Q1 2024 Carmax Inc Earnings Call
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Hello.
[music].
Ladies and gentlemen, thank you for standing by welcome to the FY 'twenty for Q1 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.
He's been advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, David Loew inside ADP Investor Relations. Please go ahead.
Thank you Chelsea good morning. Thank you everyone for joining our fiscal 'twenty 'twenty four first 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 Daniel <unk>, Our senior Vice President Carmax.
To 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 are forward looking statements that 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.
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 SEC. This morning.
Annual report on Form 10-K for the fiscal year ended February 28, 2023 previously filed with the SEC.
Should you have any follow up questions. After the call. Please feel free to contact our Investor Relations Department at Yale.
47470 for tier two extension 7865.
Lastly, let me. Thank you in advance for asking only one question and getting back in queue for more follow ups Bill.
Great. Thank you, David and good morning, everyone and thanks for joining us well.
Although the first quarter remained challenging due to the same factors. We cited in fiscal 'twenty three we're seeing sequential quarterly improvements across our business. We are focused on controlling what we can as we take deliberate steps to support our business for both the near term and the long run.
This quarter, we reduced SG&A independent of the legal settlement, we delivered strong retail GPU, we increased use saleable inventory units, while driving down total inventory dollars, 13% year over year, we drove strong wholesale GPU as our unit volume continued to recover and finally, we grew cash penetration even is.
We raised caps consumer rates to help offset higher cost of funds and tightened lending standards and reaction to the current environment.
For the first quarter of FY 'twenty for our diversified business model delivered total sales of $7 $7 billion down 17% compared to last year, driven by lower retail and wholesale volume and prices.
In our retail business total unit sales declined nine 6% in used unit comps were down 11, 4%, which reflects an improvement from down 22, 4% and 14, 1% year over year during last year's third and fourth quarters.
Average selling price declined approximately $600 per unit or a 5% year over year.
First quarter retail gross profit per used unit was $2361 consistent with the $23 39 last year.
Historically margin tends to run higher during the first quarter compared to the rest of the year and.
In the current environment, we expect this year's second quarter and full year margins will be similar to last year slightly ahead of the full year 'twenty $100 to 2200 dollar range that we spoke to last quarter.
As always we will continue to test price elasticity and monitor the competitive landscape.
Wholesale unit sales were down 13, 6% versus the first quarter last year, which reflects continued improvement from the 36, 7% and a 19, 3% year over year declines during last year's third and fourth quarter average selling price declined approximately $2000 per unit or 18% year over year.
Wholesale gross profit per unit was 1042 in line with 1029 during last year's first quarter.
We bought approximately 343000 vehicles from consumers and dealers during the quarter down 5% from last year and an improvement from the 40% and 22% year over year declines during last year's third and fourth quarters.
These vehicles, we purchased approximately 323000 from consumers in the quarter with a little more than half of those bonds coming through our online instant appraisal experience as.
As a result, our self sufficiency remained above 70% during the quarter.
We source the remaining approximately 20000 vehicles through dealers up 20% from last year supported by our Edmond sales team.
In regard to our first quarter online metrics approximately 14% of retail unit sales were online up from 11% last year.
Approximately 54% of retail unit sales were omni sales this quarter, which is consistent with the prior year.
Nearly all of our first quarter wholesale auctions and sales, which represents 20% of total revenue remain virtual and are considered online transactions total revenue, resulting from online transactions was approximately 31% which is in line with last year.
Carmax auto finance or cap delivered income of $137 million down from $204 million. During the same period last year, John will provide more detail on customer financing for loan loss provision and cash contributions in a few moments at this point I'd like to turn the call over to Enrique who will provide more information on our first quarter financial performance.
Enrique.
Thanks, Bill and good morning, everyone.
Our continued focus on managing what is in our control drove another quarter of sequential improvement in year over year performance across key financial metrics, including unit sales SG&A leverage gross profit and EPS.
First quarter net earnings per diluted share was $1 44 down from $1 56, a year ago.
Included in our EPS this quarter was the equivalent of 28 or.
Or $59 million related to a legal settlement.
Total gross profit was $817 million down 7% from last year's first quarter.
Used retail margin of $515 million in wholesale vehicle margin of $168 million declined, 9% and 12% respectively.
The year over year decreases were driven by lower volume across retail and wholesale.
This was partially offset by strong margin performance with both retail and wholesale per unit margins up slightly from last year's numbers.
Other gross profit was $135 million up 12% from last year's first quarter.
This increase was driven by a service, which delivered $4 million and margin of $26 million improvement over last year.
As we communicated in our Q4 FY2023 year end earnings call. Our expectation is that service will delivered improved year over year performance in FY 'twenty four driven by the efficiency and cost coverage measures that we've put in place.
Our first quarter has us off to a solid start.
The improvement in service was partially offset by reductions in extended protection plan or a P. P revenues and third party finance fees.
<unk> revenues were down $5 million, primarily due to lower sales, partially offset by stronger margins that were implemented at the end of last year's first quarter.
Third party finance fees were down $3 million to last year's first quarter.
Lower volume in tier two for which we receive a fee was partially offset by a reduction in tier three volume for which we pay a fee.
On the SG&A front expenses for the first quarter were $560 million down 15% from the prior year's quarter.
Excluding the benefit from the legal settlement SG&A was down 6% from the prior year's quarter as we continue to see the benefits of our cost management efforts.
SG&A as a percent of gross profit was 68%.
Excluding the benefit from the settlement, our SG&A leverage was 76% roughly flat to last year's first quarter.
First other overhead decreased by $79 million of which $59 million was due to the settlement.
The balance of year over year favorability was driven by several factors, including favorability in noncash uncollectable receivables, which benefited partially from timing.
Favorability in cost associated with lower staffing levels and a variety of other smaller test.
Second we reduced advertising by $17 million.
While our advertising expense on a total dollar and per unit basis was lower year over year on the quarter, our investments for the quarter on a per unit basis remained in line with last year's second half spend level.
Third total compensation and benefits, excluding a $13 million increase in share based compensation.
Increased $15 million.
This decrease was primarily driven by our continued focus in stores and she sees on aligning staffing levels to sales and driving efficiency gains.
As I noted in our Q4 FY2023 year end call, we expect to required low single digit gross profit growth to lever SG&A for the full FY 'twenty four year well below the levels, we 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 to growth to profitability.
Our first quarter performance has us on track to deliver on this goal.
Well, we delivered SG&A leverage SG&A leverage point in the mid 70% range in the first quarter. It is important to remember that the first quarter is typically our strongest for SG&A leverage as it is historically, our highest unit volume and margin per unit quarter.
Regarding capital structure, our first priority remains to fund the business.
Our adjusted net debt to capital ratio was slightly below our 35% to 45% targeted range given ongoing market uncertainties. We continue to appropriately manage our net leverage to maintain the flexibility that allows us to efficiently access the capital markets for both Cas and Carmax as a whole.
In keeping with the school and maintaining flexibility we continue to pause our share buybacks in the first quarter.
245 billion dollar authorization remains in place as does our commitment to returning capital to shareholders over time.
Additionally, post quarter calendar, and we successfully renewed our $2 billion revolving lending facility with materially similar terms. We plan to include additional information in our forthcoming 10-Q, which we plan to file on Monday, now I'd like to turn the call over to John .
Thank you Enrique and good morning, everyone.
During the first quarter Carmax auto finance originated $2 3 billion, resulting in penetration of 42, 7% net of three day payoffs up from 39, 3% observed during the first quarter last year.
This growth in penetration came despite cash credit tightening within the higher risk higher APR portion of tier one as well as the reduction of cash targeted volume of tier three that began at the end of Q4.
Despite the decrease in volume in these higher APR segments. The weighted average contract rate charged to new customers was 11, 1% an increase of 20 basis points from Q4, and 200 basis points from the same period last year.
Tier two penetration in the quarter was 24% up from Q4, but still down from the historically high 25, 2% seen in Q1 about high grade.
Tier three penetration was six 7% down 40 basis points from last year.
While caf and other lending partners have tightened lending standards over the previous few quarters, a robust multi lender credit platform was still able to promote to approve of approximately 95% of credit applications during the first quarter.
Caf income for the quarter was $137 million down from $204 million in the same period last year.
The $67 million a year over year decrease is primarily driven by a $23 million increase in loss provision as well as a $94 million increase in interest expense, partially offset by growth in interest and fee income.
Note our interest expense was impacted by a negative $9 million of fair market value adjustment from our hedging strategy versus a positive $9 million adjustment seen in the same period last year.
Within the quarter total interest margin decreased $258 million down $40 million from the same period last year.
The corresponding margin to receivables rate of six 1% continued to come down from the 10 year peaks seen in last year's first quarter, but has moderated and it's declined from previous quarters as was expected and previewed during last quarter's conference call.
This slowing in NIM reduction comes as a result of targeted rate increases on new originations executed over the last year that effectively manage cat penetration finance margin and sales conversion to generate the most valuable outcome for carmax as a whole.
The loan loss provision in Q1 of $81 million, resulting in an ending reserve balance of $535 million or $3, one 1% of ending receivables. This.
This is compared to where a reserve of $507 million last quarter, which was three 2% of receivables.
The sequential nine basis point adjustment in the reserved receivable ratio reflects unfavorable performance within the existing portfolio as well as the uncertain macro environment. Despite this.
This increase the existing tier one portfolio continues to trend within the targeted to tier 2.5% cumulative net credit loss range and the recent tightening is expected to provide a reduction in loss rate for future originations.
Regarding continued improvements in our best in class Prequalification product during the first quarter, we began broadly scaling yet another of our large lending partners within FBS, Our finance based shopping platform. This marks the sixth lender that is now capable of providing millions of additional customized credit decisions in minutes to our <unk>.
Customers.
While we continue to add enhancements to our online credit experience. We believe our FBS platform is currently an industry leader and truly empowers consumers by providing simple access to penny perfect multi lender credit decisions in seconds, while having no impact to their credit score.
Now I'll turn the call back over to Bill. Thank you Jon.
Over the past several years, we built a leading omni channel platform that enables us to deliver what we believe is the most customer centric experience in the industry.
Our ability to offer integration across digital and physical transactions gives us access to the largest total addressable market and is a key differentiator.
With our core omni capabilities now in place we are continuing to prioritize projects that drive operating efficiencies and optimized experience for our associates and customers. We believe the steps we will be taking enable us to further expand our competitive moat and will position us well for the future.
Some examples from the first quarter beyond what John just spoke about related to Caf include one as we work to deliver a seamless digital first shopping experience, we are increasingly leveraging sky or 24, seven virtual assistant sky enables us to efficiently assist customers via chat functionality, while taking work out of our CEC system.
During the first quarter. We expanded these capabilities to include work flows related to finance applications vehicle transfers and appointment reservations since going live we've had great success, reducing C. E. C work volume routed to associates, enabling us to provide a quicker response at a lower cost per transaction, we anticipate.
Rolling out additional functionality to sky throughout fiscal 2024.
Second we are currently rolling out express drop off which enables customers with instant offer or store generated appraisals to progress the selling process from home.
When utilized this option offers customers the ability to complete their transaction in one of our stores in under 30 minutes and our research shows that customers and associates both loved this experience.
Finally, we're continuing to modernize our auction platform to enhance the experience for dealers. This quarter, we launched an integrated check in experience that enables single sign on across our systems and streamlines access to the information that dealers rely on the most when bidding on vehicles. Additionally, we initiated proxy bidding capabilities in a limited number of markets. This.
Allows dealers to bid on vehicles in advance so they don't have to participate live during each auction. It also unlocks the ability to take part in multiple auctions and bid on multiple multiple vehicles simultaneously.
Feedback on both of these capabilities has been positive.
Land expand proxy bidding two additional markets as well as launch other enhancements in upcoming quarters.
With our focus on improving experiences and gaining efficiencies. We believe we are well positioned to emerge from the current environment and even stronger company. We're confident in the future of our diversified business model and believe that the deliberate steps steps that we're taking will enable us to drive robust growth as the market improves.
With that we will be happy to take your questions Chelsea.
[noise] Chelsea can you remind folks of how to.
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Our first question will come from Brian Nagel with Oppenheimer. Your line is open.
Hey, good morning, everyone. Thank you for taking my question good morning, Brian .
So the question I'll ask.
One question a follow up two parts of it just maybe you could talk about the market share dynamic you witnessed you're early in <unk>.
I guess, so so far in the year and then secondarily you talked about in your script. We are seeing this improving farming that used car sales, obviously is still down year on year, but better than it had been prior two quarters.
Look at the drivers behind that is that more what carmax is doing or you've seen an actual solidifying backdrop within the sector. Thank you yeah, great. Thank you for the questions. Brian first of all on the market share question, Bryan you might remember that last quarter given.
Given the title data that we had we thought we had bottomed out in the December January timeframe, we actually have title data now through April and we did bottom out and in December and although we are growing it year over year. Yet. We're pleased that January through April we saw some good sequential good sequential growth and we did that while.
Painting, a strong margin. So we feel good about the trajectory, we're on and if I compare it to previous times. When we had given up market share again, we talked about that last quarter, you know COVID-19 in <unk> I would tell you that theyre coming out of it is more similar to the COVID-19 period than the OE, though not as far as your second question on just the used car sales yeah, I mean the <unk>.
I'll use market, obviously is still still depressed I do think while depreciation is a little bit of headwind on parts of the business. So for example wholesale.
I think it's good for the overall industry, so having vehicles depreciate during the quarter I think was a good thing it was a little unusual quarter for it because it first started off appreciating and then it ended up actually decreasing a little bit. So I think that's a I think that's good for the industry, but I think there's also things that are specific to to carmax and how we're managing our inventory our manage.
Our margin the right cars out there that are unique to carmax. So I think it's probably a combination of both.
I appreciate all the color Bill Thank you sure.
Thank you.
Our next question will come from Craig Kennison with Baird. Your line is open.
Oh, Hey, good morning. Thank you for taking my question as well I'm trying to anticipate a down the road when when student loan payments are required again.
Do you have a feel for the percentage of your buyers that are also making student loan payments.
And you know whether that could be a significant impact on demand.
That's a great question, Craig it's one that we've actually talked about internally both from a sales standpoint and from a finance standpoint, I think from a sales standpoint.
It's hard to tell because folks have been taken in consumer loans out for longer periods of time, and and you know I would think probably the majority of our customers are outside of the student loan.
Majority of our retail customers are outside of that period.
I think when you think about the Caf business and John you made some different thoughts on this but when you think about the caf business, because we skew to a higher credit customer that probably puts us in a little bit better positioned I don't know if you have any additional thoughts beyond that yes, I agree Bill I mean, certainly the prime customer is probably a little bit older but I think when we're looking at our underwriting platform our underwriting criteria in our model.
We're always going to take into account total outstanding debt for the.
For the consumer evaluate the things that are most predictive of auto loan payback and so.
That would be contemplated in our underwriting criteria. So.
Thank you.
Thanks, Craig.
Thank you.
Our next question will come from Daniel <unk> with Stephens, Inc. Your line is open.
Yeah, Hey, good morning, everybody. Thanks for taking the questions.
Good morning, I wanted to start off our focus on the SG&A results, obviously impressive in the quarter, maybe two part are related to the first.
Within other maybe overhead historically I've thought a lot about with E E Commerce investment other than head count reductions can you maybe talk about Enrique some of the operational changes you made to drive that improvement in that line item and maybe the sustainability and then related I think you said there was a onetime benefit from the timing of some caf receivables in the.
Could you quantify that just to help investors, maybe underwrite and to write that outlook as well as from yesterday one sure.
Alright, great. Thank you for the question Yeah, Let me take it kind of one by one so let me first define noncash finance receivables, we haven't talked about it too much in the past, we have a little bit but not too much. So those are primarily low instead of our financing partners issue to our customers that we end up writing off either due to title processing issues or down payment obligations and if you could.
Go back to when we emerge from Covid, we had a low staffing we had high turnover and there are a lot of DMV delays right in emerging from that we've re staffed we've trained up our stores the envies or moving faster. So we're actually able to kind of catch up on these non cat finance receivables and execute better our stores are executing at home offices.
Executing and again, the <unk> are executing as well better than they were and as a result, we've seen some favorability in that line I did talk to some favorability due to timing. So part of that is due to timing what I'd tell you that's not timing that will come back and hit us in the future. It's more of a change in estimates that we have what we think will be writing off system with a little bit more of a <unk>.
<unk> changed I won't hit us moving forward. So that's number one that was kind of the biggest favorability we saw in the quarter year over year.
As well, we did see some favorability related to head count, which I mentioned are related to staffing levels. Specifically you know as we've stepped down and right sized we have favorability in relocation expenses as you'd imagine in recruiting expenses as you would imagine, but then also in casual labor and all of those hit or are the other bucket.
So we see favorability there we are still seeing a little bit of pressure from decisions. We made in prior quarters on our technology and strategic growth. So that's still growing a little bit and within that bucket, but it's being offset pretty materially by the other areas.
Great. Thanks for all the color guys. Thank you. Thank you.
Thank you.
Our next question will come from Sharon Zackfia with William Blair. Your line is open.
Hi, good morning.
Wanted to actually ask some questions about sky I don't recall, you talking about sky previously so how I mean, how far do you think you can take.
I guess, what I'll, what I'll call.
And AI technologies to help.
Macy's he sees more efficient and.
How should we think about if theres any kind of step up in investments that would be related to kind of.
Enhancing or optimizing sky further if that makes sense yeah. No. Great question Shannon you know first of all just AI in general.
You know I think we're bullish on AI in general we've been using open AI for a period of time now we think about it is there's lots of opportunities to enhance our associates work, maybe take some of the more mundane stuff out particular to sky, we talked about Sky I can't remember if we've actually named at Sky and the path that we talked about a virtual virtual assistant so that's what I have.
<unk> sits in this call. It is sky and we're really pleased you know one of the things that we've been on a path to is really making our CEC is as efficient as possible and leveraging our associates for the really value added work and this quarter with the improvement that we saw with Sky, we really deflected a good amount of calls to the CEC that sky was able.
To handle.
Independent of calling in and the areas that we that we put in there where the pre qual the transfer the transfer process.
And appointment setting and in the way that it's working right now, which I think is really kind of the first version of it is sky hooked them up with a link we see a world where sky will actually interact back and forth and not even necessarily have to hook up with a link. So I think that's an enhancement. Another enhancement will be looking at is just integrating I O with with Sky. So I think there's.
There's opportunity are still a lot of opportunity just in the cec's with sky, but I also think there's a lot of opportunity just AI in general we've we've used it in our.
Training, our Cec's consultants and we think there's additional possibility there we've used open AI to assist in our in our vehicle reviews and customer reviews really allowing our content team to focus on more insightful stuff and like I said, we're working on a proof of concept our knowledge proofs of concept for our CEC is to allow them to access.
A very specific state information, so again, where we're excited about it.
You know what I'd say as well just building on that is it's this guy has been a pretty strong contributor to helping us get our operating model even more efficient than.
What we have been in the past.
And sequential improvements now in quarter over quarter costs. When it comes to the <unk> and the operating model and that's on a per retail unit basis, and when you consider total units so use in wholesale or even gross margin dollars. The progress has been even stronger. So it has been a pretty material, it's had a pretty material impact.
Two the efficiency of our model and it's contributing to the SG&A gains that we're seeing.
Thank you.
Thank you Sharon.
Thank you.
Our next question will come from John Murphy with Bank of America. Your line is open.
Hi, good morning, guys.
One very quick follow up is there a way to quantify the timing.
You got a tiny benefit you got on SG&A from the noncash uncollectible receivables just in it in a dollar sense.
Yeah, I would say the timing was not all that material in the scope of things Yeah, I'll give you a dollar number but it's not all that material in the scope of things that the majority of the benefit really was from that improvement and execution from our stores from our home office and from the D N V as well.
Okay.
Then just a question.
Bill as you think about the same store sales comps I mean, it's tough to call exactly when things will inflect I'd love to hear your opinion about when you think they they they may may inflect, but if they don't is there an opportunity to potentially get more aggressive on SG&A costs through head count reduction or other or other <unk>.
Areas in case, we were in an environment, where affordability and supply remain.
We're pretty material issue.
Yeah, So so John what I'd say on the.
The cadence as far as being able to flip that they're really the only thing I can point to which is what I've talked about in the past when we've seen this in the past how long is it generally let generally taken and I think if you go back to <unk>.
I think it took us about seven to eight months before we flatten and then started growing it year over year, you look at Covid I. It was more in the four to five month range. So again I feel good about the progress we're seeing there now as far as your second part of the question, which is the SG&A reduction look I hopefully hopefully we made it.
Very clear that we are very focused on this SG&A. So reduction so whether you know it.
Wherever the market share goes and we're going to continue to move that but regardless of that we're going to continue to focus on on continuing to prove that she now with things like we've been talking about with sky and becoming more efficient in the CEC is becoming more efficient in stores. There really isn't one piece of the business, where we don't have efficiency plays that we're where we're currently looking at so it doesn't matter if it's busy.
This office service operations merchandising every single Department, we have internal goals that we're going after so regardless of the market share we're going after continued efficiency.
And that targeted low 70% I mean is that a one or two year target or is that an eventual how should we think about getting their timeframe.
Yeah, you know, we we want to get there as fast as we can it's also going to require that gross profit improves as well. So it's critical that the underlying business and the macro environment improves as well and then we will get there you know this quarter was particularly strong in the first quarter again is usually the strongest quarter for the reasons I mentioned in my prepared remarks, but we do expect the rest of the year to continue to deliver.
Our commitment for this year, which is a low single digit gross profit in order to lever, which is a material difference from where we've been over the past few years in a heavy investment phase, but 70% is our next step is what we mentioned and from there we can hopefully even lever even more in the years beyond but 70% is a hit.
Our next step yeah, John I think we talked about last quarter that our you know well for this year will need the macro conditions to continue to improve to get there if that doesn't happen. This year. We wouldn't expect this to be a two year thing we would expect to get back there next year and that's in the mid 70% right Yeah, all right great.
Great. Thank you very much thanks, Sean.
Thank you.
Our next question will come from John Healy with Northcoast Research. Your line is open.
Alright, great. Thank you for taking my question.
We haven't heard the word affordability used on this call compared to the last couple and.
My thought is that your performance probably reflects you guys kind of changing and adjusting the merchandise you have on the lots of the site to meet retail demand.
Talk about how the maybe the mix in the age or the biologic.
Of the vehicles that you're selling today looks versus a few months ago and maybe just the multiyear outlook for supply because I think there's some concern in the market about your ability to source vehicles kind of in that late model category. Given the fact that they might not exist for the next couple of years. So just love to kind of hear your thoughts about what you are.
Selling today and what you think your your merchandise mix might look like but in the next year or two.
Yeah, great. Thank you for the questions John So I think from a.
Affordability look theres still an affordability issue out there, even though our average selling price is down it's still up substantially over where it used to be and I think in the previous calls we said Hey, if you think about the affordability, 85% of its been driven by the vehicle probably 15% driven by the interest rates that I think we're probably more than a 70 525, which is more driven.
And by the prices coming down which automatically get your interest rates and it makes it a little bit more but you know I think we've knock on wood I think we've kind of peaked on what the the increase in payments I think we were running if you look at just the Caf business, we were running about 150 monthly higher than pre.
Normal times, and I think we're probably down to $1 30, or so so there is still absolutely an affordability issue I think your question is great. When you think about the mix.
Our prices were down.
Roughly $1600, but the interesting thing, while you're acquisition prices down almost.
And that was the that was more than 50% of the price swing. There was also a bit of an age mix thing here as well and what I mean by that is if you look at the zero to four year old cars that we sold a year ago compared to the zero to four year old cars that we sold this year, we had a less we had less percent of those so yeah, we dropped a few points which means.
You know less of those newer cars and what you've shifted to is we've actually seen a little bit of uptick in.
The <unk> plus and so that obviously is going to drive down your overall selling price. It's also it's also a little bit of a tailwind for us on margins as well, which played out in the quarter.
I think the last part of your question, which was the supply we've gotten this question in the past and what I would tell you is.
The fact that the new car sales rate has been off of what it traditionally is that's not an environment that we're unfamiliar with working because if I if I think back in the past.
We've seen that before back in the Ocado nine the reduction in new car sales was actually a more dramatic than it is now if you look at the new car sales that we've been experiencing here more recently, we still haven't hit some of the numbers that you saw back coming out of <unk>, So and we were able to manage through that period.
Very.
Well and I would tell you we have a better tool in the toolbox as Tom was self sufficiency being so hot so we're not worried about.
The availability of inventory just like we haven't really been worried about it you know over the over the last year I think the only piece I'd add to that from an inventory mix standpoint is like for customers.
Over 25% of our cars are less than 20, $20000 and last year in the first quarter that was closer to 20% right. So now we're up over 25%. So in terms of customers. We are making the right inventory to make sure we're being as affordable as we can.
Yeah.
Thank you.
Our next question will come from Scot Ciccarelli with truly your line is open.
Good morning, guys.
Can you help us.
Can you help us understand what the exit cap rate was in the quarter and then related to that your 95% credit approval rate is that actually higher on a year over year basis in other words did traffic dropped more than what you saw in our what we saw in that that the comp results.
I'll take the the comps and then I'll pass it over to John to talk about the other question. So the.
The way I'd think about the kind of the comp cadence it was pretty steady throughout the whole quarter. I mean, there wasn't any remarkable difference month to month. So if you look at the quarter as a whole that's kind of how each each month basically performed and then John I'll.
Toss it to you on the credit on the 95% credit approve right again, that's anybody that's applying for credit whether it be online or directly in the store where they start.
That's similar to what we've stated before and I think frankly in this environment with the tightening tightening that we've seen from the partner lenders and Caf I think it just speaks to the robust the robustness of our platform to maintain that level. So we feel real good about that number.
Like we're not kind of a follow up question on that if everyone's tightening credit how does the approval rate stay flat, but just fewer and fewer people and better qualified people coming in.
The way to interpret that sure yes, a fair question and that speaks to the uniqueness of the platform. So let's say, perhaps the approval scale there, but it's at a higher interest rate, where you're asking for a little more money down or get moved from lender to lender be further down the platform, but again, that's the benefit of having those multiple lenders and there is multiple tier.
As we are at least still able to provide some level of credit to the consumer to at least contemplate purchasing the car.
So the approval includes changes in what those terms are so I can't guarantee that that's correct. It does so it might not be as strong of an approval in that sort of the tightening as opposed to maybe a single lender platform, where its just look I can't improve your period, we've got other lenders to provide alternatives.
Got it Super helpful. Thank you thanks Scott.
Thank you.
Our next question will come from Michael <unk> with Evercore. Your line is open.
Hey, Thanks for taking the question.
First off I was wondering if you could discuss at all.
Comp trends quarter to date, and then also what you're seeing in terms of inventory levels. We had seen I think an increase now year over year to start the quarter.
Just wanted to understand that and then I had a follow up.
So I think you know.
Comp trends quarter to date I would have looked at similar to where we ended the ended the quarter I think you know in the <unk>.
Inventory levels look I was.
Really pleased the team has done a phenomenal job you know as I said in my opening remarks, we actually took the total dollar amount down yet we increased our salable and they're doing a great job, making sure that we're getting cars through even with delays on parts that kind of thing so.
We.
Typically <unk> go.
Go down a little bit of inventory and this month, we actually this quarter, we actually when you go from Q4 to Q1 and this year, we actually went up a little bit. So we feel good we're still if I think about the traditional stores were a little bit lighter than where we normally are but I think that that's a appropriate in this type of selling environment. So I think from an inventory standpoint, where we're in good shape.
And then just to follow up on the share components understanding historically, you know it could be like a seven to nine months type of issue, but if that continues to persist you know should we anticipate incremental investments either from gpus or potentially add expense or head count.
Or do you think that basically that's not necessary because it's more industry demand dynamics that are driving it yeah I feel good about where we are right now and you know obviously, you've got a you've got to continue to monitor the competitive landscape you've got to come and continue to monitor price elasticity, especially when it comes to the Gpus, but.
As I said earlier, we're working on efficiencies regardless of market share, but again I would just reiterate that I feel good about the growth that we're seeing so far and Ah Ah.
You know positive about the outlook in front of us.
Okay. Thank you. Thank you.
Thank you our.
Our next question will come from Seth Basham with Wedbush Securities. Your line is open.
Thanks, a lot and good morning. My question is really around GPU in the.
Better performance in retail GPU for the quarter can you give us a sense of how much of that was driven by market pricing dynamics relative to other internal factors.
Yeah, what I would say is the.
As far as our price elasticity test goes it really hasn't changed much which is why we continue to see strong margins.
We continue to have great self sufficiency, we continue to have a.
You know a mix of older vehicles, which are our more profitable all those certainly help you know in my prepared.
Our prepared remarks, I heard that I said that essentially last quarter. We were talking about if you think about the full year 'twenty 100, $2200, we're actually updating of that a little bit to be between 200 $2300 more similar to last year, especially as you look at the second quarter. So again I feel I feel good about where we are.
We continue to measure the macro factors, but we do have some nice efficiencies that we've picked up that we've been able to take a little bit to the bottom line as well as continue to pass through the customers. So we feel great about our prices.
And as a follow up do you think you can hit that $2 million unit sales goal for fiscal 'twenty six with retail Gpus in that 'twenty 100, 2200 normalized range.
Yeah, as we said the last quarter, where we're going to stick by those long term ranges Oh, well updated at the end of the year you know a lot can happen in one year, but yeah.
We're not changing that guidance at this point.
Fair enough. Thank you. Thanks.
Thanks Seth.
Alright, thank you.
Our next question will come from Rajat Gupta with Jpmorgan. Your line is open.
Oh, great. Thanks for taking the questions just a couple of quick ones one on the other gross profit line and all the services you shouldn't think that you mentioned.
It's really to you know give us a little more granularity.
The 25 million year over year improvement.
Can revenues go up that much because it come primarily from reduced head count or any other areas that you can block.
Yes. Thanks for the question, so really two things drove that right within the bucket of service service is really where we saw the year over year increase of about $26 million and actually were able to deliver profitability and service, which we haven't done in a couple of years and in a quarter here. So we're really pleased with the progress that we've made two things have driven that number one is we took cost coverage.
Metrics measures I'm, sorry, so as you'll recall, we've been hit by inflation for a very good period amount of time here and we check increase in rates and labor increase in rates and parts and that has allowed us to cover the inflationary pressures that we've been facing that's number one number two really strong focus on efficiency, it's still a headwind year.
Over year, especially with sales is still being challenged but we've shown a sequential improvement in driving efficiency in the service department. So we've reduced labor along with retaining our tax which is critical right, but we have been able to reduce labor and we're also in a little bit more of a stable sales environment, which allows for more effective scheduling.
And so those are the primary reasons why we've seen that benefit I would expect that our year over year benefit to continue for the rest of the year, whether or not services will be profitable for the year, we will see but what we do know is that we do expect from a year over year basis to show.
It's a pretty considerable improvements year over year for the rest of the year.
Got it that's helpful.
Last one quick one on the gas there hasn't been much passed yet no just on the provisioning.
The improvement.
You know on a year over year basis, or you know more of a sequential basis.
Is there is there an element of recovery.
Oh no you can talk about that might've benefited sequentially you know.
But just generally talk about what you saw from a recovery standpoint, either frequency or severity.
Okay, and any any any way to think about.
And as you know over the next couple of quarters sure.
Sure Yeah I appreciate the question or is that yes, I'll just talk about the provision sequentially quarter over quarter and I think that's driven primarily by some of the tightening that we've done.
Obviously youre going to provision for your new originations within the quarter. So if you have tightened and that's going to come in at a lower loss rates than Theres, just less money that you need to put towards so those receivables and obviously then make adjustments on the existing portfolio. Accordingly, So I think that's somewhat youre seeing there with regard to your recovery rates.
I'll just speak in general around that historically were between 40% to 60% on our recovery rate, obviously with vehicle values very high we enjoyed recovery rates in the 70 range year over year, we're probably down.
<unk> 12 to 13 points were actually up sequentially.
So yeah, I don't think recovery rate that was playing a large piece of that.
I think units still carry the day here and again that hopefully that explains that the provisioning down quarter over quarter.
Got it got it just to clarify you mentioned, 70% on the recovery in the corner. So the recovery rate for the quarter was I think the numbers were.
Let's see I think we'll show it about 59% to 60% when all is when all this counted so which we were 70, 374% last year, we were about 57% last quarter. So just yes, obviously down year over year, but it ticked up quarter over quarter.
Great. Thanks for all the color sure thanks for that.
Thank you. Our next question will come from Chris <unk> with Needham Your line is open.
Oh, Hey, Bill you talked in your remarks about feeling better about the macro as wholesale prices come in quicker than they normally do at this time of year. If I understood that right is your are you feeling better about the used car macro environment, returning to a 40 million unit number.
Sooner rate than you had previously thought based on kind of what you're seeing out there I just wanted to get a sense of how youre thinking about bigger picture.
No I don't I think it's too early to make that call on my comments around the depreciation that you know I think what we're seeing now is is depreciation which you would normally see you know if you go back to the old normal normalized environment, which is hard to remember back then typically you see depreciation this time of year into the into the fall. So I think we're seeing that.
And again why while it can be a bit of a headwind for the wholesale business I think overall, it's good for the industry because it just makes those cars more affordable, especially for a consumer that budget pen. So I think it's still a little too early to say, we're going to get back to $40 million right away, but I think the more prices moved down.
The better that is for the industry.
Okay and then on used GPU. The question was asked about lack of news.
New car sales being the lack of used car sales and you guys retailing older vehicles, if I understood that right, if you're going to be telling older vehicles for the next multiple years is that a multiyear tailwind for used GPU I know you raised it to 2200 2300, but we just saw come in above 23 of $22 61. So I'm just curious if there would be upside to that number even if you re.
More aged vehicles than you normally would prior yeah, no I wouldn't think of it as more upside I mean, as Enrique said in his comments.
So in the script you know the first quarter is generally your your strongest quarter from a margin standpoint.
The turns on inventory less markdowns that kind of thing. So while you know the older vehicle makes it absolutely helps us from a margin standpoint, we've been seeing this play out over the last year, because we had a higher mix of older vehicles, we've been selling and really that's been determined by the customer.
So if the customer wants to continue to see older vehicles, we'll make sure we have plenty of that inventory out there if pricing comes back in line over a period of time and all of a sudden you're later model vehicles are more affordable, especially in comparison to two new cars than some consumers may migrate there I think that's the beauty of the business models that we can put out on the lot.
Customers are looking for and we have the capability to grow older and we have the capability to go to go new or just depends on what the customer is looking for.
Thank you.
Yeah.
Thank you.
Our next question will come from David Whiston with Morningstar. Your line is open.
Yeah.
Thanks, Good morning, just curious on electric vehicles with the such a huge surge in demand on the new vehicle side are you seeing that on the used vehicle side too or is affordability kind of.
Muting that'll EV demand for used buyers yeah, David Thank you for the question.
So I think if you think about carmax as a whole and the number of Evs, we actually sell it's a very small percentage I think probably last quarter. It was roughly on pure evs around 1%, maybe a little bit more and we've seen that number tick up a little bit as you can imagine there just hasnt been a lot of Tvs out there in the marketplace for US now obviously all of the manufacturers are putting out more EV EV <unk>.
<unk>.
I do think I mean, you pointed out a good thing on the affordability I think they have to become a little bit more affordable for the average consumer but that being said just like where the retailer of used vehicles, we wouldnt be the retail they're the largest retailer of used evs and so we're preparing for that while it's a small percentage of our sales now we think that that will grow over time and so we're already.
Taken steps to make sure that we can be prepared for that.
Yeah.
Okay, and just one thing on FBS can in FBS customers loan eventually go into a camp securitization or does it have to stay with an external lending partner.
No Oh cap is one of the six lenders that are currently operating on FBS and again Thats the online shopping tool.
So yes, absolutely all lender all of those lenders are participating in caf loans.
We will absolutely iterate folks and MBA FBS and it'll go through our normal funding channels.
Yeah that David.
Sps is all of the different lending partners, it's a very unique product out in the marketplace, because it's not only cash but it's you know our additional lending partners, who has been with US forever and at the end of the day, that's what gets consumers, especially ones that are conscious about their monthly payment as it gives them the best rate.
Have you given FBS penetration number.
You mean as far as how many consumers are leveraging FBS yeah.
What we would say is of the people that apply for credit.
You know, 80% plus are starting online and leveraging our online platform and everybody everybody can do in FCS experience. It just depends on how they want to shop.
Okay. Thank you.
Thank you.
Thank you.
We have no further questions at this time I'd like to hand, the call back to Bill for closing remarks, great. Thank you well, thanks, everybody for joining us and your questions and your support and as always I want to thank our associates for what they do taking care of each other and our customers. They are absolutely our differentiator I also would like to remind everybody. That's on the call. We recently put.
<unk>, our 2023 responsibility report I encourage everybody to listen to it I mean read it. That's that's listening today. It provides some great updates on some key initiatives in Colombia, including climate related and.
The tangible impact that we're having on community. So again, we're proud of the values that we're living every day and think we're well positioned to drive long term sustainable value for all of our shareholders. So again. Thank you for your time today, and we'll talk again next quarter.
Thank you ladies and gentlemen, this does conclude the FY 'twenty for Q1 Carmax earnings release Conference call.
You may now disconnect.
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