Q3 2022 Carmax Inc Earnings Call
Ladies and gentlemen, thank you for standing by when it comes to the third quarter of fiscal year 2020 to Carmax earnings release Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer.
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 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.
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 28, 2021 filed with the SEC.
Should 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 422 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.
Thank you David Good morning, everyone and thanks for joining US we're very pleased with this quarter, we delivered record levels of used and wholesale sales as well as EPS for the third quarter. We also delivered all time high margins in both used and wholesale for.
For the third quarter of FY 'twenty to our diversified business model delivered total sales of $8 5 billion up 64% compared with the third quarter of FY 'twenty, one driven by both higher average selling prices and volume gains.
Net earnings per diluted share was $1 63 up 15% from a year ago.
Across our retail and wholesale channels, we sold approximately 415000 cars in total up 29% versus third quarter last year for the first nine months of FY 'twenty. Two we sold approximately $1 3 million retail and wholesale cars combined as we set new records in each month.
We continue to be the largest buyer of vehicles from consumers. We bought approximately 383000 cars from consumers in the third quarter, which is up 91% versus last year and again, we achieve self sufficiency above 70%.
Our customer centric omni channel strategy solid execution and macro factors are driving performance across our company.
In our retail business total unit sales in the third quarter were up 16, 9% in used unit comps were up 15.8 versus the third quarter last year.
We experienced robust demand as we ramped staffing levels and built inventory.
Cap in our credit partners also supported our sales by continuing to deliver strong credit offers even as our average sales price grew by over 30% year over year.
We achieved sequential growth in saleable inventory each month within the quarter, while inventory and staffing remain below our targets. We are pleased with our momentum and are confident that we have access to the resources, we need to build inventory ahead of tax season, the retail demand will determine the pace.
In addition to strong unit sales, we reported record retail gross profit per used unit of $2235 up $84 per unit versus the third quarter last year.
With used car prices at all time highs, we chose to pass along the majority of our self sufficiency driven acquisition cost savings to consumers via lower prices. We believe we struck the right balance between increasing our margins and supporting our customers in a time of elevated industry prices.
Wholesale units were up 48, 5% from the third quarter of last year and gross profit per unit achieved an all time record of $1131 compared with $906 a year ago.
The strength in wholesale units was primarily driven by the ongoing success of our instant online appraisal offering.
We also benefited from still elevated valuations of used autos in the broader market.
Carmax Auto finance, our Caf delivered income of 166 million down from $176 million. During the same period last year Caf margins remained strong year over year financial results were impacted by a $68 million headwind and reserve adjustments as a reminder, last year's quarter benefited from a reduced.
Provision coming out of the pandemic in this years quarter reflects a more normalized provision.
Cap and our partner lenders delivered strong offers in all credit tiers in a few moments John will provide more detail on customer financing and cap contributions as well as on the impact of the auto loan receivable systems conversion right now I would like to turn it over to Enrique who will provide more information on our third quarter financial.
<unk> and Riga.
Thanks, Bill and good morning, everyone.
Gross profit was $837 million up 32% from last year's record third quarter.
This was driven by wholesale vehicle margin of $212 million, which was up 85% and used vehicle margin of $508 million, which was up 21% from last year's third quarter.
Other gross profit was $116 million up 18% from last year's third quarter.
Favorability in the quarter included $20 million of margin contribution from Edmunds.
Other gross profit also benefited from a $12 million improvement in third party finance fees with income of $1 $6 million compared to a $10 6 million dollar cost last year.
This was driven by renegotiated third party finance fees and lower tier three volume compared with last year.
Also positively impacting other gross profit E. P. P was up $5 million or four 8%.
<unk> penetration was stable at approximately 60%. This year's third quarter reflects a $6 million unfavorable return reserve adjustments compared to a $3 million favorable return reserve adjustment during the prior year's quarter.
Partially offsetting gross profit favorability service was down $21 million from the prior year's quarter.
This was driven by pressures primarily related to our efforts to grow technician staffing as well as a shift in some retail service capacity to instead supports used car reconditioning.
Service gross profit versus the prior year period improved in each month during the quarter and we anticipate that results will continue to improve into the fourth quarter.
On the SG&A front expenses for the third quarter increased to $576 million up 34% from the prior year's quarter due to costs related to unit volume growth and continued investment in our strategic initiatives.
SG&A as a percent of gross profit was roughly flat at 68, 8% compared to 68, 2% during the third quarter last year.
The increase in SG&A dollars over last year was primarily driven by three main factors first a $100 million increase in total compensation and benefits driven by a strong ramp in staffing.
$23 million increase in stock based compensation.
Unit volume related commissions.
And the inclusion of Edmunds payroll this quarter versus a year ago.
Second a $22 million increase in other overhead which includes our receipt of a $23 million settlement from a class action lawsuit.
The remainder of the change primarily reflects investments to advance our technology platforms and strategic initiatives.
And the impact of Covid related cost savings in the prior year quarter.
And third a $17 million increase in advertising expense as previously communicated to drive customer acquisition and to amplify the carmax brand by continuing to build awareness of our omni channel offerings.
For the first nine months of fiscal year 'twenty to SG&A as a percent of gross profit was 66, 1% leveraging approximately three points over last years nine months percentage of 68, 9%.
We remain committed to ensuring that we are efficient and effective in our spend and we expect that our targeted areas of focus will continue to deliver results over time.
During the third quarter from an efficiency and effectiveness perspective, we saw solid improvements in the service levels of our CEC and their conversion of web leads.
This was despite the record level of volume that our CEC is handled in the third quarter.
This improvement was due to a combination of successful staffing ramps and ongoing utilization of our AI and machine learning processes that drive the right work to the right associates.
We also continue to see efficiency gains in our buying organization.
The combination of our instant offer program along with the investments we've made in data science automation and AI continue to materially drive down our cost per byte.
From a capital structure perspective, we ended the quarter with an adjusted debt to capital ratio in the middle of our targeted range of 35% to 45%.
During the quarter, we entered into a $700 million term loan agreement primarily to support the growth of our total inventory dollars.
In regard to our share repurchase program, we remain committed to returning excess capital to shareholders and repurchased approximately 850000 shares in the quarter for approximately $115 million.
Now I'd like to turn the call over to John.
Thanks, Enrique and good morning, everyone.
Once again, our finance business has delivered solid results for.
For the third quarter Caf penetration net of three day payoffs was 42, 2% compared with 45, 7% observed last year.
Tier two increased to 22, 2% of used unit sales compared with 19, 5% last year.
Tier three accounted for six 5% of sales compared with nine 7% a year ago.
The year over year change in Caf penetration was driven by a larger percentage of customers leveraging cash or outside financing for the purchase of their vehicle. So all is caf comping over a historically high penetration in Q3 of FY 'twenty one.
We continue to observe strong credit offers from our tier two partners as they compete for additional volume within the Carmax channel. These offers along with a decrease in application volume in the lower portion of the credit spectrum contributed to the swap in volume between tiers, two and three.
Carmax continues to provide outstanding access to financing for our customers across the credit spectrum, our approval rates. This quarter remained over 95%. Despite financing amounts that are approximately 25% above the same period in 2020.
This ability to maintain such a strong credit offering speaks to the value of our multi lender credit platform supported by Caf and our long term finance partners.
During this year's third quarter on the strength of record used unit sales <unk> net loans originated was nearly $2 $4 billion.
The weighted average contract rate charged to new customers was eight 3% down from eight 6% a year ago and eight 5% in the second quarter.
The difference in APR is primarily a result of the change in the credit mix of customers along with rate testing the cap executed within the quarter.
Caf income for the quarter was $166 million down $10 million from the same period last year.
This included a more normalized loan loss provision of $76 million as compared to the significantly reduced provision of only $8 million in the same quarter last year that was driven by the continued reduction of the reserve that was established at the start of the Covid pandemic.
Almost fully offsetting the provision headwind was a year over year increase in total interest margin of $65 million or seven 2% of managed receivables.
This year over year margin increase highlights the strength of our ABS program the favorable state of the capital markets and our continued growth in receivables.
The current quarter's provision of $76 million, resulting in an ending reserve balance of $427 million or $2, 75% of managed receivables. This was up from $2 six 6% at the end of the second quarter and includes a six basis point adjustment for the added tier two and tier three volume cap is now <unk>.
<unk> you.
Adjustments was primarily driven by the implementation of our tier two origination test remember contribution from Caf originations is recognized over the life of the receivables while the loss reserve is recognized at the time of origination note also that the core portion of the reserve allocated to tier one loan losses remains well.
Within our historical range of two to two 5%.
During the third quarter, we transitioned from caps legacy auto loan receivable servicing systems to brand new systems.
The new platform went live in October and included a period of planned downtime and a number of operational areas, including collections and customer service.
This required pause in our business resulted in an increase in delinquencies and losses that we expect to normalize over the coming months as both our systems and processes stabilize.
This had an immaterial impact to the loan loss provision on the quarter.
Additionally, castle absorbed roughly $5 million in deployment expense in the third quarter related to items, such as temporary contractor support proactive customer communication regarding the systems change and added staffing to handle the elevated call volume once back on line.
We are extremely excited about this new platform that will not only provide caf a modernized foundation for growth and efficiency, but will also allow us to enhance our customer experience and self service capabilities.
I'd like to take this opportunity to thank the Caf organization, along with the corresponding project teams, who have worked so tirelessly to build them and implement such a transformative solution for both our associates and our customers now I will turn the call back over to Bill. Thank you Jon and thank you Enrique.
This quarter continues this year strong topline performance trend, we're benefiting from our investments and are excited about the opportunities that lie ahead.
We provide the ability for customers to buy a car, 100% in store or 100% online and our omni channel capabilities allow our customers to personalize their experience with a mix of digital and physical interactions to meet their needs.
As our omni channel and online sales continue to grow we have observed that the vast majority of our customers who buy digitally still elect to take delivery in our stores. This is another proof point that our ability to offer seamless integration across digital and physical transaction is providing value to our customers and is a key differentiator for us.
In the third quarter, a little more than 9% of retail unit sales were online up from the prior year's quarter a 5%.
Our wholesale auctions remain virtually 100% of wholesale sales, which represents 23% of total revenue are considered online transactions total revenue, resulting from online transactions was approximately 30%. This is up from 20% in last year's third quarter.
Approximately 57% of retail unit sales were omni sales this quarter up from 49% in the prior year's quarters.
We've been focused on completing the rollout of our 100% self service experience where customers if they choose to can independently complete the entire car buying process online currently.
Currently more than two thirds of our customers have access to complete end to end unaided online experience and increase from a little over 50% from our last call. This expansion reflects customers ability to incorporate trade ins without leans to their online orders. The remaining two use cases that we will be working through during the fourth quarter.
Our paid transfers and trade ins with wings.
In the third quarter, we bought approximately 194000 vehicles from customers through our online instant appraisal, which represents about half of our total buys from customers.
That's a new record.
4% increase from our second quarter number and a 19% increase compared to the first quarter.
This growth supports our belief that we remain the largest online by our abused 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.
In the third quarter, we continued to make progress on our online finance experience by expanding our finance they shopping or FBS capability.
Sps enables our customers to see personalized finance terms from multiple lenders across the full inventory of vehicles on our web site, which is a key differentiator in the retail marketplace roughly 75% of our customers are able to enjoy this experience today and going forward, we are working towards adding the remaining customers and integrating additional lenders to this.
Additionally, during the fourth quarter, we will be launching a more sophisticated version of the tool and increasing the speed of digital decisions.
Again, we're proud of our strong results for this quarter and year to date by delivering the most customer centric experience in the industry, we will enable sustainable growth and create meaningful long term shareholder value and with that we'll be happy to take your questions.
Jim.
Ladies and gentlemen, as a reminder, if he would like to ask a question. Please press star one on your telephone keypad and if he would like to withdraw your question press. The pound key. Your first question comes from the line of Sharon Zackfia with William Blair. Your line is open you may now ask your question.
In.
Hi, good morning, and happy holidays.
Just a question good morning, I guess a question on SG&A per car I mean, it's been up kind of at a double digit percentage range over the last few quarters and I know thats comparing against.
A year ago capacity restrictions and.
Lesser investments in the business, but I'm curious what your line of sight is into kind of SG&A per car returning to more of a loaded low single digit percentage increase or even starting to leverage that in the future.
Hey, Sharon good morning, happy holidays to you as well and.
About three quarters ago in our analyst day, we communicated kind of a new way that we were looking at SG&A that which is SG&A as a percent of gross margin or gross profit dollars. Because we believe that's much more reflective of how we actually run the business and more reflective of our efficiency because we are investing not only in our used car business, but we're investing in technology and platform.
And resources to grow our wholesale business, which certainly we've seen so far this year and certainly this quarter as well as our cat business. So we're investing across the board. So if you take a look at SG&A as a percent of gross profit that's kind of how we manage the business and year to date, we've leveraged that by 300 basis points and our intent is that we will let.
Average this year when it comes to SG&A and our plan is to leverage that into the fourth quarter as well.
Okay, great. Thank you and then a follow up question on new car pricing I mean, there's a lot of debate amongst investors on how much you know companies such as yourself are benefiting from used car prices. So is there any way to disaggregate. What you think the benefit is particularly maybe in wholesale GPU.
Prices as opposed to the initiatives that you've done without that increase the appraisal volume in general from the online arena.
Yes, Sharon when I think about used car prices. It's on one side, it's a bit of a headwind on another side, it's a bit of a tailwind I think you've hit the area, where I think it's more of a tailwind which is wholesale so anytime used price valuation goes up that's a good thing for organizations are buying cars and certainly is a good thing for us as I think about the wholesale.
Our just our growth in self sufficiency in totality.
Would still go back to that we believe that the majority of that growth is really a result of some of the innovations things like instant appraisal with the instant offer that we have on for appraisals I think that's driving the majority of the of the growth.
Even if I go back to the first quarter, where we didn't see it was prior to kind of this continued ramp up in valuations. We saw a huge increase in wholesale and just overall bought so while it is hard to your point to disaggregate. The two I think we believe that the majority of the increase is driven by things that we're doing internally.
Okay, great. Thank you. Thank you Sharon.
Your next question comes from Rick Nelson with Stephens. Your line is open.
Okay.
Thanks, a lot good morning.
Nice quarter.
Follow up on me online penetration it was 9% up from five.
A year ago, but yeah.
That's stayed stable sequentially.
Any thoughts on.
Why why we didnt grow sequentially.
Yes, good morning, Rick It was up a little bit.
But youre right. It is.
It was fairly a small increase from the last quarter and as I think about it one of the reasons that we got our self progression up to about two thirds was because we added some functionality to the trades that don't have liens and we added that more to the latter part of of the quarter last year and.
The the what we're really saying is we're giving customers options to do different things. So while they may think okay I'm going to do an online sale as I said moving rock remarks, some people are still coming in and wanting to deliver in the store. They want to do a couple of things in the stores. So I think a big drivers just options, we give consumers options and so they may think.
They are going to do one thing and they actually take a different path, which that's what we're all about we don't we don't care, which way a consumer wants to buy or how they want it delivered we just want to make sure that we're giving them. The most personalized experience I'd expect to see this percent continue to go up.
But again, it's going to be more driven by the customers' behaviors than us, forcing anybody to go one way or the other.
Okay.
It's bill.
Sure.
And your next question comes from the line of Craig Kennison with Baird. Your line is open.
Hey, Good morning Happy holidays. My question has to do with affordability.
With your Asps.
Up over $6000 to more than $28000 are you seeing the high prices crowd out any segment of your customer base, especially among your less fast.
Fluids consumers yes.
Yes, so Craig I think it just goes back to a little bit of Sharon's question, where I said, we've got some headwinds we've got some tailwind when you think about asps. The tailwind is more on the wholesale or the headwind I think theres a little bit of a headwind on the on the retail side, while you youre benefiting from less new cars that are out there. So you you probably getting some new card customers are looking for higher.
Selection.
But the price is up I think that does pinch some consumers out, especially at the lower end of the of the credit spectrum. It could make it more difficult for them. This is also the reason why we stay very focused on trying to make sure. We can continue to pass along efficiencies to customers just to make sure that we can give them as good a deal as possible, which again is why we took a lot.
Of our self sufficiency gains and put it through in prices.
Yes, Craig and I will just accentuate that comment I made in my prepared remarks.
I think this makes us feel all the more better given the asps on our 95% plus approved rate on those that did come through the door and our lending platform and our lenders down in that space still able to provide strong quality offers so certainly recognize it as it can be a challenge down there, but we feel like we have the credit to provide those customers.
Great. Thank you. Thank you Craig.
Your next question comes from the line of John Murphy with Bank of America. Your line is open.
Good morning, everyone. This is aileen Smith on for John.
I wanted to ask a question and circle back to one of the targets that you provided at your analyst day back in May which was to sell 2 million vehicles per year by 2026 across the retail and wholesale channels.
The time Youre volume levers, we're closer to the 1.2 range, but based on where <unk> lands youre, probably going to be close to 1617 for this year, which is impressive.
First question relative to when you provided that outlook six months ago, what segment of the business has been performing perhaps better than expectations.
Retail or wholesale and second what factors would you attribute to that more so increasing inventory through sourcing efforts or making progress with your customers on omni channel or other offerings.
Yes, so I mean, the way I think about it is.
We've been pleasantly surprised by some of innovations we expect it to increase our sales both wholesale and retail and which is why we set the goal out there. Obviously wholesale has been very strong, but so is retail topline retail has been strong as well. So we're very pleased.
I think it's a little a little too early we just put those targets out there.
Not that long ago, but will be reviewing those targets probably later on in the year after the year end.
And potentially updating but I think it's a little little early a little early at this point, yeah, I would agree with that and I think we've said on our previous calls we have our performance in our instant offer.
He has really exceeded our expectations, we put that product out really in the first quarter and it just has taken off its resonated with our consumers. It's resonated with the marketplace and that has really driven a good part of our business to self sufficiency, but also driving our wholesale business as well so that has exceeded our expectations and it's gotten.
Our instant offer program has gotten stronger every single quarter. So second quarter was stronger than the first quarter was stronger than the second so it seems to be building momentum out there in the marketplace.
Great. That's helpful. Thanks for taking my question.
<unk>.
Your next question comes from the line of Red Sox Goop Pas with J P. Morgan Your line is open.
Great. Good morning, Thanks for taking the question just wanted to follow up on you know just with the labor and capacity situation today.
How comfortable are you with the.
Pace of hiring and the level of staffing that you have azure stores.
Just to serve.
The demand that has to come in the near to medium term.
Yep, Yeah, we feel like I said my prepared remarks, we feel great about the momentum both in inventory and staffing if I look at staffing.
For the quarter, we hired more than 2000 associates and obviously the majority of those are are in the field and the customer experience centers. So we're on a good trend there were a little light of where we'd like to be and also this is a time of year. When we start to ramp up for the traditional tax season, but we feel great about that we also feel great about our ability to produce cars.
As I said earlier, we're sequentially building every single month, and we've continued that trend.
Early into this fourth quarter, we're very confident that we can get both to where we need that we've got the resources and the wherewithal to to take care of above.
Got it that's helpful and just a follow up on gas.
You've increased your tier two tier three mix within there.
That gap.
GAAP loss.
A few quarters.
Back to two years ago.
It looks like your third party tier two mix is also higher.
As you've also increased the tier two mixed Reuben Gaz.
So just curious as to what's changing in your overall customer base in general.
Michael Moore.
For Blue Chip.
Towards.
Tier two tier three banks or.
It's more a one time thing and I'm just curious how that's going to change.
Got it.
Yes, I appreciate the question.
So within the tier two percentage, obviously you saw that that went up within the quarter a couple of things going on there penetration or the amount of sales that are tier or a lender will take certainly a function of those that are applying for credit. We did mention that there was less volume down and lower the lower.
Subprime space that'll take volume from tier three but I think also very important to note is the credit offers from our tier two lenders has been spectacular.
Probably pulling some volume up out of tier three which is positive obviously from a from a participation standpoint. So that's strong obviously you did recognize the cap is in the tier two space as well. So we're taking some from some volume there, but I think the combination of the credit quality that are applying and then the tier two strength of offers is whats changing in the tier to tier two.
Tier three space.
Yeah.
Understood great. Thank you.
Yeah.
And your next question comes from the line of Brian Nagel with Oppenheimer. Your line is open.
Hi, good morning.
Nice quarter congratulations thank you Brian Thank you Brian.
The question I wanted to ask.
No what I mean.
Probably a bit of a follow up some of the prior questions, but there was definitely a nice acceleration in the used car business from fiscal Q2 to fiscal Q3, you know Bill you talked in your prepared comments about.
Some of the responses to questions you brought the inventory maybe the inventory constraints are lining up but I guess my question is what how should we think about this acceleration would be what are what were the key factors behind it and was it more supply more demand driven and then I recognize you don't give guidance or how should we consider maybe the sustainability of what we're seeing the business right.
As of the end of Q3.
Yes, so Bryan. Thank you for the question first of all I got to give a shout out to the team because they've done just a phenomenal job from a from an execution standpoint, taking advantage of the opportunities.
I did say I think the fact that we have been light in inventory, especially in the second quarter and how we've continued to work through that I think that's a big factor I think the staffing is another big factor because we were understaffed in the stores and our customer experience centers.
We continue to make enhancements on our omni channel experience you know if I think about just year over year online and omni channel. This year was roughly let's call. It 66% of sales a year ago was 50, 53% of the sales I think passing along efficiencies and pricing you know last quarter was really the first quarter that we had seen self sufficiency above <unk>.
90% and we saw that continue through this quarter and being able to pass those those savings along I think were also a good thing. So I think there's a lot that's playing playing.
Playing into and it is really hard to say, okay, well this piece of it or that piece, we felt great about the quarter. They were strong every month in the quarter and Youre right. We don't give guidance, but I will tell you where we're pleased with the start of the fourth quarter.
Perfect and then if I could follow up to that is.
As we think about the business what.
Constraints are still in place.
Inventory labor other things I mean, and then how should we think about those constraints abating again and just over the next a few months or whatever.
Yeah, I think you have labor I think labor is one that will continue to focus on while we've made great progress we want to hire some more folks there and thats pretty much across the whole organization.
So I think thats another one that we're continuing to focus on making great progress.
As well as inventory will continue to build out inventory, but like I said earlier I think we have the resources and we are on the right path to make sure that Oh.
We will be able to get our inventory to where it needs to be.
And Tom for any type of tax time.
Sales and I'll tell you. The other thing is if I look over the next year. We're also you know as part of our planned growth we have roughly let's call. It 10, new.
New production centers opening up some of them are part of G. O. Some of them are part of expansion plans that we'd already started so we've got the resources, we need and want and we're on a good trajectory, but those are our.
I think shorter term focuses for us certainly.
Ryan what I would add to that is between the improvements in staffing and certainly the physical capacity that we have today and moving forward, but I would tell you is that we have a strong belief that we are operationally strong and ready for growth. So we are well positioned.
Got it congrats again, thank you Kathy holidays.
Two.
Your next question comes from the line of that.
<unk> <unk> with Wedbush Securities. Your line is open.
Yeah.
Thanks, a lot and good morning. My first question is regarding the self sufficiency ratio, which was again up over 7% this quarter.
Second time in a row, but this quarter, we saw your retail unit comps really accelerate in your GPU be much stronger year over year than last quarter can you help us understand the dynamics that are driving those big changes from one quarter to the next.
Yes, so I think I spoke a little bit about the comps and all of the factors that kind of drove that in there I mean, obviously the self sufficiency is at a high for a second tier second quarter, we were able to pass those efficiencies along and like I said in my prepared remarks, what we're trying to do is walk a fine balance here you know we know prices are.
30% for US we know that puts pressure for some customers. So we're really trying to make the vehicles is as affordable as possible. We'll continue this quarter just like we did last quarter. We continue to look at inventory levels test elasticity check competitors' inventory. So there's a lot of things that go into this but I do think we struck.
The right balance both from a margin standpoint kind of coming in historically high if you look at recent the.
The recent margin ranges for the last few years I think we came in high on that but still we're able to pass along some great efficiencies to the to the consumers.
Right just to follow up last quarter, we didn't see.
As much improvement in GPU or comp.
Is the delta between last quarter and this quarter. Therefore due to market forces such as the difference between market retail and wholesale prices or is there something else.
Well I think this is the last quarter was the first time, we've really achieved our self sufficiency over over 70% and that's what we did realized last quarter, we pretty much where we're passing along.
I'll tell you is if you look at the market and we don't talk about market share until the end of the year, because there's definitely a lag in it you have to look at it on a calendar year basis due to that lag, but you know some of the external sources are out there that will tell you that the used car just overall market is either flat or maybe even negative.
And.
The last few months and we think that bodes well for the gains that we're starting to see so I think what you're really seeing here is you're just seeing a combination of a whole bunch of things that are really really kind of came to fruition like I talked about all the different things for comp I think what you're starting to see Theres just a lot of factors that really played in on the third quarter results.
Good to see thanks, Congrats and happy holidays. Thanks, you too.
Your next question comes from the line of Michael Lynn Tani with Evercore ISI. Your line is open.
Oh, great. Thanks for taking the question and congrats on the quarter.
Thank you Michael Thanks, Michael.
Just wanted to clarify one thing and then I had a question on provisioning but.
From a clarification standpoint.
Into the fourth quarter Enrique.
I just wanted to make sure I heard you correctly that you all would look to potentially lever the SG&A to growth ratio in the fourth quarter.
Just wanted to clarify that first of all and then I had a follow up.
Yes, that's what I said, our intent is to leverage.
Okay, Great and then the follow up I had was just from a provisioning standpoint, just wanted to understand moving forward.
How you all are thinking about it.
Basically that line item within Caf, because obviously, you've got potential for further improvements in unemployment rate and stubbornly high kind of used car prices, which theoretically should help you out.
And then Theres, obviously more tier two that you are doing and so forth. So.
Now that the reserve has been kind of built up again, a little bit.
Should we think $75 million a quarter more or less or any color. You can provide there would help a lot.
Yes, great Great question Michael.
Yes, if we think about.
Combination of the reserve and the provision exactly as you stated our reserve right now metric, we use as the $2 seven 5% reserve to receivables.
Remember in there is as you stated tier one but also tier two tier three volume and then some expense for recovery. There. If you back out that tier one as I mentioned, we feel like we're at a normal range of two to two 5% for that tier one business.
Also if you look at what we originated in the quarter $2 $4 billion again, recognizing that theres tier one a higher loss of tier two and tier three in that and that originations as well as the recovery expense, but $76 million feels very much close to normal.
For that size of origination so I think youre right on the Mark here, it's something we feel like retinal at a normal normal percentage from a loss rate perspective, but I would think about that going forward and one thing I'll point out as a reminder, again the provision was substantial at the height of the pandemic of $122 million done back in quarter, one of FY 'twenty, one and as we.
Saw performance improve really fantastic performance from our consumers, we were able to reduce that provision over time. So the fact that we comped over last year's quarter. Three is fantastic. So realized we've still got that comping to do but yes agree we're in a normal environment right now.
Thank you.
Thank you Michael.
Your next question comes from the line of Adam Jonas with Morgan Stanley. Your line is open.
Thanks, everybody happy holidays.
So yeah got it.
So would love to know how online looks on GPU versus the 2200 $35 is it higher or lower than that and as a follow up you mentioned the vast majority of your customers still prefer pick up in store within within the omni sorry.
Within the online.
Our label I'm curious if you can tell us how many or what portion of the 9% did opt for home delivery. Thanks. Okay. So on your first question online GPU. It's the same as in the in store. It doesn't matter if you buy it online or in store that the GPU is relatively the same.
As far as the 9% online sales the way, we think about it as we speak to it more alternative delivery, which is.
It includes home delivery as well as express pickup.
And when I think about that that percent of total sales.
Obviously is less than 10% with the bulk of it being more express pickups, where the customers come into the store. They are already filled out everything and maybe one or two little things to do but we get them in and out and about very quickly. So that's that's the bigger share versus the home delivery.
Yeah I just didn't know if you want to specify that you did say vast majority I just didn't know if it was 90% of the nine or 70% of the nine.
Oh, you mean for the you mean for oral.
Are you in home delivery.
It's a much smaller it's a much smaller percent of that.
All right, we'll leave it there okay. Thank.
Thank you.
Okay.
Your next question comes from the line as Chris noted Larry with BNP Paribas. Your line is open.
Hey, guys. Thanks for taking the question.
Hey, Good morning, just had a quick follow up on the credit and then have another credit question, but so the first one it sounds like in response to Mike's question I can take Tony's question earlier.
Like there was there was no impact I mean, the systems impact you seem to imply there was some kind of impact on gross losses recovery.
But then said like it wasn't headwind provision, but I'm trying to triangulate those two like was there any impact on gross losses recovery this quarter or is it more like just in the overhead expense.
Yes Fair question, Chris, Yes, as I stated in my.
Prepared remarks, a big systems change a lot of.
A fair amount of disruption that we're fully expecting and planned for but as we've come online and caught up with the volumes. We've seen those delinquencies trend down to more normal levels, but absolutely no impact or we believe it's immaterial on the full lifetime loss of the portfolio and so that's obviously nothing in there in the provision and the corresponding reserve so yeah just to add.
Chris We did it was immaterial last quarter in anticipation of it and it was immaterial again this quarter.
Okay. So that's helpful. Okay, and then just bigger picture bigger picture question.
Can you elaborate more on the lower rates on new loans this quarter compared to last quarter as I mentioned like kind of rate testing. Your peer made a large online pyramid a similar comment last quarter, just timing feels a little bit unusual to the experiments cutting rates were actually seeing the inverse happening where the markets raising rates now in terms of like a tier two you rich.
First question is with that backdrop have you found customers historically become more rate sensitive when rates rise and that is that the motivation for testing.
And then like just using some kind of historical precedent how should we think about the impact on rates to customers in periods, where funding costs go up like how big of a lag is there between passing those those rate increases through yes, great questions, Chris Yeah, as I mentioned in the prepared remarks, yes, we did execute some rate testing this quarter.
It's what we do we're always trying to keep an eye on what the market is doing we can look at a number of metrics internally again, our capture rate or our booking rate, which results in our penetration three day payoffs a number of metrics. We can keep an eye on but most importantly for cap is at the sole tier one lender, we want to be highly competitive for our customers for.
The best possible offers we can so it made sense. We just wanted to get the pulse of the market. We did some rate testing and we're watching that very carefully as you mentioned certainly it said did come out and signal that there's going to be rate increases in the future.
Again, we'll manage that as we always do we'll look at what the peers do.
How the market reacts often in a rising rate environment to your point you will see a lag there it won't get passed along to the customer right away, we're not looking to get out in front of that one again remain highly competitive in our rates and we will test we will test as we always do accordingly, we will watch how the market is moving what those take rates are and then if it makes sense to <unk>.
Along to the customers, we will but if it impacts sales to cars or the experience or our cash capture rates. Then we may not so the testing will drive what we do yeah and I think the great thing about Caf, Chris is that they're not just focused on maximizing their own profit the beauty as they're working on profit, but theyre also working to help maximize sales so.
Our decisions maybe sometimes vary from other players that are just purely in the finance arena.
So it makes sense. Thanks for the help appreciate it thank you.
Your next question comes from the line of David Bellinger with Wolfe Research. Your line is open.
Hey, good morning, Thanks for taking my question I wanted to ask on the nearly 200000 vehicles sourced from consumers through the incident appraisal can we get a sense of just how many offers you're making each quarter.
And version rate improving sequentially and given all the data you are now armed with and deploying.
Deploying more effectively are you seeing better engagement or even repeat activity from past customers.
Yes, so good morning, David on the online offers as you can imagine we make a lot of online offers some of the customers who are just really shopping for their value and they're not really interested in selling or even buying a car. So we're making up a couple of million dollars offers.
Year.
As I think about the conversion of that was really the way we've talked about it in the past is the customers that show up at our store that are there to get their vehicle appraise, whether they haven't had it appraised online or whether they have had it appraised online we look at the buy rate from that standpoint, So if I look at the traditional appraisal lane, where a customer hasn't had it appraised online we're really see.
And you know mid 30 buy rate, which is which is great.
On the online side as you can imagine if they've already had their vehicle valued online and they're showing up at the store then that's certainly it's gonna be a higher buy rate. So it pulls the overall buy rate by rate up but I think it's I don't think we should look at it necessarily as of the ones that have offers how many of them actually sold we do see some.
Good improvement there, but that's not really how we think about the business.
Got it and just anything on the repeat activity do you see more engagement from past customers in terms of the instant appraisal.
You know what.
David I'd have to go back and look and see how many of them are customers that have had them appraised price I don't have that number off the top of my off top of my head.
Okay, well thanks for the color I appreciate it bill.
Thank you once again, if he would like to ask a question. Please press star one on your telephone keypad to ask a question. Please press star one on your pallet found keypad. Your next question comes from the line of David.
Please turn with Morningstar. Your line is open.
Thanks, Good morning.
I'm just curious if you don't mind looking forward ahead into the future a bit I'm just curious what your thoughts are on as the chip shortage improves our new vehicle inventory over the say the next 18 months.
Will that cause used pricing to crash kind of hard and abruptly or do you see a soft landing and if you see a harder landing are you worried about your customers, perhaps having too much negative equity that they may stay out of the storm stay out of the market.
And 'twenty, yes.
It's a tough question to really gauge when I think the chip shortage will kind of correct itself.
Whatever I tell you, it's probably going to be wrong, what I believe will be will.
Start to see some relief maybe latter part of next year I think it's not going to be like a faucet that just automatically turns on overnight. So as more chips available new more new cars are available youll start to see the impact on used vehicle prices. I think you know anytime sales prices are up 30% year over year I think there is a risk that down the road.
Good.
There could be.
Some more negative equity out there, but I can tell you we've been in this business a long time.
Been through a lot of cycles up and down and we've proven that we can we can work through any any such factors, whether it'd be negative equity whether it be depreciation in the marketplace and I would actually tell you I think we are able to handle that and do a much better job than anybody else just given given our experience. So.
Stay tuned it's harder to know when we will get some relief on just overall use used car prices.
And just one other thing on that.
And just one other thing on the previous David's question on the I O. The team here for me I Misspoke, It's actually I think what I said was a couple million dollars a year, it's actually a couple of million per quarter, I misspoke I meant to say quarter versus a year. So I just wanted to clarify that for him as well.
Yeah.
Okay and.
You talked about mitigating.
Negative equity.
Is it possible that caf can be more aggressive and a negative equity situation.
Yeah.
Yeah, I mean, I don't think that we're going to necessarily adjust our underwriting given a particular situation of where asps are in negative equity and all that.
Again, all in all yes cap being the captive lender a great environment to always think about sales and capture that in our decisions, but again, we want to underwrite a strong credit customer we're going to the ABS market, we need a solid book of our book of business. So.
I just think we are very focused on delivering sales and credit quality, yeah, we deal with negative equity customers. All the time the cap team does a phenomenal job, they're just like our third party lenders do.
Yeah.
Okay. Thanks, guys. Thank.
Thank you.
Thank you and we don't have any further question at this time I'll hand, the call back.
To bill for any closing remarks, great. Thank you well. Thank you all for joining the call today and your questions and your support as I said earlier, we're really excited about the opportunities in front of us and as I always do I want to thank all of our associates for everything that they do how they take care of each other and our customers.
They are really the reason for our success and why we remain such a positive disruptive force in the used car industry. So I wish all of our associates and all of you a happy holiday season, and we'll talk again next quarter. Thank you for your time.
Thank you, ladies and gentlemen that concludes <unk> third quarter fiscal year 2020 to Carmax earnings release Conference call you may now disconnect.
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