Q1 2021 Carmax Inc Earnings Call
[music].
At this time I would like to welcome everyone to the current fiscal 2021 first quarter earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question answer session.
Thank you.
I'd like to turn the call over to see see fairly Vice President Investor Relations.
Thank you Carol.
Good morning, Thank you for joining our fiscal 2021 first quarter earnings conference call I'm here today with Bill Nash, our President and CEO, Tom Reedy, Our executive Vice President Finance, and Enrique Man Mora, our senior Vice President and CFO.
Let me remind you are statements today regarding the company's future business plan prospect 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 management's current knowledge and assumptions about future events that involve risks and uncertainties.
That could cause actual results could differ materially from our expectation.
And providing projections and other forward looking statements the company disclaims any intention or obligation to update them for additional information on important factors that could affect these expectations. Please see the company's form 8-K issued this morning and its annual report on form 10-K for the fiscal year ended February 29, 2020 filed with the assay.
C.
Should you have any follow up questions. After the call. Please feel free to contact our Investor Relations Department at 8047 470 for two to extension 76 five.
Lastly, let me. Thank you want advance for asking only one question and getting back into queue for more follow up bill.
Great. Thank you Stacy good morning, everyone and thanks for joining us.
Before I get started I wanted to comment on the significant so social challenges, we're facing as a country.
Carmax, we stand United against Rachel injustice hatred and violent I'm proud that our bodies have always been focused on doing the right thing in treating everyone with respect regardless of race ethnicity her background.
We need to do better as a company and as a country.
I want our associates communities and shareholders to know that we're committed to doing more.
Change must start at the top and that's why I'm personally champing. This to ensure we make a positive difference for the future.
Now moving to a highlight for the quarter.
As you read an earnings release. This morning, our first quarter performance was significantly impacted by the Corona bars.
At the peak in early April sales were down more than 75%. During this time, 95% of the country was under shelter in place orders and approximately half of our stores were closed or under unlimited operations due to the mandate to public health officials and government agencies.
Limited operations means the stores could sell cars, but were limited to appointment only curbside pickup home delivery or some combination of all three.
Social distancing guidelines in occupancy restrictions also limited operating capacity at our open stores, including our largest stores, which prior to the virus routinely saw more than 100 customer shopping in a store on any given day.
To put this further into perks perspective, more than 80% of the days in the first quarter were impacted by stores that were closed and or under limited operations as of May 31st of all of our stores were opened but we still had more than 50% of our stores running with occupancy restrictions and more than 10% with limited operation.
As I described earlier.
Since we believe our first quarter results are not indicative of future trends, we will not spend a lot of time of commentary that was included within this mornings release.
But we will provide insight into how we navigated the crisis recent trends and near term strategic priorities. We believe create opportunities to further distance ourselves from other used car retailers and thrive in this new environment.
Let me start by saying how proud I am of our associates response to this challenge really challenging and rapidly changing environment.
We continue to live or core values every day by taking care of each other taking care of our customers and getting back to help our communities.
To start of the pandemic, we had to make an extremely tough decision deferral or more than 15000 associates due to store closures and lower demand.
I'm pleased to say that as of today, we've called back more than 85% of these that associates and we expect to return to normal operating levels in the very near future.
We've accomplished a lot this quarter. Our teams were quick to react at the start of the pandemic implementing robust plans to reduce the risk of exposure and further spread of ours in our stores as well as following the mandates of public health officials and government agencies, which were changing daily.
We introduced social distancing and sanitation procedures to reduce the risk for our customers and associates.
We also launched new initiatives such as contact was curbside pickup a temporary extension of our 90 day warranty and cash payment assistance to meet the near term needs of our customers.
We quickly shifted our entire wholesale business from in person to online auctions and we continued to keep our appraisal and open were where possible for customers, who wanted to four needed to sell their cars.
In addition to keeping our stores open and selling cars to customers. We were very pleased with our margin and inventory management for both retail and wholesale and the steepest depreciation environment we've ever experienced.
We also exited the quarter in an even stronger liquidity position than we had entered.
Since hitting a trough in early April we've seen or sales progressively improved as stores reopened occupancy restrictions start to ease and customers began to reengage in car buying.
Looking at more recent performance, we're encouraged by the trends we experienced in late May early June web traffic is up year over year in reaching new highs a reflection of the great work, our marketing team is doing to capture demand in pay channels and strength and non brand FCO performance.
In addition leads coming into our customer experience centers or Ccs continue to increase week over week.
Although we have four stores still unlimited operations in more than 50% with occupancy restrictions for the first two weeks of June our comp unit sales have been within 10% of last year sales with many stores comping positively.
We recognize the current environment has accelerated the shift in consumer buying behavior.
Customers are seeking safety personalization and convenient <unk> now more than ever and how they shop floor and Bob vehicle.
For us this reaffirms that our strategy is the right passport and the current environment creates a unique opportunity for us to accelerate our omni channel experience and other digitally driven investment.
Before the crisis, we were already making significant investments in digital merchandising online financing and customer lead management tools as we rolled out our new omni channel experience.
It's an experience that gives customers the opportunity to buy online in store for seamless combination of both.
We expect to complete our omni channel rollout in the second quarter and are focusing our efforts on optimizing this customer experience with new enhancements.
Our proven business model and ability to act quickly allowed us to meet consumer expectations, while remaining financially strong.
This in turn enables us to continue to aggressively invest in our core business and pursue new opportunities for growth, which will speak to shortly.
Right now I'd like to turn the call over to Enrique who will provide a financial update and then Tom will provide additional detail around customer financing.
Thanks, Bill and good morning, everyone.
Our diversified business model solid balance sheet, and strong cash generation position us extremely well to manage through challenging times.
This strength also allows us to be opportunistic in the short term, while maximizing our long term growth and earnings potential.
Further distancing ourselves from our competitors.
I'll begin with an overview of our operating performance followed by a review of our financial position.
On the GPU front, our teams did a great job managing margins, despite a period of unprecedented marketplace depreciation and operating limitations.
Hi, GPU of $1937 for the first quarter represented a decrease of $270 per unit versus the prior year.
Our wholesale gross profit per unit was solid at $970 down by only $65 per unit versus the prior year quarter. This was despite sharp declines in wholesale values in late March and April.
Our strong GPU management is a testament to the strength of our professional buyers are proprietary algorithms for buying selling and appraising cars and our experience in managing through challenging times.
Our wholesale business experienced a 48% decrease in year over year unit sales.
Wholesale unit sales were negatively impacted by lower appraisal traffic from stores being close or having limited operations as well as a decline in our buy rate.
During the second half of the corridor, we began to see steady improvement in both areas as the country began to reopen and our options transitioned online.
Our sell through rate at our options in the quarter was consistent with our historical rates have over 95%.
For the quarter other gross profit decreased by approximately $89 million. This was driven by $55 million decrease in service department profits and a $38 million decrease in any revenues.
The decrease in any profit is attributable to the decrease in used units sold slightly offset by a 7 million dollar benefit related to the receipt of profit sharing and favorable cancellation reserve adjustments.
We were also pleased to maintain DSP penetration rates above 60% for the quarter.
The decrease in service profits reflects overhead de leverage as well as the pay continuity, we provided our technicians by a reduction in production.
Service profits also continued to be adversely affected by the increase in our post sale warranty period from 30 to 90 days and by a crisis driven reduction in retail service [noise].
As you May recall the extension of the warranty from 30 to 90 days was implemented in May of 2019.
As a result of the recent improvement in sales in May and the first part of a June we are ramping production to increase our inventory levels. We therefore expect continued service inefficiencies in the second quarter as it takes time to return production to a normalized operating state.
During the first quarter as sales began to be negatively impacted by the pandemic. It was important that we aligned our operating expenses with the state of the business at the same time, we took advantage of our financial strength to continue making investments in our omni channel experience and other digital initiatives that provide us with the current.
Manage.
For the quarter SG in a decrease by more than 20% or a $116 million.
This is due to a decrease in variable expenses associated with the reduction in sales volume. In addition to temporarily furloughing associates, reducing advertising spend and aligning other overhead costs to the business.
As you know for the quarter also benefited from a 40 million dollar gain on settlement of a class action lawsuit and the $17 million reduction in stock based compensation expense.
As the business improves we expect or SGN eight costs will ramp as associates return from furlough, our advertising spend increases based on increasing demand and we continue to invest in strategic initiatives, which bill will discuss shortly.
Now I'll provide you with an overview of our financial position.
We ended the first quarter and a stronger liquidity position than we started.
As of May 31st we had approximately $660 million of cash and cash equivalents on hand.
And $1.08 billion in unused capacity under our revolving credit facility.
This compares favorably with a $700 million and $300 million, respectively. We had at the end of March and that we announced in our April 2nd fourth quarter call.
We were able to increase our liquidity by selling through inventory and quickly aligning cost to the lower volume.
We did this while continuing to invest in their omni and digital experiences.
From a debt perspective, we ended the first quarter with approximately $1.7 billion of long term debt, excluding non recourse notes payable.
Consisting of approximately $370 million outstanding under our revolving credit facility $800 million of senior notes and term loans and approximately 535 million in financing obligations largely related to sale leasebacks on select stores.
It's important to note we have no near term maturities as the earliest isn't 2023.
We ended the quarter modestly below our historical leverage target of 35% to 45% adjusted debt to capital when netting out the approximately 660 million.
In cash we accumulated.
During the first quarter, we opened four new stores that required minimal capital spend to complete.
Previously we mentioned it was our intent opened 13 stores during fiscal year 21, and a similar number of stores in fiscal year 22.
We continue to pause on any additional suppose spend on store expansion activity in F. Why 21, and we'll revisit this decision later in the year.
In addition, while we remain committed to returning capital to shareholders. Our share repurchase program is currently on hold as well.
We are extremely proud of our ability to improve our liquidity position during a very challenging quarter. While at the same time continuing to push forward investments in our omni and digital initiatives.
All of this positions us favorably to profitably grow market share as the economy and consumer rebounds, I'll now turn the call over to Tom.
Thanks, Enrique and good morning, everybody.
Since the vast majority of customers, who purchase a vehicle obtained some sort of financing.
It's important that we ensure a broad range of customers have access to lending and all economic conditions.
So having cow along with the diverse group of partner lenders recognize the value of Carmax has origination channel allows us to consistently provide high quality finance offers to our customers.
First quarter, our lending channel continued to deliver providing offers to 97% of customers applying for vehicle.
Having no captive finance arm offers numerous contributions to the business model that are difficult to replicate.
Within the origination channel Caf captures considerable finance income.
While generating some incremental sales.
Caf fully services all of the customers and finances.
Continuing carmax is outstanding brand promise throughout the life of the finance contract.
We have more than 800 cap associates in the entire team did a phenomenal job. This quarter quickly mobilizing two were remotely while responding to the increasing demands of our customers.
In mid March as the pandemic escalated, we put in place a variety of measures of Caf to help our customers.
This includes the spending repossessions waving late fees.
And providing payment relief under a disaster policies.
Our service offering did evolve throughout the quarter as we focused on supporting our customers while also protecting our portfolio.
Similar to auto to our retail and wholesale business.
Cash performance was also impacted by the krona virus.
For the quarter originations decreased substantially due to close stores and lower sales demand.
In addition caf penetration.
Three they pay offs decreased to 36.1% from 41.4% a year ago due to the shift in the customer credit mix.
Some temporary underwriting adjustments in certain pockets focused on preserving our high quality portfolio.
And some testing of loan routing to our third party partners.
Tier twos penetration increased to 28.5% in Q1 from 20.3% last year as it benefited from caps routing test and to changing customer credit mix in the quarter.
Tier twos conversion also remained strong.
Tier three for the first quarter increased to 14.5% from 11.5% a year ago as it also benefited from the changing customer credit mix.
Caf income for the quarter was $51 million.
Which was predominantly affected by the impact of the increase in this quarter's provision for loan losses to $122 million, which understandably a significantly up from $38 million in Q1 of last year.
For the first quarter, the any reserve balance was $437 million versus 147 million a year ago.
The significant increase in the loss reserve arose from two factors.
First the required the adoption of the new current expected credit loss accounting standard.
Which is commonly referred to as Cecil.
And second and unfavorable adjustment for experience arising from the front of ours.
[noise] upon the adoption of Cecil we recorded a 202 million dollar increase in the allowance for loan losses.
On the first quarter opening consolidated balance sheet.
With a corresponding adjustment of $153 million net of tax to retained earnings.
As previously discussed the most significant element of Cecil requires us to reserve for expected lifetime net losses.
Whereas previously we reserved for the following 12 months.
In addition sees the requires incorporation of economic adjustment factors as component in the lifetime loss projection.
Just to be clear the initial adjustment for the adoption of seasonal ran through retained earnings it did not impact Q1 provision for losses.
Post adoption any changes in the loss expectations are applied to the entire remaining life for the portfolio and run through the provision in accordance with season.
The $122 million provision for loan losses in the first quarter.
Includes an increase of $84 million on our estimate of lifetime losses for receivables on the books as of the end of Q4.
This isn't nearly 25% increase on our expectations largely resulting from the current of white voters turmoil and worsening economic factors.
The remaining $38 million.
Largely reflects our estimate of lifetime losses on this quarter's originations.
As a result, our loss reserve is now 3.32% of ending managed receivables.
30.4 billion.
Recall this includes cash tier seres sequels, which represent roughly 10% of the reserve and 1% of the portfolio.
With the underwriting adjustments I mentioned earlier, we are currently targeting new loan originations.
Toward the higher end of our historic target range for cumulative net loss, which is two to two and half percent.
As we mentioned last quarter cap is not originating tier three loans at this time.
We believe our efforts to help customers minimize defaults and maximize the ultimate flexibility loans are having an impact.
At this time delinquency rates are lower year over year. However, this number is somewhat distorted due to payment extensions that have been granted.
As one would expect payment extensions spiked in April and have declined significantly in recent weeks as customers have exhibited the ability and willingness to pay.
Going forward, we will continue to manage payment extensions with the focus on providing our customers with appropriately relief.
Well at the same time protecting our portfolio.
We have demonstrated an ability to finance cap receivables and support the core business with the execution of a $1.15 billion as transaction in April.
And we maintain warehouse lines totaling 3.5 billion of capacity.
Which 1.55 billion was available at the end of May.
Finally, we strive to provider customers with an iconic experienced during the car buying process and they are multiyear finance experience.
Like our norm, our omni channel investments, we've been making large large investment in our auto finance customer platforms.
That will provide more opportunities for customers to self serve and provides flexibility to offer more customized experience.
We look forward to rolling out this technology and there were 22.
Our expertise resources and strong lending partnerships remain instrumental in helping us successfully manage through this challenging an ever changing environment.
I'd like to take a moment I think our teams in Atlanta enrichment for their dedication and hard work.
And now I'll turn the call back over to build great. Thank you Tom and Enrique.
[noise] a record sales earnings and market share gain last year combined with the changing consumer behavior in favour of omni channel offerings validate our strategy as the right path for.
We believe the Carmax is unmatched in the industry as an omni channel used car retailer and now more than ever customers want to personalize seamless and multichannel experience that allows them to shop on their terms, whether that is online in store or a combination of but.
Over the past several years, we've invested more than $300 million in digital initiatives technologies and our associates.
These investments focused on modernizing our systems, expanding our digital offerings and reorganizing ourselves to innovate quickly while capitalizing on the inherent advantages to being a larger company.
Hi, I'm extremely proud of how these investments have been powered us to quickly adapt to an ever evolving consumer and operating environment.
Also excited about the opportunities we've set ourselves up for in the future.
The priority of our near term strategic investments will focus on our customer experience vehicle acquisition and our wholesale business. In addition, we will continue to assess opportunities to become a leaner more agile and more cost effective organization over the long term, which in turn funds new ways to evolve and grow.
Our omni channel offerings for the next evolution of the exceptional customer experience that Carmax has already known for providing a truly unique retail experience by personalizing each customer's journey through multiple challenge channels is a significant differentiator for us.
With the rollout of omni channel almost complete our focus is turning towards improving and evolving this experience.
For example, last year, we began testing a post sale home delivery process, where customers can buy a car fully online afford has delivered to their home.
Well, most customers prefer to see and drive vehicles before purchase some want to purchase without taking these steps. It is our goal to quickly scale. This capability nationwide by the ended this year, we're allowed by law for any customer who wants to shop. This way.
Another experience here that we will continue to focus on is our centralized ccs.
While we know they will provide significant long term benefits in the near term they will run with some inefficiencies as they ramp.
Opportunities exist to drive effectiveness through improved associate training and specialization of roles.
We also see opportunities to gain efficiencies through automation data driven algorithms and smart routing to get the right customer to the right associate at the right Tom.
When it comes to vehicle acquisition, we are the largest bar of used vehicles, which provides us with unique avenues to efficiently source cars.
In the near term our investments are going to focus on improving our core buying channels and opening up new buying channels.
We will also continue to invest in modernizing our wholesale auction platforms, which will enable us to operate all auction simultaneously online and in person.
Finally, there are variety of areas, we're looking at to become leaner more agile and more cost effective over the long term. These include store and reconditioning efficiencies in adapting our workplace for the future further separating ourselves as one of the best places to work in America.
The rapidly changing consumer behavior is favoring companies with Omnichannel offerings, and we believe we have the best Omni channel experience in the used car industry, we provide a personalized multichannel experience that empowers customers to buy a car on their terms.
All while taking steps to keep our customer safe across their car buying journey.
It is designed is world class in store experience a world class online experience in a seamless combination of the too.
No other used car retailer is in a position to deliver this iconic customer experience. The way, we can because of our talented associates or physical footprint or online experience or infrastructure and national brand.
We're very excited about the future as we continue to leverage all of our capabilities, while also advancing with new innovations.
At this time, we will be great be glad to take your questions.
Thank you.
This time, we will be conducting our question and answer session.
In order to ask your question. Please press star and the number one on your telephone keypad.
That's a reminder to allow for his many questions as possible. We ask that you. Please limit your questions to one question with one related follow up.
Then reenter the queue for any additional question.
Our first question. This morning comes from Scot Ciccarelli from RBC capital markets. Please go ahead.
Good morning, guys. So everyone is well unhealthy down there.
Well I have a question just regarding your performance I mean, we obviously saw a a very nice sequential improvements in kind of late March early April but the fact is you are still posting negative comps.
Call it 10% or just under 10% when I think we've seen both E commerce competitors and franchise competitors shift to positive comp in their use business. So I guess im wondering are there any structural reasons why carmax would be.
Underperforming others like that magnitude, especially given your outperformance calls in the fourth quarter.
Yeah. So good morning, Scott So I think first of all its a little it's difficult to do comparisons at this point you have to look a growth rate going into it you have to look at growth rates that are currently at I think you have to look at geographic differences.
I also think you have to take in consideration different responses to the mandates because I can tell you even though we are falling mandates.
Every single market, we know that there were others. It we're not calling mandates, but I think the biggest factor I think the structural factor that I think it's important to mine a mind, everyone and I talked about this in my opening remarks about the limited operations and the and the occupancy restrictions now keep in mind, we sell on average more than 300.
Cars a month, we have locations itself upwards of 1000 cars a month and when you start talking about limited operations or occupancy restrictions when they bring to life. We we had docket occupancy restrictions and a bunch of markets, where all you can have were 10 customers in your store in a time, that's 10 total customers. So it doesn't matter there for.
Appraisals, if there, but there for buying for the there for retail you only have 10, so I think that alone the occupancy restricted and the limited operations, probably hurt us a little bit more just because of the sheer volume because again if you if your dealerships to sell 60 to 100 cars, even limiting eliminate to 10 customers at a time is not.
Not as impactful on them as it would be for someone like us.
So with that mind is there any way to potentially estimate the impact that.
Some of these occupancy restrictions has had on your business.
Within the last couple of weeks, yeah, It's it's hard to.
To pinpoint down to specifics you know when in my opening remarks, when we had a at the peak we had half of them that we either closed or or limited operations at that point the bulk of them workload. So we had about 70 stores that were close 35 or under limited operations and then the remaining hundred plus.
I had had a occupancy restrictions and over time, what we saw is that shifted from store closed to limited operations and eventually limited operations to occupancy restrictions now great News is documents you restrictions. Although currently we still have half of our stores that have a occupancy requirements. They are starting to E.
So instead of having only 10 customers or 20% occupancy or 30% occupants, you're starting to migrate more to the 50% hockey occupancy, which makes a big difference. We still have four four stores that are running limited operations right now, but we hope to get them back up to full operations based off the mandates.
In the new in the near future now keep in mind with the rise of the the virus spiking in some markets at any given point in time, we may have to close this year store here and there because of a positive test result in the store and we are normal protocol, we close we do a big deep clean and then we and then we reopened so yeah, if I look back in Q.
One probably it's right around 73% of the days.
We ran with limited operations about 70 little above 70% of the days, we ran with closed totally closed operations and when you looked at them combined about 62 ish percent of the days out of the quarter had both things going on closed and limited operations.
Okay very helpful. Thanks, guys. Good luck. Thank you.
Our next question comes from Seth Sigman from Credit Suisse. Please go ahead.
Hey, guys. Good morning, Thanks for taking the question I want to follow up on that last point. So Bill you did discuss some stores returning to positive in the recent weeks. So if you're running down 10% overall quarter to date. It does imply pretty big gap still across the store base. So I just wanted to confirm is that is that purely the occupancy restrictions or there are other regional differences in any other.
Trends that maybe you can speak to across the store base and then if you can any way to give us a sense on how positive or how many stores are positive versus not that would be helpful. Thanks, yes. So regionally if you look at it throughout the quarter. Obviously, there were certain markets that were a lot more restrictive for a lot longer time period and some of the way.
Co stores.
Come to mind, so right now I think the occupancy restrictions.
And the limited operations are the big driver of the difference between keep in mind, there's lots of different mandates out there by local level and so the more restricted the mandates are they more it's going to have an impact on our business. So thats really whats driving I think the the different performance as well as you know some of these markets have been open.
Now for three four weeks now other markets are just starting to kind of kind of reopened so I think thats been the that's the big driver, but between the differences, but again, we're we're pleased both with how occupancy is restrictions are starting to ease and we're pleased with.
We do have a bunch of our stores already comping over.
Significantly higher sales last year.
Okay anyway to quantify what significant means how much over last year, well, it's not quite a majority of the stores at this point that we do have Ah Ah. We did have many stores that are comping.
Okay perfect. Thanks, very much thank you.
Our next question comes from insurance Axiom from William Blair. Please go ahead.
Hi, good morning, I will.
Morning, I was hoping you could talk about some of the since you alluded to in consumer behavior and put some more numbers around that obviously, you've been rolling out Omnichannel and you rolled out curbside pickup pretty aggressively earlier in the quarter.
What kind of opt in rate did you get on either delivery or curbside pickup.
Occasion on how that's also trendy and as markets reopened would be I think useful.
Yeah sure Sharon So first of all the way I think about omni channel experience I don't necessarily measure it or kind of through alternative delivery, although I'll speak that to answer your question. The way I think about the omni channel experiences how many of our customers are.
Engaging with us online with RCC and prior to the virus hitting it was roughly about 50% of our sales were coming through engagement with our Ccs fast forward to listen to now that number is north of 60% and I think thats reflective of customers wanting to do me.
More things online if you look at kind of alternative delivery so for us it's about home delivery.
And curbside at the at the peak when that most stores were closed and you know running under limited operations in the markets. It offered those services combined you're looking close to about 15% penetration the interesting thing though is now.
Markets are starting to open we still see heavy engagement online doing things ahead of time, but customers are still opting to go to the store. So the number has actually settled down now.
Between those two right around 10% little bit under 10%.
Thanks, Thanks for that and if I can follow up with with an additional question just on the TPS treasuries probably quarter I mean, obviously managing inventory very well are you expecting any kind of incremental GPU pressure in the second quarter or do you feel like.
Got to manage through that have lower costs inventory at this point, yeah. I think we're in great shape and I again I said this on the my my opening remarks, but.
The team did a phenomenal job and just to put it in perspective, if you go back to overweight and own on in the in the great recession.
Over the the worst depreciation south cycles over about a years' time, we saw $3500 in depreciation.
And this period over about a five week period, we saw about $2500 of depreciation we've never seen the magnitude of depreciation like we saw this time the team did a phenomenal job rightsizing, our inventory and we certainly did not go into fire sale mode by any stretch it imagination, but we did do strategic markdowns on certain pieces of it.
Inventory to make sure that we got it into the to the right level. So.
I feel really great about our position I feel really great about our margins going forward and assuming that the economy. Obviously, there's lots of uncertainty with the economy right now, but assuming that we continue on this cycle I.
I think we the GPU headwinds are beyond us.
Thank you thank you share.
Our next question comes from Seth Fischer from Wedbush. Please go ahead.
Thanks, a lot and good morning on my first questions just around.
Rich strange on him on sales that you Havent mentioned, so far in the Tonight first is on inventory and second is on cap underwriting any sense of how you can quantify how much does held back your sales in recent weeks.
Yeah.
Ill talk about the inventory so.
Obviously, when the when the virus hit our immediate focus and when the virus hit our media is kind of crisis focus was really about okay, the health and safety and financial well being of our associates, the health and safety of our customers. But then also the financial security of the organization and part of that financial security was rightsizing, the the inventory and we.
Always make sure we had the inventory that's appropriate for sale. So this was no different when we saw the demand go down we absolutely got into the mode of Oh, Okay, let's get our inventory rightsize now the great news is.
The sales have come back better than what we expected over a quicker quicker Tom peers, and we've got our production facilities, all back up and operational but it is a bit of a headwind right. Now if you look at the sales demand and our inventory is lighter than where we want to but you know truth wed rather be on this side of the equation than the other side of equation. So again I think it's the.
The team did a great job and we'll work over the next few weeks to get the inventory rightsize, we've already started to fill backup our pipeline. Our sellable inventory is less down I mean, it's more down year over year than our total inventory. So now it's just a matter of getting it getting it produced which our teams do a phenomenal job on.
And then I'll, let Tom talked a little bit about caf except.
'cause there's so many moving parts, it's really hesitate to try and cheese out precise numbers on the drivers of sales but.
What we saw during the during the quarter was not just a shift in mix of overall credit for customers, but even a shift in the mix within tier one and that means a greater proportion. We can you look at how capital groups. We have segments that we that we that we buy and a greater portion of the tier one mix was it the lower most higher.
Higher loss segments. So in order to preserve our portfolio Financeability as we target on a go forward basis, we've made some I would call it fine tuning by carving out for at least for the time being some of those highest loss.
Segments.
And what does that mean that means that those those loans go down to tier two and they see them first rather than us.
We know that in overall there is some pressure on conversion when you got to tier two for the offers aren't quite as nice as what they see a cap.
But for the most part our tier two lenders are delighted to see those and accommodate them because it's the high end of what the the typically buy so we did see them taking up for the most part I think there was some pressure maybe one or two points on sales.
Based on the adjustments, we made but as we seek credit mix can go back to normal and that means.
Both the increase in the in the overall FICO score and mix within tier one that pressure will diminish because you know a lower percentage of the portfolio is.
I'll go into those categories and is getting pushed down to tier two.
Hey set the other than that the other thing I mentioned that you did not mention as far as a headwind is you know I would also considered the.
The ceases to be a bit of headwind this quarter as well because of that that big jump up that we saw from folks engaging online we expected to get there. We had no idea we're going to get there over about a four week period. So.
We had to ramp up the Ccs, which.
In the near term is a bit of a headwind our service levels, we're not at where we want them to be but again, we're we're fixing that right now and that will continue to improve as well.
Thank you and just as a follow up climb as it relates to your loan loss provision your current balance which is 3.3% of.
Launch that's up in the range that we saw that peak of the great recession and for loans originated in quarter, 3.8% is well above that understanding that there's some shifts in the credit profile of what you originated this quarter, but how do we think about where that loan loss rate and provision is likely to go going forward.
Well at this at.
The way things work, we make take all or our best information and make an estimate.
On where we expect the portfolio to end up so for existing loans that 3.32.
Yes.
Our expectation based on everything we know today, we would not expect that to.
Evolve unless we were to learn new information or new things were to evolve and the economy.
As far as new originations I said, we've made some adjustments to our origination strategy and we expect that those should evolve.
In the higher end of our target ranges due to two and a half that's what we're striving to do and that I think insurers of financeable portfolio and keep keep things going.
Understood. Thank you Uh huh.
Our next question comes from Mitch.
From Jpmorgan. Please go ahead morning.
Hi, good morning, Thanks for taking my questions.
Just one clarification from prior question that than what.
Follow up.
So dark station or the 10% to 15% penetration levels, you've talked about for all the earlier that does that does that mean that 10% to 15% of sales unit sales right now is completely through the automated delivery channels or.
So just want to make sure like understanding that definition directly yes. So they tend to so at the peak of the virus. When we had the most stores closed during the limited operations. We saw in the markets. The eligible markets that have the home delivery and the curbside we saw at peak combined peak close.
As to 15% if you looked at it as a percent of total sales across the whole organization.
It was around 10% and it's settled in it was a little bit above 10%, but it's now settled back into a little around 10% a little bit under under 10%.
Got it so that's I don't mean like around like 15000 units on so last quarter world through the.
Through the alternative channels that yes.
Roughly at the little bit higher.
Got it. Thanks, Thanks for clarifying clarifying that and then just just wanted to go dark side of the accretion.
Well just through the prices processors and you know the four years and he has gone reductions.
We should we expect to see any permanent reduction that gives you any when you're back to more normalized levels of sales and relatedly. During the week Onein prices you did see significant improvement inefficiencies related to reconditioning, whether they're going to structures shipping. Your we didn't see view do we.
Should we expect something similar or maybe a bit more magnitude. This turnaround is low.
No just just new cars and those two points. Thanks, Yeah, I'll talk about the reconditioning side, and then I'll, let Enrique talk about the generic so.
On the reconditioning side as I said earlier, we're going to continue to look for ways to take cost out the reconditioning will be one if you remember back to await we had significant improvements there what I would say as I think they're gonna be incremental improvements in the reconditioning. So I wouldn't say that you're going to see back then it was north of $250 per unit.
There is no big Okay go do this is gonna be $250, there's going be a lot of incremental things were going to be rolling out our new version of flow into all the stores, we will pick up efficiencies there as well as we'll continue to look for procurement efficiencies both in the reconditioning side, but but in the store side as well and all that Enrique talking about the US you know.
Yes from an M&A perspective, you know within the quarter, we focus our actions aggressively on better aligning what we've traditionally considered as fixed costs relate to match the a lower demand so items like staffing through our furloughs advertising reduction reduction and contractors store base project home office based projects.
Really were all acted on aggressively within the quarter.
But as sales rebound, we do expect these costs to increase as I spoke to earlier, but we're always looking at ways to get more efficient it's too early to tell whether or not there's some systematic opportunities. What I will tell you. Though is that we will continue to invest in our business as well. So we have a strong balance sheet with a strong financial position and it allows us to continue to end.
Best in our growth as well.
I think the other thing to add to that if you. If you looked at what we were thinking about before the current of ours were going to be coming into this year, we were going to continue to make investments.
In the past couple of years, we've talked about.
Needing comps in the range of 5% to 8% in order to order to lever. If you looked at what we're looking at coming into this year. If all we have been focused on with omni. The omni experience. We would have we would have levered better than that now we have made the decision to to hit some new strategic initiatives some of which we continue.
Hit ended this into this quarter some of them.
We put on hold but that gives you a little bit of color you know, we still it this year, but a normal year, we would have still been into five to eight range, but it just so hard to know at this point.
Sales come back, we'll we'll continue to adapt.
Got it Greg, but thanks for the color.
Alex.
Thank you.
Our next question comes from I meant to think conditions from Morgan Stanley. Please go ahead.
Good morning. Thank you for taking the question I was hoping you could quantify the the growth in the web traffic and the growth in the lead to the customer experience center that you highlighted in the press release, Yeah. So that growth I was talking about was the first two weeks of June both leads and traffic were.
Double digits.
Well at least in traffic okay.
What was it for the quarter.
For the quarter web traffic was down.
Is about 11%.
And leaves weren't weren't far off from that.
Okay, and then just a quick one here as we think about last few vehicle inventory coming to market there being a pressure on a new vehicle inventory.
Maybe you could talk about the age of your portfolio and you know how well positioned or not you are to be able to sell nearly do vehicles. So to the market that may be demanding them.
Yes so.
You know as far as the the source goes we don't feel like we have a problem on on finding the vehicles were in production mode right now, which is really building the inventory back up at the concern isn't about being able to find the vehicles will be able to source. So I will tell you during the during the quarter pretty much the wholesale market external market froze.
Because a lot of the sales were were closed dramatically low vehicles being offered for sale, but at that time, we weren't out really buying anyway. So it didn't really matter and it's it's gone to the point now where if you look at the volume that you're seeing in the sales and you look at the sales rate that you're seeing the external sales it really have come back there.
Very near getting back to two.
Pre virus levels.
Okay, but are you seeing you selling younger cars are older cars.
Where are you seeing the most demand yes, well during the quarter, we had a little bit of a shift mix to from zero to two year old cars shifted to five plus I'm. So that was that's what we saw a during the quarter. We also saw a if you look at our our average selling price for the quarter. It was.
Up a little bit, but that's primarily due to the fact that we had a shift mix into large SV gas guzzlers, which are more expensive you every year and we were several percentage points up on on that and because a lot of inventory that was sold in March and April was acquired back in the appreciating market time.
Of the pre virus.
Appreciate it.
Thank you.
Our next question comes from Brian Nagel from Oppenheimer. Please go ahead.
Hi, Good morning, Thanks for taking my question when Brian.
Sure.
Last quarter conference call.
No its breakthrough in the beginning of the Cobot crisis. We are you how should we discussed this cut the nature of what was that very quickly diminish in demand through here you are saying today, it's very encouraging that we're seeing this this rather significant sales pick up late in the quarter then into that usually that into the current quarter.
So you've got much better with data watching your customers as well try to figure out kind of what will rebound due to reductions were carmax within retail in general how would you characterize this demand right. Now is it is there is pent up from the weaker sales maybe several weeks ago or do you see underlying.
Real underlying demand taking hold its likely to sustain itself.
Yeah it.
Brian It's hard to know for sure I mean, I think theres, absolutely. Some some pent up demand because people were staying home for for several weeks. So I think there's some of that I think the the cares Act has given some folks money and I think thats one of the reasons why you see the increase in tier three I think that.
You know.
It's a little bit like tax refund money when when folks habit. They tend to go out and that the biggest population that we see that driving our the lower FICO type customers.
As far as the sustainability, it's hard to tell I mean, right now it's such an uncertain environment out there I mean, we've got high on unemployment you've got these spikes in the and the krona virus cases.
You got the social challenges going on so.
No I think we're well positioned and haven't come through this I think were more agile and resilient than we even before so I think we're prepared for wherever it may go but I think it's too early to say hey, this is going to be where this is going to go and it is going to be sustained I think it's going to depend a lot of macro factors, but at what I can tell you is that we'll be ready.
To to pivot anyway, we need to.
Well, it's really helpful. Then my follow up question.
It's a bit of a fall but from the prior question just with regard to inventory.
I know, there's always a lot of who reports out there right now, but as we think about you'll get that what's that spread if you will between new and used car pricing given what you're seeing right now how is that shaping up in this environment. As you look forward I mean, your sand or are there or you see for whatever because of the dynamics are shifting dynamics.
Better inventory acquisition opportunities that could that could basically help to bolster sales down the road.
Yeah. So during the quarter really what's the kind of a non story as far as the gap widening or or collapsing and I think as we look forward. There's a lot of factors that you have to kind of way and what's going to happen with new car as far as the manufacturer and how much production, they're going to actually be able to do there. There you know they're struggling to get open back up again and get no.
[music] car out new cars out there. So I think that'll be something that weighs into it I think there's probably a lot of wholesale inventory that needs to be released through the sales that kind of got backed up a little bit so I would expect to see.
Additional wholesale inventory being offered.
So I think it just depends it depends on the new car and how that continues to progress as well as.
You know when the timing of some of this wholesale inventory really starts to come out I mean, I talked about the depreciation during the during the quarter, but you know what's is remarkably.
Which is remarkable as the decline was how quick it's come back and so I think you know the you know the wholesale markets is pretty is pretty self regulating and at some point. It gets too hot it will just slow down sales and it corrects itself, but I.
Our next question comes from Craig Kennison from Baird. Please go ahead.
Hey, good morning. Thank you for taking my question wanted to ask about the wholesale business that pivot to all online wholesale auction sales happen really fast, but tremendous execution on behalf of that team I would like to understand the economics of that digital only model versus your traditional format you.
Experiencing any differences in like the proceeds per unit or what you see as your cost per unit and do you see this is permanent change. Thanks, yeah. Thanks for the question Craig and you're right. It was it was awesome. The team did a phenomenal job we've talked on the past. The fact that we've been testing some simulcast tech.
Oh, Gee and really within a matter of about two weeks got all of the sales converted over to the the virtual platform is truly truly remarkable that team did a phenomenal job as far as the economics. It's a it's a little too early to talk about that but what I will tell you is during that time period, we didn't see any degradation of dealer.
So we already had a very high dealer to car ratio and obviously the more.
Dealers you have the more.
Your vehicles will bring as far as price. So I think that our physical presence it having online auctions, but also complimentary it I'm, sorry, having the physical presence and having.
Running these auctions and then also complementing it with the online is great because I think it will continue to open up the sales even more dealers and when you have more dealers theoretically you're you should be able to get more value for your cars. If you can get more value for your car than you venue for US you want to put as much on it for the consumer as we can.
We can buy as many unit as possible. So I think it's a little early but I would expect on that the having the online will make it.
Available to more dealers.
Thanks Bill.
Our next question comes from Michael Montani, you from Evercore. Please go ahead.
Hey, guys. Good morning, Thanks for taking the question.
First off wanted to start on the advertising front.
Curious too to see Bill if you could give any color about where you see kind of full year, and even next quarter or kind of AD spend per vehicle going.
Just in light of the fact that the sales is recovering and then I had a follow up on multi channel.
Yes so.
You know if the virus hadn't been here I think we had already talked about last year, we stepped up a little bit on a per unit basis, when it came to advertising.
This year, we were planning on if you look at it on a per unit basis. That's the way we look at it we would have spent a little bit more and really a lot of that was also just fourth the omni channel rollout, obviously, we pulled back on all different pieces of advertising during the during the quarter, but we've been ramping it back up again, and so I would expect the rest of the year to.
To get more on par assuming that business continues like this I would expect to get more on par of what we would have been expecting I had the virus not not hit us.
Okay, Great and then I'm, just a multichannel front.
No in the release, you mentioned that a lot of that rollout was now kind of completed and so I just wanted to drill into that I understand better.
No we like how many of the stores.
Currently are offering ship to home or our home delivery capabilities.
And then.
Secondly, as it relates to the Ccs.
No at what point in time could we anticipate that those would start to.
Generate kind of net favorability and efficiency gains as they gain scale. Okay. So on the omni channel experience at the ended the quarter.
We were roughly let's say it was available omni channel experiences was roughly available and about 65% of the markets were now a in ER. The 70 ish mid 70 ish will be done with rolling the omni channel out next quarter now as far as home delivery goes when we're all said when we get rolled out omnichannel rolled out everywhere.
Our home delivery will probably right off the bat at that point all of you be available to about 85% of the markets just because there. There's some small one off market since of different logistics will have to have to work through as far as the CE CE efficiencies.
Coming into this year, we didnt expect to see see efficient we didn't expect it's easy to really become.
Efficient because we knew we were going to continue the ramp of omni and as we're ramping up.
We knew they were going to be inefficient. So I would expect the efficiency is really to really take hold.
And next next fiscal year, but I tell you a I'm really pleased with some of the progress we've already made on the conversion. If you look at the conversion the Ccs versus the conversion of our old our old process. We continue to see improvements there and so we're excited about we think it's a it's going to give us a lot of great great benefits as we look for.
Great. Thank you.
Thank you.
This concludes our question and answer session as we have reached 10 am.
Those are meeting in Q can reach into two investor relations to have their questions answered.
Ill now turn the call back over to Bill match for closing remarks.
Great. Thank you. Thank you Carol.
Yes, So look I would you say look we never an experience such a rapidly changing environment and in all aspects of our business whether its retail its wholesale for caf opening remarks, I talked about all the different accomplishments and I tell you. It's really it's because of the strength of our culture. The unique business model and our financial structured it really has enabled us to navigate all this we feel really good.
Good about our investment in our passport and we believe our omni channel experience is fundamentally different than any other used car retailer 'cause it that back. It is designed in the world class in store a world class online, but equally important it's a world class combination of the too.
I want to thank all of you for your questions today. Thank you for your support and as always I you know I have to thank our associates for their continued dedication to living our values each and every day.
You are the success of Carmax. It. Thank you for what you do and we will talk again next quarter.
Ladies and gentlemen, this does conclude today's conference call. Thank you for participating you may now disconnect.
Yeah.
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