Q4 2022 Carmax Inc Earnings Call
Thank you for holding ladies and gentlemen, your online for this Carmax earnings release conference call. At this time, we are still gathering additional participants we will get started momentarily. We thank you for your patience and I ask that you. Please continue to hold.
[music].
Yes.
Please standby we're about to begin.
Thank you for standing by welcome to the fourth quarter fiscal year 2022 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 session.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, Mr. David Loewenstein, a VP Investor Relations. Please go ahead, sir thank.
Thank you Jess good morning, Thank you for joining our fiscal 2022 fourth 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 Carmax Auto finance.
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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 additional.
All 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 28, 2021 .
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 great. Thank you David.
Everyone and thanks for joining us.
For the fourth quarter of FY 'twenty to our diversified business model delivered total sales of $7.7 billion up 49% compared with last year's fourth quarter driven by growth in average selling prices and wholesale volume gains partially offset by a decline in used units salts.
Net earnings was $159 8 million for the fourth quarter and $1 2 billion for the fiscal year.
Fourth quarter net earnings per diluted share was 98 cents down 23% from a year ago.
During our call in December we shared that we were pleased with our sales performance at the start of the fourth quarter. However, we began to see pressure after the holidays to continue through the end of the quarter.
In our retail business total unit sales in the fourth quarter declined five 2% in used unit comps were down six 5% versus the fourth quarter last year.
We believe several macro factors weighed on market wide used car sales, including consumer confidence vehicle affordability, the omicron COVID-19 surge and lapping stimulus benefits paid in the prior year period.
While the fourth quarter used market was challenging we are extremely proud of our accomplishments for fiscal 2022, and we believe we are well positioned for continued long term success across our retail and wholesale business and Carmax auto finance.
Our full year results reflect significant growth in sales market share and earnings as well as a solid progress on our strategic initiatives.
In fact, our retail market share growth. This past year was the highest it's been during my tenure as CEO and as a reflection of our focus on delivering the most customer centric experience in the industry.
Our market share data indicates that our nationwide share of zero to 10 year old vehicles grew 13% from three 5% in calendar 2020 to 4.0 in 2020 one.
Despite posting a decline in sales during our fiscal fourth quarter, comparing our results to publish used vehicle Saar data suggest that we continue to take share during the quarter.
We believe we are well positioned to deliver profitable market share gains in any environment.
Across our retail and wholesale channels, we sold approximately 343000 cars in total during the fourth quarter up 11% versus last year's periods.
For the fiscal year, we sold approximately $1 6 million retail and wholesale cars combined up 38% year over year.
We continue to be the nation's largest buyer of vehicles from consumers. We bought approximately 324000 cars from consumers during the quarter up 69% versus last year's period.
For the fiscal year, we bought approximately 1.4 million cars from consumers up 95% year over year.
Self sufficiency continued to be strong during the fourth quarter remaining above 70%.
We reported fourth quarter retail gross profit per used unit of $2195 up $109 per unit versus the prior year period.
With used car prices remaining elevated we chose to pass along some of our self sufficiency acquisition cost savings to consumers via lower prices. We believe we struck the right balance between covering inflationary cost maintaining margin and keeping our vehicles more affordable.
Our approach reflects our continuation of our commitment to doing what's right for the customer, which ultimately drives the growth of our business.
Wholesale unit sales were up 43, 8% from the fourth quarter last year and gross profit per unit was $1191 compared to $990 a year ago.
The strength in wholesale units was primarily driven by the ongoing success of our instant.
Online appraisal offering.
So valuations remain historically high during the quarter, which supported margin relative to the fourth quarter last year.
Carmax auto finance for Caf delivered income of 190 $194 million up from $188 million. During the same period last year in a few minutes John will provide more detail on customer financing and cash contributions, but at this point I'd like to turn the call over to Enrique who will provide more information on our fourth quarter financial performance.
Enrique Thanks.
Thanks, Bill and good morning, everyone.
Total gross profit was $711 million up 11% from last year's fourth quarter.
This increase was driven primarily by wholesale vehicle margin of a one.
<unk> hundred $77 million, which was up 73%.
Continued growth of the wholesale business is providing us with a strong gross profit lever.
Used vehicle margin up $427 million was relatively flat over last year's fourth quarter with the decrease in units largely offset by an increase in margin per unit.
Other gross profit was $107 million down 4% from last year's fourth quarter.
This decrease reflected a $33 million decline in service profit.
Primarily due to the deleverage driven by the reduction in sales and the staffing and efficiency impacts from the omicron COVID-19 surge in the fourth quarter.
Our intent continues to be to operate service as a profit center, which from quarter to quarter can be impacted by sales trends and staffing disruptions.
Partially offsetting this decline was favorability in ETP and third party finance fees as well as $20 million of margin contribution from Edmunds.
<unk> grew by $6 3 million or 5% year over year for the quarter with penetration stable at approximately 60%.
This favorability was driven by an $11 million a year over year net benefit from the recognition of profit sharing revenues and adjustments to our cancellation of reserves.
Recall from our second quarter call in September one of our providers implemented a timing shift in their performance period for profit sharing revenues.
All of our providers now utilize the same timing, which alliance recognition as applicable to our fourth quarter.
Third party finance fees improved by $4 $7 million with income of $1 $8 million compared to a cost of $2 9 million last year.
This improvement was driven by lower tier three volume compared with last year's fourth quarter.
On the SG&A front expenses for the fourth quarter increased to $621 million up 23% from the prior year's quarter due to continued investment in our strategic initiatives and in marketing.
The consolidation of Edmunds and gross costs related to the increase in appraisal buys new stores and customers customer support at our customer experience centers or <unk>.
SG&A as a percent of gross profit deleverage to 87, 3% from 79% during the fourth quarter last year.
This deleverage was primarily due to the decline in sales that occurred in the quarter.
The increase in SG&A dollars over last year was mainly due to three factors first a $43 million increase in total compensation and benefits driven by our continued strong ramp and staffing, including proactive staffing in anticipation of tax season and wage increases.
Additionally, we had a $16 million increase in annual bonus related compensation.
Plus the inclusion of Edmunds payroll this quarter versus a year ago.
Partially offsetting this increase was at $42 million decrease in SaaS based compensation.
Second a $40 million increase in other overhead the primary drivers of this increase include investments to advance our technology platforms and strategic initiatives as well as growth related costs.
Third a $19 million increase in advertising expense to our ongoing plan to drive customer acquisition and amplify the carmax brand by continuing to build awareness of our omni channel offerings.
For the full year SG&A as a percent of gross profit was 77% leveraging approximately one point over last year's percentage of 71, 6%.
Our approach to SG&A and costs heading into next year remains consistent we will continue to invest in our business.
At the same time, we remain committed to ensuring that we are efficient and effective in our spend and we continue to target areas of focus that we expect will result will deliver results over time.
We expect to require an increase beyond the 5% to 8% range of gross profit growth to lever in FY 'twenty three.
This is largely driven by the timing of strategic investments and growth related costs as well as heightened inflationary pressures.
While we expect to remain in investment mode over the next few years, we expect our leverage point to go back down after FY 'twenty three.
Our capital allocation philosophy remains consistent.
We will continue to invest in our core business consider new growth opportunities through investments partnerships or acquisitions, and returning excess capital to our shareholders.
In regard to our share repurchase program, we repurchased approximately 872000 shares in the quarter for approximately $102 million for.
For the full year, we repurchased approximately $4 5 million shares for $561 $6 million and as of March 31 2022.
<unk> $721 $7 million of authorization remaining.
As communicated today, our board of directors has expanded our share repurchase authority by $2 billion with no expiration timeline.
The board's authorization reflects carmax is ongoing commitment to long term shareholder value creation through growth and return of capital.
For capital expenditures, we anticipate approximately 500 million in FY 'twenty. Three this increase in spend is driven by long term growth capacity initiatives, our auction sales and production facilities. In addition to continued investments in technology.
In FY 'twenty three we plan to open 10, new locations, including our first three stores in the New York City Metro market.
Our extensive nationwide footprint and logistics network continue to be a competitive advantage for carmax and we remain committed to an appropriate level of investment how these differentiated assets.
Now I'd like to turn the call over to John .
Thanks, Henry and good morning, everyone.
Carmax Auto finance business delivered strong results once again for.
For the fourth quarter Caf penetration net of three day payoffs was 41% compared with 43, 5% last year.
Tier two increased to 23, 7% of used unit sales compared with 21% last year.
And tier three accounted for six 7% of sales compared with nine 5% year ago. The.
The year over year reduction in <unk> penetration is attributed to a larger percentage of customers coming in with outside financing.
Our tier two partners continue to provide highly competitive credit offers as they compete for additional volume within the Carmax channel. These.
These strong offers along with the decrease in conversion in the lower portion of the credit spectrum, driven by higher average selling prices and a corresponding monthly payments contributed to the swap in penetration between tiers two and three.
During this year's fourth quarter caps net loans originated was nearly $2 $1 billion.
Weighted average contract rate charged to new customers was eight 2% down from eight 5% a year ago and eight 3% in the third quarter.
The difference in APR is primarily a result of the credit mix of customers booking with cat.
GAAP income for the quarter was $194 million, an increase of 3% or $6 million from the same period last year.
Total interest margin increased $64 million driven by $42 million in higher interest and fee income from our continued growth in receivables and $22 million and lower interest expense from the past ABS deals to continue to provide value over time.
This improvement in <unk> margin and the growth in average managed receivables more than offset the substantial increase in the provision for loan losses, which was a more normalized $54 $4 million in the current year's fourth quarter versus $4 $6 million in the prior year's fourth quarter.
In the prior year's fourth quarter, the provision for loan losses benefited from the continued reduction in the reserve that was established at the start of the Covid pandemic.
The current quarter's provision of $54 million resulted in an ending reserve balance of $433 million or $2, 77% of managed receivables.
This is largely consistent with the 275% at the end of the third quarter and includes a three basis point adjustment for additional tier two and tier three volume originated by Caf.
I also want to take the opportunity to highlight a few of the accomplishments made since our last call regarding our online finance experience.
As a reminder, nearly two thirds of our customers begin their financing process when carmax dot com applying for credit on any vehicle and our inventory or simply request a dollar amount.
Our unique finance space shopping engine available to most of our customers allows for multiple lenders to decision a single customer or co applicants on our entire inventory to provide a full suite of personalized decisions available at the consumer's fingertips.
This tool is incorporated into the search page within Carmax dot com, allowing the user to sort and filter not only on the vehicles characteristics, but also an important finance terms, such as monthly payment and down payment.
During the month of March we further enhanced this experience and are now testing or no impact to your credit score feature.
Along with a streamlined application process that provides real time credit decisions on our full inventory.
We believe that our differentiated multi lender platform coupled with these and additional enhancements that are on the horizon will further strengthen our digital shopping experience now.
Now I will turn the call back over to Bill.
Great. Thank you John Thank you Enrique as I mentioned earlier in this call I am very proud of how we performed in fiscal 2022, we bought and sold more vehicles than ever before through our retail and wholesale platforms. We've continued to innovate to aggressively invest in core areas of our business and to pursue new growth opportunities.
As a result of these efforts we have achieved double digit year over year growth in our market share and we believe we are well positioned to take even more share. We have continued to build out new and enhanced capabilities and add those capabilities have come to market. We have continued to see positive returns from.
Some highlights from this year that will have a lasting impact our first enabling online self progression capabilities currently available to approximately 90% of our customers with full availability for every customer anticipated by the end of this first quarter.
Next leveraging our online instant appraisal offering to buy record number of cars directly from consumers, which enable us to nearly double our self sufficiency as we drive.
As well as drive sustainable wholesale unit growth.
Also transitioning caps legacy auto loan receivable servicing system to brand New technology, which provides cap a modernized foundation for growth and allows us to enhance our customer experience.
And finally rolling out the finance based shopping capabilities that John just described.
Our E Commerce engine combined with our unparalleled nationwide physical footprint is a key value to our customers and helps us provide what we believe is the best experience in the used car industry.
Our ability to offer seamless integration across digital and physical transactions gives us access to the largest total addressable market and is a key differentiator and one that we will continue to enhance.
In regard to our fourth quarter online metrics approximately 11% of retail unit sales were online up from prior year's quarter.
5%.
Our wholesale auctions remain virtual so a 100% of wholesale sales, which represents 23% of total revenue are considered online transactions.
Total revenue, resulting from online transactions was approximately 31%. This is up from 17% in last year's fourth quarter.
Approximately 55% of retail unit sales were omni sales this quarter up from 51% in the prior year's quarter.
In the fourth quarter, we bought approximately 162000 vehicles from customers through our online instant appraisal that represents about half of our total buys from consumers.
The fiscal year, we bought approximately 707000 cars through this channel again, representing roughly half of our total buys from consumers.
Going forward, we will continue to evolve our online and in store capabilities to enable more seamless experience for our associates and customers.
I'd like to highlight four key areas of focus for FY 'twenty three.
First as John mentioned earlier, we're deploying a more sophisticated version of our finance based shopping capability that enables real time decisions and offers our customers the ability to pre qualify for a loan with no impact to their credit score.
Second, adding self service capabilities to enhance in store interactions, including appraisals and express pickups.
Third growing vehicle acquisition through attracting new customers and pursuing partnerships as we expand our appraisal offering to dealers and other businesses.
And finally, continuing to leverage data science automation, and AI to improve efficiencies and effectiveness across our buying organization business offices and <unk>.
We're very proud of the strong results for fiscal 'twenty two.
They are in large part due to our relentless focus to provide our customers the best experience in the industry.
We are in a strong position moving forward and we'll continue to invest and innovate to achieve profitable market share growth.
During our analyst day last May we announced long term targets of achieving 2 million combined retail and wholesale units sold and $33 billion of revenue in FY 'twenty six up from $1 2 million and 19 billion, respectively. During FY 'twenty one.
So we don't anticipate updating our targets annually our strong performance in FY 'twenty two has given us new perspective on these targets that we believe is appropriate to share at this time.
We're revising our FY 'twenty six targets to reflect the range of two to $2 4 million combined units with revenue between 33% and 45 billion.
These ranges reflect the macro factors, we called out earlier that could result in ongoing volatility in consumer demand and vehicle pricing.
In regard to market share I am excited for the future and confident that we will expand it beyond 5% by the end of calendar 2025.
Last but most importantly, I want to thank all of our associates for the work that they do they are truly the keys to our success just yesterday Fortune magazine named Carmax as one of its 100 best companies to work for for the 18th year in a row I'm incredibly proud of this recognition as it is due to our associates commitment to some.
Courting each other our customers and our communities every day I want to thank and congratulate all of our associates with that we'll be happy to take your questions.
Thank you ladies and gentlemen, if you do have a question or comment it is star one on your Touchtone telephone.
You're on a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
Once again that was star one for any questions or comments at this time.
Your first question comes from Craig Kennison with Baird. Your line is open Sir Please go ahead.
Good morning, Thanks for taking my question I guess I am curious about the online student appraisal tool just a number of questions about that how would you assess your competitive.
Positioning and the competitive landscape in that market how are you different.
Are you putting enough marketing spend behind that after a while you have this competitive advantage and then Bill I think you mentioned plans for fiscal 2023 to roll this out to other dealers, maybe you could shed some light on that.
Sure. Good morning, Craig there's a lot in that question. So first of all I feel really great about our Io success I think it's it's.
It's really been so successful because of a bunch of reasons. One I think it's really the experience and the ease of use of the product I think it also has the backing of the brand recognition of Carmax.
Let's not forget this is what we do we've been buying cars from consumers. Since 1993, we have started advertising obviously for it.
If I look at the fourth quarter and think about our advertising spend you know we break it down between.
Kind of.
Brand awareness and acquisition awareness I would tell you the acquisition awareness awareness, we spent a little bit more on vehicle acquisition awareness. This past quarter than we have in previous quarters. So we feel good about the advertising now I think obviously I think everybody in the marketplace is benefiting a little bit from higher valuations, but I think thats the.
D of the bump that we've seen so we're excited about that as far as my comments earlier, yes look first of all I want to continue to improve.
Improve that experience for our consumers, but we're also we've been testing and we'll continue to roll this out to make it available to other dealers as an easy way to get rid of inventory that they're looking to get rid of as well as we will look for other partnerships, where we can we can leverage this.
Yeah.
Our next question comes from Sharon Zackfia with William Blair. Your line is open. Please go ahead.
Hi, good morning.
Thanks to all of the color on the long term plans for that.
Sure I have your line is interested in kind of how you can pivot in the current consumer environment, particularly with used car prices, where they are and you talked a little bit about kind of passing on some better prices to consumers in this quarter, but I'm wondering.
First I guess, if you have any.
Kind of additional insight on how that stimulus might've benefited the year ago period, both in the fourth quarter ended March now that you've lapped that.
And if there was any distinct Omar an impact that was isolated to the fourth quarter I think that would be helpful to know and then just given where gas prices are and used car prices are you seeing any kind of falloff in demand for Suvs. How are you pivoting for that and then are you shifting average ages of your inventory is somewhat older to try to make.
The price points, Mark audible I know theres a lot there, but I think it's important to kind of cover all of them sorry.
12, one part question.
That's a that's a creative way to get like 14 questions into the first one but look I'm happy to take all of them.
So let me start first of all just on your the last to the gas prices for the quarter, we really didn't see much of an impact on gas prices as far as a shift you know if I look at gas Guzzlers from sales standpoint, very similar year over year. So I do think that's an area that we need to continue to monitor as we as we go forward we have seen it.
Uptick for example in things like EV searches and edmunds as seen that as well, but we've certainly navigated that before and been very successful as consumers want something different we were right. There for them. So I'm really not worried about that and we will be able to pivot on that.
Your question on average age of vehicles, we did from a retail standpoint, we did see a shift to a little bit older car, which obviously is a little bit cheaper.
I think the mix if I'm looking at a.
Zero, two let's see zero to four.
Year over year, I think there was about 10 points with changed from that bucket into the little bit higher maybe the five to seven bucket. So we have seen a little bit of a shift there and again the beauty of our businesses as we see customers looking for different types of inventory, we make sure we get that inventory out there. So we feel good about that.
As far as just commentary around the comps look I highlighted a whole bunch of different things that are macro factors that I think are weighing on the overall used car industry. If I had to rank in order of magnitude and again. This is it's hard to exactly quantify each one but I would probably say that the high prices are at the top of list.
<unk> followed by the Covid surge, we did see a COVID-19 surge in January and then I think coming out of the Covid surge I think it kind of transitioned into this whole lower consumer confidence.
And then I also think the lapping of the federal stimulus you know there was some stimulus came out last December January timeframe, primarily more in January than it was even more stimulus coming out in March So I think.
That certainly weighed in on the on the quarter and I think it's also.
Probably just adding to the softness as we look into the first quarter as well.
How do I do I get all your questions.
Yes, I think so I'll get back in the queue. Thank you alright, thanks Sharon.
Our next question comes from Rajat Gupta with Jpmorgan. Your line is open. Please go ahead.
Alright, great. Thanks for taking the question, maybe just on the SG&A run rate.
The $140 million and overhead costs.
Is that kind of looks like a good baseline to assume.
For that particular line item going forward, just curious how does that <unk>.
With any changes on the volume side, given given things are a little weaker in the near term.
And then maybe if you could comment on gas.
Given like.
I guess somewhat worsening affordability environment.
No.
I can hear you in terms of being able to pass through.
Any.
Benchmark rate increases or widening ABS market.
How confident are you.
In terms of being able to pass that through to the consumer.
Kind of environment.
If you are not able to do that and how should we think about the implications to the gas.
Okay.
Yes, I'll, let Enrique talk about the SG&A and then the Caf business will let John answer that.
Yes, so Richard I, just want to make sure I understood. Your question are you talking specifically about other overhead or just over SG&A as a whole.
Are there other overhead.
Yeah. So other overhead this quarter really was a continuation of our investment in our technology spend and also costs related to growth. So you've got to keep in mind. The the tremendous amount of cars that we're buying through the alien to the appraisal lane.
As well as an increase in our wholesale business. So I would say that was certainly up this quarter I would expect it to continue to be up I think taking a step back, though and taking a look at overall SG&A and all its components heading into next year. We do expect as I mentioned in my prepared remarks, two to need in excess of the 5% to 8% growth and growth.
Profit in order to lever and that really has to do with the timing.
Our investments this year, we were successful in staffing the business up as you recall at the beginning of the year, we had some staffing challenges and we ramped up that staffing throughout the year and that will comp into next year. So really when we look at that higher and 5% to 8% gross profit for next year, it's driven primarily by that timing that staffing.
<unk> that we need to continue to grow this business.
Yes, John I can take the affordability question appreciate that question I.
I think we've mentioned before in the kind of a non cap customer that lower credit spectrum customers certainly we feel affordability, maybe often priced them out of the market you can see that probably reflected in our tier three percentage of sales.
But if you look at the Caf customer I think there is impact there as well.
If I look at kind of the micro aspect here of customer last year, whats coming and purchasing at $20000 car and maybe putting $1000 down now theyre coming in and getting their financing 19000 in that case, they are coming in and they're borrowing $28000 and.
If they saw that same knowledge down they're asking for $27000.
<unk> has a decision to make as all lenders do are they going to let that person borrow that much more money. So there is an affordability question. There I think what we're seeing is in the case of cap and it will speak to our penetration this quarter cap was not necessarily just allowing someone to borrow that $27000 potentially their income didn't increase at the same level as they are requested amount. So.
There are other lenders out there that maybe we're willing to provide that larger dollar amount. So.
That did affect our penetration people are taking longer terms out there right now you see a much higher prevalence of used car loans higher than 72 months. It's it's clear it's market year over year cap actually does not provide alone greater than 72 months, even though people are trying to manage that affordability through term that may or may not be the right decision for them.
But cap is exacerbating that so.
So I think Theres, a couple of things that affect the penetration on our clear impacts of affordability for the customer the last thing to your point on rates. We clearly have seen a signaling that rates are going to go up they have gone up initially they are going to probably continue to go up this year. The back half of this quarter cap actually did do some price testing up we've often shared where we will price steps down or up randomly.
We did a movement up this quarter, we did see that clearly impacted our penetration, but we think it's the right thing to do is we manage our margin.
As prices go up we will continue to do that testing and we think other lenders will follow in kind or be compressed. So we will pass that along as we see fit we want to remain highly competitive in the marketplace, but yes, we want to make sure that we're managing margin as well.
And Richard.
Yes.
Okay.
And a little bit.
On SG&A.
I think it's important to remember as well that were focused on capturing the opportunities and are transforming and fragmented industry right. So whether whether it's so it's the right time to invest for us and whether thats periods of strong industry performance or more challenged industry performance like we faced in the fourth quarter. Our goal is to take.
Profitable market share, which as bill talked about in his prepared remarks, we do believe in the fourth quarter. Despite sales being down that we saw market share in our segment and again that is our objective as we continue to move forward, which means we're going to continue to invest just a huge opportunity for us and that's what we're going to continue.
We'll take our next question from Brian Nagel with Oppenheimer. Your line is open. Please go ahead.
Hello. This is William Dossett on for Brian Nagel Good morning.
Good morning.
Okay.
So the question that we wanted to ask was on the nature of the deceleration in the used car business from fiscal Q3 to fiscal Q4.
You spoke about the factors previously how.
How should we think about the factor of declining consumer confidence where did it come about in Q4.
And how should we consider this dynamic into fiscal Q3.
Yes, I think.
As I said earlier.
Consumer confidence was obviously one of the factors I think we actually right. After we saw the Covid surge I think as we're kind of transitioning out of that we're starting to see kind of just lack of consumer confidence.
And I think that that's a very similar situation that we're in right now just for the reasons that we've talked about from a from an affordability standpoint, you've got interest rates going up inflation, you've got the Ukraine, Russia War Theres, just a lot Wang on the consumer right now so.
As far as.
When that turns around.
No, but again I think to Enrique point earlier, I mean, we're going to continue to manage this we have managed through cycles like this before and we think we're in a position to do it in a way that we can continue to gain market share.
We'll go next to John Healy with Northcoast Research. Your line is open. Please go ahead.
Bill just wanted to ask kind of a big picture question Youre talking about affordability kind of being a headwind to the business, which makes sense with.
It makes us all kind of realize that with higher rates, maybe values need to come in lower.
Maybe you could give us your thought in terms of the relationship between unit and ASP and maybe how you think asps.
And the used car market kind of maybe fluctuate over the next six to 12 months and with that.
Or is there still a lot of confidence that you guys are going to protect GP potentially.
Potentially at the expense of the same store sales in.
Is that $2100 GP kind of benchmark.
In your view.
Achievable, even in a kind of softening used car market where.
Maybe values and what you have in inventory.
Maybe are pressured a little bit.
Yes, good morning, John Thank you for the question.
First of all the affordability, while you're right. It's a it's a headwind for retail is actually good for wholesale as you saw our wholesale margins and I think thats one of the benefits of having the diversified business because as you saw our GPU for wholesale was up.
I think the unit Asps.
You had asked me probably three or four months ago I would've said I was hoping you know later this year, we'll see some relief I'm just not sure.
Especially given the war in Ukraine, and Russia, I'm not sure.
New car supply is going to come around later this year that's to be determined I think thats, a big factor that will help.
Mitigates some of the overall price inflation in both new and used cars, what I will tell you as though to your question about GPU I think that we're in a great spot I mean, if you look at the benefit we've got with self sufficiency and I talked a little bit about that.
Everybody is seeing inflationary pressure as well the nice thing is we have a lever that's offsetting those inflationary pressures. So if you didn't have a lever offsetting inflationary pressures, that's obviously going to be.
They are cutting into your margin or it's going to be raising your average.
Selling prices and then we still have benefit leftover beyond that to pass along to the to the retail consumers and I think our self sufficiency benefits are still.
Kind of maturing I think there's more potential there.
And how we manage that and how we do our offers that kind of thing so as I think about the future. Even if you get into a depreciating environment, which we've shown over time in a depreciating environment, we're still able to maintain very consistent Gpus I think with self sufficiency I think with our diversified business with the caf profits that can be generated.
At wholesale additional wholesale profit that can be generated I think we can maintain.
Very good margins per unit as well as having great retail front prices. So I think we're well positioned for however, the market going forward.
Great. Thank you guys.
Thanks, John .
We'll go next to Daniel <unk> with Stephens. Your line is open. Please go ahead.
Yeah, Hey, thanks, guys.
Wanted to ask one just on the tax refund season, I mean, I think that started earlier this year in total dollars paid are actually up and Ricky I think you mentioned you hired proactively ahead of tax season. So I'm curious did you guys see the expected pickup maybe in trend as you move as those got paid out and has had the trends you've seen as tax refunds got.
Paid out change your opinion of the underlying health of the consumer kind of as we look for the rest of fiscal 'twenty three out of us.
Yes, Daniel I think when I look at the tax season. This year I think it is very representative of what we saw last year now remember last year. It was a late tax season in comparison to what we normally see so.
This year was timing wise is very similar last year I do think the refunds are a little bit higher this year versus last year, but I think the other complicating factor that you don't have this year that you had last year was the stimulus that was paid out in January and March So it's really hard to decouple.
All of that I would just go back to my comments on the consumer confidence earlier, which is which I think is.
Regardless of the kind of the taxes I just think the consumer is in a strong position as they were a year ago.
We'll go next time, Michael <unk> with Evercore ISI. Your line is open. Please go ahead.
Hey, there good morning, Thanks for taking the question good morning.
Want to ask if I could.
On the capacity front, if you could just bring us up to speed now in terms of some of the incremental hires that you were looking to do.
And the ability to recondition vehicles in light of some COVID-19 disruptions et cetera, do you feel that you all were kind of appropriately staffed now able to get kind of a full recon work through that you would have hoped for so that was kind of the first question.
Yes, so we feel great about both our capacity production capacity and our staffing at this point.
Pretty much the whole year first second and third quarters I talked about.
Trying to get staffing ramped up I tried I talked about lower inventory and coming out of the third quarter.
Made comments that look we are well on our way to getting inventory to where we need to be.
Don't think inventory was necessarily.
A big topic for the fourth quarter, you know when I look at our inventory levels I always look at it on a kind of a per average store and I've always said historically on average it's about $3 20, we're not quite at the $3 20.
But I would tell you I don't think it was a big story I do feel like we've got the capacity we need. We obviously can write currently we have we can build more than 1 million cars, a year and the capital expenditures that Enrique talked about earlier that's all.
All part of our natural planning process as we look out to the future. We already have some production facilities. We're working on but these are additional production facilities as well as just given the success of our wholesale business, we want to make sure that we can accommodate all the space. So really it's just us doing business as we as we normally do it.
Yes, Hi, Matt.
Capex perspective, we're really just matching our capacity to the longer term demand and like Bill said, it's just natural kind of steps, we're taking just being very thoughtful in our approach to capacity expansion to make sure that over time, we can meet the longer term targets that we've set out there I think the only difference in the capital expenditures, which Enrique is called out on a couple of different calls now is just the stepped up <unk>.
And technology.
It's a bigger percent of our overall capex spend yes, it's actually a fairly interesting and I talked about this in analyst day, but if you go back a few years about 15% of our Capex spend was on technology and now that we've been transforming our business as we look to this year and next year you were looking at about 30% of our overall capex spend is related to.
Technology, So certainly not in the direction of becoming an omnichannel retailer.
And then one of your major competitors did an acquisition in the wholesale channel recently.
I guess, what I wanted to do is build on the comment you just made so do you feel that given the step up in Capex spend towards Tech and then given some of the alternative profit opportunities. You have do you think that there is enough in house or is there potentially an opportunity set to kind of bolster the core capabilities inorganically.
Are you talking about from a production capacity.
I think one is just in the wholesale business right you guys have done a great job this past year there.
Is there an opportunity to potentially grow that platform, even faster Inorganically and then also as it relates to the tech side given the stepped up investment in Capex is that kind of adequate or potentially is there some inorganic capabilities that you might be targeting as well.
Yes, no I look we feel great about the auction business as you know we continue to run that 100% virtual right now when you think about the Capex your auction expenses a lot less than your overall production expense because production youre building out facilities, they're expensive auctions you just essentially need space at this point I mean, there is some some buildout.
On some larger auction facilities, but to hold this inventory, but we feel great about the plans and are very comfortable with how we've been operating and the fact that we can continue to.
Grow the wholesale business really at a quicker pace than just kind of along with the normal growth that it sees when it's growing as we sell more retail cars.
We'll go next to Seth Basham with Wedbush Securities. Your line is open. Please go ahead.
Thanks, a lot and good morning, there's been a fair amount of talk about market share on this call and I know you don't measure market share on a quarterly basis, but in the fiscal fourth quarter. According to Cox, David used vehicle retail Saar decline, 4% your unit sales on a retail basis declined more than that so.
You would have lost market share can you. Please give us some sense as to is that because you're protecting GPU or are there. Other reasons why you might have lost market share.
Yes.
When we look at market share and even in the fourth quarter.
We had great market share growth and we go off of pulp data, which is titled data.
The reason, we only look on an annual basis is because it was really like a two to three months lag. There. So we are very confident that we gain not only market share for the whole year, but we gained it for the fourth quarter as my comment said earlier.
We feel really really good about market share gains.
In the first quarter, despite what's going on in the macro factors and when I look at the market share.
It doesn't matter if you break it down zero to four year old cars five to seven 8% to 10, we got double digit growth in all of those buckets. So.
Yeah, we feel great about it and the other thing I would point out is that market share growth is primarily coming through comps.
It's not like we've opened a whole bunch of new markets and that's what's driving the market share, which again we're excited about.
Got it Okay, and then just a follow up on the gas business should be outlined.
Our loan loss provision was.
In a normal range I guess your plan to Jon and as you think about the credit environment now and the go forward, we have seen deterioration, but from your perspective, you don't expect any further deterioration. So theres no need to further increase your loan loss reserves going forward.
Yeah Fair comments, yes, no I would say just point to our reserve a reserve to receivable ratio steady from last quarter to this quarter yes.
Yes, we mentioned we felt like we were kind of a return to pre pandemic levels. We think we're there.
We feel real good about our reserve right now and we have a good handle on the business. So if all things perform as we expect really the focal point on the future provision will be on the new originations and then obviously there is a mix of tier one tier two tier three and the volume we originate but yes, I think were pretty steady and in a good spot.
We'll move next to Chris <unk> of BNP Paribas. Your line is open. Please go ahead.
Hey, thanks for taking the questions.
So first question is on the ETP, obviously, you kind of true up given the change in accrual status I don't want to wait for next year should we just take like a four quarter average and that's kind of could you run rate.
Or is it going to be kind of like this year, where it's Q4 weighted E. P T.
Yes, I think different considerations and ETP right. There at the end of the core business, which is driven by sales in an attach rate from our ESPN ETP products, and then Theres a year end.
Profit sharing that we have with our partners. So I think on the prior I think is for growing our business growing our penetration that will continue to grow and then the consideration in the fourth quarter of this year was that we had more profit sharing revenue than we did last year in the fourth quarter.
Just have a profit sharing was higher and so given the timing of when we recognize that if you recall last year, we actually had one of our partners and profit sharing revenue that was in the second quarter. They were recognized on a quarterly basis.
We have moved in fiscal year 'twenty two to an annual basis. So now all of our recognition of profit sharing is in the fourth quarter, which is why we saw a little bit higher this year of profit sharing in the fourth quarter.
Taking a look at our business again, you take a look at the core sales you take a look at ETP attachment rates, which has been going really well we're stable at about 60% and we would expect that to continue moving forward as well yeah. The only other thing I would add to that Chris is our goal isn't to generate a bunch of profit sharing I mean, we want to have these things.
Price fairly for the consumer you got some profit sharing I think it was more driven by people with lack of driving things like that but our goal is not to necessarily drive a big revenue recognition at the end of the year.
That's kind of the bigger picture question on customer sourcing. So you talked about the instant appraisal business and grow the customer sourcing I know, it's difficult to tease out but.
Based on like the age profile of the vehicle that you're buying from those.
How much of this is incremental purchases do you think will come from a private party market has been expanding the Tam.
Do you think you are coming from other dealers indirectly the cars that would've gone to auction or or what it has been traded in retail or is there a way to give any sense internally for what like how much of a paid are growing versus taking share.
Lastly, you can just give a perspective on on buyer rates like once you appraise it appraised that car, what's the buy rate like today versus where it was pre COVID-19 .
Okay. So Chris just on kind of incremental share you know we're in the process of developing kind of a buy share.
It looks add vehicles that originally were with the consumer the last person that there was essentially with the consumer and so we're working on a metric there we feel great about.
We certainly increased that by share we know that and now we're just trying to be able to quantify more so that's something we're looking at but we certainly are comfortable with that.
The bulk of this is coming from other consumers.
As far as the buy rate historically, the way we talk about buy rate before instant offer was how many people came into the store and ended up getting an appraisal and then what did we what.
What percent of those cars that we actually buy then we added the encino online appraisal and the way we buy.
Measured by right now as you take because we're.
We're issuing.
Issuing probably a couple of $3 million instant offers and a quarter and you know theres a lot of folks are just kind of shopping to see what their vehicles work. So the way we calculate by right now is on the instant offers when they show up at the store how much of those actually convert in addition to the traditional way that we looked at it and we're in the 40% on buy rate.
If you look at it the more traditional way that we used to look at it it's probably in the low 30 ish 30 ish percent. So.
Hopefully that's the color that you need it.
Far more complex I appreciate it. Thank you that's helpful.
Yeah.
Okay.
We'll go next to David Whiston Morningstar. Your line is open. Please go ahead.
Thanks, Good morning on Caf penetration, where three day payoffs.
Compared to fiscal 17, or so it is down.
And I'm just curious.
It looks like obviously tier two taking more business and does that just a national thing on your part or is there something else driving that decline and then.
Roughly mid decade, where do you want your penetration either gross or net to be.
Yeah I appreciate the question David Yeah, as I mentioned in earlier comments around affordability, let's just talk about penetration.
I appreciate you going back to pre pandemic levels. You know historically Q4 is not going to be one of the highest cap penetration quarters, obviously being wedged up against tax time, but that being said it is down we are losing penetration to outside financing I mentioned previously we really believe this is an affordability aspect people are coming in.
Looking to borrow more money given the asps that are out there as a lender we have a decision to make which is are we going to ask for more money down and we're going to let them borrow that full amount in some cases, we are not letting them borrow that full amount that they are asking for given the higher asps and perhaps theres. Another lender externally, it's willing to provide that full amount even though the income maybe not have gone up at the same level. So.
We think we're losing in that case I also mentioned around the longer terms people are clearly managing affordability through extending that term that is far more impactful to lowering the monthly payment than any rate adjustment. So we do not provide a greater than 72 month term on a used loan right now Pat does not actually impacted carmax, none of our lenders do.
So we think there are people out there that are absolutely providing that that's been shown in the data. So I think those two things are contributing to penetration I also mentioned, we did price testing up which again trying to be in line with where interest rates are headed manage our margin. So we did see some impacts there. So I think thats whats changing the actual penetration for this quarter.
A question of where do we want it to be.
I think we probably think more about it as we want to be highly competitive.
There are ebbs and flows all the time based on what external folks do but we want to remain highly competitive and provide our are.
Our higher end customers, an opportunity to finance internally, but thats, what we love about our platform you can do a three day pay off we do have other lenders to pick up pick us up if we don't want to extend the full amounts and we can still sell the car in carmax. So I don't think were targeting our penetration and I would expect it to ebb and flow over time, especially as prices come down.
And I think approaching our cat business that way is really what leads us to have a really strong portfolio of receivables out there and a really strong and consistent performing business in cash.
It's also the reason that you want to have also other lenders so that if we keep our portfolio in paper very very.
Consistent having other lenders there and the in car Max's.
Camp has a great day.
And let me just clarify something you said did you say not only cat, but also tier two and tier three partners do not use over 72 months right now in the Carmax stores are in the Carmax business, we do not offer us loan greater than 72 months, it's something that we may or may not consider in the future, but right now that is not what we're doing.
<unk> across Caf, where our other lenders.
Okay, and do you think inevitably youre going to have to go over some of the group.
We have chosen not to again, we're trying to make the right decision for the customer we're not necessarily convinced that 84 months is best on a used car.
We'll see what the market dictates and we obviously know that prices are increasing in terms of increasing but we also expect prices to probably normalize as well and it might not be necessary, but again, we want to make the best decision for the customer and we feel like we are still able to sell vehicles without providing that today.
Alright, Thank you guys.
Thank you.
Next we'll go to Sharon Zackfia with William Blair Sharon. Your line is open. Please go ahead.
Hi, I just had a quick follow up I know that you have planned more investments in marketing and <unk> really loaded up in the fourth quarter I think it ended up at around 350 for the full year is $3 50, like a right run rate and I'm wondering how you think about the guardrails around marketing.
In an environment, where the consumer just to may be incredibly distracted.
Yes, Great question, Sharon and look if I think back on kind of pre pandemic. If I look our overall advertising spend we're spending as we said we would we're going to spend more we're spending about 70% more than pre pandemic, which if you look at it on a unit basis is probably about 55% or so increase on a per unit basis.
I think we kind of came right in the range of where we talked about being this year.
When we started out this year.
Mid 300 per unit and I would tell you I think we're at a point, where there are certain things we want to make sure that we advertise and get out there, especially as we have new functionality and I can't see us necessarily taking a step back on our advertising now to your question do you continue to step up that's where it will.
We'll figure out what's going on with the dynamics, whereas the consumer right now to figure out if we go beyond that but I think a good way to think about it is the spend on a per unit basis. This year will be similar to what it was for last year.
Okay. Thank you.
Thank you.
Well go next to Daniel <unk> with Stephens. Your line is open. Please go ahead.
Yes. Thanks, so much for taking the follow up question I just want to follow up on the instant offer with consumers right now consumers having positive equity in their cars I would think that makes it easier to buy from them, just because they're making money on each one but as we return to negative equity vehicles over the coming years do you think that will make it harder for you guys to customers' doors or just how do you.
We anticipate that impacting your ability to source and kind of have success of instant offer if we return to negative equity can you just rolled out of the financing or how do you handle that.
Yes, so Daniel I mean surprisingly, there's still folks that have negative equity out there today, albeit there is down just because the prices are up high but you know thats an environment that we have lived in for the last almost 30 years, we have consumers coming in with negative equity now you've got obviously as this price appreciation is there a risk down the road that some customers it may be harder for them because.
They can't come up with a big enough down payment or whatever but again the way I think about it is and John talked a little bit about this if you look at loan to values and loan to values have actually gone down people are putting more down payments down. So I think that's a good sign I think the other thing is all of these customers are buying today, its not like theyre going to all decided to trade in a year from now or two years from now.
Three years from now they're going to be sprinkled throughout time, and we will manage the business just like we have in the past with with other customers that have have negative equity. So we feel like we'll be able to manage it both from a sales standpoint, but also to your point.
On the on the buyer's standpoint as well.
Great. Thanks, so much best of luck.
Thank you and we don't have any further questions at this time I'll hand, the call back to Bill for any closing remarks, great. Thank you Jessica.
Want to thank all of you for joining the call today and your questions and your support.
I look back FY 'twenty two as it was a great year with great sales, it's great earnings great market share, we've been making investments and those investments are paying off and we're really excited about the opportunities ahead of us as we continue to be that positive and disruptive force within the used car industry and again I want to thank all of our associates because they.
The reason for our success I appreciate everything that they do on a daily basis, and we will talk again next quarter. Thank you again for your time.
Thank you, ladies and gentlemen that concludes the fourth quarter fiscal year 2020 to Carmax earnings release Conference call you may now disconnect.
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Okay.
Yeah.