Q2 2023 Carmax Inc Earnings Call
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Good day and welcome to the <unk> second quarter fiscal year 'twenty 'twenty three earnings release Conference call. Today's conference is being recorded at this time I would like to turn the conference over to David <unk>. Please go ahead.
Thank you Samir good morning, and thank you everyone for joining our fiscal 2023 second quarter earnings Conference call I'm here today with Bill Nash, our President and CEO Enrique Mayor Moore, our executive Vice President and CFO and John Daniels our senior.
Vice President Carmax Auto finance operations.
Let me remind you our statements today that are not statements of historical fact, including statements regarding the company's future business plans prospects and financial performance.
Our forward looking statements, we make pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
These statements are based on our current knowledge expectations and assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially from our expectations.
In providing projections and other forward looking statements, we disclaim any intent or obligation to update them.
For additional information on important factors that could affect these expectations. Please see our form 8-K filed with the FCC. This morning, and our interim report on Form 10-K for the fiscal year ended February 28, 2022 previously filed with the SEC.
So do you have any follow up questions. After the call. Please feel free to contact our Investor Relations Department at eight O four seven and four seven O 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.
Alright, Thank you David good morning, everyone and thanks for joining us.
Before I get started I want to share that my thoughts are with our associates their families and communities that are being impacted by hurricane and we have a significant number of stores in the storm's path and as always the safety of our associates is our top priority, we've taken steps to support our associates and our communities and we will continue to monitor the situation.
And take actions to provide assistance as needed.
Now to our results.
This quarter reflects widespread pressure the used car industry is facing macro factors, including vehicle affordability that stemmed from persistent and broad inflation climbing interest rates and low consumer confidence all led to a market wide decline in use auto sales.
In addition, wholesale values were affected by steep depreciation in the quarter.
Despite the impact of these factors on our results. We continued to grow market share. We also continue to make progress on the key initiatives that will further strengthen our competitive differentiation over time.
We have weathered a number of difficult cycles in our history and each time, we have successfully managed through them and have leveraged key learnings to further strengthen our operating model. We remain on track to achieve our long term strategy and goals.
For the second quarter of FY 'twenty, three our diversified business model delivered total sales of $8 $1 billion up 2% compared with last year's second quarter driven by growth in average selling prices, partially offset by lower retail and wholesale volume.
In our retail business total unit sales in the second quarter declined six 4% and used unit comps were down eight 3% versus the second quarter last year.
Our performance was impacted by the macro factors that I mentioned previously.
We believe the industry sales were also impacted by shift in consumer spending prioritization from large purchases to smaller discretionary items in.
In response to the current environment and consumer demand, we have continued to offer a higher mix of lower priced vehicles.
We began the second quarter with a low single digit decline in comp sales during the June that reflected the continuation of softer, although improving sales, which we discussed on our last earnings call.
Thompson fell sharply at the beginning of July with August ending in mid teen declines.
Last quarter, we reported market share data, we will do that again this quarter as the data provides additional context and highlights our performance relative to the industry.
Based on external data, we continued to gain share through July the latest periods, which title data is available.
We reported second quarter retail gross profit per used unit of $22 82 up $97 per unit versus the prior year period, a reflection of our ability to manage huge margin in any environment.
We continue to focus on striking the right balance between covering cost increases managing margin and passing along efficiencies to consumers to support vehicle affordability.
Wholesale unit sales were down 15, 1% versus the second quarter last year, partially as a result of our deliberate decision to reallocate some older vehicles from wholesale to retail to meet consumer demand for lower price vehicles, we estimate that without this ship wholesale units would have been down less than 10%.
Performance was also impacted by depreciation of about $2500 and isn't and as we intentionally slowed baas in reaction to rapidly changing market conditions.
Wholesale gross profit per unit was $881 down from $1005, a year ago and reflected softening market conditions as well as our decision to retail a higher mix of older used vehicles.
Our ability to source these vehicles from consumers as a competitive advantage, but relative to younger vehicles more of them fall out during the reconditioning process as they are not able to meet our standards for consumer sales.
And that happens we wholesale those vehicles often at lower than normal margins in the third quarter. We have been focused on aligning our offers to current conditions and adjusting inventory to more efficiently incorporate older vehicles.
Buying vehicles at appropriate prices for market conditions is one of our core competencies.
We bought approximately 343000 vehicles from consumers and dealers during the second quarter.
While down 8% versus last year's period. This was up approximately 50% from the second quarter of FY 'twenty, one and reflects customers responsiveness to both our nationwide online instant offer tool and our offers.
We purchased approximately 323000 cars from consumers in the quarter down 11% versus last year's record results.
We also sourced approximately 20000 vehicles through Max offer our digital appraisal product for dealers. This was up 130% versus last year's period and up 18% compared to this year's first quarter.
Our self sufficiency remained above 70% during the quarter.
We remain focused on providing the most customer centric experience in the industry with a leading e-commerce platform that integrates buying and selling cars with our best in class store experience.
In regard to our second quarter online metrics approximately 11% of retail unit sales were online up from 9% in the prior year's quarter approximately.
Approximately 53% of retail unit sales were army sales this quarter down slightly from 55% in the prior year's quarter.
Our wholesale auctions remain virtual so 100% of wholesale sales, which represents 21% of total revenue are considered online transactions.
Total revenue, resulting from online transactions was approximately 30%. This is up from 28% in last year's second quarter.
Carmax Auto finance, our Caf delivered income of 183 million down from $200 million. During the same period last year as a reminder, last year's quarter benefited from a reduced provision coming out of the pandemic.
We will continue to provide strong credit offers to our customers as we move rates with the market John will provide more detailed customer financing the loan loss provision and caf contributions in a few minutes.
At this point I'd like to turn the call over to Enrique who will provide more information on our second quarter financial performance as well as the steps we are taking to further align our expenses to the current sales environment and recap. Thanks.
Thanks, Bill and good morning, everyone.
Second quarter net earnings per diluted share was <unk> 79 down from $1 72, a year ago.
Total gross profit was $737 million down nine 6% from last year's second quarter.
This decrease was driven primarily by wholesale vehicle margin of $141 million, which was down 26% a.
The year over year decrease was driven by both lower volume and margin per unit.
As Bill noted, we faced sharp depreciation throughout the quarter and have been adjusting accordingly to better position ourselves to manage through the current environment.
Total used vehicle margin was down slightly at $495 million a decrease of 2%.
Total used unit volume of negative six 4% was largely offset by higher margin per unit.
Other gross profit was $102 million down 15% from last year's second quarter. This decrease was driven primarily by the effect of lower retail unit sales on service.
<unk> results declined $13 million has lower sales and secondarily impacts from inflationary pressures drove a deleverage in results.
E P P fell by 3% or $3 million, reflecting the combined effects of the stronger margins stable penetration at approximately 60% and the decline in retail unit sales.
Third party finance fees were flat over last year's second quarter as lower volumes and fee generating tier two were offset by lower tier three volume for which we pay a fee.
On the SG&A front expenses for the second quarter increased to $666 million up.
Up 16% from the prior year's quarter, reflecting a slowdown from the year over year increase during the first quarter.
Approximately three points of the increase this quarter reflects a change in an accounting estimate in the prior year quarter.
Yes.
SG&A as a percent of gross profit deleverage to 94% from 74% during the second quarter last year.
Key contributor of deleverage was a nine 6% decrease in total gross margin dollars compared to last year's quarter.
The increase in SG&A dollars over last year was mainly due to two factors first a $50 million increase in other overhead.
Primary drivers of this increase include investments to advance our technology platforms.
Strategic and growth initiatives.
$14 million, one time impact from a prior year change in an accounting estimate related to noncash uncollectible receivables and a variety of other smaller cost headwinds.
Second a $34 million increase in compensation and benefits excluding share based compensation, primarily driven by the annualized <unk>. The strong growth in staffing we experienced in the back half of last year as well as wage pressures.
Yeah.
Partially offsetting this increase was a $4 million decrease in share based compensation.
During our first quarter earnings call. We discussed how we have actively taken steps to better align our staffing expenses in our stores and customer experience centers or see he sees to the sales levels, we were experiencing at the time.
However, as Bill noted sales declined sharply in the second quarter versus our expectations starting in July .
Accordingly during the second quarter, we pulled additional levers to further align our expenses to our sales levels.
We expect these savings will materialize more fully in the coming quarters.
This included further reducing staffing through attrition in our stores and see he sees.
Pausing on a portion of the hiring and contractor utilization in our corporate offices as well as better aligning marketing spend to sales.
In regard to marketing our intent is to continue to maintain a strong level of investment on a per unit basis.
That is at least consistent with our full year FY 'twenty two levels.
For the second quarter total marketing dollars were flat year over year, but reflected a robust investment on a per unit basis.
Yes.
As part of our Omni channel journey, we have reduced the variable cost component of our operating structure.
Given the macro environment, our near term priority will be on allocating resources towards those initiatives that will further drive efficiency and effectiveness across our fixed cost.
At the same time, we will continue to selectively invest in customer facing initiatives that will enhance our omnichannel experience and support our long term growth.
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.
During the second quarter, we repurchased approximately one 7 million shares for $163 million.
Now I'd like to turn the call over to John .
Thanks, Enrique and good morning, everyone.
Once again, the Carmax auto finance business delivered solid results, while transitioning from a learning environment that has seen historically low levels of credit loss and extremely favorable funding costs.
During the second quarter caps net loans originated was over $2 $3 billion caps penetration in the second quarter net of three day payoffs was 41, 2% compared with 43% last year and 39, 3% in Q1.
The weighted average contract rate charged to new customers was nine 4%, which was higher than the eight 5% in last year's second quarter, and then 9% seen in Q1.
This rate increase combined with the quarter over quarter increase in penetration reflects <unk> ability to strategically pass along a portion of the added funding cost to consumers, while still providing highly competitive offers.
Our lending partners continue to complement each other and also providing attractive credit offers.
Tier two penetration rate was consistent with last year at 21, 6% and tier three accounted for 6% of used unit sales compared with seven 2% a year ago.
Although the lower credit consumer continues to show demand by actively shopping in applying for credit they continued to be challenged with affordability and being able to complete the purchase.
Caf income for the quarter was $183 million, a decrease of eight 6% or $17 million from the same period last year.
Last year, our loan loss provision of $35 million was a significant tailwind as the overall performance of the consumer remained remarkably strong.
This quarter $76 million provision, resulting in an ending reserve balance of $478 million or $2, 92% of managed receivables up from $2 eight 5% last quarter.
Seven basis point adjustment is once again predominantly attributed to the proportionately higher quarterly volume of tier two and tier three loan originations compared to the preexisting $16 billion portfolio.
Okay.
Of note as the macroeconomic conditions pose a challenge to the credit consumer we remain confident in our ability to leverage our vast experience and robust credit platform to ensure our tier one credit losses remain comfortably within our targeted operating range of two to two 5%.
As was seen last quarter, our provision headwind was significantly offset by our total interest margin, which grew $31 million year over year.
Our margin of 729% was up 11 basis points from last year's second quarter and it was supported by a $9 $4 million benefit from our hedging strategy.
Regarding our industry, leading online finance experience during the quarter, we significantly expanded our prequalification product launched in March.
As a reminder, this unique multi lender product results in no impact to your credit score and generates customized real time credit decisions on our full inventory.
As of the end of the second quarter of this product was available to over 50% of our consumers and is expected to go nationwide during the third quarter.
Now I'll turn the call back over to Bill. Thank you Jon Thank you Enrique.
Given the realities of the macro environment, we will further sharpen our focus on driving additional operational efficiencies as we continue to navigate the near term pressures facing the used car industry.
At the same time, we will remain focused on continuing our work to achieve our long term goals, including further improving our omnichannel experience for both our customers and associates as well as growing our diversified business model.
Some of our key initiatives include first we are leveraging data science automation and AI to improve efficiency and effectiveness within our customer experience centers.
During the second quarter, we expanded our associate facing guarded action software from chat to phone calls and developed additional work streams for our consumer facing digital assistant.
Over time, we anticipate these tools will enable us to reduce associate time spent per customer as we enhance our ability to provide a lot of interactions at the highest value moments.
As John mentioned, we continue to scale, our industry, leading finance based shopping experience. This best in class Prequalification product Leverages, a streamlined simple application and generates multi lender credit terms on cards within our retail inventory in just minutes.
With this tool customers have all the information they need to quickly understand apr's in monthly payments across different contract terms and effortlessly compare vehicles to ultimately secure the right financing options for them.
Third we are expanding Max offer to acquire vehicles and build on our market leading position as a buyer of cars.
As a reminder, buying directly from consumers and dealers lowers our acquisition costs enhances our inventory selection and provides profitable incremental wholesale volume.
We are currently live in over 40 markets and anticipate launching additional markets later this year.
Finally, we are upgrading our auction experience to be even more user friendly we're testing a modernized vehicle detail page to be mobile friendly and officially to display the most relevant information dealers need to preview our wholesale inventory similar to how customers shop, our retail inventory.
We're also testing AI capabilities to enhance our online vehicle condition reporting.
In addition, we have rolled out self service checkout capabilities nationwide.
These tools will enable us to drive incremental operational efficiencies as we continue to scale, our wholesale volume all while providing an even better experience to our wholesale dealers.
As I close I want to reiterate that while the market conditions and consumer behaviors remain challenging we believe that these pressures were transitory and that our foundation remains strong we are well positioned to navigate this environment as we have during challenging times in the past and remain excited about the future of our diversified business with.
That will be happy to take your questions Samira.
Thank you.
You would like to ask a question. Please signal by pressing star one on your telephone keypad.
You are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question and as a reminder, please limit yourself to one question and if you have a follow up please press star one again.
We will take our first question from Craig Kennison with Baird. Please go ahead.
Hey, good morning, Thanks for taking my question I'm sure there'll be several macro questions, but I'd like to ask about your sourcing tools I'm, a little surprised to see an 11% drop in vehicles sourced from consumers given the secular momentum you've had with your online instant appraisal tool can you shed a little.
More light on the traction you're seeing with that online incident appraisal tool and.
Whether the slower pace as a function of the slower traffic online or is it a decision to buy more selectively.
Yeah. Good morning, Craig. Thank you for the question look I think it goes back to a couple of things first of all we're really excited about both our online offer tool and the Max off that I talked about earlier, while we did see a decline the environment I mean, I think the biggest factors of that decline.
One, which I already highlighted was the fact that where we're moving a kind of change in retail selectively taken some of those wholesale cars and putting them over in retail, which if you take that out. It would then mean our decline was less than 10% depreciation you know you've followed us long enough anytime we get a depreciating market. We're lowering our offers that has an impact on what you all.
But they end up buying from consumers and then I would say the third thing, which is a smaller than the other two but we actually we slowed some of our baas in certain pockets in certain geographic areas and certain price points, either because we didn't need the cars or just because of the dynamics of the changing the quickly changing environment. So I think those are the three factors.
That really led to that.
That led to the decline.
Thank you.
Sure.
Well take our next question from Brian Nagel with Oppenheimer. Please go ahead.
Hey, good morning.
Good morning, Good morning, taking my question.
So I wanted to focus on.
Brent can be in there.
Quarter, which would be used car unit sales keep going here.
You talked in your prepared comments about <unk>.
Market slowdown that began in July . So my question. There is is there anything as you look at those.
The macro pressures are pretty well documented out there but is there anything you can do obviously particular that could exploit that slow down you'll see some variability geographically you work you across the broad spectrum.
Just a quick follow up within that question any comments on how the business is tracking.
Here with me into Q3 in September , particularly.
Yeah, Brian .
Great question, you know if you remember the last call I talked a little bit about June and how we were feeling good about June because it was it was doing better than the first quarter and as I as I said, we saw a big drop off in July .
And that softness continued.
Two August where we ended up in a mid mid teen decline for comps and there's not one single thing that I can point to that we can tell because of this happened in July is why we saw the drop off I mean, there's lots of.
I think pressures out there I talked about the broad inflationary pressures you know obviously consumers are having to make decisions groceries are higher than ever I think we've seen more interest rates increases.
Consumer confidence certainly during the quarter all time low as far as recent history, I mean, even lower than the height of the pandemic. So I just think consumers are prioritizing their their their spend a little differently, but there's not one single thing that I can point to like Oh. This happened and that's why we saw the decline I think it's just a continuation of kind of the deterioration.
The overall consumer moving into September we're seeing the same softness.
You know that we saw in August and I would tell you even more recently just.
Just given the hurricane as you can imagine that's contributing to two additional softness as well now.
The thing with Hurricanes or any weather events, you generally will get that back later on but you know.
As far as September goes it will absolutely put pressure we have oh.
About 2022 stores are currently closed and had been closed for varying amounts of time.
We've also seen on the wholesale side and just from a depreciation standpoint, just a continuation of that depreciating environment that we saw in the first quarter as well. So that has continued into September .
Okay, Great can I ask a follow up.
Yeah, I'll make it quick I apologize, but just so you're talking about the depreciation in the wholesale I mean should that lead them to.
More attractive prices in the used car business.
Undermine or what has been a significant challenge for consumers.
Yeah, I think you're thinking about the right way, Brian and in fact I believe this is probably the this is probably the first quarter, where the gap between used and new got a little bit water and gosh, probably six or seven quarters you know so.
It'll take some time, but I think so.
Depreciation and prices correcting on unused will absolutely benefit to the used market over over time, but I think we got to keep in perspective. This quarter was challenging I mean, we haven't seen $2500 and depreciation that rivals in absolute dollars that Rob was back what we saw at the height of the great recession that Rob was what we saw at the peak of omni So it's a <unk>.
Unusual thing and brings challenges, but I think that we've proven over time that we've been able to navigate those and that will do it better than than pretty much anyone.
I appreciate it thank you.
Sure.
And our next question comes from Sharon Zackfia with William Blair. Please go ahead.
Hi, good morning.
I follow the company long enough to see you guys navigate a lot of different cycles.
I you know congratulations I am continuing to gain market share all that I'm sure. It's.
The smell.
With the comp trends that you're seeing them.
Yes, you know him.
Stork Lee you haven't been a company that really.
It has down to lay out.
Materially if at all.
Obviously slowed.
It sounds like staffing acquisitions and an open hires.
But I'm curious just given the retraction in profitability here, where it used to be kind of a race.
Seven years of profit in this quarter.
I mean, how how do we think about those initiative and read data that you talked about it in terms of slowing SG&A spend because and there are certainly scenarios that I can get to where SG&A spend exceed gross profit in the back half of the year and as we go into kind of a seasonally slower time so.
You know how help us think about kind of how much money you can take out right. Now you know whether that's in SG&A as a percent of gross profit or SG&A dollar growth.
He kind of barometer is supposed to be mark to market nowhere, where we have an idea of where.
That SG&A spend it is kind of coming out.
Yeah. Thanks for the question Sharon and you know our objective is on winning in the long term and that really requires that we remain focused on making the right investments to continue to differentiate ourselves from our competitors. So we have an active and accretive portfolio of omni related initiatives that we've been investing in and we've been able to do that in large part because the restaurant balance sheet in our in our performance.
<unk>, but that being said certainly now with the current macro environment. We have started to pull the levers I mentioned in my prepared remarks to better align our cost structure to the current environment and we're also gonna be tilting our resources more towards initiatives that drive efficiencies that I talked about and bill talked about in our prepared remarks as well.
I'll be slowing some of the velocity down on our growth related investments, but certainly not pulling back.
So I think we're doing the right things at the current moment in terms of better managing our AR are our costs.
We have a strong and active I on the consumer and we you know we stand very experienced in managing through these cycles.
But we also want to make sure that when the industry picks back up that we're in a really strong position to capture the upside. So I think in terms of the balance of the year and you know how to how to look at SG&A. We do expect the levers that we pulled during the second quarter will start to manifest themselves more fully over the next few quarters.
The other component certainly in any kind of SG&A leverage is purely just the gross profit rate and where that stands to be in the fourth quarter and moving into next year. That's another factor in what we can control is certainly very strongly as the SG&A. So we feel good that we pulled the levers are the appropriate levers for the time being.
Yeah in this year and the only thing other thing I would add to that as it were at absolutely entering this from a position of strength and you know to Enrique is point, there's lots of levers I mean, just from the expense side. There's a lot of growth expense that we're continuing right now to prepare ourselves for the future. There is these initiatives. There's advertising there is variable spend all of those we can still we can still pull on not to mention as a whole.
Host of other levers just for you know to preserve cash if that's ever needed. So you know I think where we are at this point is because look we pulled the levers we know it's a challenging time, we're coming at this from a position of strength. There's initiatives that we know that will help us both in the near term and the long term, let's get them done and so when this market turns and it will turn.
When it turns we will be able to take off because we've already done these things, but we will keep absolutely not to the to the outside environment.
Can I ask just ask a follow up just given that the mid teens decline in comp trends you've seen I guess.
I mean can you kind of mark to market for us what that is in terms of SG&A as a percent of gross profit I mean have you. Let it go over 100 or is that you know what that.
Is that a is that a kind of a market where you would say okay. Now now we have to pull back more.
Yeah, No I think you know like we've said we've pulled back on the levers that we can control right. Now we think we're better aligned with the current environment Youre going to see those savings manifest themselves kind of moving forward, we did pull those stronger levers kind of halfway through the second quarter. So you don't fully see it in this quarter's P&L, but moving forward we should start.
To see more of those savings, yeah, and I think ensuring the way to think about it is look we had an absolute dollars and improvement in SG&A from the first to second as Enrique talked about we would expect these dollars to manifest more youll see a reduction there the other wildcard in the equation that was just gross profit dollars and that's going to be driven by the macro factors as Enrique talked about.
Thank you for that.
Sure.
We'll take our next question from Michael Montana with Evercore. Please go ahead.
Hi, there thanks for taking the question. So the first question I had was just around the wholesale side. If we should assume kind of similar trends in terms of volume and G. P. O you pressure.
To start the third quarter in wholesale given the challenging macro.
Yeah, Michael Good morning, so.
You know in previous calls I've talked about because I've gotten asked questions about retail margin in wholesale margin and you know what I've said in previous quarters is all else being equal we feel pretty good about keeping strong retail margins wholesale would be coming under pressure.
We're going to enter into a depreciating environment, that's going to cause the pressure like I talked about before the other reason I mentioned that it could come under pressure just because of that retail selectivity and because we're moving some cars older cars over to retail and then the corresponding what we call kicks you say, okay. Let's retailers car you go build it or you start to go out and realize okay. We can't get this to the standards. We then moved them.
You know back to wholesale and we generally perform worse on those and the normal wholesale. So we knew there was going be some pressure I think if you look at recent performance, let's call. It certainly last year I think every quarter last year on a GPU standpoint for wholesale was over $1000.
And then you look at the year before that I think we had another quarter that was over $1000.
You look at that and then compare it to the five years prior to that.
There were there were probably equal or more quarters in the last year than we had in the last five years over $1000 and that's because of the massive appreciation that we saw last year. So I think the way to think about it going forward is probably more in line with what you would normally see.
The average wholesale that we'd make in any given quarter over 345 year period, I think that's the way to think about it especially in this depreciating environment, especially as we continue to push more try to push some more of these older vehicles over just from an affordability standpoint.
Yeah.
Yeah.
And we'll take our next question from Adam Jonas.
Stanley. Please go ahead.
Hey, Bill I'm sure. Your teams following the proposed rulemaking from the FTC that motor vehicle dealers trade regulation rule.
That's now collecting comments and aim to increase transparency on pricing and advertising.
And some downstream yourself like aftermarket add ons. So if this rulemaking is approved I know theres going to be a lot of a lot of puts and takes.
Have you have you guys done any preliminary work on what impact this might have on carmax in terms of the compliance costs SG&A expense.
Or any potential revenue impacts thanks.
Yeah, Adam it's a great question, obviously, we commented during the comment period is as many folks did.
Just because the requirements in some cases are a little onerous, we started to look at it obviously whatever ultimately gets decided we will we will make sure that we we do follow but we havent put a we are prepared at this point to really talk about additional expenses or anything because again to your point. It's so much up in the air and there's so much discuss.
And debate about it there's a lot that's really unknown.
One thing I will add though I mean to your point in the overbid, you use that transparency and clarity around pricing add on products et cetera.
I think our business model sets us up perfectly for that we already are very transparent honest online.
We can show our E P P products online and the pricing there. So I think we're in a great position to do that and obviously, we'll we'll do whatever is required so yeah and I think the most of the bigger complication for us and I think really needs to be looked at as you know some of the requirements on signing paperwork physical signatures managers that kind of thing well.
Everyone's operating in a world of online so again it'll be interesting to see how it how it pans out.
Well take our next question from John Murphy with Bank of America. Please go ahead.
Good morning, guys I just wanted to ask a question on pricing I mean year over year.
Comparisons are always relevant but sequentially as things are changing here it might be you know more relevant the typically when you look at the retail price yours was down about 2% sequentially quarter over quarter, but wholesale was down 7% I mean, you talked about doing sort of more older vehicles and they're in the retail.
So I mean, you know that 2% is absorbing even lower priced vehicles. So the gap actually may be even larger between those Julian but what are you seeing in the market where retail pricing and we're hearing this from a lot of other folks it is holding up.
Fair amount better than.
And then wholesale pricing I mean, do you think that the market is sort of anticipating the deals or is it just waiting some kind of weakness are looking to maintain grocery. They just seem to me like there is no things are softening, but a lot more on the wholesale than they are on the retail side.
Yeah, John I think some of it has to do with timing I mean, if you think about it although there was depreciation in the quarter and although as you pointed out we have an older vehicle mix both of those bring.
Bring down your your overall retail prices, but it wasn't enough to offset when comparing to a year ago. So if you think about it we ended last year with an appreciation of about 7500 Bucks.
We've only experienced about $2500 and depreciation so that dynamic will become less and less as we get later into the year, but you're still there just wasn't enough to offset that overall appreciation wise, what which is why you still see us above last year I think the other thing that you got to think about is a lot of the cars that were sold in the second quarter or.
But actually a majority of them were bought prior to the quarter, even starting so they're at a higher price. So I think theres. Some theres definitely some some timing there you know on the wholesale side, obviously, if you're moving some of the debt.
The nicer more expensive stuff into retail that's going to impact your wholesale a little bit more and so I think that's the dynamic that you have going on there.
Yeah.
We'll take our next question from Chris <unk> with BNP Paribas. Please go ahead.
Hey, guys. Thanks for taking the question.
It's still a little lost on kind of how these hedges affect profitability it'll be quantified this quarter and then two just like even like bigger picture question I'm trying to think the impact of the next couple of years given the decline in use volumes the tightening in the securitization market spreads.
Defaults picking up a bit can you just kind of maybe refresh us refresh us on how the fluctuations these renewables impacts loan originations and net margins.
So we can better model the cadence of Catholic forward.
Yeah, maybe I'll jump in first on the hedge.
Similar dynamic to what we saw in the first quarter right. So the vast majority of our receivables are funded through the ABS market as we know.
We have accounting hedge it out on those however, we do have alternative financing vehicles with our banking partners are long standing banking partners and a portion of those receivables have a cash flow hedge, but not an accounting hedge and that's really due to our desire to maintain flexibility in our funding profile.
Those receivables are going to get mark to market every quarter like they did last quarter, and really where you see a change or a benefit or potential head is when there are sharp and material rises or decreases in interest rates and that's exactly what happened again. This quarter. So we would only expect us again to be material for caf during periods of material changes and it's very similar to the first quarter.
Sharp changes in movements in the interest rates and that's what happened so and it was 9 million in the same amount from the first quarter.
Great and I'll touch on your other question, Chris and correct me if I if I don't cover everything you've asked but with regards to just overall interest margin, obviously rising cost of funds that we've said I think we signaled last quarter. You know you could begin to see a change in our net interest margin, maybe it's hit a peak and it could come down and again that's.
Where our accounting.
The way that we do our accounting benefits us obviously as the margin increases over time that that are higher margin receivable continues to hang around for a longer but obviously our margins have tightened.
Had the hedge not been in there, we probably would have seen a downturn this quarter and you know, we're obviously going to be in a tighter environment. So maybe it's continued to see that come down. We're obviously on our side continuing to manage margins very carefully through our pricing. So we'll do what we can but still remaining competitive for our customers. So again I think there will be pressure on our net intra.
Margin going forward.
Again, we'll manage that as well as we can.
Got you. Thank you very much.
Okay.
We will take our next question from Sean <unk> with Jpmorgan. Please go ahead.
Okay.
Oh, great. Thanks for taking the question.
Maybe just a couple of quick ones here first on <unk>.
Because if you go if I heard you correctly, you mentioned that.
You believe you could still maintain the current retail GPU level.
In the current pricing environment.
And the next few quarters did I hear that correctly.
Just want to clarify that I have a follow up thanks.
Yes.
When I was thinking that I was talking about earlier, although I do feel good about being able to maintain a strong retail margins, but I always caveat that with you know depending on a lot of different things sales elasticity, what competitors are doing inventory levels, our own inventory levels. So theres a lot that goes into it but we really are still realizing some now.
Benefits from.
Although we've lapped self sufficiency.
Feel like Theres, a little bit there, but then there's the fact that we are selling these older vehicles gives us a little bit more margin in this quarter, we were able to pass along some of it to the consumers and form in the form of offsetting some of the inflationary pressures as well as take a little bit more so again.
We feel good about our retail margins and where they are today and we'll just continue to watch some of the more other external factors as we go forward.
Got it.
And maybe just you know one of them.
His comments around the advertising.
It looks like you wanted to maintain a healthy advertising spend per unit.
But just curious like in terms of like the focus of the company right now.
Is it is it more to make sure you can do to gain market share or is it more around that.
Managing overall profitability you know.
Maybe higher interest rates or.
You know maybe lack of pricing discounts I'm, just curious as to like what.
Oh, you know, what's really the strategy in the near term.
Is it.
The one or the other or you think you could get it done to the world around profitability.
Yeah, So I'll I'll answer and then I'll just give you some of my thoughts and have been in <unk> anymore, but as far as advertising goes as Enrique said look we.
We still are where we're really excited about this industry and where the industry is going granted we've got a we've got some challenging things right right now, but we still want to continue to invest in advertising, we're going to do it we kind of think about it on a on a per unit level. So ultimately advertising as a whole will come down if the <unk>.
<unk> are down, but we feel like continuing to invest in the business. Now obviously, you may change, where you spend it to this quarter. The majority of it was awareness and from an acquisition standpoint was more customers versus buying vehicles.
But it's also one that we can continue to monitor.
Everything we do from an advertising standpoint, we measure ROI and so we.
We have certain targets that we're going to have to if we see things that aren't panning out we will certainly pull back or pivot to something else that is so do you have.
Thoughts on that yes, what I would say is compared to a few years ago.
Getting team overall has done a tremendous job of really giving us a line of sight into profitability and the dollars, we're investing and how that then translates to an ROI. So we feel really good about the investments we've been making over the past couple of years. If you compare ourselves to two years ago. I think we've increased the dollars per unit by over 50% right.
That's because we feel really good about our ability to get visibility. So I think we can continue to drive awareness and at the same time drive that profitability. So so we've got I think we can get the best of both worlds Yeah. I think the other thing that's important to remember to regard as we've got a lot of great things going on you know I'll give you. An example, the prequalification that both John and I talked about we haven't even we.
Haven't even marketed that yet and so that's an area for opportunity. So again as we think about advertising. It really allows us to kind of okay. What do we want to highlight highlight online offers do we want to highlight the omni experience. We want to highlight you know being able to buy online to better highlight prequalification theres lots of things. So we're constantly moving it around so so again, that's kind of how we're thinking about it.
Okay.
Got it got it maybe just on the cash piece you know are you still able to.
Feel comfortable being able to continue to pass on interest rate increases to the consumer.
Or is that also going to be more thoughtful based on you know just more competitive lenders out there.
Yeah Rich I appreciate the question Yeah as I said in my prepared remarks I was I.
I was extremely pleased with the penetration we had we did show that we were able to pass along.
Some of the increases onto our customers yet still manage the elasticity capture the volume that we could again three things. We're trying to manage here is stay highly competitive for our consumers from our offer standpoint.
Manage that margin and then make sure that we can capture the right amount of sales and it's a delicate balance, but I think we've done a great job and I think we'll continue to do that.
Okay.
Well take our next question is from Seth Basham with Wedbush Securities. Please go ahead.
Thanks, a lot on my first question is on Caf and just thinking about your loan loss reserves and where you're at right now what does that imply for what you're reserving or your allowance rate is for your core tier one securitized managed receivables.
So right now we are comfortably within the 2% to 2.5% range the.
The increase that you saw as I mentioned is predominantly coming from that tier two and tier three volume that's a larger percentage in the new originations than it is in the portfolio. So we feel real good about staying in that targeted range and that's reflected in the reserve.
Got it so you haven't really taken up here allowance rate for those receivables. Despite the fact that we've seen collateral values come in sharply and the macro environment deteriorate, how should we think about the dynamics, there and potential for higher loan losses for those cores.
Yeah, we we modeled that pretty.
Pretty extensively and we felt like again, assuming there isn't just an absolute.
Plummeting of the values, you've got people that are buying vehicles on our books that bought it five years ago three years ago. So there is a obviously it's been a slow ramp up and you know hopefully it's a slow ramp down but modeling that it really was relatively immaterial in a $477 million reserve. So we feel we are well reserved.
We can absolutely absorb that and what we have today. So we've considered it but we think we've got the right the right reserve as it sits today.
Got it thank you.
Yes.
And our next question from Joe <unk> with Stephens. Please go ahead.
Hey, guys. Thanks for taking our question.
So a question for the older vehicle mix as the vehicle supply normalizes could you see these older vehicles remain part of the mix to support higher Gpus, the historical levels or how are you thinking about that moving forward.
Yeah, no. It's a great question.
The great thing about that is we know that we have so much more of that inventory available. We can put out whatever the customer wants so as we go forward and maybe get to a more normalized area. Our period. If consumers are looking for this we can we now have a source to make sure that we put it out there. So I think there's also will benefit us if you think about the fact that new car.
Cars right now there aren't as many being sold they'll have to be something that fills that gap. This is a great. I think this will be a great tool to do that so again, we will put out there whatever the consumers want.
Got it thank you guys.
And as a reminder, its star one to ask a question.
We will take our next question from David Whiston.
Listen with Martin Im sorry. Please go ahead.
Thanks, Good morning.
<unk> spending was roughly flat from Q1 stock obviously, a lot cheaper now but of course, there's macroeconomic pressures, but you can make one want to conserve cash it's that delicate balance, but do you anticipate being able to be.
At least flat in second half versus first half or are you going to pull back on buybacks or be even more aggressive.
Hey, David Yeah. Thanks for the question and as you pointed out in the second quarter.
On the same pace as we were in the first quarter. So continue to buyback our shares but I would tell you that our capital allocation philosophy remains.
First and foremost a.
Our cash goes into growing the core business. So that's our retail businesses, our wholesale businesses for Caf business and making sure those are in a position to continue to grow from there. We also look for growth opportunities.
Investments that we make and then we return capital back to shareholders. So our philosophy has remained the same.
Okay and just on your SG&A control I, just want make sure I understand the comment you made earlier on staffing are you doing any replacement hiring if someone does leave voluntarily.
Yeah. So we absolutely have we don't have a pause on hiring at this point, we're very strategic we have a prioritization of hiring so as folks leave in the positions critical positions, we absolutely well will replace them, but at the same time. If you have a vacancy you want to make sure. It. Okay is this something that supporting our.
Our near term initiatives that kind of thing, but while we.
Prioritize we have not paused overall hiring.
Yeah, and just to be clear that does that managing our head count is also done through attrition as well right. Just how we've been managing that so you will see those benefits again more sharply as we progressed into the into the future quarters.
Okay. Thank you.
Thank you.
Yes.
Yeah.
And it appears there are no further questions at this time I'd like to turn the conference back to Bill Nash for any additional or closing remarks.
Thank you as always I want to thank our associates for everything they do how they take care of each other and our customers.
And the communities again, my thoughts are definitely those being impacted by the hurricane. Please please stay safe. Thank you all for joining the call and we'll talk again next quarter.
This concludes today's call. Thank you for your participation you may now disconnect.
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