Q2 2022 Carmax Inc Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and walk through the Q2 FY 'twenty to Carmax earnings release Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to turn the call over to your house.
David launched Eaton you may begin.
Thank you Kevin Good morning, Thank you for joining our fiscal 2022 second quarter earnings conference call I'm here today with Bill Nash, our president and CEO Enrique Mayor Mora, our senior Vice President and CFO and John Daniels, Our senior Vice President Caf.
Operations.
Let me remind you our statements today regarding the company's future business plans prospects and financial performance are forward looking statements, we make pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
These statements are based on management's current knowledge and assumptions about future events that involve risks and uncertainties that could cause the 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 interim report on Form 10-K for the fiscal year ended February 28th 2021 filed with the SEC.
So do you have any follow up questions. After the call. Please feel free to contact our Investor Relations Department at eight O four seven and four seven O four.
For two two extension 7865 lastly, let me. Thank you in advance for asking only one question and getting back in the queue for more follow ups Bill.
Great. Thank you David and congratulations on your new role welcome to the call to everyone else. Good morning, and thank you for joining us.
As you read in our earnings release. This morning, we delivered a record level of used sales for the second quarter and an all time record for wholesale vehicle sales as well as robust Carmax auto finance income growth.
For the second quarter of FY 'twenty to our diversified business model delivered total sales of $8 billion up 49% compared with the second quarter of FY 'twenty, one driven by higher average selling prices and volume gains.
Net earnings per diluted share was $73.0 down <unk> <unk> from a year ago as we rolled over last year's pandemic driven expense reductions and also continued to invest in our growth.
Across our retail and wholesale channels, we sold approximately 420000 cars in total up 20% versus the second quarter last year for the six months of FY 'twenty. Two we sold approximately 872000 retail and wholesale cars combined.
We also bought 59% more cars from consumers in the second quarter this year versus last year and achieved record self sufficiency of approximately 70%.
Our omni channel platform unique customer offerings solid execution and macro factors are driving performance across our company.
In our retail business total unit sales in the second quarter were up six 7% in used unit comps were up six 2% versus the second quarter last year. Despite the despite headwinds from inventory levels staffing and overall used car valuations.
Our team has made steady progress in building, our sellable inventory during the quarter and we achieved sequential growth each month. Despite the strong retail demand that carried into the second quarter.
While it remains below our targeted levels, we are on pace to grow our sellable inventory during the balance of the year.
In addition to strong unit sales, we reported $2185 of retail gross profit per used unit in line with our historical second quarter performance.
For wholesale units sold were up 41, 4% from a record second quarter last year.
Wholesale gross profit per unit was $1005 compared with 1086 for the same period last year. The strength in wholesale units was primarily driven by the ongoing success of our instant online appraisal offering that rolled out nationwide on Carmax dot com in February after launching on Edmunds Dot Com last year, we also.
Fitted from still elevated valuations of used autos in the broader market.
Carmax auto finance or Cath continue continued to deliver solid results with income of $200 million in.
In addition, caf and our partner lenders delivered strong offers in all credit tiers that we did see a sequential decline in tier three volume relative to the first quarter.
John will provide more details on customer financing and cash contribution shortly.
Now I'd like to turn the call over to Enrique who will provide more information on our second quarter financial performance followed by John After that I'll update you on the progress against our strategic priorities and then open up the call to Q&A Enrique.
Thanks, Bill and good morning, everyone.
Total gross profit was $815 million up 8% over last year's second quarter.
It was driven by wholesale vehicle margin of $189 million, which was up 31%.
And used vehicle margin of $507 million, which was up 5% from last year's second quarter.
Other gross profit was $120 million down $7 million from last year's second quarter.
Favorability in the quarter included $22 million of margin contribution from Edmunds since our June 1st 2021 acquisition.
This was on revenues of $39.0 million, which as noted at advertising and subscription revenues in the earnings release.
Other gross profit also benefited from an $18 million improvement in third party finance fees.
With income of $3 million.
Compared with $15 million in costs last year.
This was driven by lower tier three volume compared with last year and are renegotiated third party finance fees.
Offsetting this favorability service was down $40 million.
Primarily the result of rolling over a favorable items from the prior year's quarter and short term headwinds during this year's quarter.
Specifically, we comped over last year's Covid related cost reductions.
Additionally, we experienced higher 90 day warranty cost timing stemming from the significant increase in sales during the first quarter of fiscal year 'twenty, two compared to last year's first quarter.
We also realized lower retail service margin as production capacity was focused on reconditioning retail cars.
Also impacting other gross profit E. P P was down $6 million or five 4%.
While penetration was stable at about 60% last years second quarter included a benefit of approximately $8 million in profit sharing revenues that was not recognized this year due to a timing shift in the performance period for one of our providers.
On the SG&A front.
<unk> for the second quarter increased to $574 million up 30% from our Covid impacted quarter, a year ago and as we continue to invest in our strategic initiatives and growth.
As a reminder, last year during the pandemic, we took aggressive cost containment actions, particularly during the first half of the year.
SG&A as a percent of grow gross profit was 74% compared to 58.
8% during the prior year's second quarter.
The increase in SG&A dollars over last year was primarily driven by three main factors first.
$55 million increase in total compensation and benefits driven by staffing and sales growth and by the inclusion of Edmunds payroll this quarter.
Second.
A $41 million increase in other overhead due to investments to advance our technology platforms and strategic initiatives.
Third a $35 million increase in advertising expense as previously communicated to amplify the carmax brand build awareness of our omni channel offerings and drive customer acquisition.
We estimate that the COVID-19 related cost savings in SG&A in the prior year quarter was between $25 million to $30 million.
For the first six months of FY 'twenty to SG&A as a percent of gross profit of 64, 8% leveraging five points over last year's first half rate of 69, 3%.
We remain committed to ensuring we are efficient in our spend and we expect that targeted areas of focus will continue to deliver improvements over time.
We achieved an additional reduction year over year from our core CEC cost structure during the second quarter.
Additionally, our omni channel capabilities will unlock new opportunities as we leverage automation to reduce expenses and streamline operations for example.
Online instant offer program is resulting in more efficient buying organization as we continue to leverage the power of automation AI and data science.
On capital allocation, our ongoing focus is to deploy capital in our business to grow market share and deliver long term shareholder value.
That includes investing in digital capabilities to enhance all aspects of our omni channel experience such as online vehicle acquisition, which is already generating a strong ROI.
We also continue to invest in the strategic expansion of our store footprint and look for additional paths to create incremental value.
In regard to our share repurchase program, we remain committed to returning excess capital to shareholders and repurchased approximately one 8 million shares in the quarter for approximately $220 million.
Now I'd like to turn the call over to John.
Thanks, Enrique and good morning, everybody.
Once again, our finance business has delivered outstanding results.
For the second quarter caps penetration net of three day payoffs was 43% compared with 42, 6% year ago.
Tier two decreased to 21, 6% of used unit sales compared with 22, 3% last year.
Tier three accounted for seven 2% compared with 11, 1% year ago.
As a reminder, last year Caf decided to strategically route a portion of its tier one volume and all of its allocated tier three volume to partners to preserve the high quality of its portfolio during the start of the pandemic. These.
These changes were rolled back by the end of Q2 last year.
During the quarter, we observed strong offers from our tier two partners as they competed for additional volume within the Carmax channel.
We also saw a decrease in application volume and conversion to sale for applications in the lower portion of the credit spectrum.
We believe these decreases are due in large part to the higher average selling prices seen across the industry.
During this year's second quarter on the strength of record used unit sales Caf net loans originated was nearly $6.0 billion.
The weighted average contract rate charged to new customers was eight 5% up from eight 2% a year ago, but down from 9% in the first quarter.
Similar to the first quarter this year over year difference in APR as a result of the change in credit mix of customers rather than an increase in the rate charged.
For our portfolio overall interest margin increased to seven 2% versus 6% in the same period last year, resulting in a year over year increase of $65 million or <unk>, 33%.
The strong net interest margin highlights the strength of our ABS program and the favorable state of the capital markets.
Given we recognize income over the life of our loans, we will benefit from this higher net interest margin across multiple years.
Cash income for the quarter was $200 million up from $147 million a year ago.
This significant year over year increase comes as a result of the stronger net interest margin and higher receivables.
Our expense related to the provision in the second quarter was $35 million and resulted in an ending reserve balance of $398 million for the second quarter were 266% of managed receivables.
This is in line with the 262% at the end of the first quarter, while also reflecting a modestly higher percentage of tier three loans in the portfolio as a result of our decision to retain 10% of tier three volume.
We believe our future outlook on losses, and corresponding reserve is appropriate given the current macroeconomic environment.
With regard to our lending platform, and specifically where cat participates across the credit spectrum. We are constantly evaluating the landscape and remain committed to making decisions that we believe are sustainable in the long term and in the best interest of our customers.
During the second quarter and coordination with our business partners. We began a small test of caf originating in the tier two space.
Lakeland Caf entered tier three this test will remain in place at low volumes for an extended period as we take the time to understand both the tier two customer and how cast participation in this space can best enhance the range of credit options improve the customer experience and drive profitability.
Now I will turn the call back over to bill. Thank.
Thank you John Thank you Enrique I'm.
I'm very proud of how our teams have driven strong results this quarter across our diversified business model and we're excited about the incredible opportunity that lies ahead, we've intentionally built our omni channel platforms to give every customer the ability to progress to a sale or a bot, regardless of how they shop with us.
We've found that most customers don't want to shop for a car in a way that is tied solely to an in store or digital experience.
While we provide the ability for customers to buy a car, 100% in store or a 100% online our omni channel capabilities really differentiate carmax by enabling our customers to personalize their experience with a mix of digital and physical interactions to meet their needs.
In the second quarter, approximately 9% of our retail unit sales were online consistent with our first quarter and up from the prior years quarter of 3%.
As a reminder, we considered an online retail sale when a customer completes all four of the major transactional activity remotely. So that's reserving a car financing the vehicle if that's needed trading in or opting out of a trade in and creating a sales order.
Our wholesale auctions remain virtual so 100% of wholesale sales, which represents 21% of total revenue are considered online transactions.
Total revenues, resulting from online transactions was 28%. This is up from 24% in the first quarter and up from 18% in last year's second quarter.
Approximately 55% of retail unit sales were omni sales this quarter flat to the first quarter and up from the prior year second quarter a 49%.
Omni sales are those where our customers complete at least one of those major transactional activities remotely.
We've been focused on completing the rollout of a 100% self service experience where customers can independently complete the entire car buying process online if they so choose.
Currently a little more than 50% of our customers have access to a complete end to end unaided online experience.
And we are on track to bring this capability to all of our retail consumers by the end of the fiscal year.
Remember, while rolling out access to these capabilities will enable more customers to complete a 100% self service online experience.
All customers currently can buy a car online with assistance from an associate.
In the second quarter, we bought approximately 188000 vehicles from customers through our online instant appraisal, which represents about half of our total buys from customers.
That's a 15% increase from a record first quarter number this growth supports our belief that we become and are further expanding our position as the largest online bar of used autos from consumers in the U S.
We are continuously enhancing our e-commerce offerings to exceed customer expectations and to seamlessly integrate with our best in class store experience.
Let me share a few examples.
One of the areas we've enhanced.
As our digital capabilities our.
Our digital cables as well as our financing process nearly 65% of our finance customers start their loan process online with a preapproval application and as of the second quarter, 100% of those customers now receive a digital decision that includes customized loan terms.
A majority of those customers through no additional time or effort or provide a digital access to their personal financing terms on every corner inventory, allowing them to shop with more confidence.
In addition.
What differentiates our experience is the ability to provide these inventory wide credit offers using multiple finance partners, including Caf.
This ensures we provide our customers with the most attractive rates and terms were excited about our progress on this crucial part of the car buying journey.
We also continue to advance what we believe is industry, leading digital merchandising, which is critical to providing customers an immersive experience with our inventories the shop remotely.
This quarter, we added 360 degree interviews from the driver side and the back seat of the vehicle and continued to advanced vehicle hotspots, which are callouts to help the customer understand key vehicle features.
We also continue to leverage artificial intelligence to ensure that our photos are consistently high quality to best represent our inventory.
We're hearing very positive feedback on these advancements that help customers understand and fall in love with our vehicles as they shop online.
In relation to our acquisition of Edmunds, we're very pleased with our progress as our teams have hit the ground running on new innovations. We will continue to invest in the Edmunds brand and work together to unlock opportunities to compete across the larger used auto ecosystem.
We're really proud of the quarter and the significant progress we have made in advancing our omni channel strategy.
We are well positioned to deliver the most customer centric experience in the used auto industry, which will enable sustainable growth and create meaningful long term shareholder value.
With that we'll be happy to take your questions. So Kevin.
Ladies and gentlemen, if you have a question or comment at this time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered or you wish to move yourself from the queue. Please press the pound key.
Our first question comes from Brian Nagel with Oppenheimer.
Hi, Good morning, good morning, Brian.
Congratulations on the new role.
Thank you.
Question I wanted to ask and I know you talked about this a bit in your prepared comments, but just as we look at this quarter and the six 2% used unit comp.
Help us better contextualize that backdrop, clearly with Covid, maybe coming out of the Covid crisis, a lot of the internal initiatives.
What.
Is there a is there a way to think about that number on a board normalized basis I mean, how is it tracking versus what you view as the real well we've got the white healthier.
Follow up you're just as from a positioning standpoint, when you're cheap we're talking more and more now about used cars together with wholesale cars as a measure of overall sales is that reflect more of a strategic shift on the part of other.
Part of progress thank you.
Thank you for the question Brian So on the first question look we're really pleased with the the roughly 6% comps and I say that because you also have to put a little context around the environment. So we had several headwinds that we also faced during the quarter.
First of all inventory inventory is lower than where we want to be you know its probably about 30% off of as we entered the quarter, probably about 30% off of where we would normally target. In addition to the inventory headwind we were understaffed and we still are understaffed, but not to the degree we were understaffed pretty much occur.
The board and that's important not only because it hinders our ability to hit our S. L. A but in some cases, we just weren't able to get back with customers, which is never a good thing and so we're working on that and then I think also just a broader macro thing is just the used car valuations I mean year over year of acquisition price.
They are up about $6000 in and I think as <unk> talked about in his opening remarks or John talked about in his opening remarks about how that may push some used car customers just out of the market and I think when you take the comps in that light with those headwinds those headwinds when you add them altogether, our material headwinds. So we feel great about the comps.
For the quarter and we also feel great about the overall progress.
On your second question.
How do we talk about using wholesale yes, we do talk a little bit of a differently about that but I think that really goes back to a little bit of what I talked about on analyst day, which as you know people always think about is this is this used car retail and that that is in fact, great, but we're much more than that where you know a great retailer wholesaler finance here we've added Edna.
So we've got dealer services and it really goes to this broader used auto ecosystem. So thats really kind of the change that as to why we talk about both.
That's helpful.
To follow up on beyond the initial question because there is there a way to quantify what that $6. Two would have been had you not face these headwinds in the quarter.
I would tell you, Brian it's hard and I'll give you. One example, like the inventory being that down that substantially down in inventory would be just in itself a significant headwind now I will tell you I don't think the normal elasticity applies right now because a lot of folks are under inventory, but what I will tell you is we feel like when you take all three of those things and add them add them up there.
Material headwinds. So again, we're pleased with how the quarter came out from a from a comp perspective and just overall.
Thank you. Our next question comes from Sharon Zackfia with William Blair.
Hi, good morning, good morning.
Good morning, So the inventory dynamic has been I think pretty obvious throughout the quarter for anyone kind of kind of looking at your website.
What is your line of sight to getting inventory back into kind of more normalized levels. I know you mentioned you expect this to continue to improve as it did during the August quarter, but just you know is this something where you were three six months out and just to quantify is it a staffing issue is that the acquiring of vehicles. That's the issue.
Help us understand.
Stan kind of where the pinch point is right now on the inventory side right Yep. Thank you Sharon well first of all it's not acquiring the vehicles are you know I talked about my opening remarks, just about the fact that were you know approximately.
Approximately 70% self sufficient so it's definitely not the sourcing you know as I talked about Brian's question is it certainly has been a headwind and it's really all relates back to what happened in the fourth and the first quarter.
In the fourth quarter typically is a time, where we build our inventory up we weren't able to do that because of COVID-19 and some winter disruption productions than we had record sales in the in the in the first quarter. So we're still digging out of that hole, you know and like I told Brian we're about 30% light to target, we're about 15% year over year. If you look at last year's second.
Quarter wherever this second quarter, we were about 15% light we did make great progress sequentially. Every month, we grew our inventory and look we plan to continue to build inventory over the rest of the year and I think the timing is really going to be you know when we get back to where we want to be will really depend somewhat on on the demand.
As far as staffing yeah during.
During the quarter, although we were able to build inventory we did have some headwinds even though on the staffing side, but again I think staffing in general we're.
We're making great progress, we made great progress staffing across the board throughout the quarter and we continue to make great progress in this quarter as well.
And I know you mentioned, Brian that it's kind of hard to quantify the impact of the inventory, but I'm curious if you've seen conversion go down just because obviously every used car like a snowflake and if you don't have as broad of inventory I mean, you have to be losing sales. So is there any way to look at conversion as like a metric that might indicate what's been left on the table.
I think conversion was down a little bit and we look at conversion a couple of different ways. Both conversion from when they start top of funnel. But then also in the store store was fairly strong but up top of the funnel. We saw conversion go down which we think is a great opportunity because we've always said you know one of the main reasons people don't buy from US is because we don't have to vehicle that they're looking for and that certainly is magnified.
When your inventories down.
Thank you. Our next question comes from Rick Nelson with Stephens.
Okay.
Okay.
One follow.
Carol.
Strategy too.
More tier three.
Carol can you compare.
Compare the profitability of our tier three unit sale to a third party.
Lender what Kurt.
Risks elsewhere, where post strategy sure Yeah I. Appreciate your question rich yeah, So with regard to a tier three units of tier three sale from a finance perspective.
Obviously there is.
Generally a higher cost to fund there is a high risk customer there.
But it's going to be just a little south of maybe a more prime or prime loan. If you will so in that call. It depending on the funding environment and obviously the APR, we can charge, but let's say in that $4100.0 range, if you're able to capture all the finance economics, potentially but there is higher risk there.
There's a funding aspect there now.
Obviously with our partners, we were able to renegotiate fees. We're currently paying $750 to those tier three loans that are partners pick up and obviously we mentioned.
Beginning over the course of Q1, we started taking now 10% of the volume within the tier three space and we're happy with that volume and we appreciate it and we'll continue to assess the mix that we should have but ultimately for us we want to make sure that whether we take more tier three our partners taking more tier three we want to make sure that we are able to provide.
Great credit offers to those customers and in our current credit platform construct we feel we do that so.
The economics simply if that answers your question, but but again, we love the way it's constructed today and we provide great offers to those customers and.
And Rick the only thing I would add to that is whether it's tier three or tier two for that matter. It really is about balancing the sustainability of the program the profitability and then the customer experience. So we take all that into consideration.
Good luck, thank you Rick.
Our next question comes from Craig Kennison with Baird.
Yes.
Hey, good morning, Thanks for taking my question Bill.
Jin vehicles sourced from your online appraisal tool, it's really impressive do you have a feel for what those sellers would have done without the tool would they have shown up.
It showed up at Carmax store, where they have gone to another dealer where they've sold through some person to person listing service where are they coming from.
Craig I think.
We're pleased with the online I think we're getting a lot of incremental units there.
Because even our traditional appraisal lane is still very strong. So you know I'm not sure where they would've gone, but we absolutely feel there's a tremendous incremental value. There by the fact that we are are offering. This service. So maybe they would have gone in and sold other channels, but I I don't know which channels, but we feel good about the incrementals.
And what percentage of online offers are you able to purchase and does that tell you anything about the competitiveness of your offer yeah. So our buy rate traditionally how we've talked about the buy rate is through our appraisal lane, our trade appraisal lane buy rate.
<unk> is still I mean, it's very hard and its in the low thirty's on the online offers with the way we really look at that at this point as you know.
If you get an online offer because think about it where we're putting millions of online offers out there each quarter with the way we think about it as okay. Once we put an offer.
Of those customers, how many show up at the store and of those customers to shop the store how many of them actually sell in as you can imagine that buy rate the customers that show up with an online offer that itself is actually much higher than the traditional ILEC.
Yeah.
Thank you. Our next question comes from Richard <unk> with Jpmorgan.
Great. Thanks for thanks for taking the question just had a question on you know.
The investments are there.
You have made in the second quarter.
That's nearly advertising.
No other investments picked up.
Added more head count.
Could you give us any color on like how much of this is now started to benefit comps maybe you could give us some color on all of the house September is tracking.
That's useful and then just on GPU, because given the rising used vehicle pricing environment, we are back in again.
Late August into September.
Due October November as well.
You've previously given us some color on you know like a greater than 2000 number.
If you have any similar color you could provide us some.
Quarter as well.
With both of them.
All right.
Yeah Eric.
Yeah and in regards to SG&A, we firmly believe that now is the right time to invest in growing our business.
We're very bullish about our future given the strength and trajectory of our business and we're going to continue to invest in our growth we're going to continue to invest in the omni and e-commerce functionality as we move forward again, but we are on track by the end of this year to offer up to all of our retail customers, 100% self sufficiency online.
Our self service online and we're going to continue to invest in the acquisition of customers paid marketing and the investment in marketing is something that we had communicated last year that we were going to step up our marketing.
Advertising.
In other channels as well again, we believe we have a superior platform, but want to make sure that we're communicating that in an effective way to consumers and at the same time. There is also a very targeted ROI opportunities in advertising as well that we're investing in and then lastly, we're going to continue to invest in the acquisition of vehicles you know in the instant offer program that we launched has had tremendous.
Success is just an example of one of those investments that just provide an outstanding ROI, but we're going to continue to invest now and that being said, we do expect to lever over the longer term because at the same time that we're investing we also have cost efficiency plays whether it's the CEC is or whether it's the buying organization or whether it's other.
Channel as well as opportunities to get more efficient in how we work and so we will continue to do that but I think it is important to remember that we are we're on track with our investments. We're on track with our performance at this point, yeah and Raj. It wears out the only thing I would add to that is on the like the advertising.
For example, we're really pleased with the performance of that we saw about a 19% increase in web traffic or average flow to our website was about little more than $34 million a month. So that's another example, where you feel like the investments paying off as far as the second part of your question. The GPU. It's great question. So you know.
I kind of think about we're in a very similar situation today that we were last quarter. When we talked about this you know we're constantly testing you know a couple of quarters ago, we talked about doing some broader scale testing just because of some of the other factors. Some of the other profit channels that were coming through the organization and while there's still exist just like last quarter, we really.
Wanted to make sure we got to monitor the macro factors and doesn't make sense you got to look at your inventory levels, you got to understand the elasticity, which again were still getting the read on elasticity with the test that we always have going.
You want to see what competitors are doing and it just didn't make sense.
Two to deviate from that historical trend.
Trend that we have on margins and we at the end of the day, we want to have very very competitive.
Accretively priced inventory I think with the self sufficiency that certainly helps I think going forward. It is how you should think about the third quarter is probably gpus more in line with historical.
Average is just like the second quarter was.
Okay.
Thank you again, ladies and gentlemen, if you have a question or a comment at this time. Please press. The Star then the one key on your Touchtone telephone.
Our next question comes from Michael <unk> with Evercore.
Hi, Thanks for taking the question.
Wanted to follow up on the cadence of the comps throughout the quarter and then to start the third quarter from our work. It looked like the trends had accelerated nicely into August and basically could've been up double digits into September. So just wanted to see if you all would would comment on that if you could do it quantitatively and if not that if you could provide some color as to.
Oh, why trends named strengths and if its inventories or enhanced multi channel.
Good morning, Michael Yeah.
So obviously I've already said, we're pleased with overall comps for the quarter. We had positive comps every single month, and we really continue to trend. It started since March March was not only a record all time high record, but it was a record for the month April May June July August have all in their respective been a record month for us So we.
Phil we feel great about that and to your point. We're also very pleased with the start of the third quarter and obviously, we will talk more in detail about that at the at the at the end of the third quarter.
Okay, and then if I could just on the margin front kind of two questions. There. One was some folks had been anticipating a little upside on G. P. You do too pretty inelastic demand at the moment. So just wanted to understand if there's something we need to also consider in terms of the volatility of the pricing in the environment or perhaps there is more investment you are making.
And then the other one was just on the advertising spend.
For the year, and if theres any kind of cost reductions to consider as we cycled <unk> in four Q, what you called out in <unk> was helpful twenty-five $30 million. Okay. Yeah. So on the margins look we're always looking at our margins and you know I know, we probably have some some competitors that were the big.
Spike up in average selling prices.
Take more margin, you've followed us long enough to know that Asp's don't really drive our our margins, we feel very comfortable where our margins are going up for us it's about making sure we get a great margin, but also having great great prices. So.
Again.
The question I answered earlier I think the third quarter. You can think about you know margins more than the historical trend you know could you have taken more margin yeah, but again, we're in this for the long haul and we want to make sure our prices are super competitive all the time and we feel we feel great about that I'll, let <unk> speak to the advertising so.
So two questions on advertising, we had communicated earlier this year that our.
Our expectation for advertising on a per unit basis for this year was going to be similar to what we spend in the back half of last year. So somewhere in the mid three hundreds per unit and we're on track. So far this year and our expectation is that we're going to meet that for the full year.
In regards to you.
Copying over Covid, and the $25 million to $30 million that we estimate that last year and a one time savings and that was really focused on the front half of the year and there still are some of those that will carry over into Q3, but not to the same level of materiality as what we saw certainly in the first two quarters of the year.
Thank you. Your next question comes from Seth Basham with Wedbush Securities.
Thanks, a lot and good morning, my question's around GPU in the pricing environment, maybe you can comment on what's happening with home sale price strength in retail price trends through the quarter and how that's impacted your retail GPU.
Yes, so obviously retail if I look at it from a mix adjusted standpoint retail pricing was up about from an acquisition standpoint was up about 6000 wholesale was up probably around 3000 and so both are.
Actually as long as I've been doing this those are the biggest jumps I can remember ever ever seeing now I think the fact that self sufficiency is so high for US I think that provides us a lot of opportunities as we as we go forward because that comes into play on not only your margin, but you're your pricing structure I think.
During the quarter, what we saw was weak.
We came out of the first quarter very high elevated prices it hung in there for a little while we then actually saw a little bit of depreciation take take place.
But surprisingly it started to appreciate again, so and we went back I think we finished the quarter probably at the the hard that we we finished the first quarter. So it's a very interesting dynamic and I can only speculate maybe because the chip shortages as it looks like it took me longer than I think what people originally thought up for new cars. I think you know maybe there are some folks out there.
Or buying more used cars to replenish their lots since they're not gonna have new cars, but it is an interesting dynamic that we're seeing.
Yeah. So the fact that prices started to appreciate again through the back half of the year quarter unexpectedly should indicate that you could capture incremental margin on those unit sales. So your GPU exiting the quarter. It was probably stronger than it was at the beginning of the quarter is that the right way to think about it.
No I would just think that pretty much.
You know the way, we manage our GPU really doesn't it doesn't take into consideration the average selling prices theres. Other factors that go into that so I think it's fairly consistent throughout the quarter as the way you should think about it.
Thank you. Our next question comes from Adam Jonas with Morgan Stanley.
Why are you guys still buying back stock.
I mean, you have such an unbilled once in a generation growth opportunity youre up against competitors.
Have a license to lose money in zero expectation to return cash I understand there is the business spins off cash in everything but isn't it time to change the philosophy and just double down on the growth of the business cut the buyback stuff.
Yeah.
He said, we generate we're blessed with their operating model and the business model that generates a significant amount of cash and we're making the investments. We think are the right investments at the right time to generate our growth and we still and still with that in mind. We believe we have excess cash to buyback our stock and return it back to shareholders.
We're not holding back on our level of investments and you can see that in our spend and in our Capex that we are investing aggressively will continue to do so and even in that scenario, we have enough cash to buy back shares.
We are not holding back on our investments.
Thank you. Our next question comes from John Murphy with Bank of America.
Good morning, guys. Just a question on two pressure points I mean first on <unk>.
Inventory I mean, it certainly seems.
Bill as you just alluded to win based on what we know on the new vehicle side that the inventory shortage on the new vehicle side is going to persist well into next year and certainly probably past mid next year calendar year 2022. So I'm. Just curious if you think any of the dynamics will be relieved until we get there and then also as you think about sort of the staff.
<unk> levels.
Finding folks at reasonable prices is getting harder and harder so that cost inflation on the SG&A side and staffing up might be difficult to as well I mean, I'm just trying to understand if you can change strategy ultra strategy or the changes your growth strategy as you fight through these two macro factors.
Factors and when there'll be relieved because it's kind of masking all the good stuff youre doing and.
Modeling the story, but it's not you're not your fault and it's the other macro issues that you're going to have to fight through.
Yes, I think whatever I tell you on like the chip situations, probably the only I can guarantee you it will be wrong, but I do agree with you I think it's going to persist throughout this year, which could keep used cars at an elevated.
Persist through this year and I think pretty much through next year a good part of next year, which will keep I think prices elevated but it is also the reason why I'm. So excited about the investments we've made in <unk>.
<unk> acquisition and things like our instant offer because that really helps to offset some of those headwinds and really gives us a lot of opportunity and like I said earlier I mean, we're making strides continuing to get our inventory up so we feel good about that on the staffing look we've always invested in our associates I mean, they are they are the reason of our success and.
During this time period, you know I mean every employers out there looking for for staffing and we're no different than we've continued to invest more in this quarter and our associates. We've made pay changes that we feel really great about we also look for 17 years in a row. We've been one of the best places to work, which is a great thing from an employer brand standpoint, so again, even on the stack.
<unk> side, we feel great about the trajectory that were going on so yes. There are some headwinds there, but we're progressing both on the inventory side and both on the staffing and feel great about some of the opportunities that we have that things like self sufficiency in Io give ya.
Is it fair to say or maybe just a follow up at the SG&A leverage is going to be difficult.
To get through this.
A macro pressure.
I mean, it just seems like Youre going to maintain I mean, you guys are executing incredibly well on same store sales and grosses. Despite these headwinds I mean, I think some people are concerned about it but I mean, what you've done this quarter.
Pretty remarkable.
The grocers in the volumes.
I mean are you going to be able to get SG&A.
SG&A leverage until we get through sort of the end of calendar year 2022. It just seems like it's going to be hard to to pull off I mean, what's your thought about that and where should we think about that inflection point.
Yes, we certainly are in investment mode. As we've made clear and you can go back to our analyst day, and say, we really focused on driving our top line. We are focused on driving market share and are meeting and exceeding our target that we laid out there which is greater than 5% market share by FY 'twenty six and that does require investments like we've been.
Looking about the investments in the different areas that we mentioned certainly.
So will it be harder to leverage well in that kind of environment. It is a little harder to leverage right and our expectation is that our gross profit will continue to grow it will grow robustly and on the back of that gross profit growth.
<unk> deleverage specifically for this year for the entire year, our expectation continues to be that we should be able to leverage for this year. It's hard to look quarter to quarter. You just can't look at quarter to quarter, just because there's so many things that pop in and out of a quarter, but for the full year, we feel pretty good about that and then moving forward again, it's we are in growth mode and we're investing.
Accordingly, and at the same time and as I speak to every quarter, we do look at opportunities to get more efficient the investments, we're making to drive the top line and the investments, we're making to help pull out costs as well and we always have a sharp eye to that so we'll continue to do our best on that and at the same time, we are focused on market share growth and the opportunities there.
Lay ahead of us and we're really excited about them.
Thank you. Our next question comes from Ali for Greg with Guggenheim.
Good morning, Thanks for taking my question, so I'm sorry, but another question on retail GPU here. So I recognize that retail prices don't really drive Carmax is GPU, but just the self sourcing improvement from sub 50% to 70%. This quarter by itself should have been a big boost to GPU given the cost advantage from acquiring from <unk>.
<unk> versus auction I know you said you kept your prices competitive but it also doesn't seem at least based on our work that you are meeting meaningfully outperforming peers on volumes either so how do I tie that altogether.
Yeah, well first of all we feel really good about our pricing position and we've been we've been looking at this for a very long time. So we feel very good about where we are from a pricing standpoint and look this is one quarter. Some things have a longer tail, but I would also go back to the fact that look we had some major headwinds when you add them all up together.
They were hard to overcome which I've already talked about the inventory the just the pricing. The staffing. So you know those are headwinds over the self sufficiency I think what we're most excited about is this self sufficient and the opportunities that that gives us as we continue to move move forward.
Thank you. Our next question comes from David Whiston with Morningstar.
Okay.
Thanks, Good morning.
I hear you say youre happy with pricing, but then when I look at page six of the.
GPU gross margin per unit, there, it's down considerably year over year, and also down versus the quarter two years ago.
Is there do you, it's obviously a competitive marketplace so too.
Leeway to raise prices.
Well, David just so we're clear on like the GPU, if you look at it.
Last year's second quarter was a record GPU and we're only a little bit off of that so I would say if you look at our historical average were on the higher end of GPU side, I think there might be a little disconnect there.
There could.
Could we could we raise gpus, absolutely and look we're going to continue to monitor the macro factors to see what makes sense. You know self sufficiency gives us a lot of opportunity as we go forward, but I think at the same time, we are in this for the long term and we want to make sure customers are getting great value.
Every day and so we're going to continue to kind of weigh all factors as we as we go forward.
Okay.
To be clear I was talking with the eight 3% versus the 11% and then the 10, 5% to two years ago.
That's why I asked about price. So I'm sorry, So you were talking more as it relates to S. P.
Yeah and again, we just.
I would.
Throw that I look at it on a per unit basis, it's going to be skewed artificially skewed as a percent of revenue just because I've reached at retail prices are just up like 30% since the beginning of the year. So it's hard to look at kind of as a percent of revenue. We really look at the business is on a per unit basis, yeah, and we manage it differently than a lot of the other publicly traded.
A lot of retailers.
Thank you. Our next question comes from Christopher <unk>.
Exane BNP Paribas.
Yeah.
Hey, Thanks for taking the question.
Two quick ones on other gross profit.
This first trying to understand the service gross profit stimuli went negative this quarter because of the warranty issue.
Uh huh.
Next quarter or whatever like does this go back to the 20% to 30% gross margin rate, you've historically had or is there something like some kind of like lag told this warranty stuff that we should be thinking about.
Yes service this quarter, we were upside down $40 million year over year in the quarter and we estimate that a material amount of that were headwinds we faced in the quarter that were really short term in nature. So the two largest ones I would tell you is number one with a 90 day warranty that you mentioned and when you think about it right our comps this year in the first quarter.
We're 99% last year in the first quarter it was negative 42% and so youre looking at a lot more volume from a 90 day perspective warranty work that carries over into the subsequent quarter. So that's very much as a timing play right. There and then the second piece is similar to SG&A. We just had prior year kind of onetime COVID-19 related savings.
And support pay in the employee retention credit plan as well that are more kind of.
Shorter term in nature. So the material amount of that is really shorter term what I'd say is you know historically, we've run service as a positive margin contributor. The exception was last year certainly during COVID-19.
Not but prior years it had been a positive margin contributor and as we move forward on an annual basis, we do expect that to continue to be a positive margin contributor as well, but this quarter certainly those two headwinds.
Maybe a little bit harder.
Yeah.
Thank you again, ladies and gentlemen, if you have a question or a comment at this time. Please press. The Star then the one key on your Touchtone telephone.
Our next question is a follow up question from Rajat Gupta with Jpmorgan.
Okay.
Hey, Thanks for thanks for letting me get back on the queue here.
Yeah, I just wanted to follow up.
In terms of like a housekeeping question around SG&A.
How much of the quarter over quarter pickup in SG&A was due to the Edmunds acquisition.
And if you could frame it within some of the buckets and SG&A also that might be very helpful. Thank you.
As regard to Edmunds I spoke in my prepared remarks that from a gross profit standpoint Edmunds contributed about $20 million, you're going to see that in the 10-Q tomorrow when we file.
Overall, so it's an operating segment Edmunds is we're going to be reporting on it as an operating segment not a reporting segment. So we're gonna be reporting moving forward on the revenues on their gross profit.
But that's the extent to which we're going to report on them. What I can tell you, though is that overall they were slightly accretive.
To Carmax. So you can kind of back into their SG&A using that kind of approach.
And I'm not showing any further questions at this time I'd like to turn the call back to Bill <unk> for any closing comments, great. Thank you, Kevin well listen thanks for joining us today for your questions and your continued support.
We're confident in our ability to seamlessly merged our world class in person and online experiences.
Add to that our diversified business model and we will be able to continue to drive growth and market share gains as we move forward has always do I want to thank our more than 27000 associates for their continued dedication to living our values each day, taking care of each other the customers and our communities. You. All are the reason that we remain a positive disruptive force within the used car industry.
Again, thanks for everyone's time today, and we will talk again next quarter.
Hello, Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
Okay.
Okay.
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Please go.