Q3 2021 Carmax Inc Earnings Call
At this time and I'd like to welcome everyone kind of Carmax fiscal 2021 third 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.
I would now like to turn the call of Stacy Frole, Vice President Investor Relations.
Thank you Carol good morning, Thank you for joining our fiscal 2021 third quarter earnings Conference call I'm here today with Dell Nash, our president and CEO, Tom Reedy, Our executive Vice President of Finance and we gave me I'm more of our senior Vice President and CFO and John <unk>, Our senior Vice President.
Calf operations.
Let me remind you our statements today regarding the company's future business plans and prospects and financial performance are forward looking statements, we make pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
These statements are based on management's current knowledge and assumptions about future events that involve risks and uncertainties that could cause actual results could differ materially from our expectations.
And 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 at the annual report on form 10-K for the fiscal year ended February 29, 2020 filed with the FCC.
Sure do you have any follow up questions. After the call. Please feel free to contact our Investor Relations Department at eight zero for Southern Force thought and the real for Q2 extension seven and 865 black.
Lastly, let me thank you and advance for asking only one question and getting back in the queue from more follow up Bill.
Great. Thank you Stacy and good morning, everyone and thanks for joining US you may have seen and our announcement and this morning's 8-K that Tom will retire on February 20 Eightth.
Before we get started and I want to take a moment to congratulate and thank him for his tremendous contributions to carmax.
Expertise and strategic focus and leadership have helped us build a best in class Finance organization and he has been instrumental and guiding us through the largest transformation in our company's history.
Thank you for all of that you've done.
We wish you the very best and you're well our and retirement.
John Day knows who many of you already know will continue leading our Carmax auto finance team and we'll begin reporting directly to me.
On today's call will first discuss our third quarter financial performance and then turn to an update on our omni channel experience and other strategic initiatives before opening it up for questions.
Our diversified business model spanning retail wholesale and auto finance combined with strong execution by our teams and disciplined cost management delivered another great quarter of strong EPS growth, even as retail sales were hampered and the back part of the quarter due to macro factors.
Carmax auto finance or Caf continued to deliver solid results this quarter with income of 55%.
In addition, caf and our partner lenders delivered strong conversion and all credit tiers.
John will provide more details on customer financing and cash contribution shortly.
Our wholesale business also delivered strong results with volumes up 10.8%, which was driven by a record third quarter appraisal by right.
The strength of our buyers of our algorithms and extensive datasets and able these results would only at slightly year over year decrease and wholesale gross profit per units and on her and $6. This is despite sharp appreciation and the broader market.
All auctions were run virtually throughout the quarter.
Total retail used units sales were up 1% compared with the same period, a year ago, while used unit comps were down less than 1% growth.
Gross profit per retail unit for the quarter was 21 51 comparable with last years third quarter.
Our this of you doesn't really paint a full picture of how the macro environment impacted our retail business.
For the first part of the quarter, we achieved mid single digit comp growth continuing the positive momentum from the end of the second quarter.
And the election approach and there was another surgeon cope at 19 cases, which tightened occupancy restrictions and shelter and place orders we saw demand softened.
As a result sales trended down and the back part of the quarter.
This trend has continued into the first two weeks of December with sales down approximately 4% year over year.
As a reminder, last year and we had a strong fourth quarter and an added benefit of leap day.
Looking ahead, we're confident the sales trends we experienced in the latter part of the third quarter and into December or shorter term and nature.
Good day, approximately half of our stores have occupancy restrictions and plays to the state and local government mandates.
Of these more than 40 stores have mandates limiting capacity to 25% or less.
Even with these restrictions our omni channel experience is allowing customers to connect and transact with us and more ways and ever.
As we continue investing and our systems, our people and our offerings. We're confident the experience we offer at we'll continue to attract more customers to carmax and better serve all of their needs, whether that's online through our CE CE and store through whatever combination they choose.
I'll speak to the ongoing enhancements.
To our omni channel experience later, but first I'd like to turn the call over to Enrique to provide more information on our third quarter financial performance and then to John who will provide additional detail around consumer financing recur.
Thanks, Bill and good morning, everyone.
For the quarter other gross profit increased $4.7 million or 5%.
ETP profits grew by $4.6 million or 4.8% due primarily to favorable adjustments at the cancellation reserves and profit sharing revenue recognized in the quarter.
And the third quarter, we maintained our MSP penetration rate at 60% comparable with the prior year quarter.
On the F G and H front, we continue to do an excellent job at maintaining cost discipline, while supporting the growth of our omni channel experience and pursuing other investment opportunities.
For the third quarter expenses decreased 1.2% or approximately $6 million to $479 million.
At June eight per unit was $2461 a year over year leverage of $57 per unit on the quarter.
The decrease and SGN aim was driven by a $16 million decrease and stock based compensation expense.
And at $15 million decrease and other overhead cost.
The decrease and other overhead costs was due primarily to pandemic related reductions and year over year favorability due to lower litigation expenses in the third quarter.
These SGN at reductions were partially offset by the following notable asked DNA expense drivers for the third quarter.
At 13% increase and advertising expense.
The opening of 11 stores since the beginning of at third quarter end of last year, which represents a 5% growth and our store base.
And continued spending to advance our technology platforms and strategic initiatives.
As we discussed and or last call, we are increasing our marketing spend and the second half of the year.
For the third quarter and this spend included additional investments and SCM content and social as we look to drive customers to our digital properties.
At this and other quarter brings our year to date advertising expense to $144 million up 2% or $3 million when compared with the same nine month period last year.
On a full year basis for fiscal year 2021, we anticipate advertising spend will be up roughly $25 million when compared with the prior fiscal year.
The vast majority of this increase will occur in the fourth quarter and will be driven by heavier broadcasting in support of the next evolution of our brand campaign.
At this campaign will focus on clearly differentiating our brand and demonstrating the benefits of our omni channel experience.
We will also continue spending on ROI based digital investments.
From a capital allocation perspective, our priority is to fund growth initiatives, we continue to be focused and aggressively investing in it.
Digital capabilities required to enhance their omni channel experience.
The expansion of vehicle and customer acquisition and the strategic expansion of our store footprint.
And the third quarter, we resumed construction activity and new stores, and we had passed and the first quarter due to the pandemic. We're currently planning to hope and eight to 10, new stores and F Y 22.
Our unique business model generates a significant amount of cash.
So while our priority remains on investing in our growth. This strength allows us to also return capital back to our shareholders and.
The third quarter, we resumed our share buyback program.
Repurchasing approximately 1.2 million shares for $109.2 million in the quarter.
We have $1.4 million remaining $1.1 billion remaining on the current authorization.
Finally, we ended the quarter modestly below our historical leverage target of 35% to 45% adjusted debt to capital.
As you can see our diversified business model.
Operating excellence and strong cash generation position us extremely well as we manage through at dynamic environment.
Ill now turn the call over to John.
Thanks, and recruiting and good morning, everyone.
As Bill mentioned, Carmax auto finance and our lending partners continued to deliver solid results.
For the third quarter net of three day payoff Caf penetration was 45.7% compared with 43.3% of year ago.
Tier two of accounted for 19.5% of used units sales compared with 20.4% last year.
Tier three was up slightly from 9.7% compared with 9.5% year ago recall that the distribution realized across the tiers is a function of both lender behavior as well as the credit mix of applicants.
Year over year cash net loans originated grew by 7% to $1.8 billion debt.
Weighted average contract rate charged to new customers was 8.6% up from 8.1% of year ago, and 8.2% and the second quarter.
Regarding the portfolio. The overall interest margin increased to 6.3% versus 5.7% from the same period last year as we realized significant benefit from lower funding costs.
We continue to efficiently and our business through the ABS market and our most recent transaction October was very well received by investors.
Caf income was up 55% to $176 million and the quarter from.
I think of reduced loss provision bus and increase in both interest margin and average managed receivables.
The provision for loan losses was $8 million, resulting and ending reserve balance of $432 million for the third quarter.
The total reserve of 3.17% and its receivables, which is moderately lower than the 3.23%, but the end of the second quarter.
While we recognize significant favorability from losses relative to the expectations at the end of Q2, we believe the reserved adequately reflects the unpredictability of the current environment and at the uncertain consumer situation.
Before turning the call back over to Bill I'd really like to take this opportunity to recognize the outstanding performance of our many associates dedicated to certainly credit needs of our customers our ability to consistently provide exceptional customer service from purchase to pay off was never more parents and in this past year and of yet another aspect of our business that sets us apart from others.
Bill.
Thank you John Enrique.
Our teams continue to execute and this dynamic environment. Despite the near term market challenges that follow the trajectory of the pandemic. Our fundamentals remain strong we have an agile business model generates a significant amount of cash and we are and the best position within used car industry to further expand our market share and deliver shareholder value over the longer term.
The carmax experiences about putting the customer and the driver's seat and providing them with a great sort of us regardless of how they choose to interact with us to do that we have been transforming every aspect of our business from supporting systems to how we operate the physical stores in order to create an efficient seamless process of the customer and our associates.
Last quarter, we announced that we had completed the national rollout of Romney channel experience.
We now have a common platform and place across all of Carmax at Leverages, our scale nationwide footprint and infrastructure and empowers our customers to buy vehicle on their terms, whether that's online and person or seamless combination of the two.
While the current platform enables customers to buy vehicle online some parts of the transaction such as appraisal transfers and appointment scheduling require assistance from customer experience consultants, we're now focused on and enabling self service for all components of the sale and will deliver significant improvements over the next two quarters for.
Simple we've been testing against and appraisal offers on Carmax Dot Com. This feature gives customer set of customers and offer on their vehicle and five minutes or less based on these initial tests. We are rolling out this offering more broadly and expected to be available for standalone appraisals nationwide by the end of the fourth quarter.
We are on track from most of our customers to have the ability to buy vehicles online independently if they choose by the middle of next fiscal year.
Even with the ability to transact online customers appreciate having real time support available to them should they choose.
And we believe there is untapped value and focusing resources and supporting the online sales process, just as we know there's greater value and having friendly helpful Associates and store to assist and the end person sales process.
This is why we developed centralized customer experience centers for our CE seats.
Again, the advantage of our omni channel model is at customers get to choose how they progressed their experience.
And the third quarter, approximately 70% of our customers who bought of car from us interacted with RCC and more than 50% of our customers chose to advanced sort of transaction online.
In addition, we are seeing those customers progress more of the transaction online, but still prefer and can take ownership of the vehicle at one of our stores.
For the third quarter alternative deliveries chosen by customers, including home delivery and curbside pickup we're less than 10% of sales.
Having just completed the initial rollout of our omni channel platform last year, it's too early to quantify its impact across carmax as a whole, but we already have evidence that supports the benefits of a seamlessly integrated and store and online experience.
It was just two years ago that we launched our first omni channel experience and Atlanta now after two years and continue testing on pricing and advertising, we can see that our omni channel experience is delivering sustained growth and it's very competitive market.
During this time, the Atlanta market has outperformed the company with high single digit comps and the third quarter and two year stack comps of 20%.
We're also very pleased with how our other markets are ramping as their omni channel offerings mature.
In addition, the number of alternative deliveries and the Atlanta market, including curbside pickup and home delivery has increased by 45% when compared with the third quarter of last year. Although this remains a relatively small piece of overall sales.
As we continue enhancing our online experience and offerings, it's important to educate our customers on our on net omni channel experience to differentiate and elevate the carmax brand and our position and this evolving marketplace.
Within the next week, we will introduce the next phase of our non national multimedia marketing campaign that began last year to increase awareness of our core omni channel capabilities.
We want customers to understand at Carmax offers the ultimate flexibility to shop and buy on their terms their way.
In combination with the improvements and enhancements, we are making to omni channel experience. We're also implementing additional pricing and marketing test beyond the National campaign, I, just mentioned and select markets.
We expect to continue reporting attractive gross profit per retail unit and the fourth quarter above $2000. However, we anticipate the year over year change in this metric will be larger than what we've experienced in recent years.
Finally, before we take your questions I'd like to let you know that we plan to host the large virtual analyst day event following our year end earnings call.
There is a lot going on at Carmax and we're excited to share at and we think that this form will provide us the opportunity to go into greater detail and strategy and metrics behind our continued progress and the innovations we are delivering to our valued customers.
Were finalizing the dates and logistics and plan to email limitations and early 2021 and the meantime, please feel free to reach out to our Investor Relations Department should you have any questions regarding this event.
Now, we'll be happy to take your questions operator.
Thank you.
At this time, we will be conducting our question and answer session.
Ask a question please press star and the number one of your telephone keypad.
To allow for as many questions as possible, we ask that you can.
Please limit yourself to one question.
And then reenter the queue for any additional questions.
Your first question. This morning comes from Scot Ciccarelli from RBC capital markets. Please go ahead.
Good morning, guys and happy.
Today.
Hi, Bill.
Good morning, Bill can you help us better understand the correlation between at the slowing sales trends in the quarter and how the occupancy restrictions ramped up like just just any kind of color you might be of will provide in terms of how big of and impact you think those occupancy restrictions had on the business.
Yes, so Scott as I said and the opening remarks, we saw continued good growth from the beginning of the quarter and really up until a week or so part of elections really when we saw a decrease of step down.
And I think part of his election of also think Thats. When we started seeing these these type of restrictions I noted that we had.
More than 40 stores at a 25% or less if I go back to June we didn't have that many stores I think there's almost at was about half of that and actually had that type of restrictions and of those the more than 40 that are at that 25% or less more.
Most of those the majority of those are at 20% so.
It's hard to quantify exactly the restrictions versus the shelter and place, but we absolutely have seen and step down in those markets and if you think about some of the larger markets that are under these restrictions.
Weve, absolutely saw a step down once the restrictions when and into effect.
That's really helpful and I could just a quick follow up on some of the very said.
You talked about higher marketing ramp in the fourth quarter and maybe a little less GPU is it fair to assume those similar trends would come kind of roll forward to the next year as you guys try and get people are I understand the changes and the business.
Yes, so and obviously the third quarter, we stepped up a little bit the fourth quarter were stepping up.
We feel like we have a great opportunity in front of us and so.
It takes a little while debate and to build awareness. So I would expect next year that would be.
Step up, but we will talk more about that at the end of the fourth quarter.
Very helpful. All right. Thanks, guys.
Thank you Scott.
Your next question comes from Michael Montani from Evercore. Please go ahead.
Hey, good morning, Thanks for taking the question.
Morning to dig and dig in a little bit more if I could bill and the experience that you've seen the Atlanta I thought that was some helpful color.
And hoping you can share of that more than.
Just confirming.
By the middle part of calendar 2001, if I was hearing you right earlier it sounded like the experience would go basically frictionless for online so consumers could decide to speak to a person lives, but if they wanted to basically just click of button and do the transaction themselves.
They could do that as well so just wanted to make sure I understood that and then some extra color and the multi channel would be great.
Yes. Thank you for your question Michael Yes, So like I said and Atlanta Atlanta was the first market that we rolled this too and and we've been testing at Atlanta is kind of the first market that we roll new things in fact, we actually have a new user experience out there.
And that and from other markets right now that allows the customer to build the order.
Starting from the order themselves. So I think the Atlanta performance.
Is indicative of these markets mature longer because if we look at other markets. We have about 70 stores and then the corresponding markets at those stores ran and that had been open for at least a year and we see performance from that group better than the rest of the company, which just shows and as it matures.
Yeah, they continue to ramp and in fact, we have some of those early waves of our permits are currently producing nice strong comps. So we're encouraged by all of that I think some of the things we've been doing Atlanta and a few other markets. We haven't rolled out other places, which is one of the reasons, we want to extend some of the testing which is the comments on the advertising.
And.
And the pricing on the second part of your question. The Frictionless, Yes, I mean, right now of consumer can buy online from us, but as I mentioned, there's parts of at where the customer experience consult needs to to get involved.
And work with the consumer and will make great strides and focus right. Now is on self service will make great strides and the next two quarters and I think the HMA.
Majority of our customers will have that option to pay.
Regress self serve without the CXC, if they choose to do that and and we think we'll be in good shape at.
Second quarter middle of of next fiscal year.
Thank you for that update.
Sure.
Your next question comes from John Murphy from Bank of America. Please go ahead.
Good morning, guys and congrats Tom and John on the retirement of new roles.
Just eight.
A question here Bill.
And obviously, there's a lot of concern about the same store sales being down and understand the.
Yeah, the regulatory regime more sure of the shelter and place requirements are driving some of this but when you look at wholesale sales they were up 10.8%. So there is some part of the market is functioning.
Well even under these constrained.
Constraints and skeptic would say, hey, look and there's a big problem here because your your wholesale sales are really strong somebody's.
Regional at some cars on the other side and you're not.
And and Optimist, and say, hey, listen at 10.8% of indication.
That ex.
These these constraints you'd really be.
The crushing it I mean, how do you how do you Inc.
Interpretation of that Big gap, there between the wholesale and retail channel can't number any GAAP quite that big of a before so just to understand what's going on sure. John Hey, look I think there are a lot of factors going into into the mix for the third quarter. I mean, obviously, we talked about the the code and surgery, the Lockdowns and restrictions we talked about the election you bring.
Up and interesting point.
No higher used prices for the third quarter keep in mind and a lot of the cars that are sold and the third quarter of bar of bar are bought earlier on and the months leading up into that and you know from the earlier months the two of those.
Very steep appreciation and so what's happened is and other factor that I hadn't really talked about and this quarter is you have a tightening of the gap between late model used and a new and so I think thats also.
A factor in there and then I think the external some external sources out there that would tell you that used car industry has gotten softer and we're seeing that weve seen depreciation and.
And the marketplace throughout the quarter now value year over year is still above what it was a year ago, but.
We're certainly seeing the depreciation.
The depreciation kick in.
Okay, but I mean, it used to it seemed like there is there is an indication I mean lower prices is not as sort of means lower unit sales and lower price view and actually kind of diversity me at the same and lower pricing, while as you manage and well meet your buy and goes up and your profits go up so I mean, it just seems like at a.
As the market normalizes theres, a potential for real volume increases and that that wholesale number is maybe a better harbinger of whats to come as opposed to what just happened with your same store sales kind of Thats, just sort of our interpretation it seems like where things are headed.
Well keep in mind, the wholesale when you're we flipped that wholesale inventory very quickly and obviously there are wholesale inventories of dramatically different what were selling other auctions is dramatically different then and what were selling on our retail a lot, but you know and.
The wholesale you're getting cars real time, and selling and real time on the retail side, we've got inventory that we've been working through that we bought earlier leading up into the quarter.
And just I'm sorry.
The wholesale restrictions are not the same obviously as what you have other retail side rates of wholesale has not hampered by any kind of restrictions that correct.
The wholesale side I mean, we chose to to keep all of our sales virtual they're actually some markets that we could have turned the physical sales back on but just given the nature of bringing a bunch of folks into our store location and keep our associates say.
We've decided for the quarter to keep everything virtual.
Great. Thanks very much.
Thank you John.
Your next question comes from Sharon Zackfia from William Blair. Please go ahead.
Hi, good morning good.
And I was hoping I was hoping and by the way I suspect at time of the spend all of his retirement sort of been so congratulations to him.
But.
Wanted to.
And a little bit deeper into kind of what you're seeing at home and Atlanta, which sounds really encouraging at and I think you mentioned bill from test on price and then marketing and maybe accelerate that that dynamic for the rest of the country.
So I guess at the at the end of the day and my question is just.
There are way too.
To increase awareness more quickly of the omnichannel offering because it seems that it's happening, but it seems that is happening maybe more slowly than than some of us at originally anticipated.
So I'd love to hear more about the effectiveness of different kinds of marketing and to our programs that you can do to accelerate national awareness, and then secondarily and the pricing and test I Didnt catch if any of that was related to pricing and for delivery as opposed to at.
Total unit pricing.
All right and a lot of that question channel and see if I can get at all and they have to ask you to repeat part of the question, but first of all I think it's important we worked really hard to get a common platform out there, which we got in the in the third quarter and that was a significant milestone for us because we really needed. We wanted everybody to be on the same platform before we started to go out and.
And educate the consumer and like us and the third quarter, we planned.
By the end of the year to kind of kick off this new multi media marketing campaign, which we're really excited about and I think it does a nice job of really differentiating us from whether it be traditional dealers are on dot online dealers and really highlights the capabilities and the flexibility that we have and so we're excited it's going to be.
Everything and you can think of from broadcast and digital to social to out of time. So you think about billboards that kind of thing. So it really is a a broad sweeping.
Effort, because we do think there is an opportunity to educate the consumer and drive that awareness now.
And any awareness advertising at doesn't it takes a little time, because when you do awareness advertising. The majority of folks that are hearing hearing and aren't necessarily in the market, but the point is to make sure that do at when they are and the market that we are top of mind. So that's going to be the real the real focus.
And I think that will be a.
A catalyst and we really haven't done done that up to up to this point. So we're excited to get that out there I think the other part of your question was the pricing on delivery is that.
Could you clarify that park.
Well, you talked about pricing and test.
Current quarter and net impact on GP I, just didn't know if that was.
Going to include some sort of price elasticity of dynamic around the cost of delivery to the consumer.
Yes, so were constantly and when you made the comment earlier and speaking more specifically to.
The GPU pricing, our retail pricing, we're constantly doing test on delivery to the consumers and we'll we'll continue doing that as well.
You know we have been doing that and I would expect as we go forward.
You know were very analytical when it comes to do and things like this and whether its pricing and advertising whether it's the.
The transfer fees.
We're going to do combinations are going to do them by themselves there will be a whole bunch of different things that were never try and this quarter.
Sorry can I, just ask one follow ups and you're getting the pricing and marketing test.
Market this quarter.
And how quickly can you pivot if you see something encouraging there.
I think we can pivot we've.
Good very quickly.
First of all we're going to have the awareness campaign going on everywhere and then we're going to at some of these markets with some additional marketing.
Some of it may be awareness and they'd be at more acquisition. So.
I feel very confident that we can we can pivot quickly.
Thank you I.
I think I'd just add at you know now really is the right opportunity and at the rate time for us to invest through at the increase in marketing to testing lower pricing, we've rolled out our omni platform. We continue to enhance the capabilities of omni. So we believe now is the right time to do that and we're excited as bill said about our opportunity.
He is moving forward to grow the brand and to grow our market share.
Your next question comes from Shannon from Wedbush Securities. Please go ahead.
Thanks, a lot of and good morning, and congrats Tom and my question is around the pricing tests as well you.
You are signaling as much of that as a 9% decrease in free cash GPU year over year in the fourth quarter, which would be unprecedented at at times of market shock. So this presumably is a pretty wide spread at test that you plan or at the buried deep test in terms of the price cuts at your plan.
And with some more color on exactly what you're thinking relative to prior price test and how we should think about the go forward.
Yes. Good morning. Thank you for your question.
Yes, this is going to be and the pricing tests will be trying and several different markets and I think the way you should think about if you look back historically for us on on any given quarter, we probably when you look at year over year.
GPU, we've probably been at a band somewhere in the <unk> on a given quarter 30 to $50 on year over year, that's kind of at the range on full years, it's probably a little bit tighter than that and I would say you at my comments and you should expect at outside of that normal range and that will allow us to do some of.
You know that we always do testing throughout the quarter, but this will give us more flexibility to do some different things. So again, we're we're we're excited about some of the combinations of things and we also know that not every market is going to respond the same way different levers. So that's what we'll be checking.
Got it all right so presumably it's a little bit more widespread than normal and turns of your test from a debt of the price cuts and could be deeper than you've done in the past is at the right way to interpret it yes.
Very good. Thank you very much thank you Seth.
Your next question comes from.
From JP Morgan. Please go ahead.
Hey, good morning, Thanks for taking my question.
Just had one.
Although non cash.
Could you help break out you know what the benefits were in the quarter.
You know from just the economic factors versus losses, you took on the underlying the growth I believe you provided.
During the last quarter is there something and then.
You could the likes of this quarter and then.
How we should look.
Moving to the fourth quarter.
Sure Yeah. Thanks for your question for John Yes, So it's.
Really the quarter Q3 was fantastic for us from of losses perspective, no doubt.
And we saw $10 million of net losses, which really is.
Much lower than our expectation going into the quarter.
And I.
I can break that down a number of things worked in our favour there.
So I think we had excellent execution of Caf you had the consumer who was very willing to and able to make payments and.
See when the when the units are lower than losses are going to be good and a quarter.
We also had an inventory of charge offs the head hit us in previous quarters that we were able to liquidate within the quarter. So that was really.
And.
When we do believe there is some benefit going forward realized net $8 million provision inherent in there we had $1.8 billion of originations also which included.
Reid restarting of the tier three originations that we had a hiatus and over the summer. So a number of things that we feel relatively positive that drove.
Our provision that being said when we look at our motto and our economic adjustment factor all in.
And we set our reserve Theres a lot of uncertainty as we see and the upcoming quarter and quarters ahead. So we feel good about the reserve I would tell you all in and in that reserve theres going to be the tier one at the tier three and the.
Recovery costs volume in there and we're probably a little higher than what we've normally expect under normal times.
From our cumulative loss factor, but overall, we feel like at Theres, just uncertainty out there the reserve is adequate great quarter, but we're cautious and what's what lies ahead.
Got it okay.
Thats helpful color and.
GAAP notice that.
And with a wall you sold through the captive was up you know.
7% year over year, while one of the tier two tier three combined.
Combined and absolute volume go down here we are.
Was that just the deliberate effort.
And with that have.
Influence on your on your same store comps in the quarter.
And then should we expect like that mix going back to more normal levels.
And the fourth quarter and next year or and should should GAAP remain at this and the at level. Thanks.
Sure, Yes fair question as I mentioned in my comments really ultimately you're going to see that penetration or the distribution of cross the tiers, it's going to be of function generally at two things lender behavior and mix and this quarter. It really was a mix thing I don't think there wasnt much change of amongst lenders certainly cap as well. So I think thats really what at what drove at end so mix next quarter hard to say.
And we'll see how it plays out and I think or is that really not.
It's kind of had and pick them up they would have been picked up by somebody else to your part on your part of your question on same store sales.
I think was at the other piece and great.
The other piece on cap and I would call out.
And a little bit overshadowed this quarter because of the loan loss reserve adjustment is really just the underlying profitability of the cat business. When you take a look at the net interest margin on the quarter and you consider that this is profitability of that we're going to continue to see over the life of the loans at a considerable tailwind.
Tailwind for us moving forward since we do not employ gain on sale for our financing youre going to continue to see that benefit for the life of the loan again, so again considerable benefit this quarter and moving forward just from the profitability of our cat business.
Well look at Mcdonald's and price.
Well the color and good luck.
Thank you. Thank you.
Your next question comes from Brian Nagel from Oppenheimer. Please go ahead.
Hi, good morning.
Good morning.
Thank you for taking my question, So first off Tom and John Congratulations and target of a new role.
So look at the risk of you know kind of beating the dead horse here, but just with regard to the sales reps.
Hey, Bill of Squish, a couple of questions together, but.
Clearly the comparisons.
And your comparison.
Were more difficult here in the fiscal third quarter. If you look at the beginning of the stack at up sort of say that business actually strengthened and Q3 versus Q2. So the question I have is as you look at the trend in the quarter, where you called out that slowing does that coincide with cash.
Harrison's giddy, turning more difficult and then the second question I have with that is we talked a lot about the of the rich the cobot restrictions and stores could you discuss.
And you spread the business between stores, where there were more significant kober to restrictions of and baby stores, where there were less restrictive or there weren't a day are worth of restrictions and placed.
Yes, Brian so im not going in and specifics on and on particular stores are really markets I will tell you on the the the coated restrictions and the sheltering place and place I mean, certainly there's there are states like California.
Chicago area that have some of the strictest requirements and if you look at pre route pre restrictions versus post restrictions and like I said earlier, we absolutely saw us of step down and you are.
Obviously, we can compare to the to the rest of the country and especially the ones that don't have any any restrictions on the I think you at the first part of your question can you repeat that part.
Yes that was just just on the up from a comparison standpoint, and so if you look at your comparisons toward more difficult and Q3 in aggregate used.
Used car unit comps actually improved and a two year basis Q3 from Q2. So the question I had is at the did as you were looking at the business intra quarter did the trend stepped out as comparisons got more difficult.
Yes, so if I look at year over year, certainly last year third quarter and fourth quarter were both.
Strong quarters, and it bill kind of throughout the quarter. So I think it's a combination of and other comparisons got little to suffer. But then you also have a lot of these and other other external factors that are are weighing and.
Okay. Thank you.
All right. Thank you Brian.
Your next question comes from Craig Kennison from Baird. Please go ahead.
Hey, Thanks, and congratulations Tom and John I wanted to circle back on the wholesale business with your pivot online.
Effecting.
Your perfecting this omni channel experience and retail.
What does and omni channel experience look like and wholesale if that's the right analogy of feels like there's a ton of disruption happening in that space too.
No Craig I think you are thinking about it and the the way that were thinking about it we have we have to to customer sets, we of our retail customers and our wholesale customers and both of them are equally important and we talk a lot about providing and omni channel experience for our retail customers, but our wholesale is also an area that I've talked about in the past is one of our strategic.
And is continuing and invest and we want the experience for our wholesale customers to match up.
With what the wholesale customers want so just like with the retail customers, there's different need some dealers like coming to physical sales from like doing a combination some like just the virtual and then we put ourselves in a position now that we'll be able to accommodate all of that so when we turn physical sales back on the last of the simulcast and you can come in person or you can you can bid.
Did virtual and we think that this is this.
This will be great as we moved the business Ford at allows more dealers to be able to attend our sales without physically having to be there and we think more dealers attending more dealers buying that's a good thing it will drive at prices and allows us to put more on the on on vehicles. So you're thinking about the same way we bill we're trying to put together the best experience for both customer set.
Yes.
Thank you.
Thank you Craig.
Your next question comes from Adam Jonas from Morgan Stanley. Please go ahead.
Hey, Thanks, everybody and Bill really appreciate the extra color on any of the K P eyes and on the on the omni and that's going to be incredibly helpful stuff at going forward.
Can you give us some color on at the attach rate of products like F and I and other things and left at the front end for specifically for the alternative distribution units and and color on the GPU of vehicles through alternative distribution of versus.
Non alternative distribution of at describe it that way.
Sure Adam Yes, so on.
Products like the finance, the Max care and when you look at alternative delivery.
Finance is pretty pretty consistent to the end store experience I think on the the Max care. There's it's very similar on the brunt of alternative lenders like and express pickup our curbside thats fairly consistent with what the store processes, it's down a little bit on the on the home delivery, but thats an area that I think that we can easily continue to.
To focus on and move the needle and as far as GPU goes.
And the way, we manage our business.
The GPU is and different on of vehicle, that's delivered to someone's home or alternative delivery of its done at the store curbs at our express pickup as it is on on our lot too I don't see of a difference and Matt.
Thanks Bill.
Your next question comes from Rick Nelson from Stephens. Please go ahead.
Thanks, Good morning, and my congrats to Tom and terminals as well.
Quick question.
And regarding cash out in other.
The contract rate.
Third quarter 8.6 percentage points, we were 8.2% of our last quarter.
Great and saying.
A P ours and good client net.
Funding cost and environment of curios, what I was expecting closer and could use our cash of take lower spreads I guess to to drive more at same stores sales.
Sure Yeah. Thanks for the question Rick.
So as mentioned before with kind of the penetration across tier one tier two tier three and mixed with a big play there similarly within Caf really the roads and an increase in interest rates for those people coming through the door is really the mix of those come through the door. Some of the higher interest rate customer coming through as opposed to a rate change with regard to guess at what rate.
Third cap setting can we run at a lower interest rate environment, obviously, given the the overall interest rates and I think we've always said really we keep a very close eye on the market, let's cafs job nearby and provide a very competitive offer out there is this whole tier one lender and we always do that and we will keep an eye on key metrics like threed and pay off and.
And obviously, what we see out there and from a competitors and marketplace and and we feel like right now we're in a very good very good position, but yeah that wasnt not a rate increase driving that purely of mix. Thanks.
Yeah, and I think the same or and the question earlier, Rick net those if we hadn't picked.
Picked up this customer somebody else and to pick them up as far as the impact on same store sales.
Okay. Thanks.
Thanks Philip.
Third to a follow up.
Our cash outflows of relates.
Provisioning on a go forward basis, the allowance accounts.
Carol is down 3.2% of receivables banner.
At the moment Perez, you talked about future loss rate expectations from sort of two to two and a half percentage.
Yes, we are.
Expect kind of allowance proportion.
Third comes out or overtime.
Sure Yes.
Yes, Greg right on with those numbers at 3.17% for the quarter I think a couple of important things to point out with that number of versus the two to two and a half we quoted historically and in that 3.17% is the tier three business as well. We've historically said, that's roughly 1% of the receivables and accounts for 10% of the loss.
And the two to two and a half percentage, we reference is generally and our tier one business. So you'd really want and net that out also at the adoption of Cecil.
And our reserve we also at also have to put.
Put money and for the actual cost to recover which again not contemplated in that two to two and a half. So when you know when you net those items out we're still probably a little above that range, but I think thats at reasonable given the environment. We're in obviously, yes, we expect to hopefully trend back to normal as things get back to normal but right now.
Theres a level of uncertainty both and we would say that both with regard to our origination volume of the 1.8 billion and the existing portfolio sale and little higher than maybe our targeted range at the net those things out, but hopefully things go back to normal same.
Okay.
And.
Thank you Rick.
Your next question comes from Chris, particularly Irene from Exane BNP Paribas. Please go ahead.
Hi, Thanks for taking the question this.
Just one quick.
Clarify question first of and other bigger question and Ted can you speak to at the provision was on new originations looking at at the last couple of quarters, just a lot of noise to understand what your provisioning for and on new loans.
Sure Yeah happy to give that we said at 1.8 billion of originations.
66 million of the reserve was attributed to that a couple of things again to remember of based on the last question just as a reminder, and there is tier three volume as a reminder, we had higher hiatus over the summer, but we.
We added back and started that backup in September so thats kind of inherent and that $66 million and net recovery expense, but you have 66 on the 1.8.
Thats really helpful. And then just kind of following up on the appraisal questioning so it really impressive by rate, especially at the used car pricing environment stabilizing. This I understand is it like again.
Again, I apologize if you guys what they're at this but.
And something structurally change of the appraisal rate. That's allowed you to raise at so materially and sustained growth you like are you finding you're getting higher proceeds at auction. That's came at the GPU flat and taking cost out like what's allowing you to raise the buy rate, but still keep at GCU any color there would be appreciated.
Yeah, So Chris I mean, if you noticed last few calls we've been continuing to have strong buy rates and I really do think it's a it's a testament to.
Our buyers of professional buyers and algorithms.
Some of the technology, we're using two I think we're just getting sharper and being able to respond quicker to market dynamics.
I noted and and some of the remarks earlier, we saw depreciation throughout the quarter and you know depreciation generally at the is a headwind for by rate and so while the bar and came down a little bit from quarter over quarter. We're still real pleased with where we are and also tells us that the consumers like the offer that were.
Net we're providing so I think it's a combination of factors.
And I think our auctions are given the attendance at the sales I think they're they're they're they're commanding strong values, which helps as well.
Got it okay. Thank.
Thank you Chris.
Your next question comes from David Whiston from Morningstar. Please go ahead.
Thanks, Good morning.
And the pricing cut pilot program coming of a it was that something that was a 100% our plan for a long time. Once you have the capabilities ready or is some of this and response to that day.
And.
And this is you know it's kind of evolved.
Just off the learnings that weve been discovering and you know it's it's.
One of those things that we feel like now is the is the right opportunity and the right time and based off of the some of the results we've seen and some of the other test that we're doing so I think it's really kind of an evolution on on what weve been testing and it's a continuation of that.
Okay and.
Longer term is there as omni channel rolls out and we'd be more optimistic about some SG and a scaling.
Yeah, you know certainly coming out of the at the a couple of things coming out of the pandemic you know we at the very strong and disciplined approach to cost management. There are some structural savings that we do expect coming out of the pandemic, specifically and corporate overhead CE CE efficiency, maybe too.
Yes. Some of your question and also and vehicle reconditioning and now that being said what we what we are doing is that we're reinvesting those savings into our growth and now as I mentioned earlier at the right time for us to invest and continue to invest and grow our omni functionality the acquisition of customers and of vehicles and our new store.
Our growth. So that's how we're thinking about the savings is really where a growth company and we're going to continue to invest.
But we do expect to see some efficiencies in our Ccs to answer your question your question specifically.
Yes, Dave and I think the Ccs is just one place that we can continue to get efficiency and I think there's still some store efficiencies with.
Reconditioning and procurement and I think we're even you know I think we've got some efficiencies just from a corporate overheads overhead and on facilities that kind of thing where we've we've got some improvements we're making logistics. So I think theres a lot of efficiencies I think Enrique point, we want to continue to invest in the business. So as were picking up efficiencies.
One of them, we want to continue to to move the business for so hopefully that provides you a bit more color.
Yeah I appreciate it thanks guys.
Thank you.
Your next question comes from Chris, particularly and I used from Exane BNP Paribas. Please go ahead.
Hey, guys Big and.
Just a quick question on advertising.
I guess ex big like two questions. One is when you think of it looks like it's probably up like 50% of Q4 of at at that math right quickly, but is this primarily just like operating investment in terms of.
Raising awareness for your new capabilities and stuff like that and then what.
How do you think of the payback is that just a longer term payback and.
And then to kind of as more of the business shifts online as you roll at your omni channel initiatives.
How do you think about the go forward of level of investment of advertising to be stepped back from these levels or do you think this is like the new door, but it just gradually creeps up as of this and shifts online. Thank you.
Yeah. So so Chris the step up is primarily awareness or brand building and as I said earlier, it's going to be kind of a multimedia campaign a lot of different components to and it really is about educating the consumer on our our new capabilities and how we have a differentiated experience and when you do awareness advertising you.
You'll get some benefit from it but it's really it's really geared towards changing the consumers' awareness, which happens happens over time. So it doesn't happen you know the the men at that you that you turn it on and so as I look forward.
Beyond the fourth quarter, and we'll certainly have more details after the fourth quarter and as I said earlier I would I would I think it's safe to say that we'll continue to have a step up and advertising year over year, because again awareness just doesn't happen and overnight and nor does it just sustain itself without some reinforcement.
Got you that makes a lot of sort of fixed.
Yes sure.
This.
Execute and a portion of today's call I would now like to turn it back over to bill much for closing remarks growth.
Great. Thank you you know as always I want to thank you for joining the call today I want to thank you for your questions and your support.
Our future success continues to be focused on providing and exceptional experience and that's that's not only for our customers, but also for our associates. We are going to remain committed to our purpose and our values and will continue to grow and create value for our shareholders I want to thank all of our associates from everything that you do on a daily basis, taking care of each other taking care of our.
Customers you are the reason that we offer the most compelling customer centric experience within the industry I wish all of the associates and I wish all of you all happy holiday and we will talk again next quarter. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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