Q4 2021 Carmax Inc Earnings Call
Good morning, My name is Carol and I will be your conference operator today.
At this time I would like to welcome everyone to the Carmax fiscal 2021 fourth quarter and year end 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 over to Stacy <unk>, Vice President Investor Relations.
Good morning, Thank you for joining our fiscal 2021 fourth quarter and.
Year end earnings conference call I'm here today with build Ash, our president and CEO Enrique Mayor Mora, our senior Vice President and CFO and John Daniels, Our senior Vice President calf operations.
Let me remind you our statements today regarding the company's future business plans prospects and financial performance.
Our 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 to differ materially from our expectations.
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.
<unk> 2020 and filed with the SEC showed.
Should you have any follow up questions. After the call. Please feel free to contact our Investor Relations Department at eight zero for $7 $4 70422 extension 76 five.
Lastly, let me thank you in advance for asking only one quest.
<unk> 20th getting back in the queue from more follow ups bill. Thank.
Thank you Stacey good morning, everyone and thanks for joining us we have a lot of exciting news to cover today, our comments will focus on material of fourth quarter and fiscal 2021 performance insights.
Based on our digital enhancements and of course of Edmunds acquisition, which we announced this morning.
And then we will open it up for your questions.
For the quarter total retail used unit sales were down less than 1% from last year's record sales in used unit comps were down two 3% when compared with the same period a year ago.
It's worth spending a moment on the events driving our results for the fourth quarter.
As we discussed on our last call.
During the quarter retail sales were pressured due to a surge in COVID-19, 19 cases, which tightened occupancy restricted restrictions and shelter in place orders.
Sales began to accelerate towards the end of December and into January but the beginning of February we were trending towards mid single digit comp growth for the quarter, excluding the impact of.
<unk> day in the prior year.
However, starting in the middle of February retail sales were affected by the severe winter weather across a large portion of the U S closing more than 65 stores in one day.
Sales were also impacted by delays in tax refunds relevant relative to last year's timing and a lower inventory position due to COVID-19 and weather.
Leap production constraints.
One of two year stacked total retail used unit sales for the fourth quarter of FY 'twenty. One we're up 13, 8% in used unit comps were up $8, 7%.
March sales were robust when compared with both of Covid impacted March last year and of record March in 2019.
Related during the month of the initial distribution of tax refunds and stimulus checks began weather improved and customers continue to respond favorably to our ongoing digital enhancements and other strategic initiatives.
In addition, the underlying metrics, we track, including website visits online progression and activity at our customer experience centers or <unk>.
These indicate continued healthy demand for used vehicles as we head into April.
Full year market share data indicates that our share of zero to 10 year old vehicles, and our current comp markets fell from approximately $4, 7% of 2019 to $4, 3% in calendar 2020, we had strong.
Momentum entering the year and we're gaining significant market share up until the start of the pandemic when 95 per cent of the country was under shelter in place orders and approximately half of our locations were closed or under limited operations as markets reopened and our omni channel experience was launched nationwide, we began gaining market share again during.
SaaS five months of 2020, we saw market share gains and we expect those gains to accelerate in 2021.
Atlanta, where we've been in operation since 1995 in our most mature omni channel market continues to outperform the company maintaining its market share in 2020, despite pressure from Covid during the last five months of the calendar.
During the year, our market share in Atlanta increased 13, 8%.
Over the past two years since we first introduced our omnichannel experience of our market share in Atlanta has increased 10, 9%.
Retail gross profit per used unit for the fourth quarter was $2086 compared with 21 95 last year.
This.
<unk> is consistent with our expectations and commentary on the last quarter's call. It reflects the impact of the expanded pricing of marketing tests, we rolled out in select markets in combination with our national multimedia marketing campaign, and the improvements to our Omnichannel experience.
Early results for these tests were positive so we expanded to more markets in the quarter.
This treatment to continue with testing while also monitoring macro factors, we expect to maintain attractive margins above $2000 in the first quarter Enrique will provide additional details around the profitability flow through on different aspects of our business that are contributing to the success of these tests in just a moment.
Our wholesale.
We're gonna business delivered another good quarter when you consider the impact of one less auction day compared with the same period last year.
For the fourth quarter wholesale volume was down one 2% wholesale gross profit per unit was comparable to the prior year at $990 per unit.
We estimate the one less auction day in this quarter.
Wholesale package of the number of wholesale units sold by several percentage points.
Now I'd like to turn the call over to Enrique to provide more information on our fourth quarter financial performance and then to John who will provide additional detail around customer financing rigor.
Thanks, Bill and good morning, everyone.
For the quarter other gross profit decreased 4 million.
<unk> interest or three 2%.
This decrease was due to a $14 million reduction in service profit driven largely by our previously announced year end. Thank you bonus for 22000 full and part time associates across the company many of whom work in our reconditioning and service functions.
Oh indices related to production Blitzes and company support paid related to Covid.
Partially offsetting this was favorability and ETP and third party of finance fees.
E. P. P grew $2 $6 million year over year for the quarter, driven by a favorable reserve adjustment and an increase.
And profit sharing revenue.
This was partially offset by lower sales volume and a slightly lower penetration rate in the quarter.
Third party of finance fees improved by $7 $7 million in the quarter, primarily due to the renegotiated fees with our partners, which John will talk about shortly.
Shortly for SG&A expenses for the fourth quarter increased $14, 7% or approximately $71 million to $556 million.
S G&A per unit was 2713.
The year over year deleverage of $368 per unit on the quarter.
The increase in SG&A was primarily driven by an increase in stock based compensation of $33 million or of deleverage of $160 per unit.
An increase in advertising expense of $23 million or of deleverage of $115 per unit, which was in line with our previously.
Obviously communicated expectations as we focused on heavier support for our next brand campaign.
And continued spending to advance our technology platforms and strategic initiatives.
Yes.
Our approach to SG&A and costs heading into next year remains consistent.
We will continue to invest.
And our business at this inflection point in our industry, specifically in marketing and in our strategic initiatives.
Regarding marketing.
As we head into next fiscal year, we expect our spend to remain elevated with similar per unit trends experienced in the second half of fiscal 2021.
Our advertising spend will continue to focus on clearly differentiating our brands and demonstrating the benefits of our omni channel experience.
In addition to our ROI based digital investments that are delivering strong results.
Included within this band is an increased focus on vehicle acquisition.
We believe we are well positioned to aggressively grab market share through the promotion of our omni channel experience and new product offerings, such as love your car guarantee.
We also remain focused on ensuring we are appropriately managing our spend targeting specific areas of opportunity.
This includes our <unk>, which are maturing and becoming more efficient and effective through automation and data driven algorithms and smart routing with the goal of ensuring customers get the right support.
This past year, our cec's, we're more efficient than the prior year and we expect this trend will accelerate.
In FY 'twenty two.
Regarding our SG&A leverage point in FY 'twenty two.
We would expect to require at $5 to 8% comp on a two year stacked basis in FY 'twenty two to lever in FY 'twenty two.
As previously communicated in periods of investment like we are in now we will.
I'll need to be at the higher end of the range to lever.
This two year comp approach is reflective of the impacts of lapping over COVID-19 and due to the continued investments in the business. We made this past year.
Now I'd like to take a moment to provide an update on the financial aspects of the pricing tests, we ran in the fourth quarter.
As Bill mentioned, we like what we have seen so far.
While these tests confirm what we have historically seen regarding price elasticity. Several factors have changed resulting in a stronger flow through from the increased sales and thereby resulting in greater profitability.
These factors include higher profit.
<unk> ability levels of our Caf originations.
Our lower variable cost structure as we continue to leverage our centralized <unk> and to favorable changes to our third party lender fee structure.
As mentioned earlier, we will continue to perform pricing tests in the first quarter, while also monitoring macro.
Macro factors.
Our goal remains to maximize both unit sales and long term profitability.
Our unique and diversified business model still generated a significant amount of cash this past year despite of challenging environments.
From a capital allocation perspective.
Of this positions us well to reinvest in the growth of our core business.
Fund new growth opportunities, such as our announced acquisition of Edmunds and return capital back to our shareholders.
Regarding Edmonds, we expect to pay for the transaction with a combination of cash and equity.
We anticipate this.
This transaction will close in June and expect their financials to have an immaterial impact to carmax as EPS in fiscal year 'twenty two.
We are confident this transaction will provide significant shareholder value creation over the longer term.
We continued executing our share repurchase program and during the fourth quarter.
We repurchased approximately 700000 shares for $66 million.
We currently have $1 three or $4 billion of authorizations remaining and we are committed to returning capital back to our shareholders.
For capital expenditures, we anticipate approximately 350.
Millions of dollars in FY 'twenty two.
As we have pivoted our business to be more technology, driven the profile of our Capex has followed suit.
Approximately one third of our capital spend in FY 'twenty, two we'll be focused on investments in technology up from about 15% just four years ago.
In.
2022, we plan to opened 10, new locations with the first Grand opening expected later this month.
As was the case with our more recent openings. These locations are predominantly cross functional stores and have a smaller footprint and can leverage our scale and the presence of other locations in nearby markets.
Our national footprint.
And nationwide logistics network continue to be a competitive advantage for carmax and we remain committed to an appropriate level of investment on these differentiated assets.
We are confident that the foundational investments we are making in our omni channel experience, our proprietary tech stack and our highly.
Early recognizable and trusted band brand set us up for accelerated market share gains in 2021.
Now I'd like to turn the call over to John.
Thanks, and regain good morning, everyone.
Carmax auto finance and our lending partners once again delivered solid results.
For the fourth quarter cash penetration.
<unk> net of three day payoffs was $43, 5% compared with 43% year ago.
Tier two was up slightly to 21% of used unit sales compared with 25% last year.
Tier three accounted for $9, 5% compared with 10% of year ago.
This distribution.
Across the credit tiers is primarily reflective of the credit mix of applicants observed in the fourth quarter.
Year over year Caf net loans originated were comparable to the prior year quarter at $1 $8 billion.
The weighted average contract rate charged to new customers was eight 5%.
Up from seven 9%, a year ago and down slightly from $8, 6% in the third quarter.
Similar to the third quarter. This year over year difference in APR is attributed to the mix of cash customers seen within the tier one space rather than an increase in the rate charged to these customers.
Regarding the portfolio. The overall interest margin increased to six 4% versus five 8% from the same period last year as we continued to realize significant benefit from lower funding costs.
Our most recent securitization in January closed with a near record spread between the APR, we charged to customers and the.
Pay to fund the receivables.
Our ABS investors continue to recognize the consistency and performance of the Carmax origination channel and we appreciate their support.
Caf income was up 68% to $188 million in the quarter, reflecting a reduced loss provision plus an increase in interest.
<unk> margin.
The provision for loan losses was $5 million.
<unk> in an ending reserve balance of $411 million for the fourth quarter.
The total reserve is $2, 97% of managed receivables, which is lower than the $3 $1, 7% at the end of the third quarter.
Our rate of reserve as a percentage of managed receivables has trended downward over the past three quarters as our customers have exhibited a willingness to make payments even in these continued challenging times.
We believe our current reserve is adequate and considers both the positive payment behavior recently observed as well as the future uncertainty of the macro.
CRO environment.
I would also like to provide an update on the arrangements we have with our third party lenders that Enrique referenced earlier.
Our agreements with our partners have resulted in Carmax historically receiving of $300 participation fee for each of the agreed upon finance contracts purchased within the tier.
<unk> space.
Within the more subprime tier three space, where cash keeps approximately 5% of the volume Carmax has historically offered lending partners of $1000 discount for providing financing to a customer that we believe would otherwise not be able to purchase a vehicle from carmax.
At the beginning of the fourth quarter this tier.
<unk> participation fee increased to $400 in our tier three discount was reduced to $750.
If this structure had been in place for the entirety of FY 'twenty, one and penetration rates remain the same.
It would have resulted in annual savings of approximately $30 million or $40 on a per.
Two basis.
Yes.
With regard to future changes in the tier two and tier three space as of March 2021, Caf has begun to methodically increase its percent of tier three volume beyond the 5% level, and we anticipate reaching and maintaining of 10% share in tier three by May 31 of this.
Per unit of farmer Macs will continue to evaluate the lending environment and will consider future adjustments if and when we believe those changes are sustainable and in the best interest of all of our long term business goals Bill. Thank.
Thank you John Thank you Enrique.
Our 2021 fiscal year was one of the most challenging operating environment we've ever faced.
But due to our ability to act quickly and rapidly changing circumstances, we delivered new customer experience experiences and continue to innovate while remaining financially strong.
Of that financial strength has enabled us to continue to aggressively invest in our core business and pursue new growth opportunities.
Some highlights from this year that will have a lasting impact.
<unk> are as follows.
The completion of the national rollout of our omni channel experience, giving us a common platform across all of Carmax that leverages, our scale nationwide footprint and infrastructure.
Move of haul wholesale auctions into a virtual environment.
The national expansion of our new online instant appraise.
Days of offering on Carmax dot com and Edmunds dot com strengthening our leadership as the largest buyer and positioning us to become the largest online buyer of used autos from consumers and finally, the introduction of the love your car guarantee and industry, leading signature customer experience.
All of these were possible because of our exceptional associates.
They came together to take care of each other and our customers while also innovating for the future.
Customer response to our Omnichannel offering is strong and we're continuing to work to further improve and enhance the digital customer experience at every step of the sale.
One critical advantage of our omni channel model is the ability for the customer to choose how they progressed.
<unk> their experience.
As previously discussed our initial rollout of our omni channel platform enabled customers to buy of vehicle online.
The parts of the transaction may of required assistance from our CEC.
In the fourth quarter, we made significant progress, enabling self service for all components of the sale.
Exiting the quarter approximately 25% of our customers were eligible to buy vehicles online independently if they chose up significantly from the third quarter we.
We expect most of our customers to have this ability by the end of the second quarter.
Additionally, in Q4 about three quarters of our customers advance their transaction digitally.
With approximately 5% buying the vehicle online.
We consider an online purchase to be when all major activity, leading up to the purchase is performed independent of our stores. We expect our online sales will grow robustly as we continued to enhance our marketing and digital capabilities.
As a reminder, we will be hosting a virtual.
<unk> analyst day on May six where we will take a deeper dive into our online capabilities and our technology and data advantages at that time, we will also discuss new metrics around online orders and how they are fulfilled as well as providing insight on our longer term outlook and expectations.
Now I'll take a moment to highlight some recent enhancements we have made.
To the customer experience.
First is our online instant appraisal offer which allows us to quickly give customers an offer on their vehicle.
This offering was first introduced and tested on Edmunds Dot Com in June in February we completed the national rollout of this offering on Carmax Dot com early.
Early response has been strong with online box quickly.
Per our expectations, providing us with a clear pathway to become the largest online buyer of used autos from consumers.
At the end of the fourth quarter, we launched the ability for customers to get Penny perfect Transacted Bill financing offers and our online checkout process.
With this enhancements customers can apply and accept finance offers without needing.
Exceeding instance of an associate to submit a credit of application over the phone or in the store.
We are rapidly expanding this feature to our overall customer base in the first quarter.
We know our customer centric approach is a differentiator for Carmax and we will never stop innovating on behalf of our customers in January we introduced our new industry leading signature.
Customer experience love your car guarantee.
This gives customers the ability to take 24 hour test drives before committing to purchase and extends our seven day money back guarantee to a 30 day money back guarantee which is unmatched in the automotive industry.
It's too early to identify trends, but preliminary results show. These offerings are highly valued by our customers.
As we continue enhancing our online experience and offerings, it's important to educate our customers on our omnichannel experience to differentiate and elevate the carmax brand and our position in this evolving marketplace.
In the fourth quarter, we introduced the next phase of our National multimedia marketing campaign that began last year to increase awareness of our core.
Omni channel capabilities, which was highly successful.
We set records every week for web visits since being introduced reaching more than 8 million weekly visits by the end of February.
After the campaign launch web traffic and Google query volumes were both up over 25% versus the prior months.
We want to continue this momentum.
And ensure customers understand that Carmax offers the ultimate flexibility to shop and buy on their terms their way.
Accordingly, as Enrique mentioned earlier, we are planning on increasing our spend in both awareness and acquisition marketing in FY 'twenty two.
We will continue to evolve our business as an omni channel.
Retailer by innovating at an accelerated pace leveraging our scale across technology data talent and physical assets to unlock opportunities to compete across the used auto ecosystem.
This is why we are excited to announce that we've signed a definitive agreement to acquire Edmunds one of the most influential and popular automotive research sites in the world.
Over the past years, our teams have had the opportunity to collaborate with edmunds on a number of strategic initiatives, including our instant online appraisal offer and leveraging its proprietary content on carmax dot com.
We've been extremely impressed with its technology content and online experience as well as its talented tech and creative teams.
We believe we can both unlock additional value by working together to streamline the user experience across the entire car buying and selling journey. In addition to identifying other digitally focused opportunities.
One thing that has become clear is that we share commitment of delivering the highest quality online experience to our customers and dealers.
Edmonds as of widely recognized and deeply trusted brand. It will continue to operate as core business independently and we remain focused on delivering confidence to consumers and excellent value to its dealer and OEM client.
We are confident this transaction will drive shareholder value as we were able to leverage our combined size scale and extensive.
Stenseth industry expertise for the benefit of both businesses.
To sum up we are very proud of our performance. During this difficult year, we're even more excited about how our continued investments in our existing business and amendments are positioning us to be further differentiated and even more competitive we.
We expect robust top.
<unk> bottom line and market share growth for the upcoming year that is a result of not only lapping COVID-19, but demonstrating the impact of the investments we've made and the experiences we're providing.
At this point, we will be happy to take your questions Carol.
Thank you.
As a reminder, in order to ask a question. Please.
Press Star then the number one key on your telephone keypad.
To allow for as many questions as possible. We ask that you. Please limit yourself to one question. You May then re enter the queue for any additional questions.
Your first question. This morning comes from Sharon Zackfia from William Blair. Please go ahead hi.
Good morning.
Two questions, but I think the person is pretty fast.
Your inventory has gone down a lot in March I'm kind of an unusual amount of can you talk about how you're positioned from an inventory perspective to meet demand and whether there will be any kind of unusual costs this quarter to ramp back up inventory and then.
Then the second question was on Caf and the expansion of tier three can you give us any idea of what the profitability is of tier three out of per car basis relative to the $7 50 that you discount on the third party lenders.
Okay. Good morning, Sheila first of all I'll talk about the inventory and then I'll, let John talk about.
The Caf question so are.
You are right at the end of the quarter, our Sellable inventory is low but again.
That is a function of the fact that we had some COVID-19 and whether shutdown. So in the rise in Covid, we had to shut down some production locations. We also had some production locations shut down.
Because of the weather.
And so that's really why we're a little bit behind on saleable inventory at the end of the quarter I think we were down about 20% on saleable inventory.
I would just point out though that if you look at our overall inventory year over year, we're actually up a little bit. So we've got the inventory. It's just a matter of producing in fact, I think we ended the quarter north of 150.
<unk> 5000, thousands of units. So it's just a matter of of working through that and we're confident we have the capacity now it's just a matter of getting the inventory back to to our target.
So and I'll, let John answer of the Caf question, Yes, sure and thanks for your question on tier three.
Moving from five.
Sent per Caf the profit per unit on that vehicle is relatively consistent to our tier one vehicle that will sit depending on funding costs between 2000 $2500 and this funding environment, we will see how it plays out over the course of the year and Thats you can compare that to the $7 50, we would paying of discount being an important point to note here is though.
Because of seasonal regulation, we will have to as we book those loans reserved for the full loss impact of that immediately and so therefore, this will probably be a headwind for us in the upcoming year, but obviously in light of the lifetime profit will play itself out over time.
Can I just ask of thoughts on your website. It says there of 24500.
Alright.
There is some disconnect there between what's on their website versus what you actually have yes. So sharon on the website all of that Youre seeing right. Now is saleable inventory, we have very little of that we put as far as coming soon which you don't see on there are customer transfers you don't see the transfers that are going between stores, so to say of hub store and of satellite.
Line, you don't see sale pending if you took all of that into consideration you'd actually at least double the number that you currently see on the website and then of course it doesn't it doesn't include the work in process, which is really what gets you to about the 150000 total units that we have.
That's super helpful. Thank you sure. Thank you Sir.
Your next question comes from Craig Kennison from Baird. Please go ahead.
Hey, good morning. Thanks for taking my question Bill you said that you aren't carmax to be the largest buyer of used autos from consumers.
What is your estimate for that that total addressable market in terms of the number of cars.
And then on a related note can you share any metrics to illustrate your activity levels of your buy rate activity on the online appraisal tool that youre using to source of those cars sure. Good morning, Craig. So first of all let me just clarify something it's not that I want to be the largest buyer of used cars from consumers. We're already of the largest buyer of used cars from consumers I certainly wont.
To continue to buy every single one that we can if I think about the total addressable market.
$40 million used cars change hands.
Every year and in that number obviously is person to person. So that's how I kind of think about the overall market and as far as the online appraisal offer yes, we're really excited about this it's exceeding.
<unk> our expectations.
On Carmax Dot Com, we really got it up kind of middle of February. So we only have the partial month and obviously we've been testing. It. So we had seen some trends before that.
But if I look at the quarter as a whole the online buys were about 10% of the total appraisal.
As of land buys that we made.
And of that just because we got the Carmax dot com up towards the end of the quarter. Most of those buys came through our relationship with with Edmunds, but as I said, just the trajectory of where we see those things going.
We think in very short order, we'll buy more than anyone else online from.
Some of consumers.
Thank you thank you Craig.
Your next question comes from John Murphy from Bank of America. Please go ahead.
Good morning, guys I, just wanted to kind of maybe stay on this line of questioning on sourcing.
Vehicles, I mean, obviously the.
<unk> from itself is very tight right now without a lot of flow.
Low into the into the secondary market the used market, but theres also.
Lot of dealers and maybe even some new competition that are grabbing vehicles or buying vehicles as well to retail and particularly with the new vehicle dealers, they're higher in the funnel.
Getting access to some.
Mark trade loans, obviously as people are selling of new vehicles. So bill just curious if you know of as you think about this going forward how much of this tightness in supply that you can get.
For yourselves to retail.
As transitory and how much of it is.
Somewhat more of a secular shift and an increased focus by.
Viewers can maybe other competition and it's just taking a little bit harder to get inventory and then also is this edmonds.
Purchase of acquisition really the key here is focused on sourcing vehicles online is that really what this is because I know, it's a big lead generator for a lot of dealers. So theres a lot of other angles to what Edmund still delivers but is.
The key to us sourcing these vehicles directly from the consumer online.
Alright, John I'll try to hit all of this you got a lot of lot of stuff in there.
First of all as we've been talking about for several quarters vehicle acquisition is of strategic initiatives that we've been focused on and to your point.
If you look at the supply out there, yes the supplies.
Fly has probably gone down a little bit versus prior years. The great thing for US is that we get such a large amount through the the appraisal lane it really helps to alleviate anything outside of of Carmax.
Our focus with the online is to continue to drive as much as we can of buying vehicles right from the consumers and we see.
This has the potential to really increase our self sufficiency, which we think is a is a huge competitive advantage and again, it's one of the reasons why why we've been focused on it and we'll continue to invest in here now as far as Edmunds goes look the online piece of Edmond that's only a small piece, it's only a small benefit of the whole transaction that's not the.
The.
The reason that we have decided to acquire admit it absolutely has been a successful par.
Partnership on that piece of it and we think Theres a lot of opportunities still do on the acquisition, but there's other components. We've been working with the content for example, theres other things that edmunds that we feel like.
Having the two companies come together.
Take two great companies and strength in both of them. So it self.
Self sufficiency and buying through the alien increasing that whether it be through online or through the traditional eight line is absolutely a focus for us going forward.
Just real quick here, it's important to remember as well that we buy cars better than anybody we always have and will continue to do so.
So all we're doing now is that we're extending that to online. So the combination of in store and online. We're just going to continue doing that better than anybody.
Can you guys just give us an idea of where you think you will go in sourcing vehicles directly from the consumer as opposed to auctions.
Traditionally bought around $50 50, EBIT from times, sometimes it kind of ebbs and flows.
Kind of thing, where you can go to $60, 70% to 80% sourced from consumers move away from auctions. So John the way I think about it is more on the self sufficiency side first of all weather.
Whether it's of retail car of wholesale car, we want them, all but I think when I think about from a self sufficiency side, you know we've been somewhere in the let's call it.
This is the $35 to 50% self sufficiency over the let's call. It the last five years.
I would expect this to.
Take us to numbers that really are historic highs, if not kind of breaking breaking the ceiling on the self sufficiency. So our goal is to continue to see how far.
That number on the north side.
Very helpful. Thank you. Thank you John.
Your next question comes from Seth Basham from Wedbush Securities. Please go ahead.
Thanks, a lot and good morning, Bill I was hoping you could provide some more color around the price tests and how broadly.
We can take to extend those what have you learned in terms of the sweet spot for discounts and how much lift are you seeing from test thus far.
So I'll talk a little bit about kind of of the extent of of tests on I'll, let in retail just talk about the focus here, but so as I said in the comments we did expand.
Due to Covid test.
We have the test and a bunch of stores now I would say that we never would've we'll expect to do this in all of the stores. It just doesn't make sense and we know the differences between markets and <unk>.
Different stores and the elasticity is very different in different markets. So as all of them opening remarks, we're going to continue.
Expand us into the into the first quarter, but we're going to monitor the macro factors and obviously theres a lot going on right now as far as from a macro standpoint.
<unk> talked a little about in John's question of the supply of the supplies tighten up a little bit you know you've got some things going on on the on the new car side as far as new car availability.
Yeah.
New with they've got.
Tax refunds that are going that had been delayed in kind of pushing into March you got stimulus money out there. So there's a lot of different things kind of going on also macro factors you have to watch it just continue to monitor what your competitors are doing and whether thats their sales price of their margins you have to take all of that and consideration. So we will continue with these.
We know Enrique said earlier, we're pleased with him, but I'll turn it over to Enrique Let me just expand on some of the the profitability stuff yeah. Absolutely. So you know it's important to remember we're solving for two things right. We're solving for driving increased sales to lower prices, but at the same time. We're also driving for increased profitability and what we've seen in this test is really two things.
One is the same level of sales of elasticity. However, what we've seen is greater profitability flow through and there's really kind of two reasons why we've seen that greater flow through of number one is higher finance income so caf originate loans much more profitable in this environment as well as of renegotiated third party of finance fees and the second is just the lower variable.
Cost as we migrate towards our <unk> and so we've been really pleased with the results. We've seen again increased sales and increased profitability of so we expect to continue to test and as Bill mentioned, while also watching the macro environment.
That's helpful. Just as a follow up when do you expect to have better data on whether.
Whether or not you plan to roll this out across the chain. Obviously this new unique period of time with all the macro factors you mentioned could this be a multi quarter cash before you have a clear picture.
I think it's a.
Great question said, just because of those macro factors.
We generally we.
Get reads on these very quickly like.
I said, we got to read that we like the results, but again, we got to see how the rest of this quarter shapes up from them, it's more of the macro factors versus kind of internally. So.
I would stay tuned on that I think we'll probably have an update that on that in the.
And on the analyst day in May.
Understood. Thank you thanks Seth.
Your next question comes from Brian Nagel from Oppenheimer. Please go ahead.
Hi, good morning, good morning. Thanks.
Thanks for all of the color today, so I'm going to I've got a couple of questions I'll merge them together.
First off just with regard to Bill you talked about the bill.
Business into I guess into fiscal Q1 of March.
Could you help size better sales.
Sales reacceleration of particularly against the I guess you'd call it kind of.
Mid single digit used car unit increase in February until until the weather hit.
And then the second question I have.
A bit unrelated, but with regard to the renegotiation of the fees and the finance.
<unk> business, there was a bunch of what.
Carb ex the one time of we've talked about this bill for a long time.
Why now I mean, why why would why.
<unk> used a copy number to make them to make this shift at this point.
Great Brian I'll, let John talk about cap in just a moment I can't believe it's taken us like five or six questions for somebody that's actually asked about.
The sales performance, but I appreciate you asking look if I think about March as I said in the opening remarks, it's robust.
Actually it's a great March has been of Great month force, it's been a record month for US we sold more than 100000 cars in the month of March for the first time in the company's history and I would tell.
It doesn't really make sense to think about comps this year versus last year, just because of the COVID-19 impact the way I think about them as we should really be comparing them to March of 2019. So two years ago March of 2019 was the old record of number of vehicles that we sold and what I'm. Most encouraged about is if I compare our March performance.
Performance.
This year to two years ago, we're seeing double digit growth on top of that March which just really speaks to a lot of the things that are going on I mean sure.
Some of whats going on a macro factors beyond our control when you think about the pushing of the tax some of the tax refund money into March you think about the stimulus I absolutely.
We get that and that's helping drive some of that tailwind, but we're really excited about the tailwind beyond that so.
As we said in opening remarks, we're excited about 2021, I think the quarter I'm sorry of 2022, the FY 'twenty 'twenty two of the quarter.
Unfortunately, it's just the ending of a very volatile year for us.
You know it.
I'd just remind everyone. If you go back to.
FY 'twenty.
It was a great year double digit top line growth high mid single digit comp growth, we continue that into the beginning of FY 'twenty one up until the point, we hit the pandemic and then since the pandemic has been in play.
It's obviously been a very volatile year looking at the fourth quarter. The pandemic also started the caused some of the volatility at the beginning of the quarter with the December and we talked about that the last call. We had a big surge in Covid cases, and we had a bunch of markets that went back into lockdown, but I'll give you. One example.
The state of California.
Which has been typically one of the most restrictive states limiting occupancy to 20 and 25% that went back into that mode of 2025% in December a market like that what we saw is that occupancy restriction causes of that market to perform on average.
North of 10% worse than the rest of the organization. So we had that headwind on the occupancy restrictions in December and in January both of those two months, we had more than 50 stores that were less than 50% occupancy in that less than 50% is difficult for us you get to 50% above we can work through that but.
Just given the traffic that comes into our store it's hard to.
To manage that but that being said we started out December of negative four we were able to do better than that at the end of December we were still negative, but then coming in and of January and if I look at January it was the most.
Normal if there is such thing of normal months, we didn't have tax refund delays, we didnt have bad weather, what we really had to contend with where these occupancy restrictions and even with the occupancy restrictions we were seeing comps north of 7% in January which we feel great about it and I really do think that that's it.
Continuing.
Some of the trends that we saw in the prior year and our investments coming forward then we get into February clipping, along and like I said in the opening remarks, we were we were looking even though we started out of the whole we were looking at a mid single digit comp excluding the impact of leap day now keep in mind Leap day last year was of Saturday and you know our stores are the busiest day of of.
Of of the week, so excluding that we were mid single digit comp and then we hit the the weather constraints and.
Just the delay of <unk>.
The tax refunds I think in February returns were down about 30% year over year. So that's a little bit more color on that let me pass it to John to talk about the other questions sure.
Sure Brian Thanks for your question on the fees. So your question was why now.
Your question I think really three things I would point to there first is I think it's just a very favorable lending environment right. Now I think customers are performing well and I think there is finance companies and lenders are anxious to extend money out to customers that are that are performing well.
It's absolutely a favorable funding environment, that's very clear so those two things certainly made it easier and I think all of our lenders all of our lenders and our platform are really excited about carmax growth. So they're excited about what's coming in the future of they love Carmax collateral. So all of those things together I just made it feel like it was the right time.
I think something I would want to drive home, though.
As we think about fees or our entire platform whether it would be.
Discounts of the partners that we have in the platform.
We are cash participates in the platform. The most important thing we're looking to deliver from our finance platform is highly competitive offers across the credit spectrum in all economic environments.
And we want to do that such that we can scale of that as carmax scales. So we're always going to look at that platform and look to optimize it. It felt the right time to make the fee changes now, but we are very careful and looked at what the impact of sales where they are and if we make any changes in the future. We will stay very focused on providing those strong credit offers.
That's most important to us.
Hey, Brian one more thing too I, just want to point out you know I talked about the occupancy restrictions.
Knock on wood, but as of right now, although we have about a third of our stores still in occupancy restrictions. The key factor is we only have one store at this point.
Net.
Less than that 50 <unk>.
So again, that's an important threshold for us so.
Got it I appreciate all the color so bill just a question.
The month of March you sold 100000 cars, if I heard that right and that's up double digits from.
Corporate from Youre, saying Thats up double digits from what the number was from <unk> 19.
That's correct and I think thats.
And they should all be thinking about this year I think trying to relate comps.
This year versus last year I think that's a I just don't think thats a good exercise I think we should relate it back to 19, which was a great year for us and we sold a lot of cars and so that's what's really encouraging is that you look at because of that March of 19 was the past record.
The way, we beat that by double digits.
Okay.
Appreciate it. Thank you thank you Brian.
Your next question comes from Scot Ciccarelli from RBC capital markets. Please go ahead.
Good morning, guys.
You'll just kind of <unk>.
By the double digit you just referenced from Brian.
Is that comp where that's at.
Total that includes new stores.
That is both.
Its both its comps and total.
Got it helpful.
So, especially since you are trying to help everyone everyone understand kind of like that that the sales pace, some variances et cetera.
Question can you provide any more details on what you're seeing in the Atlanta market from a market share of sales perspective, just given the seasoning and your omni channel offering and kind of related to that is there anything unique that you're doing in that market because at one point I know there were some unusual things youre doing with marketing and pricing.
They hadn't rolled out everywhere.
Or is everything kind of a blanket offer a blanket testing at this point.
Yeah, So Scott on the Atlanta, you know as I said in the opening remarks the <unk>.
Actually maintained market share in Atlanta, and if I look at the fourth quarter comps in Atlanta, we're actually.
Were $6, 5%. So again, we're encouraged by that.
And look we had we have some older waves that we brought out omni that also had comps in the quarter.
But then you also.
It's hard to look at the waves because of waves had some stores that were impacted by weather some of that werent. So again Atlanta is kind of the the.
About look at it as far as different things you know when we started doing the expanded pricing test and looking at the marketing of lot of that was from the learnings that we had in Atlanta. So we're starting to obviously it started to put that out in other markets I think the other thing to remember is when we roll new things out. So for example, if you think about self serve the first market we put that in.
Clean is Atlanta generally we roll things there their first so there are always getting things a little bit earlier than than everyone else. So that would be the other the difference that I would I would point to as well, but on the self serve again, we're excited about that because I think the team has done a tremendous amount of work.
Coming out of the second quarter.
We've got 25 per cent of our customers were available to use it and we think that most of the customers by the end of the second quarter, we'll have that option.
Okay. That's helpful and just one more follow up if I can is there any demographic differences for people utilizing the omni channel than what your typical customer cohort would be.
Yes no.
It's interesting, we don't really see any big shift in demographics.
It's very much mirrors, the typical carmax customer that would come into the into the store.
Very helpful. Thanks, guys. Thanks, Scott.
Your next question comes from Michael Montana from Evercore ISI. Please go.
Go ahead.
Hey, good morning, Thanks for taking the question just wanted to ask.
If I could where the self sufficiency ratio was.
For fiscal fourth quarter, and then from the prior year and then I had a quick follow up.
Yes, so Michael the self sufficiency for the quarter was around.
Round it was a little bit about 40% 41 ish percent and thats up from the prior year's fourth quarter, where it was.
And the 30 day.
Mid mid mid to really kind of mid thirties around 35 or so.
Okay and then the follow up I had was just to get some sense of magnitude.
Yeah.
The potential tailwind.
G P used from self sufficiency.
I'm thinking of it as maybe 600 to $1000 of unit.
All else equal and I guess I Wouldnt insinuate that you all would flow all of that through but it just seems like if GPU.
Ignatz, who is still going to be down.
Even with that kind of a tailwind.
Yes that youre getting.
Really sharp on price and doing a lot of free transfer. So just wanted to understand how you think about striking that competitive balance as well.
Yeah, I mean, I think you bring up a good point I mean, the more we can buy through the appraisal.
As of late and obviously is.
It's better from a profitability standpoint, because you think about it you're not.
Paying auction fees and a lot of cases and all of the cases right now we don't from not having to transport them from an auction. They are actually at the store. So we take that as part of how we manage our overall margin and at times.
We will.
Take some of those synergies and will obviously pass along in prices, which would be really hard for you guys to see other times. We obviously, we have the option to manage our margin and get to the margin where we want of base. So it is a.
It's a balancing act and it's one that we'll continue to take into consideration as well as continuing to look at.
Macro factors as we go forward on on our pricing tests.
Okay. Thank you.
Your next question comes from Richard Gupta from Jpmorgan. Please go ahead.
Oh, Hey, good morning, Thanks for taking my question.
Yeah.
Follow up on like the hundred Townsend from March.
You talked about a day.
Some stimulus and tax reform shifts maybe some recovery from.
The poor weather in Texas from that.
Because of that right is there any need of foreign acquired.
How many of those.
100 pounds of units, we have the more of a shift.
Brad from March.
Have you seen any other normal year.
And just Mike could you give us a sense of the mix of alternative delivery.
Well in the fourth quarter ended March as well and I have just one more follow up thank you.
So as far as.
The sales shift and it really is hard to quantify especially break it down between the weather and the delay in tax refunds I think the best way to think about that as kind of how I talked about it earlier that you know.
Coming into February of Middle of February.
Wood of excluding the impact of the Leap day, we would have been run in about a mid single.
<unk> digit comp and obviously, that's not where we ended up so that's that's one way to think about we ended up of negative $2. Three that's one way to think about the weather and the tax taxes combined but it is really hard to parse out of it and it's hard to know exactly obviously.
How much is.
As impacted so as far as the alts.
Turning to of delivery.
Just a reminder of our alternative deliveries both home delivery, but it's also express pickup where curbside pickup that's still we're seeing still.
Under 10% of overall overall.
Overall delivery and again, that's a number while we have reported out on it it's one that.
You know.
It's not like we're trying to drive that again. This is all about giving the customer of the experience. They want it they want home delivery growth they want to pick it up in the store Greg So.
But to answer your question its about.
It's about under 10% of the overall.
I think the other thing.
The thing that I introduced which is the is the online.
Sales.
That's kind of a new way of new metric that we talked about on this call and obviously in May we will have more on these.
On these these metrics, but 5% of our customers essentially did the whole transaction online and then.
To us we don't care, how they get it fulfilled whether it's in the store or if it's at home and.
We expect that 5% to continue to go up.
Got it.
Firstly just on the previous question Mike.
Have you been able to gauge.
From the stimulus package that quickly that might of health Mart or.
And any sense of that like what kind of contribution of that in my lifetime.
Out of your growth in March yes.
I mean, obviously of having an impact again, it's like the weather in the tax line delay of refund, it's hard to gauge, but I think the thing that we're excited about it.
You've got different ranges and it's not an exact science, but we just feel like the the increase that we.
We're seeing is beyond the stimulus that's beyond the weather rollover its beyond the delay in tax refunds and it really speaks to.
All of the investments that we've been making on so many different fronts and that's what we're excited about.
Got it got it that's helpful. And then just do some of the SG&A line.
You talked.
It's about increase of investment.
The overhead cost bucket moved higher sequentially.
When Shirley.
Our understanding based on some comments on previous earnings calls were like there were some permanent reductions that took place. There. So just curious how we should think about that line items specifically.
Theyre going into.
Into fiscal 2022, and beyond what kind of investments are going on there like how much is fixed versus variable and et cetera.
Any color on that.
We would be really helpful.
Yes, the way, we think about it and now is absolutely the right time to investing and growing our business.
And that's the path forward.
For that we've been taking you know the industry and Carmax. We're at an inflection point. So we believe investment as of right point in time is now I think it's also important to recognize that the investments we're making.
Also impacting our appraisal and our wholesale business, which we have focused some of our investments on and we will be talking about that in the upcoming.
<unk> Analyst day, we'll speak to think that we'll speak to you. How we think about SG&A in light of these investments that are really growing multiple components of our business not just our used unit business.
Would look specifically to answer your question. The other line in SG&A that actually is where you'll find some of our strategic investments and we expect.
Expect that line will go up it has been offset over the past year and will continue to be offset by efficiency gains that we have across the business and that we're always focused on but that line items, specifically tags to our strategic investments as well around technology.
The only other thing that I would add to that is if all we were focused on this.
It was continuing our Inc.
Improving our omni channel experience you would've seen a cost of <unk>.
And in the cost curve from an SG&A standpoint.
But to <unk> point now is the time to continue to invest and we're investing in all different parts of the of the business. So.
Which is also why.
Year, you've got to look at the kind of a two year $5 eight in order to lever. So I just wanted to add that as well.
Bob.
Super helpful. If I could just squeeze in one more of the admin you talked about like neutral from an accretion standpoint of including like the financing of the equity I guess.
Any way to think about line.
<unk>.
Gross profit or like EBIT contribution from some of the deal.
Will you be reporting that.
Where will that go in practically all of them.
Okay.
Separate line item or something just any color on that.
Be helpful. Thank you that's all.
Yes, we do anticipate that we'll be reporting.
And this has an operating.
<unk> segment, so you'll have a view into certainly the revenue, which we announced today with their last year's revenues as well as profitability.
What I'd tell you that if you take a step back from a impact of accretive net dilution impact upon the transaction, it's really immaterial.
Carmax.
At many of the immediacy of what I'd tell you is that we expect to create a significant amount of shareholder value creation from the acquisition and we expect that to start in fairly short order as well, we've been partnering with edmunds and of great people there for over the past year at this point. So we are really familiar with.
Net benefits weak in both.
From a relationship.
And we decided to exercise our option and pull the full acquisition largely because we've seen the benefits over the past year of our partnerships.
Your next question comes from Rick Nelson from Stephens. Please go ahead.
Thanks.
Both of them quite sure.
So.
In terms of strengths are pretty well documented.
New car side I'm curious.
Hi.
Yes.
Your boots.
Sure.
Thank you.
New car.
It was more normal.
All of that.
Might impact when they do.
Yeah Ric good morning, it's hard to know when the new car.
The new car supply is going to continue to ramp up I mean, there obviously.
Facings of major chip shortage.
I think the supply the tightening of the supply is going to be around here for a while that being said I go back to some of our earlier comments, which is we source of lot of vehicles through our appraisal lane and the more that we do that.
The better it is for the organization. So we don't rely on.
The wholesale supply.
<unk>.
For all of our inventory, which.
No.
I feel like there's plenty of supply out there you got to work a little bit harder, but I would add on top of that is.
We are buying so much of the appraisal line. It doesn't really have that much of an impact on our business other than it could cause the overall sales price of average sales price to go up for everyone.
Thank you good luck thanks, Rick.
Your next question comes from Chris, particularly here from Exane BNP Paribas. Please go ahead.
Hey, thanks for taking the questions.
So first of all of the one of the fall from the tier two tier three congrats on getting that lower tier three.
Supply number of it since the first place.
But once we exit this.
Zoro credit World that we're in where losses are lower.
Part of unemployment if things go back to kind of pre Covid trends do you expect the change in fee structure to stick is this permanent or is this like that of the piece of wasn't understood of whether its environment driven or like moving forward.
Briefly acuity with a $7 56.
Yes.
Thanks for the question Chris.
It's hard to say if it's going to stick. This is very fluid environment, we're always looking to optimize the platform clearly.
Clearly, it's a very positive credit environment in which we're operating right now, but I think our lenders are in this for the long haul they see the growth potential there. So we.
Word of per product with them carefully and assess if of the fee structure is correct. We don't expect it to whipsaw back in force.
Quarter after quarter, but we will keep a careful a careful eye on it again, one thing I want to drive home is our structures of their partners. We have many partners and are in place.
Provide.
We went with the quality of offers that we that we that we are able to give our customers in all of the economic comments Bizzaro economic times.
In good times as well so they have been critical to the success that we've had over the years, including the tier three space, where we believe that is truly incremental sales. So.
We value them.
We work very carefully.
With them to make sure that everybody is winning in this platform and we are and we're poised for growth. So we feel real good about our platform right now.
Got it Okay. That's really helpful. And then my next question of something allowance.
Obviously, a lot of noise this year because of the loss environment, we spoke of a second ago in.
Cecil implementation, so can kind of help frame for us what kind of think about.
The allowance like let's just say the world goes back to normal credit losses normalize Cecil is still intact.
Like what would you allow it to look like given the profile of the risk characteristics, you're looking at today like let's say normalized allowance for a kind of normal cycle like.
Which of the number of looked like it's been.
To forecast.
Frankly, yes.
So the metric that I'll point you to again is that is that reserve divided by receivables of $2, 97% for this quarter of member coming down from $3 17 of the previous quarter.
Remember also in that metric is the tier one allowance to tier three allowance and the required recovery expense per seasonal so.
So I would say, we're still north of what we consider normal times, we've always quoted two to two 5% of the tier one business and obviously again, you get that tier three and the recovery in there, but we're still north of it.
I would point you to that two to two and a half for of tier one business is probably where we would expect it to revert back to when things go back to normal.
This concludes our question and answer session and sort of your for each 10 a M.
Of those remaining in queue can reach out to investor relations to have their questions answered.
I'll now turn the call back over to Bill <unk> for closing remarks.
Thank you Carol look we've covered a lot today.
A few takeaways one we feel great about the trajectory of the bill.
And the outlook for fiscal 2022, we think that the past investments our current investment our ability to quickly innovate innovate on things like the online appraisal of innovate on things like self serve.
We'll create an omni channel experience and a value proposition that is really unrivaled in the car industry and will allow us.
Business or an increased market share we're excited about the <unk> acquisition and working with that talented team to make both companies stronger and finally I look forward to our analyst day on May six to dive a little bit deeper into the business and discuss new metrics and share how we're thinking about the future. I also just want to take a moment to thank all of our associates for their contributions.
<unk> this past year.
It was extremely challenging for everyone and our associates did a remarkable job of not only taking care of each other and our customers, but really helping us to innovate the company forward and I'm tremendously proud of all of their efforts and I'm proud to work with all of them and finally to all of you on the call. We appreciate your continued.
The capture of Max and we look forward to talking with you again at our analyst day on May six.
Yes.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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