Q2 2024 Carmax Inc Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by.
Welcome to the second quarter fiscal year 2020 for Carmax earnings release Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, David Loewenstein, a VP Investor Relations. Please go ahead.
Thank you Chelsea and good morning, everyone. Thank you for joining our fiscal 2024 second quarter earnings Conference call I'm here today with Bill Nash, our President and CEO Enrique Mayor Moore, our executive Vice President and CFO and John Daniels, Our senior Vice President.
Our Max Auto finance operations, let.
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, we make pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
These statements are based on our current knowledge expectations and assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially from our expectations in providing projections and other forward looking statements, we disclaim any intent or obligation to update them.
For additional information on important facts that could affect these expectations. Please see our form 8-K filed with the SEC. This morning, and our interim 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.
Four seven and 470422 extension 7865 lastly, let me. Thank you in advance for asking only one question and getting back in the queue for follow ups Bill great. Thank you David Good morning, everyone and thanks for joining us.
Although our second quarter results largely reflect the same widespread pressures that we cited over the past year. We continued to see sequential quarterly improvement across our business. We believe the deliberate steps we are taking to control what we can or supporting our business now while also positioning us well for the future.
This quarter, we delivered strong retail GPU.
We further reduced SG&A year over year, we maintain you sellable inventory units at a similar level to the first quarter, while total inventory dollars decreased by 18% year over year split approximately evenly between lower units and reduced acquisition costs, we drove strong wholesale GPU despite experiencing steep depreciation.
And we stabilized cash net interest margin, while we maintain penetration.
For the second quarter of FY 'twenty for our diversified business model delivered total sales of $7 $1 billion down 13% compared to last year, driven by lower retail and wholesale volume and prices.
In our retail business, while total unit sales declined seven 4% in used unit comps were down 9%, we continued to achieve sequential quarterly improvement.
Further comp sales improved sequentially by month across the second quarter.
Average selling price declined approximately $200 per unit or 4% year over year.
Retail gross profit per used unit was $2251 similar to last year's second quarter record high of $2282.
We continue to expect this this year's full year per unit margin will be similar to last year.
As always we will continue to test price elasticity and monitor the competitive landscape.
Wholesale unit sales were down 11, 2% versus the second quarter last year like used unit sales. This reflects continued sequential improvement year over year from the second half of last year and this year's first quarter.
Average selling price declined approximately $1300 per unit or 12% year over year.
Wholesale gross profit per unit was $963 up from $881 a year ago. We achieved this despite experiencing steep depreciation that was concentrated primarily in June and July .
We bought approximately 292000 vehicles from consumers and dealers during the quarter down 15% from last year as we adjusted offers to reflect the steep depreciation that we're seeing in the marketplace.
Well these vehicles, we purchased approximately 273000 from consumers in the quarter with a little more than half of those bonds coming through our online instant appraisal experience.
As a result, our self sufficiency remained above 70% during the quarter.
Supported by our Edmond sales team, we source the remaining approximately 19000 vehicles through dealers down 5% from last year.
In regard to our second quarter online metrics approximately 14% of retail unit sales were online up from 11% last year approximately 55% of retail unit sales were omni sales this quarter up from 53% in the prior year.
Nearly all of our second quarter wholesale auctions and sales, which represents 19% of total revenue remained virtual and are considered online try and transactions total.
Total revenue, resulting from online transactions was approximately 31% up slightly from 30% last year.
Carmax auto finance or Caf deliberate income of $135 million down from $183 million during the same period last year.
John will provide more detail on customer financing the loan loss provision and caf contributions in a few minutes at this point I'd like to turn the call over to Enrique who will provide more information on our second quarter financial performance Enrique. Thanks.
Thanks, Bill and good morning, everyone. As Bill noted we drove another quarter of sequential improvement in year over year performance across key financial metrics, including unit sales.
Sale margin gross profit.
<unk> and EPS.
Second quarter net earnings per diluted share was <unk> 75.
Versus 79 cents a year ago.
Total gross profit was $697 million down 5% from last year's second quarter.
Used retail margin declined by 9% to $452 million driven by lower volume at similar per unit margins.
Wholesale vehicle margin declined by 3% to $137 million with a decrease in volume, partially offset by stronger per unit margin performance.
Other gross profit was $108 million up 6% from last year's second quarter.
This increase was driven by service, which delivered a $20 million of improvement over last year.
With this quarter's this year's quarter reporting a 14 million dollar loss.
As we communicated in our last two earnings calls our expectation is that service will deliver improved year over year performance for FY 'twenty four as a result of the efficiency and cost coverage measures that we've put in place.
The extent of the improvement will also depend on sales performance given the leverage deleverage nature of service.
The improvement in the service was partially offset by a reduction in extended protection plan or E. P. P revenues.
Third party finance fees.
<unk> revenues were down $8 million, primarily due to lower sales and went to a lesser degree impacted by slightly lower penetration rates, partially due to recent pricing increases taken to offset cost pressures experienced by our third party providers.
These items were partially offset by favorability in year over year reserve adjustments.
Third party finance fees were down $4 million from last year's second quarter, driven by lower volume in tier two for which we receive a fee.
On the SG&A front expenses for the second quarter were $586 million down 12% from the prior year's quarter as we continue to see the benefits of our cost management efforts.
To a lesser degree we also had some timing favorability in the quarter.
SG&A as a percent of gross profit was 84% of leverage of six three points as compared to last year's second quarter.
The decrease in SG&A dollars over last year was mainly due to the following.
First other overhead decreased by $41 million.
The decrease was driven by several factors, including continued favorability in noncash uncollectible receivables.
Favorability in costs associated with lower staffing levels.
And from reductions in spend for our technology platforms, and strategic initiatives, which including it which included the timing benefit this quarter.
We also had two smaller items in the quarter that largely offset each other.
These consisted of additional settlement dollars from the same class action lawsuit, we spoke to in the first quarter offset by unfavorable self insured losses related to multiple hailstorm events.
Second total compensation and benefits decreased $28 million, excluding a $7 million increase in share based compensation.
This decrease was primarily driven by our continued focus on driving efficiency gains and aligning staffing levels in stores and <unk> to sales.
Third we reduced advertising by $17 million.
This decrease was due to a reduction in per unit spend as compared to last year's peak per unit spend lower volume and timing.
As we communicated on our fourth quarter call as we enter the back half of FY 'twenty four we will have largely anniversaried.
Over the year over year benefits from our cost management efforts.
But that said we remain disciplined with our spend.
We also expect timing and marketing and technology spend to impact the back half of FY 'twenty four.
I had to marketing we.
We still expect our full year spend on a per unit basis to be similar to FY2023 spend level.
Accordingly, I spend in the back half of FY 'twenty four it will exceed the per unit spend from the front half.
Regarding technology spend approximately $10 million of the year to date year over year favorability experienced in other overhead will hit the back half of FY 'twenty four.
We remain committed to effectively managing our cost structure.
Our performance in the first half of the year has us on track to deliver on our goal of low single digit gross profit goes to lever SG&A for the full year.
Even when excluding the benefits from this year's legal settlement.
Regarding capital structure, while we pause the repurchase of our common stock during the third quarter of fiscal 2023, we intend to restart our share repurchase program this quarter.
We expect a modest initial pace that would be below the average quarterly basis prior to our buys.
Our objective is to appropriately manage our net leverage to maintain financial flexibility and to efficiently access capital markets for both Caf and Carmax as a whole while also returning capital back to shareholders.
As of the end of the quarter, we had 2.4 of $5 billion of repurchase authorization remaining.
Now I'd like to turn the call over to John .
Thanks, Enrique and good morning, everyone.
During the second quarter, Carmax auto finance originated $2 $2 billion, resulting in penetration of 42, 8% net of three day payoffs, which was consistent with Q1 and up from 41, 2% observed during the second quarter last year.
Within the quarter Caf tightened further within tier three and is retaining only a modest amount of volume at this time, we have however, slightly increased our investment in the tier two space in an effort to continue our learning and additional credit pockets that we believe will provide future opportunity.
The weighted average contract rate charged to new customers was 11, 1% an increase of 170 basis points from the same period last year and in line with Q1.
Tier two penetration in the quarter was 18, 1% as a combination of previous lender tightening and consumer hesitation, especially in the lower credit tiers drove the majority of production versus the 21, 6% penetration observed last year.
Tier three accounted for six 4% of sales as compared to 6% last year as lenders benefited slightly from Caf and tier twos tightening.
GAAP income for the quarter was $135 million down from $183 million in the same period last year.
This $48 million year over year decrease is driven by a $90 million increase in interest expense, partially offset by $60 million of growth in interest and fee income as well as a $14 million increase in loss provision.
Note our interest expense was impacted by a negative $1.2 million fair market value adjustment from our hedging strategy versus a positive $9 4 million dollar adjustment seen in the same period last year.
Within the quarter total interest margin on the full portfolio decreased to $265 million down $30 million from the same period last year.
Corresponding margin to receivables rate of six 1%. However has leveled off as expected and is in line with Q1 I am proud of the team's continued ability to effectively manage finance margin caf penetration and sales conversion to benefit carmax as a whole.
The loan loss provision in Q2 up $90 million, resulting in an ending reserve balance of $538 million or 3.08% of ending receivables. This.
This is compared to a reserve of $535 million last quarter, which was $3 one 1% of receivables.
The slight reduction in the reserve to receivables rate as a function of the portfolio tightening partially offset by the modest additional investment in the tier two business and adjustments on loss expectations within the existing portfolio.
We believe the tightening will have a positive impact on the future required reserve, but we will also continue to look for opportunities to capture long term profitability profitability for carmax, while maintaining a targeted tier one cumulative net credit loss rate of two to two 5%.
Now I will turn the call back over to Bill. Thank you, Jon and Enrique as I mentioned at the start of the call. We believe the steps we are taking in response to the current environment are supporting our business in the near term, while also positioning us well for long run we will continue to focus on delivering what we believe is the most customer centric experience in the industry as we prioritize initiatives that drive operational.
Francies and make our omni channel experience faster simpler and more seamless for our associates and customers. Some examples from the second quarter include for online we're rolling out a number of new capabilities that enhance our digital shopping experience and our customer experience centers or <unk>, we launched a new order processing system.
Sales orders generated through the new system automatically connect to customers online accounts and to our progression tracker. This tool guides customers through each step of the car buying journey and provides a more seamless experience for customers, who prefer to blend self progression with assistance from associates, we've begun testing the system in our stores, which will unlock.
This functionality for all of our customers, regardless of where they start their buying journey.
We are also expanding capabilities for sky or 24, seven virtual assistant because you might recall sky enables us to officially assist customers via automated chat functionality, while taking work out of our <unk> system.
In addition to supporting workflows related to the finance applications vehicle transfers can appointment reservations sky is now able to identify customers, who havent an appraisal instant offer sky helps these customers complete the next steps for their trading previously associates would have to reach out to provide further support.
We've been pleased with our customers' adoption of sky as they progress in their shopping journey.
For our stores, we're continuing to leverage data automation to reduce cost and improve transaction speed and accuracy, we have deployed and integrated pay off service in our business office, which allows associates to obtain automated payoffs amounts for over 40% of the lenders holding titles for the cars, we buy from consumers in many instances this service call.
Also enables us to receive titles faster by expedited payoffs.
Our auctions, we continue to test enhancements to our platform by upgrading the information we provide dealers, which enables them to submit more informed bids for example, we launched the tests using technology from our investment in partnership with UBI that provides more detailed information on tire conditions, including brand speed size and tread depth of each tire.
Dealer feedback on this offering has been positive and we plan to roll out other enhancements in the upcoming quarters.
Before turning to Q&A I want to recognize two significant milestones in the company's history.
This June we celebrated the two year anniversary of welcoming all the talented edmunds associates to our team. We're very excited with the value that we've created together so far as we continued to build out our vehicle and customer acquisition programs.
For example, as I previously mentioned, we utilize the edmunds sales team to sign up and support dealers for our Max offer product, which has enabled us to extend our market leading position as a buyer of cars. We also recently launched an appraisal tool for dealer websites that makes instant offers based on Carmax is algorithm that are redeemable via Max offer we have received.
Positive feedback from dealers that are utilizing that service and are pleased with the initial results.
Additionally, Edmonds has launched a number of research and bi tools and support of our goal to be the leader in used EV sales.
Like to speak to three of these first Edmonds has conducted hands on range testing of more than 60, Evs, which enables us to provide insights into how far a vehicle will go on a single charge in its energy consumption.
Beginning in late 2022, we partnered with recurrent a leader in EV battery health analytics. This allowed us to become the first online car shopping resource to offer intelligence to consumers about the health and range of used EV batteries at the Vin level.
Second we've launched customized range maps on Edmunds dot com that enable customers determine how far they can drive on a single charge based on ZIP code specific to their route.
And third we have built got to help customers evaluate potential tax credits and incentives for Evs. These cover all available federal and state EV programs plus thousands of incentive offers from local utilities and municipalities across the country with more to come.
Also this month, we are celebrating carmax is 30th anniversary I want to thank and congratulate all of our associates for the work that they do they are the differentiator and they are the key to our success not many companies have the opportunity to revolutionize an industry twice, we're proud to have reshaped the used car industry by driving integrity honesty and trans.
Parents and every interaction we're excited to reshape the industry again by offering a uniquely personalized car buying experience that enables customers to do as much or as little online and in stores. They want.
We're confident in the future of our diversified business model and believe the deliberate steps. We are taking today will drive growth in the years ahead.
With that we'll be happy to take your questions Chelsea.
At this time, if you would like to ask a question. Please press the star and one Keith on your telephone keypad.
You may remove yourself from the queue at any time by pressing star Q.
Once again that is star one to ask a question.
And our first question will come from Craig Kennison with Baird. Your line is open.
Yeah. Thank you my question goes to trade in cycles with rates moving higher are you seeing elongated trading cycles from your customers that are reluctant to give up lower rates that they might have locked in during the pandemic.
Yeah, Craig Good morning, I think what we're saying is there's absolutely some customers that are.
Because of either the affordability issue, which really goes into their monthly payment customers staying on the sidelines, which would answer the question or the trade in cycles, a little longer yes, I'd say the trade in cycles, a little longer as far as how to quantify that I can't give you a specific number but we absolutely see a traffic flow coming in at the top of the funnel where theres interest.
And again continue to fall off at the conversion point when people actually start to see their their monthly payments and this is especially true in the a the lower credit customers.
Thank you sure.
Yeah.
Our next question will come from Brian Nagel with Oppenheimer. Your line is open.
Hey, guys good morning good.
I'm wondering why.
So a couple of questions I'll merge them together first off with regard to the buyback.
Maybe talk further about the decision to restart here that maybe explain a little bit your comments about.
The board has started.
To start modestly and then the second question just with respect to demand.
So actually we're seeing.
You highlighted in your comments there has been a sequential improvement in your used car unit comps still make it up with better than they did.
Comparisons get easier as you look at the data are you seeing anything that suggests that.
In certain pockets, you're actually seeing real demand improves or maybe some benefits what you've done to merchandise better.
Older lower priced vehicles.
Yeah I'll jump in on the first question so.
An important component of our capital allocation strategy has been returning capital back to shareholders.
Our goal and that strategy is really to balance investing in the business ensuring the capital structure that we have is where we want it to be and then returning capital back to shareholders.
Last few quarters of sequential improvement in our performance is really placed us in a position, where we're able to restart, albeit at a modest pace.
Modest really means an initial amount below our average from the pre pause quarterly pace, which was about $150 million a quarter.
So initially we're going to begin with roughly $50 million, a quarter plus or minus it's a quarterly amount and when annualized would roughly offset annual dilution. So it could be a little heavy it could be a little light to that go up but that's what we're initially targeting.
Yeah, and Brian on the second part of your question I'll go back a little bit of what I talk Craig you know, we're seeing good top of funnel folks shopping it's just when it comes to actually meeting the monthly payments, that's where we see the falloff I think specific to your question, but we are seeing still an increased demand for the <unk>.
Older vehicles, and our own sales for the quarter, if I think about cars over six years old 60000 miles.
The sales for that pocket sequentially ticked up not only quarter over quarter, but certainly year over year. So there still is that demand I think the market data would also tell you. If you look at vehicles that are older than 10 years old.
That that sector of vehicle is actually performing a little bit better than the zero to 10 at this point.
Very helpful. I appreciate it thank you thank.
Thank you Brian .
Our next question will come from Seth Basham with Wedbush Securities. Your line is open.
Thanks, a lot and good morning. My question is on the competitive environment. How are you thinking about the outlook here over the next.
Six months or so based on the shift in demand to those older vehicles as well as the potential ripple effects of the UAW strikes.
Yeah. Good morning, Seth well first of all on the UAW strikes I think it's a little too early to know exactly what the price the precise impact of the strikes youre going to be obviously, we're closely monitoring the situation to try to identify downstream impacts of the vehicle supply pricing in parts and a lot of that's going to depend on how long the strike goes on obviously.
This isn't the first time, we've we've worked through an issue like this and I think it's one of our strengths having gone through cycles like this in the past and been able to navigate them and I don't expect any difference there I think as far as the competitive environment again, I think consumers are pressured right now and we will.
<unk> to monitor and provide vehicles that are a little bit older keep in mind, there's a there's a large subset of zero to 10 year old cars. It just don't meet our parameters. So much our technicians are great and no matter how good they are and how much money we put into them. They just can't make the cut is a carmax car and so we're not going to sacrifice on on quality, but we will continue.
To put out their vehicles that match, our quality that they're they're also looking for.
In terms of affordability as well, we still have over over a quarter of our inventory is priced less than $20000. So in terms of hitting that affordability is certainly is a focus for us.
Just as a follow up in terms of your ability to source a late model vehicles, just still the majority of what you are selling are you seeing any more challenges do you expect that to change going forward.
We arent seeing any any more in fact this quarter I think compared to the previous quarter, we actually went up a little bit in the zero to four category as far as sales go and again I think our you know the fact that our self sufficiency is above 70%, which doesn't take into consideration anything that we're getting through our Max offering and.
Yeah, Max offer there's a nice selection of retail cars in there as well so I haven't really seen much of a change there and again we've been through cycles. Like this where are you now we've seen a shortage of late model cars to a more extreme degree than we're seeing right now.
Thank you thank.
Thank you Seth.
Our next question will come from John Healy with Northcoast Research. Your line is open.
Just wanted to ask a follow up question to the kind of bill about the conversion cycle.
What's happening after that.
Initial disappointment with the consumer that they can't afford the vehicle are.
Are you seeing them come back a couple of weeks later do you think they go into the private market are they just sitting on the sidelines I know your sales folks are persistent so would just love to kind of get perspective of what's happening after they they.
They meet that surprise affordability roadblock.
It's a great question, John you know if I look at just web traffic and kind of use that as a as a proxy where we probably were averaging for the quarter about 37 million hits, which is up substantially year over year and even up over a over the quarter, probably by about 3 million to $2 million to $3 million.
Pits, which tells me you know look we've got a lot of folks that are out there and they're interested in their their their window shopping you know and some of those are absolutely repeat offenders. You know those aren't unique unique visits as far as where they're gonna look I think there's a lot of folks unless you know they just their cars running anymore, they're just delaying.
The purchase I do think that for some of the folks that cannot delay the purchase I, absolutely think that some of them are going down to a different level of car just to make sure. They can afford the.
The monthly payments and to have reliable reliable transportation.
I'll I'll tack on to that John I think and that's one of the real values of our finance product you can easily apply online and then providing the answers back on all the vehicles you can can very easily pivot and find something in your range sort filter. Accordingly. So I think that's one of the things that we're real excited about being able to provide that to our customer well and the fact that having so many lenders on.
The platform.
Basically competing for the customers also gives them the best interest rate, which is a key component of the monthly payments.
Great. Thanks, guys. Thanks.
Thanks, John .
Thank you.
Our next question will come from Scot Ciccarelli with Truest. Your line is open.
Thank you good morning, guys.
So I think on the call you comment Bill that you know comps improved by month, but I think comparison challenges eased if I'm not mistaken. So what was the monthly cadence look like on a two or three year stack basis, and then kind of related to that I know you guys don't guide had them for a very long time, but any reason to believe comps shouldn't turn positive in the back half.
Based on current trends and comparison and comparisons.
Scott if we look at the quarter specifically.
I talked about the last call that the beginning of the quarter was starting out how the last quarter ended on average and we did as I said in the call. We did see improvement each month of the quarter.
And September so.
So far is very similar to similar with a little bit of a improvement to where August was you know, we're not going to give guidance on the the rest of the year, but as you said I mean, the comps do.
You know because of last year's performance the comps do get a little bit easier.
Okay. So if I were just to break down <unk> not coming on <unk> obviously.
If I was looking at stacks like is there a way to kind of look at it on a two or three year stack and help us understand whether there was improvement on that basis.
Well the two year stack, the second quarter was better than the first quarter, but I think when it comes to intra quarter, we try not to talk too much about the details of month to month, especially when looking over a year, but I would tell you that second quarter or two year basis better than the first quarter.
Like Bill said.
Okay I'll take the rest offline thanks guys.
<unk>.
Our next question will come from Sharon Zackfia with William Blair. Your line is open.
Hi, Good morning, I apologize if you answered this my phone cut out and I had to redial in but you know obviously, you're resuming the share repurchase program.
What are the thoughts at this point on store openings I don't know if you even reiterated the plan for this year and I know you had kind of left out there.
The door open to maybe accelerating next year or so just thoughts on that or.
Perhaps the the idea has changed in terms of harvest in more sales at existing locations rather than.
Growing the store base a meaningfully.
Good morning, Sharon Yeah, our outlook at this point, what we've already said Hasnt changed. So this year, we have a few more stores that we're going to open up so that'll get us to a total of five this year plus the one standalone production facility that we've talked about are down in the Atlanta market, we have not come out and said exactly the number of stores that will be building.
Our next year, yet we'll talk about that later on in the year, probably Q Q4, unless you know yeah and that's regular routine we provide that update on an annual basis, along with our capex guidance for the year.
Okay. Thanks.
Thanks Sharon.
Yeah.
Our next question comes from Michael Montana with Evercore ISI. Your line is open.
Oh, great. Thanks for taking the question just wanted to ask on the credit front. If you can provide an update on credit availability and then also to the extent some of the credit behavior was less favorable how should we think about provisioning given the current background is kind of $90 million the right number for now.
Any color you can give there would be great sure yeah, I'll take them in order so credit availability.
For Carmax again, I think this is one of the values of having the the multitude of lenders that we have we really continue to provide our customers with great access to credit now I think it's not surprised in the industry.
Lenders are always looking to sure up their portfolios and they've tightened where they've needed to we've seen most of our tightening from our partners. If you will probably the back half of last calendar year Caf has tightened over the course of the year and I think that's just standard lending practices that youre going to find right now, but ultimately I think we provide fantastic access to <unk>.
You know certainly in the high 90% range from a mid to over and probably 95% approval rate to customers when they apply and again I think we give them access to to see other vehicles that are available to them.
<unk> overall performance in the quarter for Caf in particular.
We continue to look at our overall portfolio I'm going to look at that from the lens of our tier one business. We securitize everything we report on that on a monthly basis, how that's performing if you really look at that the older deals that you might compare the newer deals to the 17 to 18. The 2019, even the 2020 deals exceptionally low loss rates well below.
Two to two 5% range, they're trending towards right now and obviously for all the reasons that we've cited before having access to cash.
You know government stimulus all of that so they really outperformed what we're seeing currently in the newer vintages is really highly expected. It's just a reversion back to sort of sort of the normalized levels that the industry has seen from a lending perspective. So we are a we were anticipating the 'twenty one to 'twenty two deals to go back to that two to two.
And the 5% range I would tell you we're seeing with these higher monthly payments.
We're probably at the higher portion of that range and that's why we've done the tightening that we've done we've done here over the course of the last year some to some degree in tier three and also pockets in tier one where we see opportunity to pull back we want to make sure we operate well within that two to two and a half range and I think we've done a nice job there. So ultimately as you think about the <unk>.
Provision going forward, it's a combination of several things I cited in the prepared remarks, the existing portfolio, which again.
I think we have we have a good handle on I think it is going to operate in that two to two and half range and we've done a nice job there you've got the new originations, which are suddenly going to come in lower given the tightening we've pulled back to some degree on the tier three it's a small portion of our business in the tier two we're excited about that space and we see great opportunity. So you put all that together.
Our reserve speech speaks for itself, we come from a $3 11 to 300 <unk> I think it's relatively stable, we think we're well reserved and well see how the consumer performs but I think we're in a good spot right now.
Thank you.
Our next question will come from John Murphy with Bank of America. Your line is open.
Good morning, guys.
Wanted to ask Bill you know as you.
As you go through periods of steep depreciation like Youre talking about.
You've seen in the used car market and on pricing.
Typically there they were accompanied by supply increases which would drive it.
Same store sales higher I'm, just curious what you're what you're seeing in the market right now as far as availability.
Inflow.
Vehicles, maybe in the zero to six year old bucket, which is the target and then you know maybe in the six to 10 year old which is a growing target for you over time.
Yeah. Good morning, John you know when I look back at the depreciation for the quarter like I said, there was a steep depreciation in June July and quite honestly.
It started in May so if you look at May June and July that was probably about $3000 of depreciation which is absolutely a steep and the biggest impact that has on US. Obviously is is really more on the buys because.
And adjust accordingly, and consumers are always thinking that their vehicles are worth more so it impacts the buys early on until the rest of the market.
Shift so from a buyer standpoint, it it's it's a headwind in the in the short term, but again I think the team did a phenomenal job not only maintaining the retail margins, but the wholesale margins, which we haven't talked about because year over year. They were up even in this steep environment as far as availability look if you're if you're having to.
We rely on outside sources, there's just.
There's a limited supply and if I think back over at least my tenure here at Carmax Theres, just less vehicles available through through third party auctions and it's been that way for a for a while so and I don't foresee that changing greatly and.
In the near term, which is also why we're thrilled to have our self sufficiency, So high and we're continuing to look for for avenues to continue to source inventory.
It really retail or wholesale however, we can outside of those sources.
And maybe just a follow up I mean, do you think you could ever get meaningfully above that 70% self sufficiency that you're at right now, which is pretty pretty damn good to start with but I mean are there other avenues, maybe through admins or other ways that you could you could increase that meaningfully.
Look we could take it to 100% Tomorrow and you know it's all it depends on what you put on on the vehicles I think we probably are.
I'd say it is we probably would never get to 100% self sufficiency, because you're always going to want to have little pockets of inventory that you're going to want a supplement or or whatever but again our goal is to drive as much as drive it as high as possible. It's been pretty 77, it's pretty steady in that 70 ish.
In that range, which we feel we feel good about and again I think the key thing here is it's not only on the retail card, but will also buy every wholesale car as well. So we're absolutely focused on that.
Okay Alright, thank you very much thank you John .
Yeah.
Our next question will come from Chris <unk> with BNP Paribas. Your line is open.
Hi, Thanks for taking the question.
So I hope you could elaborate more on compensation expense I know you said you are lapping cost cuts, but it seems like that compensation cost cuts up sequentially ramp each quarter.
So my question is like if you look at the four year CAGR that's got it.
Particularly better relative to units that particularly Q2 versus Q1 are you still actively reducing head count have unit trends maintain normal seasonality from here what would happen to compensation would that would that also be his normal or that'd be better or worse than normal seasonality.
Yeah. Thanks for the question Chris Yeah at this point with compensation as I mentioned in our prepared remarks, we have pretty much anniversaried over the benefits of some of the stronger leverage we put in place. So when when thinking of compensation that we think of that for the back half of the year, one and more pressured from clients. If you will relative to where we've been.
Here for the past couple of quarters.
So we've comped over those levers at the same time.
We go through the decision process at this time of year about staffing for tax time and depending on what the expectation is for tax time, we start to ramp up our our our associate level there as well so.
I do expect compensation would be one of the line items moving forward that would be a little bit more more pressure relative to where we've been for the past few quarters here, yes, Chris So just to bring it to them with some numbers you know if you look at a year ago staffing wise total company were down about 3000, a 3000 or so associates and that's pretty consistent with what the firm.
First quarter was as well so we've kind of you know as long as we're keeping staffing to.
Where we feel like we need sales to <unk> point, you know it'll be back at the back half of the year will just be you won't see as much pickup there, which we believe we're appropriately staff. So those cost management efforts. We undertook successfully at this point, we're largely successfully staffing appropriately staffed.
The only other thing would be that in Enrique touched on this in his earlier remarks for everyone to keep in mind is as the back half of the year progresses. That's generally from a seasonality standpoint, when we start to think about next year's tax time and building for that and so that generally.
You know requires a little bit larger head count so we'll be monitoring that as we go through the back half.
Gotcha that makes sense and then just quickly on car buying if you'd called it out it seemed like it was July and August when pricing was the worst or sorry June and July .
Is pricing kind of stabilized a bit in September and lesser extent August have you seen are you buying cars more often more frequently higher conversion from customers is that.
Trend maintained its pace.
Yeah Yeah.
Yeah, So June and July with the worst August actually was up a little bit and then you know September in AAA data is probably flat flattish to a little bit up from a depreciation standpoint, or an appreciation standpoint, so oh, it's call August and September fairly.
It's fairly similar but it was a a reversal of the steep depreciation and I think as we look forward to the rest of the year.
I think what we'll probably see now this is assuming no other macro factors and obviously, there's a lot of things out there, especially when you start thinking about the strike but.
Outside of that I would think we would continue to see probably more normal seasonal depreciation barring any other new event.
And that helps your car buying like you'd expect that to pick back up from here or is that or do you think it's like the level I think what that does is it does a couple of things. One is depreciation continues obviously that feed that onto your front log prices. So I think that helps.
On the affordability issue I think also more stable depreciation it just makes it easier to run the business, we do a phenomenal job the team did a phenomenal job even with that steep depreciation that we saw in the quarter, but you know when you're starting to see normal depreciation. That's just that's for kind of business as usual for us.
Got you that makes sense. Okay. Thank you for that I appreciate it. Thank you.
Our next question will come from Rajat Gupta with Jpmorgan. Your line is open.
Oh, great. Thanks for taking the question just had one question one clarification.
On retail GPU, it was a little larger than seasonal declines.
In the second quarter versus first quarter last last 10 plus years. The average sequential move has been $50.
Lower I mean this this quarter was more than 100, just curious if.
There were any one time items that impacted bad or were there any pricing passed anything you would call out.
One clarification.
Yeah.
Thanks for the question Yeah, when I think about this quarter actually I'm pleased I'm pleased with it because we talked about last quarter coming into more in line with where we were last year, which you remember last year was a record high for us.
As you point out I mean $30 within the noise for us. So you know I feel good about that especially considering the environment that that's out there I think you know the first quarter. Obviously was a was a record high and I think there was some dynamics in that quarter, where you purchase the vehicles and then we saw some appreciation in that quarter, which which.
It keeps you from having to do markdowns that kind of thing. So I look at the first quarter is more of a anomaly, which is why we set the said what we did last quarter, we thought we'd be more in line in the second quarter with the second quarter of last year, and we reiterate we think will be more in line.
For the whole year with the whole year of last year, which is still a step up from where we've historically run of 80 to $100 and or is that just as a reminder, the first quarter theres some seasonality benefit too right. So the first quarter tends to be our strongest from a GPU standpoint, just in it within tax time, so is that happening as well.
Right right. Yeah. That's helpful and just you mentioned earlier around you know the supply.
Our situation and the fact that you know there are some little cars in the zero to 10 year old that smell that did not meet your reconditioning needs.
As you look into you know later this year or into the next couple of years it looks like.
There'll be more dependency on the greater than six year old cars.
Did you grow to grow to grow your business, Yeah, How'd, you How'd you get round.
Some of those quality constrains reconditioning constraints for north cars because.
But the zero to four year old supply likely going to get worse before it gets better so how do we manage through that.
In order to return to growth in the business.
The next couple of years.
Yes.
Well, what I would remind you as odd as if you go back when we had the last big bubble go through on late model cars back into the financial crisis.
The the new car sales rate in OE, Oh 910 11.
It bounce around anywhere between $10 5 million and a little over $13 million. If you look at the period from 2020, 'twenty, one 'twenty two and even the estimate for this year, you're talking about 14 to over 15. So.
My point in pointing that out is we've been through far worse situations than what we're seeing now as far as a bubble of zero to four zero to six year old cars that we're gonna be facing and again, we're in a better position than we were back then because our self sufficiency is so high and we're getting those cars directly from consumers and other sources. So we're we feel very.
Good about our ability to to to navigate the future whether it's consumers warnings here at a six year old cars or whether it's consumers wanting to buy something a little bit older.
Understood.
Got it. Thank you. Thank you.
Yeah.
Our next question comes from Daniel <unk> with Stephens. Your line is open.
Hey, good morning, guys. Good morning, I wanted to ask.
Follow up on Caf and maybe it ties into the affordability of discussion, but the weighted average rate here with flat I think sequentially at 11, 1%. Despite maybe rising benchmark rate and your recent trend of passing through price.
I guess are we seeing customers push back on rates should we maybe take that a design customers have reached their limit on affordability and are you guys that maybe the end of your ability to pass through more APR at Caf.
Despite the rising rate environment. Just curious you know why that is sequentially flat line from here sure. Yes, Great question Danielle couple of things that are subtle in there to point out first the.
<unk> quarter over quarter also.
I realize we did some tightening in there you know.
If you pulled back in the tier three space, we pick pockets in the tier one space.
That's going to offset any sequential growth in the APR I can tell you that we did continue to test and raise apr's within the quarter, but bear in mind I think one of the key things for US is we're not looking to maximize finance margin when we do our testing and pass this along to the customer we're taking into accounts are they able to purchase the car are.
Are they going to end up paying off with someone else, where we can gain any finance income. So we very carefully test different rates and then adjust those rates in smaller pockets to optimize the overall carmax value. So I think thats why youre seeing the sequential piece, but.
Certainly obviously there are payment pressures as bill mentioned, so we continue to be very careful with that but thats why youre seeing sequential quarter over quarter flat. It's the tightening is offsetting it.
So did you follow up my question your strategy will be to maximize unit sold you know not maximize margin Caf, we hear that right now no I would say we contemplate that in the decision. We look at units sold we will get them out of.
The finance margin that Caf captures and also contemplate remember they can pay off in three days. So we could sell the car, but caf to lose the financing if they choose to go down the street to their bank or their credit Union. So we put all that together to to optimize for Carmax in total not just maximize the one dimension or the other.
Farmer Mac's total profitability right and we think that's right.
Thanks for the color I appreciate it.
Our next question will come from David Whiston with Morningstar. Your line is open.
Thanks, Good morning, just sticking with those other financing channels you just mentioned in <unk> I'm just curious why this year other is gaining a lot at the expensive tier two or there were just more cash only buyers in the market now or is there a problem with tier two consumers willing to buy our other lenders just taking the opportunity from you.
Sure Yeah, David I think there's a couple of things going on there first.
First I think what you really do see as the affordability is definitely a challenge in the bottom portion of the credit spectrum kind of that mid tier to the to the subprime space, we see great demand across the credit spectrum, but ultimately when they see the monthly payments.
It's the higher end guys that are able to still follow through with the purchase so that's going to benefit both caf and kind of the outside financing population you did see some pullback as I mentioned the.
<unk> sales are little more skewed to the high end I think theres demand everywhere, but that's really what's driving it.
Okay and could you just briefly give me some examples of what non Caf uncollectible receivables are.
Yeah. So those are going to be so this hits in the SG&A bucket right and these are going to be receivables that are our finance partners originate and underwrite that end up having a title processing issue or a downpayment challenge that we ended up having to buy back. So that's an area of focus for us over the past.
Here, we've made material improvements as I've talked about on previous quarters, both in execution in our stores and our home office Dnv's I've also got better in terms of turning around those titles as well as the banks in terms of turning around.
<unk>. So we saw another quarter of benefit this quarter, we expect to see some more benefit in the back half of the year, probably not as strong as the first half of the year as we start to lap over that.
That accentuated focus last year that we had on making sure we're managing those.
And I'm, sorry, do you do 100% of that servicing for the third party lenders in terms of the collections.
No we do not.
We do not underwrite it as a third party partners they would underwrite it and then service it that's right.
Alright, thank you.
We do have another question from Michael Montana with Evercore ISI. Your line is open.
Hey, guys. Thanks for letting me sneak one more in just wanted to ask about if you could give any incremental color around the sales trends by income level and when.
When you think about the improvement sequentially to the down nine comp and then throughout the quarter.
Are you seeing for operating income versus lower income consumers and then how does that filter into your desire to spend into AD dollars for the back half of the year.
Okay, Yeah. So as I said earlier I mean, we're seeing the biggest pinch probably not probably on the we are seeing on the lower consumer and think about it you know from a month.
Monthly household income of let's say three to $4000 that had that segment of sales for us has shrank dramatically. So it's probably in the last couple of years.
It's down probably.
And it's it's it's probably down about 50% in the in the $3000 less.
Household incomes about 50% less than what it used to be so that's absolutely a headwind, which again speaks to the affordability as far as advertising goes that's an area, where Jim and Sarah and team. They constantly are looking at it and I think an interesting thing that everybody needs to keep in mind is because we got this big buying engine.
Also when we talk about advertising, it's it's advertising for sales, but it's also advertising for buys so while you may pull back on sales you may do more on an on body. So it's a it's a work that we do and that team does a great job measuring the ROI. So to <unk> comment earlier, you know what we're expecting to do in the back half that certainly could shift.
If we see something in the marketplace that says Hey, you don't need to spend as much it's not fruitful or on the flip side, Hey, you may want US you may want to spend a little bit more and so we're constantly monitoring that but I think the guidance that Enrique gave is really the way to think about it and it will continue to monitor it.
Thank you.
Okay.
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 well. Thank you all for joining the call today and for your questions and your continued support I do want to one more time congratulate the carmax.
Carmax team on achieving our 30th anniversary and I just want to thank them for everything that they do every day to take care of each other and our customers and the communities and we will talk again next quarter. Thank you.
Thank you, ladies and gentlemen that concludes the second quarter fiscal year 2020 for Carmax earnings release Conference call.
You may now disconnect.
Okay.
[music].
Hum.
Mhm.
Hum.
Mhm.
Hum.
Sure.
[music].