Q4 2023 Carmax Inc Earnings Call
Speaker 2: Ladies and gentlemen, thank you for standing by. Welcome to the fourth quarter fiscal year 2023 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.
Speaker 2: Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Lowenstein, AVP Investor Relations. Please go ahead. David, please be advised that today's conference is being recorded.
Speaker 3: Thank you Corliss. Good morning. Thank you for joining our fiscal 2023 fourth quarter earnings conference call. I'm here today with Bill Nash, our president and CEO , Enrique Mayor Moore, our executive vice president and CFO .
Speaker 3: and John Daniels, our Senior Vice President, CarMax Auto Finance Operations.
Speaker 3: 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, are forward-looking statements that we make pursuant to the Safe Harbor provisions and the
Speaker 3: of the Private Securities Litigation Reform Act of 1995.
Speaker 3: 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.
Speaker 3: In providing projections and other forward-looking statements, we disclaim any intent or obligation to update them.
Speaker 3: For additional information on important factors that could affect these expectations, please see our Form 8K, followed with the SEC this morning, and our annual report on Form 10K for the fiscal year ended February 28, 2022, previously filed with the SEC.
Speaker 3: Should you have any follow-up questions after the call, please feel free to contact our Investor Relations Department at 804-747-0422, extension 7865. Lastly, let me thank you in advance for asking only one question.
Speaker 3: and getting back in the queue for more follow-ups. Bill? Great, thank you David. Good morning everyone and thanks for joining us.
Speaker 4: The current challenges in the used auto industry are well documented, with affordability pressured by broad inflation, climbing interest rates, tightening lending standards, and prolonged low consumer confidence.
Speaker 4: We are continuing to leverage our strongest assets, our associates, our experience and our culture to build momentum and manage through this cycle. While there are many macro factors that we cannot control, we have taken deliberate steps to support our business both the near term and the long run.
Speaker 4: This quarter we reduced SG&A further. We delivered strong retail GPU through our vehicle acquisition, reconditioning, and margin management strategies while continuing to test price elasticity.
Speaker 4: We adjusted offers to deliver strong wholesale GPU while increasing unit sales quarter over quarter. We aligned used saleable inventory units with market conditions while driving down total inventory dollars more than 25% year-over-year.
Speaker 4: And finally, we raise calf's consumer rates to help offset rising costs of funds while still growing calf's penetration.
Speaker 4: We are prioritizing initiatives that drive efficiency and improve experiences for our associates and customers. We believe these steps will enable us to come out of this cycle leaner and more effective while also positioning us for future growth.
Speaker 4: Reflecting on Fiscal 23, we achieved a number of key milestones in each area of our diversified business model. We enabled online self-progression for all of our retail customers, enhanced our wholesale shopping experience, and completed the nationwide rollout of our finance-based shopping pre-qualification product.
Speaker 4: All of these accomplishments further position our business for growth as the most customer-centric experience in the industry. I'll talk more about these later in the call.
Speaker 4: And now into results for the fourth quarter of FY23. Our diversified business model delivered total sales of $5.7 billion, down 26% compared to last year, driven by lower retail and wholesale volume and prices.
Speaker 4: In our retail business, total unit sales declined 12.6% and used unit comps were down 14.1%. Average selling prices declined approximately $2,700 per unit or 9% year over year.
Speaker 4: In addition to the macro factors I mentioned previously, we believe our performance continues to be impacted by transitory competitive responses to the current environment.
Speaker 4: Our market share data indicates that our nationwide share of 0 to 10 year old vehicles remained at 4% for calendar year 2022.
Speaker 4: Our market share data indicates that our nationwide share of 0 to 10 year old vehicles remained at 4% for calendar year 2022. Our title data shows that our market share data indicates that our worldwide share of 0 to 10 year old vehicles remained at 4% for calendar year 2022.
Speaker 4: that the market share gains we achieved during the first half of the year were offset by share losses during the second half of the year as we prioritized profitability over near-term market share.
Speaker 4: For context, we have lost the market share during prior down cycles. In those cases, we recovered the market share and then continued to grow it to new heights as economic conditions improved.
Speaker 4: We remain focused on achieving profitable market share gains that can be sustained for the long term and plan to continue running extensive price elasticity tests.
Speaker 4: The results from our most recent tests confirm that holding margins during the quarter was the right profitability play.
Speaker 4: Despite the decrease in average selling price, fourth quarter retail gross profit per used unit was $22.77, up $82 per unit year over year, demonstrating our ability to appropriately value vehicles and effectively manage margin inventory.
Speaker 4: Wholesale unit sales were down 19.3% versus the fourth quarter last year, but improved from the 36.7% decline during this year's third quarter, as our total buys from consumers and dealers improved sequentially.
Speaker 4: Wholesale average selling price declined approximately $3,200 per unit or 28% year-over-year, but we saw some appreciation beginning in January .
Speaker 4: Wholesale gross profit per unit was $11.87, which is consistent with last year's fourth quarter. Margin benefited from the recent price appreciation I just mentioned and from strong dealer demand, particularly at the end of the quarter.
Speaker 4: We bought approximately 262,000 vehicles from consumers and dealers during the quarter, found 22% from last year's record, but a sequential improvement from the 40% decline during this year's third quarter.
Speaker 4: Our self-sufficiency remained above 70% during the quarter.
Speaker 4: We purchased approximately 247,000 cars from consumers in the quarter with a little more than half of those buyers coming through our online instant appraisal experience.
Speaker 4: We sourced approximately 15,000 vehicles through dealers, up 4% from last year.
Speaker 4: In regard to our fourth quarter online metrics, approximately 14% of retail unit sales were online, up from 11% in the prior year. Approximately 52% of retail unit sales were OmniSales this quarter, down from 55% in the prior year. Nearly all of our fourth quarter wholesale auctions and sales, which represent...
Speaker 4: Total revenue resulting from online transactions was approximately 30% down slightly from last year.
Speaker 4: CarMax Auto Financer, CAF, delivered income of $124 million, down from $194 million during the same period last year. John will provide more detail on customer financing, the loan loss provision, and CAF contribution in a few moments. At this point, I'd like to turn the call over to Enrique, who will provide more information on our fourth quarter financial performance.
Speaker 5: Fourth quarter net earnings per diluted share was 44 cents, down from 98 cents a year ago.
Speaker 5: Total gross profit was $611 million, down 14% from last year's fourth quarter.
Speaker 5: Used retail margin of $387 million and wholesale vehicle margin of $143 million declined 9% and 20% respectively.
Speaker 5: The year-over-year decreases were driven by lower volume across used and wholesale.
Speaker 5: This was partially offset by strong margin per unit performance.
Speaker 5: Use unit margins increased from last year's fourth quarter and wholesale margins per unit were flat year over year.
Speaker 5: Other gross profit was $81 million, down 24% from last year's fourth quarter.
Speaker 5: This decrease was driven primarily by a decline in Extended Protection Plan, or EPP, revenues.
Speaker 5: In addition to the impact of lower retail unit sales, profit sharing revenues from our partners decreased from $33 million in last year's fourth quarter to $16 million in this year's quarter. This was partially offset by stronger margins and a favorable year-over-year return reserve adjustment.
Speaker 5: Penetration was flat year over year at approximately 60%.
Speaker 5: Third-party finance fees were relatively flat over last year's fourth quarter, with lower volume in fee-generating Tier II, offset by lower Tier III volume for which we pay a fee.
Speaker 5: Service was also relatively flat over last year's fourth quarter, reflecting sequential improvement in year-over-year performance.
Speaker 5: We have maintained our technician staffing levels and have put in place key efficiency and cost coverage goals for our teams.
Speaker 5: This supports our expectation of improved performance in FY24 compared to the full FY23 year.
Speaker 5: The extent of this improvement will also be governed by sales performance given the leveraged, deleveraged nature of service.
Speaker 5: On the SG&A front, expenses for the fourth quarter were $573 million, down 8% from the prior year's quarter, and down 3% sequentially from this year's third quarter.
Speaker 5: SG&A as a percent of gross profit was higher than the fourth quarter last year, due primarily to the 14% decrease in total gross profit dollars compared to last year's quarter.
Speaker 5: The change in SG&A dollars over last year was mainly due to the following factors. First, we reduced advertising by $34 million.
Speaker 5: Second, total compensation and benefits decreased $17 million, which included an $18 million increase in share-based compensation. Excluding the latter, compensation and benefits was down $35 million, of which $18 million was due to a lower corporate bonus accrual in the quarter.
Speaker 5: Third, other overhead increased by $6 million.
Speaker 5: The year-over-year increase in investments in our technology platforms and strategic growth initiatives was primarily the result of decisions made in prior quarters.
Speaker 5: This was partially offset by a favorable year-over-year comparison due to costs incurred in last year's fourth quarter associated with a significant ramp in staffing.
Speaker 5: and favorability in a variety of other smaller costs this year.
Speaker 5: During the quarter, we continue to take steps to better align our expenses to our sales.
Speaker 5: This included further reducing staffing through attrition in our stores and CECs.
Speaker 5: limiting hiring and contractor utilization in our corporate offices, and continuing to align our marketing spend to sales.
Speaker 5: While our advertising expense on the dollar and per unit basis was lower year over year on the quarter, our investment for the quarter and full year on a per unit basis remains aligned with last year's full year spend level.
Speaker 5: For fiscal 24 in total, we anticipate maintaining per unit spend at a similar level to FY23.
Speaker 5: with per unit spend varying from quarter to quarter.
Speaker 5: We believe that at this point we largely have the resources in place to meet our near-term omnichannel and other digital investment needs.
Speaker 5: Accordingly, our expectation is that we will bend the expense growth curve on our omnichannel investments and our overall SG&A.
Speaker 5: In FY24, we expect to require low single-digit gross profit growth to lever SG&A.
Speaker 5: well below the levels we've guided to during the investment-heavy phases of our omni-transformation. As a result, we expect to deliver a stronger flow-through of gross profit growth to profitability.
Speaker 5: While we expect that the front half of the year will benefit from the cost management actions we took in the back half of FY23, the magnitude of the year-over-year benefit relative to the 8% decrease we experienced in Q4 may be muted.
Speaker 5: While we expect that the front half of the year will benefit from the cost management actions we took in the back half of FY23, the magnitude of the year-over-year benefit relative to the 8% decrease we experienced in Q4 may be muted, particularly in Q1.
Speaker 5: This dynamic stems from rolling over a more comparable period for advertising and a corporate bonus accrual in Q1 than the fourth quarter declines that I noted earlier.
Speaker 5: While not providing specific guidance beyond FY24, we expect that this bending of the SG&A growth curve will carry over beyond this year.
Speaker 5: This will support our pathway back to a lower sGNA leverage ratio with the initial goal of returning to the mid 70% range over time.
Speaker 5: Hitting this range will also require healthier consumer demand.
Speaker 5: Regarding capital structure.
Speaker 5: Regarding capital structure, our first priority remains to fund the business.
Speaker 5: Given recent performance and ongoing market uncertainty, we continue to take a conservative approach to our capital structure.
Speaker 5: While our adjusted net debt-to-capital ratio was slightly below our 35% to 45% targeted range, we are managing our net leverage to maintain the flexibility that allows us to efficiently access the capital markets for both CAF and CarMax as a whole.
Speaker 5: In keeping with this goal of maintaining flexibility, we continue to pause our shared buybacks.
Speaker 5: Our $2.45 billion authorization remains in place as does our commitment to return capital to shareholders over time.
Speaker 5: For capital expenditures, we anticipate approximately $450 million in FY24, similar to our FY23 level.
Speaker 5: This spend is primarily being driven by investments in land and the build-out of facilities related to long-term growth capacity for production and auctions.
Speaker 5: U-Store development is also contributing to CapEx, albeit at a lower level, as we have slowed the pace of openings in FY24.
Speaker 5: In FY24, we plan to open five new locations, including two more stores in the New York City Metro Market, as well as our first offsite production location in the Atlanta Metro Market.
Speaker 5: Our extensive nationwide footprint and logistics network continues to be a competitive advantage for CarMax.
Speaker 5: Our liquidity remains very strong and we ended the quarter with approximately $315 million cash on the balance sheet and no draw on our $2 billion dollar revolver.
Speaker 5: liquidity remains very strong and we ended the quarter with approximately $315 million in cash on the balance sheet and no draw on our $2 billion revolver. Now I'd like to turn the call over to John .
Speaker 6: Thanks Enrique, and good morning everyone.
Speaker 6: During the fourth quarter, CarMax Auto Finance originated $1.9 billion, resulting in penetration of 44.7% net of three-day payoffs, up from the 41% seen in the same quarter last year and in line with Q3.
Speaker 6: The weighted average contract rate charged to new customers at 10.9% was up 110 basis points from Q3 and 270 basis points from the same period last year. We were pleased with our ability to increase consumer rates within the quarter while maintaining a consistent share of finance contracts sequentially and growing our share of finance contracts substantially on a year over year basis.
Speaker 6: Tier 2 penetration in the quarter was 19.4 percent lower than typical seasonal levels.
Speaker 6: Tier 3 penetration was flat to last year at 6.9%. While our long-term lending partners continue to complement each other in providing strong credit offers to our customers, we did observe year-over-year tightening as both rising interest rates and delinquencies likely led to these adjustments.
Speaker 6: Of note, CAF has also adjusted its underwriting standards in reaction to the current environment, including towards the end of Q4, reducing its targeted percentage of Tier 3 volume from 10% to 5%.
Speaker 6: Cap income for the quarter was $124 million, down from $194 million in the same period last year.
Speaker 6: The $70 million dollar year-over-year decrease is primarily driven by a $44 million dollar increase in loan loss provision, as well as a $61 million dollar increase in interest expense, partially offset by growth in interest and fee income.
Speaker 6: Within the quarter, total interest margin decreased to $262 million, down $22 million from the same quarter last year.
Speaker 6: The corresponding margin to receivables rate of 6.3% is down approximately 100 basis points year over year and 125 basis points from the near 10-year peak seen in this year's first quarter, driven mostly by the significant interest rate jumps absorbed during the past year. In response, we have made numerous pricing moves over the last 12 months.
Speaker 6: 3.02% of ending receivables.
Speaker 6: This is compared to a reserve of $491 million last quarter, which was 2.95% of receivables.
Speaker 6: This sequential seven basis point adjustment in the reserved receivable ratio reflects unfavorable performance in the portfolio as well as the uncertain macro environment, along with the continued increase in CAHPS Tier 2 and Tier 3 volume.
Speaker 6: We continue to target and operate within the 2 to 2.5% cumulative net credit loss range for our core tier 1 portfolio and we believe we are appropriately reserved for future losses.
Speaker 6: Regarding further advancements in our credit technology, we continue to stabilize and improve upon our nationally available best-in-class pre-qualification product, finance-based shopping, or FBS.
Speaker 6: During the fourth quarter, we fully deployed yet another of our large lending partners within the FBS platform, now bringing the total to five well-established lenders that are providing decisions on the full vehicle inventory for an applicant and co-applicant leveraging a soft credit pool. Note what truly makes this product distinct in the used auto industry is our ability to...
Speaker 4: During this upcoming first quarter, we hope to add additional finance partners to the platform as work is already well underway. Now I'll turn the call back over to Phil. Thank you, John and Enrique. As I mentioned at the start of the call, even as we navigated the challenges of fiscal 23, we achieved a number of key milestones during the year by focusing on making our omnichannel experience faster, simpler, and more seamless.
Speaker 4: for our associates and customers. I'm proud of the progress that we've made on our journey to deliver the most customer-centric experience in the industry. Some highlights from this year that will have a lasting impact across our diversified business model are for retail we enabled online self-progression capabilities for all of our customers. As we evolve our omni-channel experience we're also updating our operating models to drive efficiency gains in our stores.
Speaker 4: During the year we launched self-checking capabilities for appraisal customers and also enhanced e-sign functionality to better enable self-progression.
Speaker 4: Our e-commerce engine combined with our unparalleled nationwide physical footprint is a competitive advantage. Our ability to deliver integration across digital and physical transactions is a key differentiator in both the experience we provide and the total addressable market available to us.
Speaker 4: For wholesale, we rolled out a modernized, mobile-friendly vehicle details page that displays the most relevant information from dealers that they need to preview our wholesale inventory, creating a shopping experience for dealers that is similar to how consumers shop our retail inventory. We also expanded MAC's offer, our digital appraisal product for dealers, to a broader
Speaker 4: based shopping, our multi-lender prequalification product. As John mentioned, this gives customers the flexibility to digitally receive quick credit decisions from a majority of our lenders across the entire vehicle inventory. Over 80% of our customers have used this online tool as they begin the credit process.
Speaker 4: In addition, CAP is equally focused on coming out of the cycle leaner and more effective.
Speaker 4: The team is already leveraging the new loan receivable system that we deployed a little over a year ago to deliver on savings opportunities with many more expected in the upcoming years.
Speaker 4: Looking ahead to Fiscal 24, we will build on last year's initiatives and prioritize projects that unlock operating efficiencies and create better experiences for our associates and customers. We are confident that the actions we will take position us better to capture the upside when the market improves.
Speaker 4: Some examples include, for retail we are leveraging data science, automation and AI to make it even easier for customers to complete key transaction steps on their own and to go back and forth between assisted health and self progression.
Speaker 4: We are also building digital tools that will support customers across key transaction steps in their journey and give them better insight into their remaining steps.
Speaker 4: These tools will drive online sales and make it easier for customers to opt in to Express Pickup.
Speaker 4: This delivery option offers customers the ability to complete their transaction at one of our stores in as little as 30 minutes and represents a win-win opportunity. Our research shows that customers love this experience when utilized and it will enable us to lower costs over time.
Speaker 4: For wholesale, we will leverage our modernized vehicle detail page to offer new services.
Speaker 4: Some examples include AI enhanced condition reports and proxy bidding capabilities. We will also improve max offer by rolling out our instant offer experience to all participating dealers. These tools will enable us to drive incremental operational efficiencies as we continue to scale our wholesale volume all while providing a better experience.
Speaker 4: For CAF, we're working to integrate our finance-based shopping product into our stores and customer experience centers more seamlessly so that all consumers can enjoy the full experience. As John mentioned, we will also continue to pursue opportunities to add additional lenders to the platform, which will expand the breadth and depth of offers available to our customers.
Speaker 4: While these are a few good examples, our entire organization, from Edmonds to Logistics, is focused on improving efficiencies and experiences. We are confident in the future of our diversified business.
Speaker 4: We will continue to evaluate our performance relative to our long-term financial targets annually. As we start Fiscal 24, we are affirming the targets that we updated in April 22.
Speaker 4: selling between 2 and 2.4 million vehicles through our combined retail and wholesale channels by fiscal 26, generating between $33 and $45 billion in revenue by fiscal 26, and growing our nationwide market share of 0 to 10-year-old vehicles to more than 5% by the end of calendar 25.
Speaker 4: I want to thank and congratulate all of our associates for the work they do. They are our strongest differentiator and the key to our success. Last week Fortune magazine named CarMax is one of its 100 best companies to work for for the 19th year in a row. I am incredibly proud of this recognition particularly as we face a challenging year.
Speaker 4: It's due to our associates' commitments to supporting each other, our customers, and our communities every day. Over our nearly 30-year history, we've navigated many challenging environments and have emerged stronger each time. This environment is no different, and I am confident that the actions we are taking will enable us to drive robust growth as the market improves. With that, we'll be happy to take your questions.
Speaker 4: to our associates commitments to supporting each other, our customers, and our communities every day. Over our nearly 30 year history, we've navigated many challenging environments and have emerged stronger each time. This environment is no different and I'm confident that the actions we are taking will enable us to drive robust growth as the market improves. With that, we'll be happy to take your questions. Cornear?
Speaker 2: Absolutely. At this time, we will open the floor for questions.
Speaker 2: If you would like to ask a question, please press the star followed by the 1 key on your touch tone phone now. Questions will be taken in order in which they are received.
Speaker 2: If at any time you would like to remove yourself from the questioning queue, please press star 2.
Speaker 2: Please limit your questions to one at a time. Again, to ask a question, please press star 1.
Speaker 2: And your first question comes from the line of John Healy.
Speaker 6: with North Coast research. Guys, I wanted to talk just a little bit about the CAF business to start off. Enrique, I was hoping maybe you could hit us with kind of maybe your thoughts on, you know, where maybe some of the key metrics might look out maybe say the next quarter or so, maybe on, you know, kind of losses as well as recoveries and maybe the crosscurrents there.
Speaker 6: But also just kind of on your cost of funds and where that's kind of moving to of late as well as kind of the Coupon rate that's going to the consumer and you know, is there a lag? Is there a catch-up period? Just just how we can think about maybe some of those dynamics moving for you know, as we as we start fiscal 24
Speaker 5: Thanks for the question John . I'll address the cost of funds and kind of how to think about that, then I'll turn it over to John and talk about the business. So from a cost of funds perspective, what I tell you is that the securitization market, which we're largely dependent on, the market is open. It's constructive currently. You saw it in our first deal.
Speaker 5: where the cost of funds came down relative to the deal that ended in 2022, right? And so we do believe that the benchmarks continue to come down, spreads continue to be healthy, and we would expect that to kind of carry forward. You know, per timing, you would expect us to be in the market here in the near term.
Speaker 5: But we would expect to be able to execute our deal and again I think relative to a couple of deals ago where the market really was compressed and the cost of funds was one of the highest we had seen in many, many, many years. It's come down from there. Still higher than obviously where we'd like them to be but certainly better than where they had trended a couple of deals ago.
Speaker 5: Sure, and I'll jump in on the other metrics. Just to piggyback on the cost of funds, obviously the other component there is the kind of the APR that's in the deal as well. Last time we were at 909, we just cited that we were 10.9 on our originations in this quarter. We've done a great job of raising rates through the year, so you can imagine that to drive through into future deals as well. So if spread settles in and our APRs are higher, that should benefit us.
Speaker 5: With regard to losses and delinquencies, you know, as mentioned in the prepared remarks, again, we've taken our reserve up to $507 million. That's 3.02% of receivables. Did mention that, you know, some of that is driven by unfavorability in the portfolio and the macro environment. You know, I think the entire industry is feeling.
Speaker 5: a higher sense of delinquency in the consumer. For us, in the existing book of business, you've got some, you've got definitely higher inflation, making it more challenging for consumers. Our newer originations are purchasing at a higher average selling price, therefore there's a higher payment. So people are having to work through having a higher auto payment than they might normally be used to. So all the...
Speaker 5: in our platform as well as outside of the industry and we've tightened as well. It's something that we've done on a regular basis. We did it in the Great Recession. We did it to start a pandemic. We've done it many times in between. So we have tightened just to make it a little more conservative to watch this consumer carefully. But again, with our tightening, our partners will be happy to pick up that volume as we've done.
Speaker 2: And the next question comes from Michael Montani with Evercore ISI. Your line is open.
Speaker 4: Great, thanks for taking the question. Just wanted to ask on retail and wholesale GPUs, those were both I think stronger than we were anticipating, if you could just provide some update you know on the pricing volatility that we're seeing you know pretty unprecedented I think both at retail as well as at wholesale.
Speaker 4: competitively what you're seeing in the market, how sustainable is this kind of strong discipline in GPU I guess for those two segments.
Speaker 4: Sure, good morning Michael. On the route on wholesale GPU, obviously they did come in stronger. I think the wholesale benefited a little bit. We saw some appreciation in the latter part of the quarter, which when that generally happens we usually trail whether it goes up or comes down. I think that added a little bit of a...
Speaker 4: I think as you go forward thinking about wholesale, I would land probably more in the line of where we've been historically, $900 to $1,000. On the retail side, again, we did expansive price elasticity testing and determined that we could have sold a few more cars, but we actually would have made less money. We held the retail...
Speaker 4: in totality, we did see some depreciation at the end of the quarter. We saw a little bit of appreciation at the latter part. If you go back a year ago, not this year, they just completed the year before, prices appreciated about $7,500 and that's in the zero to five year old cars this year. By the end of the calendar year, they had come back about $5,000. I would expect, even though we've seen some recent appreciation, I would expect to probably start to see a little bit.
Speaker 4: Borliss, I think we may have lost Craig.
Speaker 7: Craig, your line is open. Yeah, good morning. Can you hear me? Yes, we can hear you, Craig. Go ahead.
Speaker 8: Thank you. Yeah, so we've heard that some banks are pulling back on floor plan credit for some of your competitors. I'm wondering, since you self-fund your inventory, would you expect an advantage sourcing inventory in this environment? To see, compatibility, in enabling quality pricing as acash houses below 90,000 users
Speaker 4: Yeah, you know, I think it's hard to say. I mean, what I would tell you is because our self-sufficiency is so high, we just really haven't had an issue on sourcing environment. It's not like we're going out and competing in the auction lanes as much as we used to. I think it remains to be seen what the impact is on competitors and, you know, where they get their funding. I guess theoretically it could.
Speaker 4: cause prices to go down if they are not able to source financing to keep inventory on their lot. That remains to be seen. Thank you. Yep. The next question comes from the line of Rajat Gupta with JP Morgan. Your line is open. Great. Thanks for taking the question. So you've had, like listings universities, civic
Speaker 9: I'm going to have to mention any one-timers there, and I have a quick follow-up.
Speaker 5: Great, thanks Rajat. Yeah, I don't think you're missing anything. I think a couple of points here. One is that there was some timing of spend, you know, from quarter to quarter things will vary, so we had some timing favorability this quarter, over the previous quarter. In addition, given the volumes and where they're at, we had a bit of a pullback in our rent.
Speaker 5: As volumes flex, we will move up in terms of our off lot short-term capacity to accommodate volumes, and given where volumes are at, we did have a pullback in our offsite capacity, so you'll see that reflected in occupancy through a lower rent. Those are the two bigger items I tell you within the quarter.
Speaker 9: Understood, that's helpful. And in terms of just budgeting purposes for SG&A for the year, what kind of view are you taking on the used car market this year? Do you expect the industry, specifically the 0 to 10 year old space, to grow this year and do you expect to grow share within that?
Speaker 4: overall being down a little bit this year. I think they also have it softer in the front part. I mean, yeah, softer in the front part a little bit better in the back half. I think that's kind of the way we think about it as well. But that remains to be seen. And as always on the market share, our goal is whether the market's a good market or a bad market, we want to, you know.
Speaker 10: Thank you. Sure.
Speaker 2: Our next question comes from the line of Ryan Nagel with Oppheimer. Your line is open. Bye, good morning. Good morning. Good morning. Well, important for everyone. Why?
Speaker 9: Okay, so the question went up so in the comments it sounds like you are you're telegraphing for this year now a lowered leverage point You're gonna leverage expenses, you know at lower rates of growth So I guess the question I have is to make sure I'm correct in that assessment and then
Speaker 11: what what change? I mean, what we what leverage were you able to pull in order to allow that to happen? And then again, kind of going back to your comments for clarification, should we assume that now as the business
Speaker 11: that that leverage point will remain more subdued than it's been previously.
Speaker 4: Thanks for the question. I'll give you my thoughts first. I'm sure Enrique will have some thoughts as well. You're exactly right. We are sending the message that we expect this to be at a lower rate going forward. If you think about the past few years, every year we update and say, okay, this is what it's going to take to leverage. We are running that five-day. In this past year prior to...
Speaker 4: what I call a considered purchase, where there's a lot of back and forth between physical and digital properties. And so,
Speaker 4: I almost equate this to renovating an old house, which unfortunately I haven't experienced with that too. You don't know what you don't know until you get into it. Every time you pull down a wall in an old house, there's some new surprise there. Well, with this, every time we would turn over a rock as it related to the omni-channel experience, there were two other rocks underneath it. I think.
Speaker 4: Now what we've gotten to the point of is that we've built out our product organization, we feel really good about the resources there, we've got the base of the capabilities, now it's about enhancing and then as we enhance and finish some things we'll shift people to work on different things. So we feel good about the resources that we have at this point. Now I'll let Enrique add any other comments. Just to build on that a little bit, as I said in my prepared remarks.
Speaker 5: We are past the investment heavy phase of our omni transformation. We believe, largely speaking, that we have the resources in place, we're appropriately staffed and now it's really a matter of executing on our plans. We're really focused around enhancing efficiencies, enhancing and strengthening experiences for our customers.
Speaker 5: and for our associates, right? But we believe we passed that point. So we do think that now and for the guidance that we've given, low single digit gross profit growth is what we're gonna need to lever. And I would think about that as well as carrying beyond FY24 and into, while not giving specific guidance, I would think about that. That is kind of where we are in our maturity curve as a company and that's kind of how I think about it for the next period of time.
Speaker 2: All right, guys, I appreciate the call. Thank you. Our next question comes from the line of Sharon Zagfia with William Blair. Your line is open. Hi, good morning. A few things around SG&A. I just want to make sure I understand the
context around leverage. So are you referring to SGA leverage as a percent of sales or SGA to gross profits? I just want to make sure we're all level set on what metric you're using. I also want to clarify the cadence in the first quarter. Are you referring to sequential moderation in the decline or year-over-year moderation? I think
That's kind of important to quantify as well. And then lastly, and I'm sorry, it's a multi-prong question It's just on the ad spend. So it's a little surprised to hear and I think I heard correctly that ad spend Per car would remain consistent year over year and I just wondered you know The thought process behind that given the environment we're in which you know It sounds as if a lot of people are just priced out of cars period so I wonder about keeping that ad spend
kind of at the same level versus retracting maybe more towards the $300 level that you had historically. Yep, thank you Sharon for the multiple questions and see here if I can... Couple clarifications. I'm using the clarification excuse. I guess yeah, that is a new large difference here, right?
So on the first one, absolutely. We move to leverage being defined as SBA to gross profit. So not retail units, not sales because as you know as we've migrated and transformed ourselves, it's less about just solely per retail unit. It's also about our wholesale business, it's about our cap business. So we take a holistic look and our leverage point specifically is on gross profit.
So I think that was your first point of clarification. The second for the first quarter, yeah, it is an important point and I had it in my notes here that I spoke to. So in the fourth quarter, right, we year over year, we were down 8% in SG&A. So what we're communicating here is that in the first quarter of FY24, upcoming year, that decrease may be muted compared to the previous quarter.
year-over-year decrease in the first quarter versus last year's first quarter, you know, would be muted compared to that 8%. And that's just because we'll be – we'll have more comparables when it comes to the corporate bonus accrual, which in the fourth quarter was down pretty materially as I called that in my notes. As well, our fourth quarter last year, our marketing spend was much higher than what it was in this fourth quarter, which provided some relief in this fourth quarter. So –
That presents a little bit more of a challenge for the first quarter of FY24 year over year as compared to FY23. And then lastly on marketing for spend, we made the decision a few years ago to take our marketing per unit spend up along with our journey here and our transformation.
And that's currently what we intend on keeping it. We believe we have a strong line of sight into ROI and very accretive properties and investments here. Our marketing team does a fantastic job in being able to track what is accretive, what is ROI generating, and what is not ROI generating.
So we have a pretty good understanding of our portfolio of investments when it comes to marketing and currently we think that 350 roughly per unit spend is appropriate for where we are. And Sharon the only other thing I would add to that is, and Enrique said this in his comments, it can vary quarter to quarter. You may be up in some quarters, you may be down in some other quarters and that will really be dictated by some of the ROI that we're seeing. You know we're always going to have some brand spend out there because I think it's important long term.
Your next question comes from the line of Scott Ziscarelli with Truist Securities. Your line is open.
Hey guys, Scott Ciccarelli. Obviously retail prices are still up quite a bit, average rates also up, and so monthly payments are up meaningfully. I know it's causing a double digit decline in comps, but I guess what kind of impact is it having specifically on your conversion rate? In other words, when we look at the sales decline, is it being driven more by reduction in traffic or kind of the first swing at the plate that you guys get?
traffic top of funnel. So it's not top of funnel. The degradation really happens at the conversion point, which can make sense. As you find a car that you like, you start working through it, and all of a sudden you realize, wow, that monthly payment is more than I can afford. And then you see where they fall out, which is the reason why we've been talking about vehicle affordability as one of the biggest factors that impact our sales. So it's all about conversion, not necessarily top of funnel.
Yeah, and I'll just add on to that, Scott, just one thing. We mentioned the FBS platform and one of the things we're so excited about that, right? So many people are shopping for that monthly payment online out the gate, not in the store necessarily. And so being able to, you know, if they pick vehicle X and it ends up being a higher payment for them, we're providing them the capability to see payments on all the vehicles with multiple lenders so they can pivot relatively quickly. So we think, you know,
continued strength in the web traffic is also because of the finance-based shopping product that John just talked with, people just trying to figure out what can I afford. Maybe they're not ready to buy a car, but maybe they're just looking to see what can I afford. Great. Thank you very much. Thanks, Scott. Thank you very much.
Your next question comes from Daniel with Stevens Inc. Your line is open.
Good morning everybody, thanks for taking our questions. Good morning. Okay, I want to ask on SG&A maybe a little bit different way. You talked about attrition for a few quarters now and you're making it seems like good progress driving down that compensation line. So, what are our staffing levels today in the stores or CECs versus...
a year ago or before these attrition. Are we 15% lower? Is headcount 20% lower? And then where should that go as growth improves? Because on one hand, I think Bill just mentioned you should stay more lean going forward, but I thought in your prepared remarks, you said working towards the mid 70s SG&A to gross ratio over time.
So just trying to put those pieces together if you could talk about kind of the staffing, where we're at, and where that goes, and what it means for long-term SGA margins. Yeah, what I tell you is that we believe we're, you know, largely speaking appropriately staffed. There's still some pockets where there's probably some over staffing that we're working through, right? And we do it in a healthy way, which is just through attrition.
and that's the approach we've taken for the past period here. But largely speaking, we think we're appropriately staffed kind of across the board. Compared to last year, we're down when it comes to what flows through SG&A, because we do have a large service department and service associates that flows through our COGs. But just through SG&A, we're down about 10% year over year, and that's really staffing in our CECs as we've right-sized in our stores, as we've right-sized as well, and that's what you'll see.
to support that and we expect to get there over time. I think to get there in FY24 I would tell you would be a strong stretch just kind of given where we ended FY23 and kind of where volumes are at and just the environment that we're operating in. But you know we are controlling what is in our control and I think we've done a pretty effective job here of taking our SG&A down.
and thinking about our business model and the maturity curve in terms of where we are with our Omni transformation. And now it's really a matter of kind of reallocating resources internally to work on the most creative projects that we have. Yeah, and Daniel, the only other thing I would add to that is even as we, as business returns, we're heavily focused on finding efficiencies. You know, the business model has really changed within the store with Omni. So...
We're looking at more efficiencies in the CECs, so as more volume comes in, CECs don't have to grow as fast. We've already reduced the sales force because of the CECs, because customers are coming more progressed, which is another reason why we're really focused on this self-progression. The more customers can progress on their own, our floor sales consultants can handle more when marketing.
more associates. As we think about the future model, we're trying to get efficiencies not only at the corporate side, which we feel pretty good about the teams we've got there, but also just become more efficient in the field operations. If I could squeeze a clarifier, not another question. I guess you guys used to be in the mid to high 60s. It sounds like you reduced head count 10%. The CEC is making more efficient. I guess why wouldn't that or something better than that?
be the target you're working towards, Enrique, rather than the mid-70s? I guess, have there been incremental expenses from the Omni and Edmonds that have just raised that long-term SG&A margin? Yeah, what I said is that our first step, right, so our initial goal is to mid-70s, and then longer term, you know, we do have as part of our aspirations to get back to roughly where we were. I don't know if we'll get back fully to where we were in the medium term here, but
Certainly our first step is to get to the mid 70s. Yeah, and I think Daniel on that, keep in mind, part of the Onme transformation is we've gone from an organization that worked with all legacy systems that really didn't cost us anything to a combination of you know, systems that we built in house, but also software as a service. And software as a service is an expense that we used to not have. So things like software as a service, the product organization that we built out, you know, we've got 60 product teams.
that really enable having this omni-channel experience, both to have the store and the digital. So that expense isn't going away. We didn't used to have that expense. Theoretically, the CECs will be offset with the sales, so that should wash. But there are other things like cybersecurity that because we have so much of a digital presence now, you had to step up your spin there. So there's some things, which is why, to Enrique's point, our first goal is, hey, let's get back to the 70s, because we know we've got some headwinds on things that we didn't use to have, and then we'll continue to work on taking it below there.
I appreciate all the color and best of luck. Thank you. Your next question comes from Seth Basham with Wedbush Securities. Your line is open. Thanks a lot and good morning. My question is on retail GPU. Pretty good performance this quarter. Curious to know whether or not you think the market dynamics helped you on that.
metric and then looking forward to be thinking about that flat year over year for 2020 for fiscal or should there be a movement one way or the other based on the price elasticity expectations and other factors.
Yeah, good morning Seth. I think the market dynamics did help because again we were doing pricing elasticity test and as I said earlier we could have sold some more cars but overall profitability would have been down. I think that did help. Now as far as going forward, I think I'd probably get more in the range of where we historically are.
to think about for the upcoming year. But again, it's going to be dependent on what we see from the market factors.
Okay, and just as a follow-up, thinking about the trade-off between unit sales and GPU, market share is clearly an important goal of yours. Is there a point in time where you'll be more aggressive on price to regain market share to meet your long-term targets? You truly believe this is transitory? Is there any reason why it may not be? Yeah, no, it's a great question. And again, we've always said this.
this idea of profit market share and that hasn't changed. If I look at the market share for 2022, relatively flat, you could argue it's slightly up but we call it relatively flat. For the first half of the year we saw good market share gains. In fact, most of the several months were double-digit gains.
We hit August , August I would call was fairly flat and then you know we saw declining gains really from September through December and we've seen this before if I go back to 08-09, if I go back to COVID although they're very different circumstances you know we've seen where we've lost market share for a period of time.
Then it flattens out. We start from a month over month. We start to grow it back. We get back to you know where we where we were before we started and then we continue to increase. I would expect this to not be any different. I am you know I'm encouraged as I look at the the data that we have so far. If you look at the August through or really September through December it was decreasing market shares month over month.
I think, you know, December , January , my hope is we've kind of bottomed out there. We don't have the February data yet, but I'm hoping that we've bottomed out it, which means that, okay, market share should, from month over month, will still be probably below year over year, but we should start to climb back out.
Thank you. Sure. Your next question comes from Scott Bottolari with BNP Paribus. Your line is open. Hey, guys. It's Chris Bottolari. I'm Chris Bottolari.
I just wanted to ask on CapEx, if you can elaborate a little bit more there. The omni-channel is slowing a bit and you're only opening five stores. I was trying to get a sense for like why the CapEx is stepping up. Are you planning to reaccelerate store growth at FY 25 to secure some upfront capital costs there?
And then, you mentioned, sorry, there's a long-winded question, you said a lot on the call. You mentioned that you're opening up these off-site reconditioning centers and auction centers.
Are these more capital intensive than your stores trying to understand what the strategy is and what these investments hope to accomplish? Just elaborate that would be really helpful. Yes, Chris, thanks for the question. Year over year in FY24 we expect our cap expense to be roughly the same.
as what it was, but what's making it up is changing a little bit, right? And so, by far the largest contributor to our CapEx in FY24 is going to be really starting to build out our offsite production, our offsite auction capabilities to ensure.
that you know over time over the longer term that we're able to meet our long targets right. We feel we feel good about our near term and our ability to hit kind of our sales our auction levels but we also need to plan for the future at the same time so that consists of buying land across the country it also consists of this year you know building out and opening our first off-site production auction production site sorry which will be in Atlanta in the metro market.
on kind of our production locations just for those. But that is actually driving the largest piece of our CAFEX spend. There is some anticipation that stores will continue to grow in FY25, right? Still, it was gonna kind of see how the market, how we perform, how the macro environment is.
We have lowered that amount for FY24, as you know, we're at five new stores. And we'll see in FY25, but there is some planning for that that goes ahead, even this early on in the year, because it does take quite a bit of time to get a store open. Yeah, and Chris, I would just add to that that...
The plan spin for the capacity, it's no different than what we've done in the past. We used to build production stores as we were going into new markets. What we've been doing here lately, because we haven't opened up a bunch of production stores, we've been leveraging the existing production. We had planned to add capacity, so it's really no different than what we've done in the past. It just happens to be, okay, now is the time that we start to do some additional production builds. The really only difference is that some of them will not be attached to stores, but still in close proximity to stores, because that's a big deal.
big competitive advantage. That's really helpful. Just related, I think you mentioned something effective, opening up Simulcast again in wholesale. Can you maybe just elaborate there? It seems you're getting really strong wholesale volumes and GPUs to understand the motivation there and what that means for revenue and cost. Any thoughts would be helpful? Yeah, no, it's a good question. We just want to make sure that we're...
both maximizing the experience for our dealers as well as maximizing the ultimate price that our cars sell for. And so we're just doing small tests just to see, hey, having both a physical sale but also virtually broadcasting it, are there new dealers that might show up? Do you get extra bids?
We, you know, in our efforts to make sure we're being as efficient as possible, we don't want to leave any students unturned. So I don't really think about it as a big SG&A spend because a lot of, like the testing that we're doing is what I would call more of a postcard sale. So you actually don't have the cards running through, but you have the auction line open for folks to bid in, that kind of thing. So again,
Small test, we're going to continue it to see what we can learn. But to your point, we feel great about the margins, what we can put on cars, but again, we always are looking to get a little better. That's okay. Thank you for the time. I appreciate it. Thank you.
Your next question comes from the line of John Murphy with Bank of America. Your line is open. Good morning, guys. Just two very quick follow-ups or clarifications. In the press release you said total interest margin would level off in 2024. I'm just curious, as we look at the last three years running in 2021 and 2020 you did about 7% collateral spreads in those pools and in the last four you did 4% collateral spreads.
there something in sort of the forward you know market or what you're about to launch where you think the spreads are going to open up quite a bit it just seems hard to understand how you know if we think about this that that spreads could could level off and maybe not compress and then just a second question bill on the franchise I'm sorry on the market share gains is there room
to gain in the six to 10 year old segment? I mean, if you kind of think about that 4% in one, you know, in the zero to 10 year old market, you know, is there significant room in these older vehicles where you might have higher grosses over time? Sure, yeah, thanks, John , for the question. I'll take the NIM one. So, you know, I think first, most important to point out is, you know, you're coming off of probably a 10 year peak in Q1 previous of this year.
You know, you really benefited from low funding costs. Lenders were able to capture a lot of margin there. You look at some of those deals you referenced. I mean, very, very strong margins. So, you know, while we'd love to have been to stay up there, it was probably never going to happen. And you've seen us come down sequentially quarter over quarter. You know, I think if you look at what, how we have been able to raise rates for our consumers, and obviously Enrique already mentioned earlier, we...
our consumers, but when we look out we've come down off of this peak. We think that we're well matched with our rates versus what we can fund this stuff for in the future and we do think we can level off in 24.
I'm sorry, the match mean that you're going to get back to 5% to 6% collateral spreads you think in the near future? That's where you've been. When things are somewhat more normal, so I'm just curious if that's what you think you're going to get to soon. Sure, yeah. If you're just looking at those previous deals, you look at the 231DO again, an APR of 909. We just referenced that we're at 109 Discord, and I can tell you that's not where we ended the quarter.
So, you know, you're going to see in subsequent deals, you know, APR is higher if funding costs are more reasonable. I think we're absolutely going to be better matched, you know, funding costs for rate out there. That's exactly what I'm referring to.
Thank you. John , on the market share of the 610, remember we always measure market shares year to 10. I do think 610 is an opportunity. I mean, if you look at our recent sales, like even this quarter, you know, vehicles over six years, over 60,000 miles, you know, if I look at where we were a year of year, we're probably 10 points higher, you know, we're probably high 30s is a percent of sale. The real question will be is.
prices come down to consumers start to go back to newer model vehicles. So we'll see, I think we're in a great position. We obviously have shown that we can acquire those vehicles and recondition them so it's a great lever as we go forward.
But when you just think of that as structural opportunity, right? I mean, if those consumers go back to the younger cheaper vehicles, you still have those 10-year-old vehicles that you can sell. Wouldn't that just augment your sort of long-term structural growth? I mean, I'm just curious. I mean, it just seems like a huge opportunity. Yeah, I think so. But again, some of will be just on consumer demand. If the folks that are coming in our stores,
are looking for later model vehicles lower mileage, we're certainly going to put more of those on our on our lot. So we'll we'll we'll manage to whatever the consumer is looking for.
for later model vehicles lower mileage, we're certainly going to put more of those on our lot. So we'll manage to whatever the consumer is looking for. Okay. Thank you. Yep. Thank you.
Your next question comes from Chris Pierce with Needham. Your line is open. Hey, good morning. About halfway through Q1 here, I was just curious if you could comment on used ASPs, retail ASPs and what you're seeing. It came down 7% sequentially to Q4, but I know Q3 was a little bit artificially inflated. Just given there's been talk about wholesale demand and strong wholesale price increases, I was curious if that's flowing through the region.
our retail ISPs are probably similar to what they were for the quarter. And again, we had a little bit of appreciation that we saw there. Keep in mind the depreciation flows through much quickly on the wholesale cars because you're turning that inventory every seven days.
Okay, perfect. Thank you. Yep. And the next question comes from David Whiston with Morningstar. Your line is open.
Thanks, good morning. I'm just curious if you've seen a noteworthy pullback from CAF Lending Partners, or I'm sorry from your lending partners because your CAF gross penetration was up 330 bps. And related to that, John , I think you said earlier you wanted to, your goal this year is to add new lenders. Were you talking about ABS lending or also for the two tier, two and three partners? Sure, yeah, just to your first question, David. foreign
who typically would be Tier II may move down and get picked up by Tier III. But I think that just speaks to the quality of our platform. If CAF pulls back, Tier II picks up. If Tier II pulls back, Tier III picks up. Or other partners in Tier II. But we did see pullback in the Tier II space, certainly. And your second question was probably with regard to my prepared remarks about adding a...
consumer and provide as rich an offer as possible. Every lender you add, we added one in Q4, we hope to add another one in Q1, just further strengthens the set of offers across all the inventory that the customer can see and helps them to convert. So that's what I was referring to. And David, those are long-time lenders that we already have that we're pulling into the funding. Absolutely. It's not adding a brand-new lender, although I'm sure we have plenty of lenders that would love to come into our space, but this is existing in our typical in-store.
industry is seeing that, we are seeing that to some degree, if that's your question.
Yes, thank you very much. Thank you. 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. I want to thank everybody for joining the call and your questions and support. I do want to congratulate all the associates again.
on being named a great place to work for 19 years in a row. And like I said earlier, we believe we're well positioned to navigate this environment and emerge even stronger. We look forward to talking with everyone next quarter. Take care.
Thank you ladies and gentlemen. That concludes the fourth quarter fiscal year 2023 CarMax earnings release conference call. You may now disconnect.
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