Q2 2021 Carmax Inc Earnings Call
This time I would like to welcome everyone to the Carmax fiscal 2021 second quarter earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session.
Thank you.
I'd like to turn the call over to Stacy Frole, Vice President Investor Relations.
Thank you good morning, and thank you for joining our fiscal 2021 second quarter earnings Conference call.
I'm here today with Bill Nash, our President and CEO, Tom Reedy, Our executive Vice President of Finance, Enrique Mamtora, Our senior Vice President and CFO and John Daniels, Our senior Vice President cap operation.
Let me, let me remind you our comments today 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 nine.
18 95. These statements are based on management's current knowledge and assumptions about future events that involve risks and uncertainties that could cause actual results to differ materially from our expectations and price.
In providing projections and other forward looking statements the company disclaims any intent 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 SEC.
C.
Should you have any follow up questions. After the call. Please feel free to contact our Investor Relations Department at eight zero for Southern force out in the real for two two extension 7865.
I also would like to thank you in advance for asking only one question and getting back in the queue for more follow up.
Lastly, I want to take a moment to personally thank less counter who is retiring from carmax lots has been an integral part of our IR program for almost 20 years and I'm sure you will all agree she'll be deeply Matt Hello.
Hello, We wish you all the joy and happiness retirement can bring.
No.
Great. Thank you Stacy good morning, everyone and thanks for joining us.
As you read in earnings release. This morning, we delivered a record quarter with sales up 3.3% to $5.37 billion net earnings up 27% to $297 million EPS up 27.9% to $1.79. This.
This performance was the result of strength across all aspects of our business retail wholesale and Caf we are.
We are proud to be the nation's largest most profitable retail of used cars.
I'm also proud to say that this quarter, we completed the rollout or omni channel offerings. This has been years in the making has required a remarkable level of focus and change across our entire organization.
During this time, we have a ball nearly every aspect of our business from how we support and interact with our customers how we structure our staffing to how we bought sell and deliver cars.
Our omni channel experiences built to provide a personalized multi channel experience that empowers customers to buy a car on their terms.
It is designed as a world class in store experience a world class online experience and a seamless integration of the two giving us the largest addressable market within the used car industry. No. Other used car retailer is in a position to deliver this iconic customer experience the way we can.
Now turning to our results.
For the second quarter, we achieved a 3.9% increase in total used units sold and used unit comp growth of 1.2%.
In June we experienced a high single digit negative use unicom, which was more than offset by positive comps in both July and August the improvement in sales was the result of a variety of factors, including solid execution in operations Finance and marketing in addition to a strengthening used car sales environment.
In the quarter, we saw solid growth in web traffic, averaging approximately 29 million visits per month to Carmax dot com.
During the second quarter ourselves salable inventory was below our targeted level as we saw rapid increase in demand from the first quarter.
For the past three months, our teams have done a phenomenal job buying and producing vehicles at record levels, increasing sellable inventory by more than 50% in the corner today.
Today I'm pleased to report that we successfully ramped inventory to targeted levels, providing customers with more than 55000 vehicles nationwide the largest of any used car retailer.
We offer a broad selection of inventory with a focus on zero to 10 year old vehicles. This quarter. We saw five to 10 year old vehicles increased to 27% compared with 22% last year as a percentage of our sales mix, reflecting customer demand for older and less expensive vehicles.
Gross profit per used unit for the quarter was 22 14 up $31 per unit from a year ago.
For wholesale poor performance was supported by strong appreciation in the market and excellent execution by our teams volume was up 5.1% driven by one more auction date in the quarter and a record bar right. We all.
We also achieved record gross profit per wholesale unit of 1086 in the quarter. The result of strong appreciation in operational execution.
We ended the quarter, we saw depreciation returned to the marketplace. As a reminder, all auctions continue to run virtually throughout the quarter.
As our results show, we have achieved a substantial recovery in our business over the past several months our talented workforce is demonstrated incredible agility and ability to drive change and one of the most challenging environment than we've ever faced we're.
We're proud to say that by the end of July our team was back together again, and we no longer had associates on furlough. We're now actively hiring across the country as we continue to grow our core business enhance our omni channel offerings and pursue new opportunities at this.
At this point I'd like to turn the call over to Enrique to provide more information on our second quarter financial performance and Tom who will provide additional detail around customer financing enrica. Thanks, Bill and good morning, everyone for the quarter, the gross profit increased $6.8 million or 5.8% each.
NPP profits grew by $6.1 million or 5.4% largely due to the increase in used units sold.
In the quarter, we also recognized $8.2 million in extended service plan profit sharing revenues compared with six and a half million dollars recognized a year ago in.
In the second quarter, we maintained our E S P penetration above 60% comparable with the prior year quarter.
Service profits increased four and a half million dollars or 31%, which benefited primarily from the improved sales growth and the employee retention tax credit from the cares Act.
The increase in SPP and service profits were partially offset by a 5 million dollar increase in net third party finance fees attributable to a shift in our sales mix by finance channel.
On the S.G. any upfront expenses increased 2% or approximately $9 million to $490 million.
SGN a per unit was 20 to 56.
Year over year leverage of $44 per unit on the quarter, excluding the impact of stock based compensation SGN, a leverage was $97 a unit.
Notable as DNA expense drivers for the second quarter, where the.
The opening of 14 stores since the beginning of the second quarter of last year, which represents a 7% growth in our store base.
At $12 million or $53 per unit increase in share based compensation expense.
A 7.7% increase in advertising expense and continued spending to advance our technology platforms and support our core and omni channel strategic initiatives.
Our ability to leverage SGN a in the quarter was supported by the decisive actions. We took at the start of the pandemic to appropriately manage costs in a challenging environment, we fair, let associates and froze hiring for a period of time right sized certain functions.
Hi, and other overhead cost to the business and five star store expansion strategy, thereby reducing pre opening costs in the quarter.
We also experienced year over year favorability in the quarter due to lower self insured losses and litigation related expenses.
We remain committed to ensuring we are efficient in our spend and we expect that targeted areas of focus will continue to deliver improvements overtime.
Examples of these areas include improving the efficiencies of our customer experience centers or cdcs. So.
Strategic sourcing and inventory production.
At the same time, we are very bullish about our future given our unique customer offering we recognize that we have an opportunity to capitalize on our current position and grow market share.
Accordingly, we remain in a period of investment as we continue to evolve our omni experience in the areas of vehicle and customer acquisition.
We also planned in the back half of this year to increase our year over year spend in marketing, which bill will address shortly.
From a capital allocation perspective, we remain focused on growing the business, while managing with the appropriate amount of caution given the uncertainty that remains in the macro environment.
Two key updates first we are ready to resume store growth and are currently planning for eight to 10, new stores in F y 22.
And second subsequent to the end of the quarter, we fully pay down the outstanding balance on our revolver given.
Given the turnaround in our business the strength of the credit markets and our solid balance sheet. We are confident that we have the appropriate liquidity and access to capital.
Finally, we ended the quarter modestly below our historical leverage target of 35% to 45% adjusted debt to capital when netting out of cash.
Now I'll turn the call over to Tom.
Thanks, Enrique and good morning, everybody.
Similar to our retail and wholesale business Carmax auto finance and our partner lenders delivered.
With strong conversion and all credit tiers and solid growth from Caf income independent of the favorable loss experience.
As we previously discussed Caf made some temporary underwriting adjustments early in the pandemic with the goal of ensuring financeable tier one portfolio.
While we remain cautious in our outlook. We are pleased with the trends we have experienced to date.
Payment extensions are down significantly delinquencies are trending favorably and our July ABS transaction was well received.
Consequently in the back half of the quarter, we began originating our normal spectrum of tier one business.
Caf also curtailed its in house tier three lending at the start of the pandemic and did not originate any loans through this channel in the second quarter based on.
Based on the trends I just mentioned, we have reengaged in the tier three space in recent weeks.
Now I will turn to performance in the quarter.
Net of three they pay offs they were significantly lower year over year cash penetration was 42.6% compared with 42.2% a year ago.
Tier two accounted for 22.3% of used unit sales compared with 19.7% last year.
In tier three.
Was up to 11.1% compared with 9.6% a year ago.
Year over year.
Caf net loans originated grew by 1% to 1.8 billion.
The increase in used cars sold and penetration rate were somewhat offset by lower average amount finance.
For loans originated during the quarter the weighted average contract rate charged to customers eight 2.2%.
Down from 8.6% a year ago and 8.4% in the first quarter the law.
The lower rate reflects our focus on a higher quality portfolio for much of the quarter.
Portfolio interest margin as a percentage of average managed receivables increased to 6%.
Versus 5.7% in Q2 last year.
Combined with our growth in receivables. This drove an increase in total interest margin of 7.4% independent of any.
Independent of any favorability in the provision for loan losses.
Total caf income for the quarter was up 29% to.
247.2 million.
This improvement primarily reflected a reduced loan loss provision plus the increase in both interest margin in average managed receivables.
The provision for loan losses was 26 million in Q2.
Which results in an ending reserve balance of 433 million.
That's 3.2% of average managed receivables, which is moderately lower than at the end of Q1.
While our loss experienced in June.
Fly in August was significantly favorable to the expectations, we set at the end of Q1.
The loss reserve continues to reflect the unpredictability of the current environment and the highly uncertain computer consumer situation.
Our results in Q2, you will see.
Illustrate the importance of having a diverse group of lenders that can continually deliver high quality finance offers to our broad range of customers in all economic environments. In addition.
In addition, having a fully functioning captive finance arm such as Caf offers numerous contributions to the business model that are difficult to replicate.
Now I'll turn the call back over to Bill Hey, Thank.
Thank you Tom Enrique.
As I mentioned earlier, we've completed the rollout of our omni channel offering the powerful integration of our online and in person experiences give us the largest addressable market within the used car industry along with.
Along with the ability to buy online customers are also seeking experienced guidance along the way we are.
We are uniquely capable of providing this help whenever and wherever the customers want with our centralized Ccs experienced for sales consultants and personalized E commerce capabilities.
Buying a used car is still a highly considered in complex purchase customers don't want to be forced to interact 100% in store or 100% online.
A competitive advantage is giving customers the option to seamlessly do as much or as little online and in person as they want.
Well omni has now rolled out nationwide. It is still early in its evolution and we will continue to make enhancements to meet and exceed our customers' current and future needs.
One area of focus is RCC, although a relatively new capability for us and still maturing they are quickly becoming more effective than our previous model and.
An example of how we're optimizing performance is by leveraging our data advantage and machine learning to ensure we get the right work to the REIT associate at the right time, we can.
We capture a customers online interactions combine them with the information and our customers data Mark and provide a truly personalized experience that is much more effective at meeting the customer needs and improving our conversion rate.
We believe that we have an unmatched opportunity to create a superior customer experience by leveraging our data and technology advantages both online and in store.
Digital merchandising is another area of continuous improvement by the end of this year, we will have rolled out approximately 95% of our photo studios, which provide a more immersive experience with high quality photos 360 degree interior and exterior views feature scoring hot spots and reconditioning with new part call out.
We also continue to upgrade content on our web site to help customers fully research vehicle without ever having to leave Carmax Dot com. All this provides our customers more confidence as they progress online.
The other Ami area focus that I will highlight is our customer hub, which provides customers a means to track the progress they have made both online and in person.
It is here that customers can manage certain aspects of their car buying journey. They can bookmark in say vehicles at selected online they consider the financing pre approval and compare the financing options. They can also get an estimate or an actual offer for their trade in and finally, they can complete the checkout process in the hub for the car they selected online or in store and.
Is that they want to home delivery or a curbside pickup.
Our omni channel experience has been well received approximately 70% of our customers' interacted with RCC. This quarter. Additionally, approximately 50% of our customers' progress their sale remotely up from about 42% pre cobot.
Most of these customers still chose to come to the store to complete their transaction and approximately 30% of our customers still opted for an in store experience only.
Again, the advantage of our business model is that customers have a choice as to how they progressed their experience. This is what gives us the largest addressable market.
We are focused on driving customer engagement strategies to ensure we continue to remain top of mind and the first choice for car buyers and sellers.
We launched a national marketing campaign last year, which has reinforced the strength of our brand and establish a solid platform for future campaigns. We've now introduced our omnichannel offering nationwide accordingly, as we go forward our messaging will focus on clearly differentiating our brand from digital only and traditional dealer brands by demonstrating the benefits.
Omnichannel offering.
Additionally, we will be increasing our year over year marketing spend in the back half of the year to expand our teams and investments in areas such as FCO SCM messaging content and social are gone.
Our goal is to drive high ROI customers to our digital properties, while empowering us to create multichannel personalized campaigns.
We have a unique retail customer experience that we're continuing to evolve to exceed our customers expectations.
At the same time, we're identifying and investing in new initiatives that we believe will also be solid contributors to earnings growth all.
All of this leads to a very exciting future, but none of this would be possible without our great associates.
I want to recognize all of them and the high performance culture. They maintain here at Carmax.
Culture that values, all individuals and perspective.
Over the past several years, we have taken on the largest transformation in our company history evolving nearly every aspect of our business.
We also accomplished all these great results and one of the most challenging environments, we've ever faced and through it all our associates have continued to live our values every day, but putting people first and taking care of each other.
Im very proud of what we've accomplished and I'm excited about the opportunities ahead.
At this time, we'll be happy to take your questions.
Thank you.
This time, we will be conducting our question and answer session.
Ask a question. Please press Star then the number one on your telephone keypad.
To allow for as many questions as possible we have.
We ask that you take some yourself to one question you made then reenter the queue for any additional questions.
Our first question. This morning comes from John Murphy from Bank of America. Please go ahead.
Good morning, guys.
Great execution in this environment is really impressive stuff.
Yes, Bill there's one statement in the press release that it is kind of intriguing you're seeing inventory was a headwind.
Sales in the <unk> in the quarter I'm, just curious if you kind of expand upon that if you think that will be relieved.
Here in the near term it sounds like in September it was to some degree but also as all these omnichannel efforts.
Bear fruit and bring customers in you how do you think about sort of the change in inventory management as your addressable market grows dramatically and you need to inventory more or think about inventory in a different way than you have historically.
Yes. Thank you John well first of all I think omni, Matt omni or not omni it won't change how we manage our inventory I think it's one of the strengths of the of the company that we fine tuned over the last 27 years, and we continue and I I can't say enough about the team I mean bumping up our inventory during the quarter about 50% is truly tremendous and I think in.
Any normal environment, having that amount of of inventory shortage would be a significant headwind to two sales now having said that were far from a normal environment and I think.
It's hard to quantify the exact degree of how much it impacted our sales other than it absolutely had an impact to sales, but no in the current environment. There are a lot of other competitors that were light on inventory you had some stimulus money out there. So it's hard to know kind of what the offsets where did that to that headwind, but again I just go back to saying that the team has done a remarkable job both buying and.
Using to get us into the the spot where we are today. We ended the quarter, we were still light on inventory when we ended the quarter, but as of today, we feel really good about our our total inventory position.
Okay, and sorry, just it just won't fall book would that mean on on the in the future is omnichannel expands I mean would you think you need to bump up your inventories you have to go with that or would you just be turning and be much more efficient on inventory just trying to gauge inventory to go up 10, 2030 40, 50% because these efforts really take off in the third need to be something else in.
The mix or you just mostly it's what.
Yeah, I mean, we went down the omni path a path because we expect this this is a better customer experience and we expect to sell more cars in for selling more cars that will also be reflected in our inventory. We'll have we'll have more inventory, so and I think thats. The way we manage the business for the last 27 years and I don't see that deviating. So as we have more sales will have more inventory.
Great. Thank you very much sure. Thank you.
Our next question comes from Sharon Zackfia from William Blair. Please go ahead.
Hi, Good morning, Good morning, Sharon I guess.
I guess a question on customer awareness of Omnichannel I'm glad to hear you're going to be bumping up the marketing around that in the second half of the fiscal year, but do you have any measures.
As to what kind of broader customer awareness is now.
Nationally versus maybe Atlanta, where you started and then a corollary question to that is the tale. Given this is a long purchase cycle and those early markets do you continue to see that tail of omnichannel relative to kind of the more recent markets, where you've rolled it out if that makes sense. Yeah. So so Sharon I think first of all for the broad.
Awareness I mean, I think now is the time to really let.
Customers know that hey, everything thats been great about Carmax is still there, but we have a lot of new capabilities. So we really havent unleash that up to this point and when we've had some marketing campaigns I can't give any specific market awareness about omni channel, but it is one of the reasons why we're going to step up our advertising.
As we go forward.
As far as how we feel if I look at our older market say, the Atlanta market, we feel great. We feel great about the the gains that were.
The gains that we're seeing in the markets. We also feel great about the awareness because because obviously, it's been around a little bit longer but I do think the advertising message going forward is going to be it's going to be different and we'll we'll make sure that people understand the difference between.
You know us and traditional dealers and online competitors.
Hey, Bill just a follow up how quickly are we going to see the new marketing.
You will see it later this year.
Okay. Thank you.
Absolutely. Thank you Sharon.
Our next question comes from Craig Kennison from Baird. Please go ahead.
Hey, good morning, Thanks for taking my question and so last best wishes to you. Thanks for all your support question on the wholesale business wholesale GPU was up $174, how much of that as a byproduct of higher prices versus a lower cost to process. The vehicle and then to what extent has the pivot to digi.
Oh auctions.
Increase the number of buyers that auction from like a broader geographic radius. Thanks, Yeah. Good morning, Craig Yes. So wholesale performance was was was outstanding and I think a lot of it was driven by the appreciation you know it's interesting as cobot on unfolded, we saw some of the most rapid depreciation in a very short period of time.
We also saw the most rapid appreciation I think from the depth.
Swing and vehicle values. So obviously, that's going up in appreciating that certainly is a tailwind, but I would minimize the execution of our of our teams as well, especially early on in the quarter. There was a lack of supply a lot of this stuff because some of the traditional auctions just weren't open in up in raw.
Running and our team pivoted quickly got the sales all of ourselves virtually they continue to be all virtually we're working through and.
Intimate individual local local mandates as far as when we can open them back up but our goal will be to get ourselves physically opened again, but also complement them. When we had the simulcast and that's the plan as we as we open up.
The new auctions going forward as far as the impact of the digital.
Look I think having digital will do nothing but enhance the overall experience because it will hopefully open up the door to more participants and you know if you have more folks at your auctions hopefully that drops the price up and then we can offer more in our appraisal lane and and I think you saw that I mean, we're really proud we had that record by rate this quarter and it's not a.
It's not by a little bit inspires a lot.
We were.
Traditionally here lately, we have been in the low Thirtys now with this what we saw this quarter. It was the high Thirtys. So it was a it was a substantial step up.
Thank you.
Thanks, Craig.
Our next question comes from Seth Basham Wedbush Securities. Please go ahead.
Thanks, a lot and good morning, good morning.
Good morning, so give us a little bit more color on your gross profit per unit on the retail side through the quarter, how that trended and what your outlook is as it relates to that.
Yeah, I think the the GPU is fairly consistent throughout the whole quarter I mean, I think we've been able to prove that we can manage in all different types of environments. The GPU and I don't I don't see any reason going forward that we wouldn't be able to continue into that that traditional range, but I always give the caveat that we continue to test and check pricing elasticity.
Because we want to make sure that we're driving the most total gross profit dollars. So I think as you look forward I don't see a reason why we can't maintain those gpus.
That's helpful. As a follow up you mentioned some efforts around strategic sourcing could you provide some more color what you're referencing there.
Yes, so I think.
First and foremost we want to accelerate improve and arm in our core buying channels. So that's both off site and the in store praise line and the way I would think about that is not only our processes, but leveraging data and technology that are not.
Better and I think thats important as well.
We are the largest part of used cars in the U.S. and we value more than 6 million cars.
On an annual basis, so continuing to make incremental changes there is significant.
We also want to open up some new buying channels and expand our capabilities with some of our partnerships and other.
And other businesses and then I think another area that I kind of put into the vehicle acquisition button bucket is we will continue to invest in our wholesale business, we're working on a new auction platform.
The auction platform has been here since I started carmax and it's time to upgrade that so the way we think about it is on a bunch of different fronts.
Thank you very much absolutely.
Our next question comes from Scot Ciccarelli from RBC capital. Please go ahead.
Good morning, guys good morning.
Bill I know you said you feel great about your performance in Atlanta, and the older markets, but can you help quantify the usage of your omni channel.
Capabilities and markets, where you've had that capability for a few quarters and then I guess related to that is there any way to size. The overall sales lift that you think omni generate for you in the quarter.
Yes.
First of all.
Scott I think the Incrementality of Ami is really difficult to measure.
Because you can't say, okay, well you measure it just by who has a delivered to the home or who's in the store because we have lots of instances where customers that are coming to us anyway. They start online and they decide to have at home delivery or folks that come to us now because hey, I want it delivered to my home I Wonder everything online and end up coming into.
Enters the store I think for US obviously rolling this out is because we believe that this is a superior model to deliver to the customer and at the end of the day, it's all about sales and market share, but I tell you along the way. The most important thing is is measuring the customer experience no matter, how they want it so well be.
Looking at different metrics, the CDC engagement online progression.
In store only customers alternative delivery customers, but we'll really be focused on the experience of those customers and how they feel about that and we'll continue to move that needle and everything that we would we have seen whether it's in older markets or or newer markets that we roll. This out it is being is being very well received.
And this is despite having some just inherent headwinds and you know I would go back to the Ccs their immature we have a lot of new folks that we have new technology and while we expected customers to migrate to this.
We did not expect them to migrate as quickly. So in this quarter, we had more leads than we could actually handle NRC. He sees it at certain times. So that's a that's a headwind and I think there's probably some experiences that we can improve on that customer experience as well. So again, we feel we feel great about where we are today and while it's the.
At the end of the rollout of Ami, we really think about this is kind of like day. One. This is where we're just getting starting started and this is kind of where we springboard to the future.
Okay very helpful. Thank you absolutely.
Our next question comes from Brian Nagel from Oppenheimer. Please go ahead.
Hi, Good morning, good morning, Brian.
Well first off congratulations thanks for all the help over the years that much appreciate it.
So my question.
No just build its its bigger picture in nature is listen to.
Listen to you today.
Congrats on the execution here very tough and Brian.
Well. Thank you what I hear you say your partner, saying is that.
Look you've oversold.
Moving past the crux of the crisis in Europe Colby.
Colby again and you're in you're also now we will begin to traditional leverage law. The Omnichannel investments you guys. So question as you look at this if you take a step back yourselves and just kind of look at the overall acquired I mean, how would you characterize the demand.
Schumer demand now maybe I recognize you don't give guidance, but the demand dynamics now and going forward versus what they were pre cokers.
Yeah. It's.
Brian I mean, you can imagine thats a hard question to answer I mean, okay.
There's still a lot of uncertainty in the marketplace we have.
Obviously unemployment you got the rising.
Oh good cases this.
This is an election year, you know that always can can throw little wrinkle into things. We've got continued social challenge, but all that being said I mean, I think if you look at the back half of the quarter. When you look at July and August performance and.
You know how that trend continued into the month to date to September we feel good about where we are given all those uncertainties and yes, there could be just with the external.
Environment, there could be some bumpiness just for for some macro factors, but again we.
What we work on his things beyond and we look beyond the next the next quarter, but.
But I'd tell you I feel great about where we are right now and we're going to keep keep progress.
Keep progressing.
If I could if I could slip one follow up in yeah.
Yes, I think you may have alluded. This I know you'll be to typically don't talk about intra quarter trends, but is it.
How is that business.
Early in fiscal Q3 or September tracked relative to what you saw.
Four months of Q2.
Yeah, well first of all you're right, Brian I don't like talking about those trends, but I do think in this environment and I look I hope, we get away from really having to talk about the environment that will mean things are a lot better but I think in this environment, it's appropriate and so yes September month to date, we're seeing the trends of July and August continue which is which is great considering.
Theres still there's still headwinds out there. So we feel we feel great about it.
I appreciate it thank you.
Okay.
Our next question comes from Michael Montani from Evercore.
Go ahead.
Hey, good morning, Thanks for taking the question.
Wanted to follow up on the digital process, a little bit further and then.
And I guess three parts to the question one was on kind of an update on remote appraisals. If you can just share the capability set there and then future upgrades to it.
Secondly was on in the past Bill you've mentioned I think one out of 10 multichannel transactions were home delivery. So just wanted to see if you could update us on how that's trending and then the last thing was.
70% of transactions it sounded like where multichannel. So was just curious about in the more mature markets how that percentage would compare to obviously some of the markets that have just been getting the capabilities more recently.
Okay, Michael So first of all on remote appraisals.
Like I said in my opening remarks, if you're going through our customer hub trying to buy a car and bring it to your home we absolutely give you the option to either get an estimate or an appraisal. We are we are.
We've got some tests going on right now with instant cash offers end markets and low.
Look to expand that so there'll be more on that in the in the in the near future as.
As far as the one out of 10 home delivery. It's actually the we have talked about in the past is really alternative delivery and under alternative delivery.
It's the.
The curbside pickup and home delivery, both combined and the first quarter, we saw that spike spiked up during the quarter, we ended up around that Tim.
10% little bit under 10%.
After the at the end of the first quarter and again I would say that we're still below that that 10% and most of the.
Most of the customers, even though they are progressing.
Progressing online they still prefer to come into the store and then on the 70% Ccs again that 70% of our customers are engaging with the CDC doesn't necessarily mean, they're all doing online progression.
That 50% number that I gave you and I think as far as how does that compare to older markets that kind of thing look I think it continues to grow that 70%. If you remember the first quarter Tom.
I talked about it and it was not.
North of 60%, so we've even seen a growth there now some of that is the fact that we finished rolling it out but I would expect to see that number continue to go up just like I would expect to see.
The progression of customers.
Go up in the future as customers want them or a more personalized experience.
Our next question comes from Russia comes from JP Morgan. Please go ahead.
Hi, good morning, Thanks for thanks for taking my question.
Just had a couple of year MBS DNA side, you talked about the.
The marketing expense going up.
You are in the second in the second half of the fiscal year could you give us a sense.
25.
The degree of expense.
Expansion, we might see there and how should we think about what the normalized.
<unk> expense for unit two should be you're going forward on that.
I have a follow up.
Yes, Yes, you are right as I said, but it will be going up in the second half the year, but I think.
The way to think about that is in the context of overall SGN, a and we've said in the past hey look its going to take 5% to 8% comps.
To leverage.
We picked up some efficiencies in SGN, a we absolutely expect to reinvest those back into the business. So even with the step up I would worry less about what the advertising cost per car is.
And more about it in this context with yesterday, even with the step up we still would expect on an annual basis to two lever at that 5% to 8% on comps keep in mind in any given quarter it can dramatically dramatically swing.
And I'll just I'll just add to that you know with that during the pandemic, we took strong and rapid actions to lower our cost structure.
This improved meme, improving we brought back a lot of this operational spend dollars, but we did make some structural changes in staffing and operations that we do expect will yield savings moving forward. We're also focused as we've mentioned a couple of times on efficiency and our Ccs.
That being said we are in growth in investment mode. So I look at those savings that we're targeting to be at least partially reallocated to higher ROI and our strategic investments that are aligned with our growth plan. So the savings will be used to help fund our growth and as Bill mentioned the way to think about it is leverage.
With that same five to eight comp that we've communicated in the past yeah, and we have I would say we have efficiency savings I think across the board I mean, it's not only store efficiencies is not only CDC.
You know I think about it.
We have also improvements in logistics improvements in wholesales and I think all those provide opportunities whether its SGN a savings estimate reinvestments cost of goods sold reinvestments. So.
So it's not just one or two areas I think it's across the business.
Got it and just on the edge in a more of a housekeeping item the other overhead costs of $65 million.
I mean that seems to be tracking well below normalized levels. There is still some catch up to be had there here in the next quarter just curious as to if there were.
Is there any form introductions, there or how should we think about that going yeah. I think the way to think about that is that roughly half of that favorability year over year would you specifically to the cost cutting efforts, we undertook a as well as certain spending limitations given the environment that we reduce contractor spend our pre open spend relocation spend.
And so those are a cost cutting efforts. The other half is what I mentioned in the in my prepared remarks was that higher self insured loss last year and litigation last year versus this year. So again half kind of cost cutting the other half I would view more is that a onetime.
Understood sorry, just wrap that up the 5% to 8% comment.
That he made is that now is that like a rolling forward comment here just curious as to when when that drops down to a lower level or is that still like something we should expect for the next 12 to 18 months or 24 months I'm just curious how we should be thinking.
Thinking about that leverage dropping lore. Thanks, Yeah, I would think of that as an annualized number moving forward again from quarter to quarter. So much that can happen within a quarter. So I would view that again moving forward or at least the next 12 months is how we're viewing the business. Yes. The other thing I would tell you is and I said this in one of our previous calls if all we.
We're focused on we're omni.
This year than we would have that that guidance five date would have been less than that we would take less to do that but obviously to Enrique point. We are in investment mode and there are some things that were investing in.
That will pay benefits and other parts of the business. So for example improvements in wholesale may not necessarily drive the leverage on a retail cost per car sold but it will drive improvements in wholesale which will be topline and bottom line benefits to the company. So I think thats an important thing to remember in this whole discussion as well.
Understood. Thanks, so much and good luck to you.
Our next question comes from Rick Nelson from Stephens. Please go ahead.
Okay. Thanks, good morning.
Good morning.
Quick question on preferred Com.
Related to Cal you have less.
Last quarter, you talked about it next record loss rate to tour helped per sorry, if I look at this quarter's providers.
26 barrels.
For reference.
0.4%.
Hey revolves originated it Tom.
Our dropout rate was below historical norms.
I'm curious about your expectation.
Our imperatives for you first cohort.
Okay, Yeah, Oh, we do a couple of things one I'll start with give you some more color around the loss provision.
And then we can talk about that expected range, but.
You know.
We talked about income as materially supported by lower loss provision.
$26 million versus the 45 and a half last year that reflects approximately $55 million of additional reserve for the originations we had in the quarter.
And then to $30 million of.
A favorable development arising from the loss performance, we saw an economic adjustment factors and I will say that we the economic risk adjustment factors actually tempered the impact of our our start strong loss performance and where we landed on the on the.
I'm a provision so well while we saw loss performance gives us substantially better than what we had booked at the.
At the end of Q1 that merited some release of the reserve, but as I say.
As I said in my prepared remarks at 3.2% the overload allowance still reflects some uncertainty facing the economy consumer behavior and with regard to our three in our target range.
Well, obviously, we can't do anything about the portfolio Thats out there, but what is what is but.
We've seen improving performance.
We're pretty confident about the capital markets and our ability to finance I mean, if you look at our last deal we had a signet pretty significant spread between HCR in cost of funds one of the highest in recent memory.
So even though even in a little bit higher loss environment that that spread allows you to tools to still make a good return on the business. So we looked at all those factors and were comfortable for a period of time, writing a little bit higher than the 2% to 2.5% range.
Given given where things falling out we believe it's worth the investment to get the return on that money rather than given the profit to someone else right now.
Her parents hubs, how called them out but yes.
Those hubs Hertzberg theres.
This quarter.
Yep.
Yes.
16.
Yes part.
As we push forward.
It's hard to say you know the 6% the expansion we saw this quarter really as a result of funding cost coming down and then obviously when we look at our rates that we charge customers our goal.
Our goal is to make sure that we are a market lender and were competitive we're not we're not angering anybody about with the offers they see from Caf and.
And during the quarter, we didn't see any need to drop.
Cars and as I always say, we'll look at that on a go forward basis. If competition allows us to preserve those margins were going to preserve them and if competition gets aggressive in the market demands a little bit less margin in the finance business will act accordingly, but right now I feel good about where we are.
Correct.
Thanks for the color.
Good luck thanks, Rick.
As a reminder, star one on your telephone in order to ask the question Erin.
Our next question comes from David Whiston from Morningstar. Please go ahead.
Thanks, Good morning.
Question on you.
Used gross margins per per unit.
They were up 50 bips.
Because your your your dollar profit was relatively flat as despite and Dsps went down but how were ASP is able to go down just like higher auction prices, where you just more self sufficient in the quarter.
Yes, so a great question. So the ASP went down the reason they primarily went down it's because of that mix shift that I cited earlier, where we sold a higher percentage of older vehicles. So that takes down acquisition price was was fairly flat I think there's a lot of inventory that we bought during the quarter that that hasn't necessarily solve that.
That is a little bit more expensive, but the main driver of what you see there is the is the mix shift in age.
Okay.
And then is it fair then that you you're probably not going to assume that's going to be a long term trend, especially as the economy gets better.
The what the mix shift or just the average selling price going down there.
The mix.
The mix look I mean, the beauty of the businesses will will have out there whatever our customers are demanding set the customers want a older less expensive cars than we're going to make sure we put them out there. So that's all driven by customer demand.
Okay. Thank you thanks.
Thank you David.
Our next question comes from Michael Montani from Evercore. Please go ahead.
Hey, Thanks for taking the follow up.
Just two things one was around the credit side just.
Just curious if there is any incremental color, perhaps that you all can share around roll rates the impact of forbearance government programs.
And then also deferrals, so kind of overall what what's.
How is it that you're feeling about.
And then just a quick follow up.
Sure, Yes, so to speak to the quality of the quarter from cap perspective from loss loss side I think we we felt like we had a really good quarter.
Important to note.
From the improved losses within the quarter.
A couple of reasons. We believe that is first as you might remember in Q1, we were actually unfavorable from a loss perspective for Q2, we were favorable. So we believe there is some swap that was going on there.
You talk about payment deferrals sort.
Certainly we also were able to provide payment relief to our customers and we did a great job throughout the quarter there.
Payment deferrals were higher in earlier on in the quarter, we predominantly reverted back to typical practices.
But we know that Thats provided some relief to our customers avoided loss I helped to lower delinquency.
And then certainly beyond that also the federal stimulus within the quarter certainly put money in the pockets of our customers and that allowed them to pay their bills.
And frankly also there was just less places for them to spend their money. So we think that probably helped losses as well speculative but as far.
But as far as all rates are concerned going forward hard to say on a go forward basis, what's going to happen a lot of uncertainty out there, but for the quarter. We felt real good that we were able to take care of our customers and we're happy with where the numbers set right now.
From a reserve perspective, obviously that uncertainty is reflected in our reserve.
But all in all good quarter from loss perspective.
Great. So that's helpful color and then just the other main question Im getting before and during this call today is around market share.
Had folks who are a bit concerned because there's some other smaller competitors that might be growing faster and the data. We've seen from Cox is really showing that over the summer the industry contracted at like a mid to high single digit rate. So I guess I'm curious to know kind of what you all would be using to gauge that as well.
Do you see that unfolding into the back half of the year as we think about some of the multichannel capability set.
Yeah. So look I think we talked a little bit about the beginning of the in the first quarter. How are sales I think were just disproportionately impacted just given the volume that we run through through our stores and the occupancy restrictions that we had to work through the operating models that we had to work through it I see.
Haven't stores it only could have appointment only our only curbside.
Current side pickup we talk about market share on an annual basis.
And look I think the whole goal of omni obviously is to deliver this better customer experience, but at the end of the day, it's to can increase market share regardless of what the macro factors are that are out there. So we will continue to to progress forward I mean, obviously in this quarter I again, I can't can talk about how.
I am of the team I mean, you go from one quarter haven't.
Negative 40, plus comps to the very following quarter, starting to comp again with with record earnings and and you've done that even in light of the fact that we're still working through occupancy restrictions about half of our stores still have an occupancy restriction, although the bulk of them are at 50% and I think the stores have done a phenomenal job being able to work within that 50%.
You get less than that it really gets hard also.
Also with the CDC and the maturity to Cc and inventory. So again I feel good about about where we are and I think.
This is a springboard for us just to continue to grow sales and market share.
Got it thank you.
Sure.
Our next question comes from Chris, particularly are you from Exane BNP Paribas. Please go ahead.
Hi, Thanks for taking the questions.
I wanted to ask more about the store opening plans for 2022, I guess, it's a little bit below trend.
I would imagine is probably the environment, but could just remind us what kind of goes into opening a store or whats the timeline of how long it takes and maybe it's to support more directly.
Is this the new cadence of store openings, we should expect beyond 2022 or is this just.
The environment for that yet.
Yes, Chris I think the way you should think about this is it's more a factor of just ramp Tom we were going to open up 13 stores. This year, we've been opening up 13 to 16 for several years. The plan was to open up 13, but just given where we are this year and what it takes to start ramping that number is more reflective of construction timing.
Than anything else, so I wouldn't I wouldn't at this point read into end to that.
Okay. That's helpful. And then Preopening can you just remind us how that works.
So opening stores right now so that should be a benefit to other overhead for the next several quarters, but can you just remind us what.
Obviously it depends on the number stores you opened but.
What's a good rule of thumb for pre opening expense per store something else you can give us to think through the impact is no store openings. So thats Jenna. Thank you.
Yes, those costs will start rolling in to get three to four months before a store opens an immaterial way and I would say on average you pre preopening costs is going to rule about a million a million and a half dollars, but that will be spread out again over that time period.
Got it okay thats helpful. Thank you very much.
Thank you Chris.
This concludes our question answer session I will now turn the call back over to Bill match for closing remarks.
Thank you Carol well listen thanks for joining the call today and for your questions and your support we are definitely confident in our ability to seamlessly merge our.
Our world class in person experience with our World class online experience along with our diversified business model will continue to drive earnings and market share gains for many.
For many years to come I, just need to thank again all of our associates.
They are the reason we remain a disruptive force within used car industry and finally I've got to give a shout out to the Celeste is as well and best wishes to her she's been here for.
For a long time knows carmax better than anybody that I noticed that she will absolutely be missed but I wish her wish her well. So again. Thank you for your time today, and we will talk again next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you once more for participating and you may now disconnect.
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