increase this quarter reflects a change in an accounting estimate in the prior year quarter. SG&A as a percent of gross profit deleveraged to 90.4% from 70.4% during the second quarter last year. A key contributor of deleverage was a 9.6% decrease in total gross margin dollars compared to last year's quarter. The increase in SG&A dollars over last year was mainly due to two factors. First, a $50 million increase in other overhead, the primary drivers of this increase include investments to advance our technology platforms, strategic and growth initiatives, a $14 million one-time impact from a prior year change in an accounting estimate related to non-cap uncollectible receivables and a variety of other smaller cost headwinds.

Second, a $34 million increase in compensation and benefits, excluding share-based compensation, primarily driven by the annualization of the strong growth in staffing we experienced in the back half of last year, as well as wage pressures. Partially offsetting this increase was a $4 million decrease in share-based compensation. During our first quarter earnings call, we discussed how we have actively taken steps to better align our staffing expenses in our stores and customer experience centers or CECs to the sales levels we were experiencing at the time.

However, as Bill noted, sales declined sharply in the second quarter versus our expectations starting in July. Accordingly, during the second quarter, we pulled additional levers to further align our expenses to our sales levels. We expect these savings will materialize more fully in the coming quarters. This included further reducing staffing through attrition in our stores and CECs, pausing on a portion of the hiring and contractor utilization in our corporate offices, as well as better aligning marketing spend to sales.

In regard to marketing, our intent is to continue to maintain a strong level of investment on a per unit basis that is at least consistent with the full year FY 2022 levels. For the second quarter, total marketing dollars were flat year-over-year, but reflected a robust investment on a per unit basis. As part of our omnichannel journey, we have reduced the variable cost component of our operating structure. Given the macro environment, our near-term priority will be on allocating resources towards those initiatives that will further drive efficiency and effectiveness across our fixed costs.

At the same time, we will continue to selectively invest in customer-facing initiatives that will enhance our omnichannel experience and support our long-term growth. From a capital structure perspective, we ended the quarter with an adjusted debt-to-capital ratio in the middle of our targeted range of 35% to 45%. During the second quarter, we repurchased approximately 1.7 million shares for $163 million.

Now I'd like to turn the call over to Jon.

[Jon Daniels, Senior Vice President, CarMax Auto Finance Operations at CarMax]

Thanks, Enrique and good morning, everyone. Once again, the CarMax Auto Finance business delivered solid results, while transitioning from a lending environment that has seen historically low levels of credit loss, an extremely favorable funding costs. During the second quarter, CAF's net loans originated was over $2.3 billion. CAF's penetration in the second quarter, net of three-day payoffs was 41.2% compared with 43% last year and 39.3% in Q1.

The weighted average contract rate charged to new customers was 9.4%, which was higher than the 8.5% in last year's second quarter and 9% seen in Q1. This rate increase combined with the quarter-over-quarter increase in penetration of flex caps ability to strategically pass along a portion of the added funding cost to consumers, while still providing highly competitive offers. Our lending partners continue to complement each other in also providing attractive credit offers.

Our Tier 2 penetration rate was consistent with last year at 21.6% and tier 3 accounted for 6% of used unit sales compared with 7.2% a year ago. Although the lower credit consumer continues to show demand by actively shopping and applying for credit, they continue to be challenged with affordability and being able to complete the purchase.

CAF income for the quarter was $183 million, a decrease of 8.6% or $17 million from the same period last year. Last year, our loan loss provision of $35 million was a significant tailwind as the overall performance of the consumer remained remarkably strong. This quarter, $76 million provision resulted in an ending reserve balance of $478 million or 2.92% of managed receivables, up from 2.85% last quarter. The 7 basis point adjustment is once again predominantly attributed to the proportionately higher quarterly volume of Tier 2 and Tier 3 loan originations compared to the pre-existing $16 billion portfolio.

Of note, as the macroeconomic conditions posed a challenge to the credit consumer, we remain confident in our ability to leverage our best experience and robust credit platform to ensure our Tier 1 credit losses remain comfortably within our targeted operating range of 2% to 2.5%. As we've seen last quarter, our provision headwind was significantly offset by our total interest margin, which grew $31 million year-over-year. Our margin of 7.29% was up 11 basis points from last year second quarter and was supported by a $9.4 million benefit from our hedging strategy.

Regarding our industry-leading, online finance experience, during the quarter, we significantly expanded our pre-qualification product launched in March. As a reminder, this unique multi-lender product results in no impact to your credit score and generates customized real time credit decisions on our full inventory. As of the end of the second quarter, this product was available to over 50% of our consumers and is expected to go nationwide during the third quarter.

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

[Bill Nash, President and Chief Executive Officer at CarMax]

Thank you, John. Thank you, Enrique. Given the realities of the macro environment, we will further sharpen our focus on driving additional operational efficiencies as we continue to navigate the near-term pressures facing the used car industry. At the same time, we will remain focused on continuing our work to achieve our long-term goals, including further improving our omnichannel experience for both our customers and associates, as well as growing our diversified business model.

Some of our key initiatives include, first, we are leveraging data science, automation and AI to improve efficiency and effectiveness within our customer experience centers. During the second quarter, we expanded our associate facing guided action software from chat to phone calls and developed additional work streams for our consumer-facing digital assistant. Over time, we anticipate these tools will enable us to reduce associate time spent per customer as we enhance our ability to provide live interactions at the highest value moment.

Second, as Jon mentioned, we continue to scale our industry-leading finance bases shopping experience. This best-in-class pre-qualification product leverages a streamline, simple application and generates multi-lender credit terms on cards within our retail inventory in just minutes. With this tool customers have all the information they need to quickly understand APRs and monthly payments across different contract terms and effortlessly compare vehicles to ultimately secure the right financing options for them.

Third, we are expanding MaxOffer to acquire vehicles and build on our market leading position as a buyer of cars. As a reminder, buying directly from consumers and dealers lowers our acquisition cost, enhances our inventory selection and provides profitable incremental wholesale volume. We are currently live in over 40 markets and anticipate launching additional markets later this year.

Finally, we are upgrading our auction experience to be even more user friendly. We're testing a modernized vehicle detail page to be mobile friendly and efficiently display the most relevant information dealers need to preview our wholesale inventory, similar to our customer shop or retail inventory. We're also testing AI capabilities to enhance our online vehicle condition reporting.

In addition, we have rolled out self service checkout capabilities nationwide. These tools will enable us to drive incremental operational efficiencies as we continue to scale our wholesale volume, all while providing an even better experience to our wholesale dealers.

As I close, I want to reiterate that while the market conditions and consumer behaviors remain challenging, we believe that these pressures are transitory and then our foundation remain strong. We are well positioned to navigate this environment as we have during challenging times in the past and remain excited about the future of our diversified business.

With that, we'll be happy to take your questions. Samira?

Questions and Answers

[Operator]

Thank you. [Operator Instructions] And we'll take our first question from Craig Kennison with Baird. Please go ahead.

[Craig Kennison, Analyst at Robert W. Baird]

Hey, good morning. Thanks for taking my question. I'm sure there will be several macro questions, but I'd like to ask about your sourcing tools. I'm a little surprised to see an 11% drop in vehicle sourced from consumers, given the secular momentum you've had with your online instant appraisal tool. Can you shed a little more light on the traction you're seeing with that online instant appraisal tool and whether the slower pace is a function of the slower traffic online or is it a decision to buy more selectively?

[Bill Nash, President and Chief Executive Officer at CarMax]

Yeah, good morning, Craig. Thank you for the question. Look, I think it goes back to a couple of things, first of all, we're really excited about both our online offer tool and the MaxOffer that I talked about earlier. While we did see a decline, the environment and I think the biggest factors of that decline one which I already highlighted was the fact that we're moving, it's going to change in retail selectively taken some of those wholesale cars and putting them over in retail which if you take that out, it would then mean our decline was less than 10% depreciation, you thought us up anytime we're going to depreciating market, we're lowering our offers that has an impact on what you ultimately end up buying from consumers.

And I would say the third thing, which is a smaller than the other two, but we actually -- we slowed some of our buys in certain pockets, in certain geographic areas, in certain price points because we didn't need the cars for just because of the dynamics of the changing the quickly changing environment. So I think those are the three factors that really led to that led to the decline.

[Craig Kennison, Analyst at Robert W. Baird]

Thank you.

[Bill Nash, President and Chief Executive Officer at CarMax]

Sure.

[Operator]

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

[Brian Nagel, Analyst at Oppenheimer & Co.]

Hi, good morning.

[Bill Nash, President and Chief Executive Officer at CarMax]

Good morning.

[Brian Nagel, Analyst at Oppenheimer & Co.]

Thanks for taking my question. So I wanted to focus on just the trend in the quarter with the used car unit sales. So Bill, you talked in your prepared comments about the market slowdown, it began in July. So my question there is, is there anything and look the macro pressures are very well documented out there, but is there you know is to particular that could explain that slow down, did you see some variability geographically or your cost the product spectrum. And then as a quick follow-up within that question, any comments on how the business is tracking here in the Q3 in September in particular?

[Bill Nash, President and Chief Executive Officer at CarMax]

Yeah, Brian, it's a great question. If you remember the last call, I talked a little bit about June and how we were feeling good about June, because it was, it was doing better than the first quarter and as said, we saw a big drop-off in July and then that softness continued into August, where we ended up in a mid, mid-teen decline for comps. And there is not one single thing that I can point to that we can tell, because this happened in July is why we saw the drop off. I mean there's lots of I think pressures out there, I talked about the broad inflationary pressures, obviously, consumers are having to make decisions, groceries are higher than ever. I think we've seen more interest rates increases, consumer confidence certainly during the quarter, all-time low as far as recent history, I mean even lower than the height of the pandemic.

So I just think consumers are prioritizing their their spend a little differently, but there is not one single thing that I can point to, like, oh, this happened and that's why we saw the decline. I think it's just a continuation kind of the deterioration of the overall consumer. Moving into September, we're seeing the same softness that we saw in August. And I would tell you even more recently, just given the hurricane as you can imagine, that's contributing to additional softness as well.

Now the thing with hurricanes or any weather events, you generally will get that back later on, but as far as September goes, it will absolutely put pressure. We have about 20 let's see 22 stores are currently closed and have being closed for varying amounts of time.

[Enrique N. Mayor-Mora, Executive Vice President and Chief Financial Officer at CarMax]

We've also seen on the wholesale side and just from a depreciation standpoint, just a continuation of that depreciating environment that we saw in the first quarter as well, so that has continued into September.

[Brian Nagel, Analyst at Oppenheimer & Co.]

Great. Can I ask a follow-up, I'll make a quick, I apologize, but just -- so you're talking about the depreciation in the wholesale. I mean should then lead then to more attractive prices in the used car business and potentially undermine what has been a significant challenge for consumers?

[Bill Nash, President and Chief Executive Officer at CarMax]

Yeah, I think you think about the right way, Brian, in fact, I believe this is probably the -- this is probably the first quarter where the gap between used and new got a little bit wider and gosh probably six or seven quarters, you know, so it will take some time, but I think depreciation and prices correcting on used will absolutely benefit the used market over time. But I think we got to keep in perspective, this quarter was challenging, but we haven't seen $2500 in depreciation, that rivals in absolute dollars, that rivals back what we saw at the height of the great recession that what we saw the peak of omni. So it's a very unusual thing and brings challenges. But I think that we've proven over time that we've been able to navigate those and that will do it better than pretty much anyone.

[Brian Nagel, Analyst at Oppenheimer & Co.]

Appreciate. Thank you.

[Bill Nash, President and Chief Executive Officer at CarMax]

Sure.

[Operator]

And our next question comes from Sharon Zackfia with William Blair. Please go ahead.

[Sharon Zackfia, Analyst at William Blair & Company]

Hi, good morning.

[Bill Nash, President and Chief Executive Officer at CarMax]

Good morning.

[Sharon Zackfia, Analyst at William Blair & Company]

So I follow the company long enough to see you guys navigate a lot of different cycles and congratulations and continuing to gain market share although I'm sure small dollars with the comp trends that you're seeing. I guess historically you haven't been a company that really has done layoff materially if at all, obviously you slowed, it sounds like South in acquisitions and open the hires, but I'm curious just given the retraction and profitability here or you kind of a race, I think seven years of profit in this quarter, I mean how do we think about those initiatives, Enrique, that you talked about in terms of slowing SG&A spend because and there are certainly scenarios that I can get to where SG&A spend exceeds gross profit in the back half of the year and as we go into kind of the seasonally slower time.

So help us think about kind of how much money you can take out right now whether that's in SG&A as a percent of gross profit or SG&A dollar growth just and kind of barometers mark to market where sales are, we have an idea of where that SG&A spend is kind of coming in?

[Enrique N. Mayor-Mora, Executive Vice President and Chief Financial Officer at CarMax]

Yeah, thanks for the question, Sharon. Our objective is not winning in the long term and that really requires that we remain focused on making the right investments to continue to differentiate ourselves from our competitors. So we have an active and accretive portfolio of omni related initiatives that we've been investing in and we've been able to do that in large part because of our strong balance sheet and our performance.

But that being said certainly with the current macro environment, we have started to pull the lever that I mentioned in my prepared remarks to better align our cost structure to the current environment and we're also going to be tilting our resources more towards initiatives that drive efficiencies that I talked about and Bill talked about in our prepared remarks as well. So be slowing some of the velocity down on our growth related investments, but certainly not pulling back.

So I think we're doing the right things at the current moment in terms of better managing our costs. We have a strong and active eye on the consumer and we stand very experience in managing through these cycles, but we also want to make sure that when the industry picks back up that we're in a really strong position to capture the upside. So I think in terms of the balance of the year and how to look at SG&A, we do expect the levers that we pulled during the second quarter will start to manifest themselves more fully over the next few quarters.

I think the other component certainly in any kind of SG&A leverage is purely just the gross profit rate and where that stands to be in the fourth quarter and moving into next year, that's another factor. What we can control certainly very strongly is the SG&A. So we feel good that we pull the levers, the appropriate levers for the time being.

[Bill Nash, President and Chief Executive Officer at CarMax]

Yeah in this year and the only thing, other thing I would add to that, we're absolutely entering this from a position of strength and to Enrique's point, there is lots of lever, I mean, just from the expense side, there's a lot of growth expense that we're continuing right now to prepare ourselves for the future, there's these initiatives, there is advertising, there is variable spend, all those we can still, we can still pull on not to mention, there is a whole host of other levers just for to preserve cash if that's ever needed.

So I think where we are at this point is, is look we pull the levers, we know it's a challenging time, we're coming at this from a position of strength, there is initiatives that we know that will help us both in the near term and the long term, let's get them done. And so when this market turns and it will turn when it turns, we'll be able to take off because we've already done these things, but we will keep absolutely an eye to the outside environment.

[Sharon Zackfia, Analyst at William Blair & Company]

Can I ask just ask a follow-up, just given the mid teens, decline in comp trends we've seen, I guess over the last three months. I mean, can you kind of mark-to-market for us what that is in terms of SG&A as a percent of gross profit. I mean have you let it go over 100 or is that, is that, is that kind of mark where you would say okay now we have to pull back more.

[Enrique N. Mayor-Mora, Executive Vice President and Chief Financial Officer at CarMax]

Yeah, no, I think, like we've said, we pulled back on the levers that we can control. Right now we think we're better aligned with the current environment, you're going to see those savings manifest themselves kind of moving forward. We did pull those stronger lever is kind of halfway through the second quarter. So you don't fully see it in this quarter's P&L, but moving forward we should start to see more of those savings.

[Bill Nash, President and Chief Executive Officer at CarMax]

Yeah and I think, Sharon, in way to think about it is, what we had in absolute dollars, an improvement in SG&A from the first to second as Enrique talked about, we would expect these dollars to manifest more, you'll see a reduction there. The other wild card in the equation just gross profit dollars and that's going to be driven by the macro factors as Enrique talked about.

[Sharon Zackfia, Analyst at William Blair & Company]

Thank you for that.

[Bill Nash, President and Chief Executive Officer at CarMax]

Sure.

[Operator]

We'll take our next question from Michael Montani with Evercore. Please go ahead.

[Michael Montani, Analyst at Evercore ISI]

Hi, there. Thanks for taking the question. To the first question I have is just around the wholesale side if we should assume kind of similar trends in terms of volume and GPU pressure to start the third quarter and wholesale given the challenging macro.

[Bill Nash, President and Chief Executive Officer at CarMax]

Yeah, Michael. Good morning. So, you know, in previous calls, I've talked about because I've gotten asked questions about retail margin and wholesale margin and what I've said in previous quarters is all else being equal, we feel pretty good about keeping strong retail margin. Wholesale would be coming under pressure and if we're going to enter into a depreciating environment that's going to cause the pressure like I talked about before.

The other reason I mentioned that could come under pressure is just because that retail selectivity and because we're moving some cars older cars over to retail and then that the corresponding what we call kicks you say okay this retailers car you go build it or you start to build and realize, okay, we can get this to the standards. We then move that back to wholesale and we generally perform worse on those in the normal wholesale. So we knew there was going to be some pressure.

I think if you look at recent performance, let's call it certainly last year, I think every quarter last year on a GPU standpoint for wholesale was over $1,000. And then you look at the year before that I think we had another quarter that was over $1,000. If you look at that and then compare to the five years prior to that, there were, there were probably equal or more quarters in the last year than we had in the last five years over $1,000 and that's because of the massive appreciation that we saw last year.

So I think the way to think about it going forward is probably more in line with what you would normally see the average wholesale that we make in any given quarter over three, four, five year period. I think that's the way to think about it especially in this depreciating environment especially as we continue to push more or try to push some more of these older vehicles over just from an affordability standpoint.

[Operator]

And we'll take our next question from Adam Jonas with Morgan Stanley. Please go ahead.

[Adam Jonas, Analyst at Morgan Stanley]

Hey Bill, I'm sure your team is following the proposed Rulemaking from the FTC that motor vehicle dealers trade regulation roll, that's now collecting comments and it aim to increase transparency on pricing and advertising and some downstream stuff like aftermarket add on. So if this rule making is approved, I know there's going to be a lot of, a lot of puts and takes. I mean have you guys done any preliminary work on what impact this might have on CarMax in terms of the compliance cost or SG&A expense or any potential revenue impacts. Thanks.

[Bill Nash, President and Chief Executive Officer at CarMax]

Yeah, Adam, it's a great question, obviously, we commented during the comment period as many folks did just because the requirements in some cases are a little onerous. We started to look at it obviously whatever ultimately gets decided we will, we will make sure that we do follow, but we haven't put, we are prepared at this point to really talk about additional expenses or anything, because again to your point, it's so much up in the air and there's so much discussion and debate about it. There's a lot that's really unknown.

[Enrique N. Mayor-Mora, Executive Vice President and Chief Financial Officer at CarMax]

One thing I will add though, I mean, to your point and the verbiage used, Adam, transparency and clarity around pricing add-on products, etc., I think our business model sets us up perfectly for that. We already are very transparent on a strong line and we can show our EPP products online, the pricing there. So I think we're in a great position to do that and obviously we'll do whatever is required.

[Bill Nash, President and Chief Executive Officer at CarMax]

Yeah and I think the [Indecipherable] complication for us and I think it really needs to be looked at is some of the requirements on signing paperwork, physical signatures, managers that kind of thing. Well, everyone is operating in a world of online. So again, it will be interesting to see how it pans out.

[Operator]

We'll take our next question from John Murphy with Bank of America. Please go ahead.

[John Murphy, Analyst at Bank of America]

Good morning, guys. I just wanted to ask a question on pricing, the year-over-year comparisons are always relevant, but sequentially as things are changing here, they might be more relevant typically and when you look at the retail price, yours was down about 2% sequentially quarter-over-quarter, but wholesale was down 7% I mean and you talked about doing sort of more older vehicles in that in the retail side, so I mean that 2% is absorbing even lower price vehicle. So I think the gap actually may be even larger between those two and what are you seeing in the market where retail pricing, we're hearing this from a lot of other folks is holding up a fair amount better than wholesale pricing, I mean do you think the market is sort of anticipating, dealers are anticipating some kind of weakness or looking to maintain gross, it just seems like there is things are softening, but a lot more on the wholesale than they are in the retail side.

[Bill Nash, President and Chief Executive Officer at CarMax]

Yeah, John I think some of it has to do with timing, I mean if you think about it, although, there was depreciation in the quarter and although as you point out, we have an older vehicle mix, both of those bring down your overall retail prices, but it wasn't enough to offset when comparing like a year ago. So if you think about it, we ended last year with an appreciation about 7500 bucks. We've only experienced about $2500 in depreciation, so that dynamic will become less and less as we get later into the year, but you're still -- there just wasn't enough to offset that overall appreciation which is why you still see us above last year.

I think the other thing that you got to think about is, a lot of the cars that were sold in the second quarter were bought, actually a majority of them were bought prior to the quarter even starting, so they're at a higher price. So I think there is some, there is definitely some timing there. You know on the wholesale side, obviously, if you're moving some of the nice and more expensive stuff into retail that's going to impact your wholesale a little bit more and so I think that's the dynamic that you have going on there.

[Operator]

We'll take our next question from Chris Bottiglieri with BNP Paribas. Please go ahead.

[Chris Bottiglieri, Analyst at Exane BNP Paribas]

Yeah, thanks for taking the question. And so last on kind of how these hedges effect profitability, they quantified this quarter. And then two just like given like bigger picture question trying to think the impact from next couple of years like given the decline in used volume is the tightening in the securitization market spreads and kind of default speaking up a bit. Can you just kind of maybe refresh us on how the fluctuations these variables impacts loan originations and net margins, so we can better model the cadence of capital moving forward?

[Enrique N. Mayor-Mora, Executive Vice President and Chief Financial Officer at CarMax]

Maybe I'll jump in first on the hedge, very similar dynamic to what we saw in the first quarter, right? So the vast majority of our receivables are funded through the ABS market, as we know, we have accounting hedges on those. However, we do have alternative financing vehicles with our banking partners, our longstanding banking partners and a portion of those receivables at the cash flow hedge, but not an accounting hedge and that's really due to our desire to maintain flexibility and our funding profile. So those receivables are going to get mark-to-market every quarter like they did last quarter and really where you see a change or benefit or potential hit is when there are sharp and material rises or decreases in interest rates and that's exactly what happened again this quarter. So we would only expect this again to be material for CAF during periods of material changes and it's very similar to the first quarter, we saw sharp changes in movements in the interest rates and that's what happens and it was $9 million the same amount from the first quarter.

[Bill Nash, President and Chief Executive Officer at CarMax]

Great. And I'll touch on your other question, Chris, and correct me if I don't cover everything you asked, but with regard to just overall interest margin, obviously, rising cost of funds that we've said. I think we signaled last quarter, you could begin to see a change in our net interest margin, maybe it's at a peak, it could come down and again that's where our accounting, the way that we do our accounting benefits us obviously as the margin increases over time that that higher margin receivable continues to hang around for a longer, but obviously our margins have tightened had to hedge not been in there, we probably would have seen a downturn this quarter and we're obviously going to be in a tighter environment. So we maybe continue to see that come down.

We're obviously on our side continuing to manage margin very carefully through our pricing, so we'll do what we can, but still remaining competitive for our customers. So again, I think there will be pressure on our net interest margin going forward, but again we'll manage that as well as we can.

[Chris Bottiglieri, Analyst at Exane BNP Paribas]

Got you, thank you very much.

[Operator]

We'll take our next question from Rajat Gupta with JP Morgan. Please go ahead.

[Rajat Gupta, Analyst at JP Morgan Cazenove]

Great, thanks for taking the question. Maybe just a couple of quick ones here. First on retail GPU, Bill if I heard you correctly, you mentioned that you believe you could still maintain the current retail GPU level in the current pricing environment in the next few quarters. Did I hear that correctly, just want to clarify that and I have a follow-up. Thanks.

[Bill Nash, President and Chief Executive Officer at CarMax]

Yeah, so Rajat, speaking out some about earlier, although I do feel good about being able to maintain strong retail margins, but always we'll caveat that with depending on a lot of different things, sales elasticity what competitors are doing, inventory levels, our own inventory levels, so there's a lot that goes into it, but we really are still realizing some nice benefits from although we've lapped self-sufficiency we still feel like there is a little bit there.

But then the fact that we are selling these older vehicles gives us little bit more margin in this quarter, we were able to pass along some of it to the consumers in form -- in the form of offsetting some of the inflationary pressures, as well as take a little bit more. So again, we feel good about our retail margins and where they are today and we'll just continue to watch some of the more other external factors as we go forward.

[Rajat Gupta, Analyst at JP Morgan Cazenove]

Got it, got it. And maybe just to follow up on Enrique's comments around advertising, looks like you want us to maintain a healthy advertising spend per unit, but I'm just curious like in terms of like the focus of the company right now, is it more to make sure you're able to continue to gain market share or is it more around managing overall profitability with may be higher interest rates or maybe lack of pricing discounts. Just curious as to, like what you know what's really the strategy in the near term, is it -- is there one for the other or you think you could get both at the same time the volume and profitability. Thanks.

[Bill Nash, President and Chief Executive Officer at CarMax]

Yeah, so I'll answer and then I'll just give you my thoughts and if Enrique has, but as far as advertising goes, as Enrique said, look, we we still -- we're really excited about this industry and where the industry is going, we've got some challenging things right now, but we still want to continue to invest in advertising, we're going to do it, we kind of think about it on a per unit level. So ultimately advertising as a whole will come down if the sales are down, but we feel like continuing to invest in the business and obviously you may change where you spend it, for this quarter, the majority of it was awareness and from an acquisition standpoint was more customers versus buying vehicles, but it's also one that we can continue to monitor.

Everything we do from an advertising standpoint, we measure ROI and so we have certain targets that we're going to have to, if we see things that aren't panning out, we'll certainly pull back or pivot to something else that is. So Enrique you have any thoughts on that?

[Enrique N. Mayor-Mora, Executive Vice President and Chief Financial Officer at CarMax]

Yeah, what I would say compared to a few years ago, the marketing team overall has done a tremendous job of really giving us a line of sight into profitability and the dollars we're investing and how that then translates to an ROI. So we feel really good about our investments we've been making over the past couple of years, if you compare ourselves to two years ago, I think we've increased the dollars per unit by over 50%, right and that's because we feel really good about our ability to get visibility. So I think we can continue to drive awareness and at the same time drive their profitability. So we got, I think we can get the best of both worlds.

[Bill Nash, President and Chief Executive Officer at CarMax]

Yeah, I think the other thing it's important to remember too, we got a lot of great things going on. I'll give you an example, the pre-qualification that both Jon and I talked about, we haven't even, we haven't even marketed that yet. And so that's an area for opportunity. So again as we think about advertising, it really allows us to kind of say, okay, what do we want to highlight, highlight online offers, do we want to highlight the omni experience. We want to highlight being able to buy online, we'll highlight pre-qualification, there's lots of things, so we're constantly moving it around. So, again, that's kind of how we're thinking about it.

[Rajat Gupta, Analyst at JP Morgan Cazenove]

Got it, got it. Maybe just on the cash base, are you still able to -- you feel comfortable being able to continue to pass on interest rate increases to the consumer or is that also going to be more thoughtful based on just more competitive lenders out there?

[Jon Daniels, Senior Vice President, CarMax Auto Finance Operations at CarMax]

Yeah, Raj, I appreciate the question. Yeah, as I said in my prepared remarks, I was extremely pleased with the penetration we had, we did show that we were able to pass along some of the increases onto our customers, yet still manage the elasticity, capture the volume that we could. Again three things we're trying to manage here is, stay highly competitive for our consumers from our offer standpoint, manage that margin and then make sure that we can capture the right amount of sales and it's a delicate balance, but I think we've done a great job and I think we'll continue to do that.

[Operator]

And we'll take our next question from Seth Basham with Wedbush Securities. Please go ahead.

[Seth Basham, Analyst at Wedbush Securities]

Thanks a lot. My first question is on CAF and just thinking about your loan loss reserves and where you're at right now, what does that imply for what you're reserving or your allowance rate is for your core Tier 1 securitized managed receivables.

[Bill Nash, President and Chief Executive Officer at CarMax]

Yeah, so right now we are comfortably set within the 2% to 2.5% range. The increase that you saw as I mentioned is predominantly coming from that Tier 2 and Tier 3 volume, that's a larger percentage in the new originations than it is in the portfolio. So we feel real good about staying in that targeted range and that's reflected in the reserve.

[Seth Basham, Analyst at Wedbush Securities]

Got it. So you haven't really taken up here allowance rate for those receivables despite the fact that we've seen collateral values come in sharply and the macro environment deteriorate, how should we think about the dynamics there potential for higher loan losses for those core receivable?

[Bill Nash, President and Chief Executive Officer at CarMax]

Yeah, we model that pretty extensively and we felt like again assuming there isn't just an absolute plummeting of the values, you've got people that are buying vehicles on our books that bought five years ago, three years ago. So there is a, obviously it's been a slow ramp-up and hopefully it's a slow ramp down, but modeling that, it really was relatively immaterial in a $477 million reserve. So we feel we are well reserved, we can absolutely absorb that and what we have today. So we've considered it, but we think we've got the right, the right reserve as it sits today.

[Seth Basham, Analyst at Wedbush Securities]

Got it. Thank you.

[Operator]

Take our next question from Joe Enderlin with Stephens. Please go ahead.

[Joe Enderlin, Analyst at Stephens]

Hey guys, thanks for taking our question. So, a question for the older vehicle mix as the vehicles buy normalizes, could you see these older vehicles remain part of the mix to support higher GPUs than historical levels or how are you thinking about that moving forward?

[Bill Nash, President and Chief Executive Officer at CarMax]

Yeah, I know it's a great question. It's the great thing about that is we now that we have so much more of that inventory available, we can put out whatever the customer wants. So as we go forward and maybe get to a more normalized area, period, if consumers are looking for this, we can -- we now have a source to make sure that we put it out there. So I think this also will benefit us. If you think about the fact that new cars right now, there aren't as many being sold, they will have to be something to fill that gap. This is a great, I think this will be a great tool to do that. So again we'll put out that whatever the consumers want.

[Joe Enderlin, Analyst at Stephens]

Got it. Thank you, guys.

[Bill Nash, President and Chief Executive Officer at CarMax]

Thank you.

[Operator]

[Operator Instructions] And we'll take our next question from David Whiston with Morningstar. Please go ahead.

[David Whiston, Analyst at Morningstar]

Thanks, good morning. Buyback spending was roughly flat from Q1 stocks, obviously a lot cheaper now, but of course there is macroeconomic pressures that you can make, one want to conserve cash it's that delicate balance. But do you anticipate being able to be at least flat in second half versus first half, are you going to pull back on buybacks or be even more aggressive?

[Enrique N. Mayor-Mora, Executive Vice President and Chief Financial Officer at CarMax]

Hey, David, yes, thanks for the question. And as you pointed out in the second quarter, we are on the same pace as we were in the first quarter, so continue to buy back our shares. But I'd tell you that our capital allocation philosophy remain first and foremost, our cash goes into growing the core business, so that's our retail business, it's our wholesale business, is our CAF business and making sure those are in a position to continue to grow.

From there, we also look for growth opportunities, the investments that we make and then we return capital back to shareholders, so our philosophy has remained the same.

[David Whiston, Analyst at Morningstar]

Okay. And just on your SG&A control, I just want to make sure I understand the comment you made earlier on staffing, are you doing any replacement hiring if someone does leave voluntarily?

[Bill Nash, President and Chief Executive Officer at CarMax]

Yeah, so we -- we don't have a pause on hiring at this point, we are very strategic. We have a prioritization of hiring. So as folks leave in and the positions, critical positions we absolutely will replace them, but at the same time if you have a vacancy, you want to make sure, okay, is this something that supporting our our near-term initiatives that kind of thing, but while we prioritize, we have not paused overall hiring.

[Enrique N. Mayor-Mora, Executive Vice President and Chief Financial Officer at CarMax]

Yeah and just to be clear that, managing headcount is also done through attrition as well right is how we've been managing that. So you will see those benefits again more sharply as we progress into the, into the future quarters.

[David Whiston, Analyst at Morningstar]

Okay, thank you.

[Bill Nash, President and Chief Executive Officer at CarMax]

Thank you.

[Operator]

And it appears there are no further questions at this time, I'd like to turn the conference back to Bill Nash for any additional or closing remarks.

[Bill Nash, President and Chief Executive Officer at CarMax]

Thank you. As always, I want to thank our associates for everything they do, how they take care of each other and the customers in the communities. Again my thoughts are definitely those being impacted by the hurricane, please, please stay safe. Thank you all for joining the call and we'll talk again next quarter.

[Operator]

[Operator Closing Remarks]