Q3 2024 Carmax Inc Earnings Call
Please standby we're about to begin.
Ladies and gentlemen, thank you for standing by and welcome to the Q3 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 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 Law and state a V P Investor Relations. Please go ahead.
Thank you Jamie good morning, everyone. Thank you for joining our fiscal 2024 third quarter earnings Conference call.
I'm here today with Bill Nash, our President and CEO Enrique Mayor Moore, our executive Vice President and CFO and John Daniels, Our senior Vice President Carmax Auto finance operations.
Let me remind you our statements today that are not statements of historical fact, including statements regarding the company's future business plans prospects and financial performance 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.
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, 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 at <unk>.
You know 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 more follow ups Bill great. Thank you David Good morning, everyone and thanks for joining us.
Our third quarter results reflect the continuation of our strategy has yielded sequential year over year improvements across key components of our business for four straight quarters, while affordability of used car remains a challenge for consumers. We're excited about the positive impact we're seeing from our omni channel investments, which reinforces our strong belief that we are well positioned for the future.
This quarter, we delivered strong retail and wholesale Gpus, we bought more vehicles from consumers and dealers and we also sold more wholesale units in a year ago. We further reduced SG&A from the prior year, we continued to strengthen the credit mix within caps receivables portfolio, which had a positive impact on our loan loss provision and we reserve.
And our share repurchase program.
For the third quarter of FY 'twenty for our diversified business model delivered total sales of six $6 $1 billion down 5% compared to last year. This was driven by lower retail and wholesale prices and lower retail volume, partially offset by higher wholesale volume.
In our retail business total unit sales declined two 9% in used unit comps were down four 1% average selling price declined approximately $1300 per unit or 5% year over year.
Third quarter retail gross profit per used unit was $2277 relatively consistent with 2237 from last year.
For the fourth quarter, our expectation is that our margin our per unit margin will be lower than last year's fourth quarter record margin.
We continue to expect that per unit margin for the full year will be similar to last year.
As always we will continue to actively manage this as we test price elasticity and monitor the competitive landscape.
Wholesale unit sales were up seven 7% versus the third quarter last year average selling price declined approximately $600 per unit or 7% year over year.
Third quarter wholesale gross profit per unit was $961 in line with 966, a year ago like.
Like our outlook on retail GPU, we anticipate wholesale per unit margin for the full year will be similar to last year.
As a reminder, last year's fourth quarter wholesale GPU was infor was within $4 of our all time record and benefited from appreciation and strong dealer demand, particularly at the end of the quarter. We expect this year's fourth quarter per unit margin will be more in line with our year to date performance and lower than last year.
We bought approximately 250000 vehicles from consumers and dealers during the quarter up 5% from last year.
These vehicles, we purchased approximately 228000 from consumers with slightly more than half of those bonds coming through or online instant appraisal experience as a result of our self sufficiency remained above 70% for the quarter.
With the support of our Edmond sales team, we source the remaining approximately 22000 vehicles through dealers up from approximately 14000 last year.
In regard to our third quarter online metrics approximately 14% of retail unit sales were online up from 12% last year.
<unk> 55 per cent of retail unit sales were omni sales this quarter up from 52% in the prior year.
All of our third quarter wholesale auctions and sales where virtual and are considered online transactions. This represents 19% of total revenue.
Total revenue from online transactions was approximately 31% up from 28% last year.
Carmax auto finance or Cas delivered income up $149 million down slightly from $152 million during the same period last year John.
John will provide more detail on customer financing the loan loss provision and cash contribution in a few moments at this point I'd like to turn the call over to Enrique who will provide more information on our third quarter financial performance and are you guys.
Thanks, Bill and good morning, everyone.
As Bill noted, we drove another quarter of sequential improvement and year over year performance across our business and our P&L.
Notable areas of improvement included use in wholesale unit sales and their respective margin dollars.
Total gross profit cap contribution SG&A leverage and EPS.
Third quarter net earnings per diluted share was 52 versus <unk> 24, a year ago.
Total gross profit was $613 million up 6% from last year's third quarter.
Used retail margin declined by 1% to $398 million with lower volume, partially offset by slightly higher per unit margins.
Wholesale vehicle margin increased by 7% to $123 million with an increase in volume and flat per unit margin compared to last year.
Other gross profit was $92 million up 55% from a year ago.
This increase was driven by service, which delivered a $33 million of improvement over last year with this year's quarter reporting a $20 million to $21 million loss.
The efficiency and cost coverage measures that we put in place towards the end of FY2023 continue to drive improved year over year performance in FY 'twenty four.
Yeah.
Extended protection plan or <unk> revenues were relatively flat compared to last year's third quarter.
We do not expect to receive profit sharing revenues in the fourth quarter due to the inflationary pressures our partners have experienced.
Third party finance fees were down $2 million from a year ago, driven by lower volume in tier two for.
For which we receive a fee and higher volume in tier three for which we pay a fee.
Yes.
On the SG&A front expenses for the third quarter were $560 million down 5% from the prior year's quarter as we continued to see benefits from our cost management efforts.
SG&A as a percent of gross profit levered by 11 percentage points as compared to last year.
The decrease in SG&A dollars over last year was mainly due to three factors first other overhead decreased by $19 million. This decrease was driven primarily by continued favorability in noncash uncollectible receivables and to a lesser degree from reductions in spend for technology platforms and from favorability.
<unk> and costs associated with lower staffing levels.
Second total compensation and benefits decreased by $20 million, excluding a $3 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 CEC as with sales.
The decrease was also impacted by a lower corporate bonus accrual in the quarter.
Third advertising increased by $5 million. This reflects an increase in per unit spend as compared to last year's quarterly low level of per unit has been it was partially offset by lower units.
As we have previously communicated our expectation is for our full year marketing spend on a per unit basis to be similar to last year.
Accordingly, we expect that our per unit spend in this year's fourth quarter will exceed last year's fourth quarter.
Entering the fourth quarter, we have now passed the year Mark since we initiated our significant cost management efforts, we are well on track to outperform the target we set out at the beginning of the year of requiring low single digit gross profit growth to lever SG&A for the full year.
Even when excluding the benefits from this year's legal settlements.
That being said, we remain disciplined with our spend and investment levels.
Regarding capital structure, we resumed our share repurchase program in October.
Repurchasing approximately 649000 shares for a total spend of $42 million in the quarter.
This base is in line with the guidance, we provided last quarter.
As of the ended the quarter, we had $2.41 billion of repurchase authorization remaining.
In terms of other uses of capital such as new store openings, we will open four stores in the fourth quarter, including two in the New York Metro market and one in each of the Los Angeles and Chicago Metro markets.
We will also open our first Standalone Reconditioning center in the Atlanta Metro market.
Our extensive nationwide footprint and logistics network continue to be a competitive advantage for carmax now I'd like to turn the call over to John.
Thanks, Enrique and good morning, everyone.
During the third quarter Carmax auto finance originated approximately $2 billion, resulting in penetration of 44% net of three day payoffs, which was up from Q2 and relatively in line with the 44.4 for 4% observed during the third quarter last year.
The weighted average contract rate charged to new customers was 11, 3% an increase of 150 basis points from the same period last year and up 20 basis points from Q2.
Tier two penetration in the quarter was sequentially in line with Q2 at 18%, but remains lower year over year as we have yet to fully comp over the partner tightening observed in the back half of calendar 2022.
Tier three accounted for six 9% of sales as compared to six 1% last year.
Impacting each of these results as caps decreased percentage in tier three as well as the increased test volumes in tier two.
Caf income for the quarter was $149 million down $3 5 million from the same period last year, but up $14 million sequentially.
The provision for the quarter was $68 $3 million as compared to $85 7 million in the prior year's Q3.
The $17 million favorability was offset by year over year reduction in total interest margin of $20 million driven by additional interest expense of $81 million.
No fair market value adjustments from our hedging strategy accounted for $6 million in expense this year versus $5 million of income last year.
The total interest margin of the portfolio decreased to five 9% from the six 1% seen last quarter. This slight reduction is primarily a result of increased funding costs, including the fair market value adjustments, along with cash deliberate credit tightening that began last year, which inherently removes higher margin higher loss.
That's from new originations.
Caf continued to offset these headwinds by adjusting customer rates, but with a careful eye on three day payoffs sales and overall carmax profitability.
We are pleased with our ability to maintain a relatively stable net interest margin. Despite the volatile interest rate environment.
The $68 million provision within the quarter resulted in a reserve balance of $512 million or $2, 92% of receivables compared to 3.08% at the end of the second quarter.
The 16 basis point reduction has occurred even with caps continued investment in the tier two space and is evidence of the growing impact that our broader credit tightening is having on the overall portfolio.
While cap delinquency levels remain elevated versus historic norms as has been the case industry wide. We believe our reserve adjustment adequately reflects the anticipated future loss performance of our portfolio.
The underwriting adjustments executed to date have been the right strategic moves to ensure we had targeted last levels preserve our access to efficient funding yet still deliver strong future cash earnings.
We are well poised to recapture tier one and tier three volume as economic conditions improve and our continued learning in the tier two space should provide a future growth opportunity now.
Now I will turn the call back over to Bill Alright, Thank you John and Enrique.
As I mentioned at the beginning of the call. We're excited about the contributions we're seeing from our omni channel investments, our omni channel capabilities offer our customers a uniquely personalized car buying experience that enables them to do as much or as little online and in stores. They want.
I'm proud of the progress that we've made on our journey to deliver the most customer centric experience in the industry.
As we have said before we believe consumers in the used car industry will increasingly prefer to have the ability to progressive digitally.
We are seeing this in our data at the end of fiscal year 'twenty. When we completed our initial omni channel rollout approximately 40% of our customers leverage some or all of our digital capabilities to complete their transactions that has grown to approximately 70% this year.
I recognize that the market volatility over the past few years has made it challenging to see the direct benefits Omni channel has delivered to our business. So I wanted to share some proof points that we're seeing.
First our data indicates that omni channel is driving incremental retail customers to carmax customer.
Customers, who fully complete an online transaction are 10% more likely to be new to carmax compared with our omni channel and in store customers. We have also found that our online consumer skew younger which creates the opportunity to participate in more of their lifetime purchase cycles.
Additionally, since initially completing our omnichannel rollout, we've seen outsized market share growth and our oldest 15 markets, where we have not opened new stores since calendar 2013.
In calendar 2019, the market share annual growth rate for these markets doubled from the average annual growth rate for the previous five years. Moreover from the beginning of calendar 2019 to the end of calendar 'twenty two the market share and average annual growth rate for these older markets continued to exceed their.
Pre omni channel average growth rate.
Second instant offer our online consumer facing appraisal tool that is a core part of our omni channel capabilities is significantly driving our vehicle purchases in wholesale sales.
We doubled our bonds from consumers of the year, we launched instant offer this enabled us to grow our self sufficiency to over 70%, which we have maintained since we launched the tool.
Online buyers have also fueled our wholesale volume, which grew approximately 65% during the launch year and has remained well above the volume prior to instant offer it's worth noting that our instant offer algorithms also support our dealer facing maxx offered vehicle sourcing application.
Third our omni channel products are supporting double digit web traffic growth.
Finance based shopping has been our number one lead source. This multi lender prequalification products gives customers the ability to digitally received quick credit decisions across our inventory with no impact to their credit score over 80% of our customers are using this online tool as they begin the credit process.
Finally, omni channel is on track to be a more efficient cost structure compared to our store only model.
Our omni channel cost structure has more fixed costs in our historical store only structure.
We continue to show sequential year over year improvements in key cost efficiency metrics for omni channel overhead model with a more fixed cost structure, we expect to lever more strongly than in previous than in the previous model as demand picks up.
We expect the impact of our omni channel capabilities will continue to grow over time as consumers demand a more personalized experience that combines online and in store progression.
We believe that many of our competitors across the used car industry will not be able to deliver this experience in a simple and seamless manner.
In closing, we're confident we have the right strategy in place our consistent approach to control, what we can and deliver the most customer centric experience in the industry is driving sequential quarterly improvements across our business. We are well positioned to emerge from this cycle, an even stronger company.
With that we'll be happy to take your questions.
Operator.
Thank you, ladies and gentlemen, if you would like to ask a question you may do so by pressing the star key followed by the digit one on your telephone keypad. Once again that is star one to ask a question. If you find that your question has been answered you may remove yourself from the queue by pressing star to again that is star one.
To ask a question and star two to remove yourself.
Well go first to Daniel <unk> with Stephens.
Your line is open. Please go ahead.
Yeah, Hey, good morning, everybody. Thanks for taking my questions. Good morning.
Jon and Rick Hey, maybe I want to circle back on the Caf provision just just given the impressive results here I'm trying to understand the puts and takes so the allowance came down quite a bit Jonathan you could talk about maybe just tighter underwriting there, but it looks like net charge offs are at maybe the highest level we've seen in over a decade. So I guess, how can you can you help us reconcile those two.
Factors and how should we think about provision have the credit improvement meant that nominally. This is the right level of provision going forward or how would you think about those trends.
As we move through the end of the year and tax refund season. Thanks, Dan.
Absolutely appreciate the question and then fully expected it so first let's start on the provision piece.
Our provision in the quarter is going to be made up of two components, it's going to be our change in outlook on the losses that we expect on the existing book of business versus what we set at the end of Q2.
Second it's going to be required reserve on losses on the new originations so let's touch on the first piece.
What I can tell you is if you look at our expectation at the beginning of Q2 and what we observed on that existing book of business over the course of Q3, there hasnt been a lot of change, let's talk about the actuals and what we have observed because you referenced that we publish on a monthly basis, our securitization and how they are performing it's important to note that that's about <unk>.
60% of our receivables.
A lot of stuff that has not yet been securitized. We've also mentioned thats been tighter but of what you see out there in the Securitizations, we certainly observe two separate books of business there the pre COVID-19 and the early COVID-19 stuff that came in markedly lower than our target well below the two to two 5% we knew that was going to come back into more normalized.
Levels and Thats, what were seeing on the new stuff we have.
<unk> also said that we believe there is frontloading occurring if you look at those newer securitizations, especially in like the 21 three that 'twenty one for the early 'twenty two stuff. There is a clear curved difference and when the losses come in we think it's front loaded all of that was contemplated when we set our reserve at the end of Q2.
So largely this first component of the provision did not yet there wasn't a major adjustment that we had to make which means at the end of the day. Our provision is primarily made up of our new originations and we talked about this our new originations are significantly tighter there's very limited tier three volume, there's a test them out in tier two and then our tier ones.
We've even been tightened there so on that roughly $2 billion. It's a tighter book of business. It's a lower amount of overall loss. It's a relatively modest required provision and that is the bulk of the Q3 provision.
Thanks, so much for all the color.
Thanks, Dan.
Our next question will come from Brian Nagel with Oppenheimer. Please go ahead.
Good morning, good morning.
Congrats on a nice continued.
Solid progression here.
Thank you.
That's my question I guess, just looking person needs a wholesale business.
Definitely.
Stronger here in the fiscal third quarter and I guess the question.
It's way more than what was behind that.
And sales growth.
The read through is if you look at the wholesale business.
Where they're weak moves over to your used car business given just given the natural kind of association between those two segments and then just a quick follow up any commentary I mean, given kind of what we saw here in Q3 any any commentary.
The quarter progressed and what we're seeing in early Q4.
Great. Thank you for the questions. Brian. So yeah. We are pleased with the the wholesale growth I think it's a combination of factors I think one there's a little bit of year over year dynamics, playing in last year, given where we were given where we saw sales things that we're going in the marketplace. We actually pulled back on our offer so I think you've got a little bit of that reflecting in kind of a year over year.
But I also feel really good about the innovation on the product side of things. So when you think about Max offering you know one of the things that Max offer we completed this quarter the rollout of our instant offer component of it we still had a few markets that did not have instant offer which meant they had to take pictures of vehicles and then get a.
Value now they have the option to just not take pictures if they wanted to take pictures. They still can so you know that that's some of the innovation there that I think that that help so we feel really great about the innovation and as we go forward it will probably be dependent more on what's going on in the market dynamics that kind of thing at any given time.
As far as.
Kind of the quarter and just outlook look obviously the industry is still challenged and everybody knows that and obviously our business isn't where we want it to be but.
I do think there are some encouraging signs out there I mean, besides the fact that we have continue to have sequential improvement.
We saw a lot of depreciation this quarter really really steep depreciation and while that causes some headwinds in the near term is going to cause some headwinds just in.
Wholesale a little bit and even on the retail side. It's a short term thing and I think it's it benefits. The overall used car industry and it'll benefit us because that will continue to come out on front lot prices you saw were.
About $1300 down this year year over year on the sales prices from an acquisition standpoint, it's more like $500, but we had some mix adjustment stuff in there. So again I think the steep depreciation is good.
Interest rates if they at least stabilize I think that's great I think it's great for the business I think that'll help and if they come down I think that it'll be you know kind of extra icing on the cake.
Another thing that I would point to is.
Our market share of October which is the latest period that we've got in market share data on is the first month that we've actually comped our market share year over year, So I think that.
That's encouraging and then the other thing I would tell you as we've talked before about just comps and where the sales might be going and we've done some analysis with one of the credit bureaus, just trying to understand the customers that apply for.
<unk> alone through Caf, where do they go and it seems like from.
From the analysis that we've done there's a lot of customers that just once they decide they're not buying they're they're not buying so it's almost like there's maybe hopefully there's some pent up demand and I think we will see is as the market comes back. So again I think while there's some signs of encouragement yes. The industry is still there's still a challenge we're encouraged by that and I think.
Taking all that in consideration also just bearing in mind. This whole time, we've been working on cost controls, becoming more efficient having better experiences for our customers.
Our associates I think all of that plays well to into the future. So hopefully that's helpful.
That's very helpful. Thanks, a lot.
Sure.
We'll turn now to Seth Basham with Wedbush Securities.
Yeah.
Thanks, a lot and good morning. My question is also on Caf John could you give us some more color on the Securitizations from late 'twenty one through 2022 in terms of your expectations that the loss curves you kind of flatten that out because we haven't really seen that in the data yet.
Yes, I appreciate the question Yeah, I think the key thing to point to here is if you look at obviously, what's published out there right now is I think that 2019 stuff going forward.
If you if you pull back and you look at sort of the 2016 17 18 stuff that I think as you probably have access to set and you look at the typical shape of that curve.
What we absolutely are seeing is the 21, 3% to 21 four it looks like it's turning over and everybody's going to trend it their own way, but when we look at that and you look at the timing of loss, we absolutely see these things coming and certainly within our targeted range.
The 22, one in the 'twenty two two we're watching very closely it looks like that's beginning to turn it over admittedly the 'twenty two to $3 22 for earlier in the life.
Have not yet turned over and so we're watching that very carefully but neither had the previous those previous ones I mentioned it at the point at which they exist. So all of this when we trend it out we know the sub segments that are in there we know how they perform and how early the loss comes we absolutely believe all of this is coming in in the two to two and half range, which is truly our target. So.
Does that give you the color you need Seth anything further on that.
That's helpful of the securitization do you have outstanding are you forecasting losses for any of them above that two two and a half range for those securities.
For the Securitizations, we have today, because again, we have the luxury of breaking that down by sub segment by different pockets and we right now do not see anything about the two 5%.
And again, that's a target yeah, not saying that anything is going to come above there if something came up at 225255 at the end of the day, we will reserve for it accordingly, it will be what it is but no right now we do not see that and I think the only other point I'll make is again. This is what has been securitized at H bear in mind I think you are well aware of this yet.
It's 456 months before it ends up in a securitization.
Bulk of our tightening is absolutely occurred over the last year. So I fully expect as that stuff hits the market youre going to see clearly the evidence of the tightening that we have done over the last year.
Thank you.
I think as Jay will go negative.
As John had mentioned a lot of the receivables that we do.
Don't see a or in our warehouses right is about what 60% roughly of what Youll see are in the securitization data that's public but it is a good chunk of receivables that are not necessarily public because our new warehouse is there an alternative facilities and that's really where you see a lot of that tightening that said blending into the overall loss rate.
Thank you.
We'll go next to Craig Kennison with Baird. Please go ahead.
Hey, good morning, Thanks for taking my question I had a question on AI at your Analyst day, a few months ago, you highlighted several ways in which your tech team was driving innovation I guess I'm wondering very big picture, whether you see AI is a technology that is going to level, the playing field for other used car retailers or.
Well. Thank you for the question, Greg well first of all I think we kind of have to separate AI versus generative AI because AI has been around a long time, we've been leveraging it for a long time and a lot of different aspects of the business and when we talked about at most recently at the day that Youre, referring it was really more generative AI and I think at some point.
You know folks will be embracing generative AI I think the early adopters are the ones that get the benefit in the near term and as you referenced I mean, we're leveraging a lot of different spots, we're leveraging in our creative are legit leveraging it in our in our coding.
Working on some AI generative the AI assistance on a knowledge base for our <unk>, which we think it can be really powerful we're leveraging it on the conversational search we've got some tests going on right now where our instead of typing in key search things, we can actually do conversational search with <unk>.
Consumer so again.
<unk>.
I think it's one of those things that's kind of going to be at the end of the day are you just need to have it and if you don't you're going to be at a disadvantage. So I think those that embrace earlier actually get a an early benefit of embracing it.
Thank you.
Sure.
We'll turn now to Rajat Gupta with JP Morgan.
Oh, Hey, thanks for taking the question.
Follow up question on Caf around net interest margin.
Should we look at that five 9% as you.
No.
Oh here and no stable around that level going forward.
Just wanted to clarify that that I just have one quick follow up on SG&A.
Sure I appreciate the question.
Yeah, I think that's a fair thought right.
We signaled a multi a couple quarters ago that we felt like that 6% range was about where we've been a level level off remember we're coming off of it.
Relatively historic high so we've been pleased that our ability to pass this right along to the customer obviously, there was a shop and the interest rate market. So we said it was come in those higher interest rates were coming in and it clearly has helped us to level off. So we're pleased where we sit right now and I think we would anticipate.
Stabilizing at this level, obviously, all bets are off both where the fed that hedged hopefully rates aren't going up if they remained stable. We think we're in good spot if they come down and turned down as a reminder, you know typically rate increases lag when rates go up and rate decreases lag when rates come down so hopefully potentially we could enjoy some some added margin on the way down but right.
I think we're in a stable spot I just would add look I think John's done a good job of kind of saying look we expect to be in this range. We said were six one in the last couple of quarters give us a little wiggle room, depending on what the cost of funds and here it was down a little bit but it was really reflected the cost of funds. So I think the way we think about it is it's really no change in story as John says.
Understood.
SG&A I mean, it looks like there are some continued actions you are taking there on the headcount side.
Can you give us a sense of what areas are these taking place that you know is it the CEC is salespeople or where edmond.
And any kind of indication.
Of your view on the market backdrop in any way.
In the near to medium term.
Relatedly could you quantify how much impact was from the bonus accruals.
That was a multipart question there.
If I Miss one just.
Yes.
I'm answering just remind what the question was in terms of where.
The reductions have been when it comes to compensation, which I think was your first question. It's really been across the board we've had compared to last year, almost a 10% decrease in our in our head count when it comes to SG&A and that's been across the board in our CEC as it's been in the business offices in the stores in the field.
Sales consultants down as well so what you're really looking at is tight.
Take control of.
Of our overhead and compensation better matching the sales, but it also really driving efficiency, we continue to see quarter over quarter year over year improvements in the efficiency of the omni model and we've talked about that on two of the three metrics that we track in terms of the impact of omni.
On a total total units are used plus wholesale we're more efficient than we used to be at this point.
When you look at as a percentage of total gross profit, we're more efficient than we used to be.
When we launched omni and one indicator and we're still not as efficient, but we're working our way there is the omni operating model as compared to 100 per retail unit basis. Our goal is to be more efficient, but we're not quite there yet. So we felt really good about the progress, we're making and what that really does that focus on efficiency positions us really well for when sales rebound.
And they will and when they do.
We do expect to flow through are those sales are at a stronger clip.
I think that was one of your questions.
The other ones like just.
No.
<unk> in any way.
No trying to or is this an indication of like market backdrop in any way.
Is there a view that we're taking on volume recovery here.
Over the next few quarters and then the third part of the question was just one would be if you could quantify the impact from the bonus accruals.
The third quarter resolved. This is bill I'll take the first part and you take SG&A as far as look if you look at our staffing I think for this whole year, we've been fairly stable like Enrique said, we're down about 10%, but head count total has been fairly consistent to last the last few quarters and I think we've really put ourselves in a position that.
We we can be very nimble here, so depending on what happens with the business.
The business picks up we feel really good about where we are from a staffing wise, we can manage hours that kind of thing if the business took a downturn for some reason we also feel like we have some flexibility. So I think we've really kind of given ourselves. The nimbleness that we feel good about going forward and then I'll pass to you have had a corporate bonus payouts within compensation and set a very specific way that was about $5 million.
In the quarter in terms of favorability.
Oh, great. Thanks, Barbara Thanks for answering the questions.
Yes.
We'll turn now to Scott since really with truth.
Good morning, Scot Ciccarelli.
So I have a follow up on the affordability issues do you guys think you need to get back to 19, 2019 levels and affordability to get your 2019 volume levels.
Back to one gig.
Get back to on a 2019 levels on a per store basis, and then related to that any insight you guys can provide in <unk> I think investors are generally be expecting comps to turn positive in <unk>, just due to easy comparisons, but I believe some of the third party data suggest trends might be still negative I. Appreciate that thanks Yep sure Scott I think on.
The first part of your question you were talking about affordability I assume you're talking about the price of cars, where it was in 2019 versus where it is today. It's am I interpreting question right correct Yep Yep look I don't think.
I'd be hard pressed to say I think we'll get back to the 2019 levels I do think there's there's plenty of room back 2019, I think average sales price was 20000.
Yeah. This period it was 20 little over 27000.
I think as you know, we will get back down hopefully in the low twenties low twenty's or so maybe mid twenties like 25, or so all of those are better than where they are today and we already see kind of year over year, where our under $20000 of cars and are under $25000 cards, we're making progress there. So we think that that's a that's a.
A good sign but do I think they'll get all the way there I don't think so partly because of just new cars are becoming more and more expensive. So I think the bigger thing. There is what does that gap look like in the future and then as far as comps go.
Look I think the market, it's been a little choppy and from a consumer demand standpoint.
Look at the three months of the quarter. It was choppy I mean September was our best month, although still negative October was the lowest month November was similar to October that although it was a little it was better than then.
November was better than October although they were similar and then dissimilar December is similar to November although right now, it's a little bit better. So I think we're.
Continuing to monitor elasticity doing the things that we that we need to do and I'm hopeful that as we see some of this depreciation manifests itself out on the front of a lot I think that'll be good for the for the industry going forward.
But bill like I guess my question is on the affordability issue like do you need how much improvement do you need an affordability to get your volume back on a kind of a per store basis to what you saw in 2019.
Yeah.
You know, it's a it's a hard question to be able to exactly answer what that needs to be.
You know I think that again I think we can get back on to the to the the comp growth without having to get back to 2019.
And you know again, we've seen sequential improvement this year, even though the prices haven't come down dramatically from the from the start of the year. So it's a it's a hard question to answer Scott, but look our goal is to get back onto the comp growth and and the reality is if I look at the first 10 months of this calendar.
A year, which we have market share data for.
The last six months of last year, we were we're doing better from a market share standpoint for the first 10 months and we were the last six months of last year, which I think is encouraging we haven't comped total year over year, yet because the first half of last year was so strong but as I said earlier I am encouraged by the fact that October is the first month, we have month over month.
Market share a year over year market share growth.
Got it thanks happy holidays, everyone due to Scott.
We'll go now to John Healy with Northcoast research.
Hi, Thanks for taking my question just wanted to ask Bill just your expectations kind of maybe on this year's tax season.
It's just around the corner and.
What you see as kind of maybe pluses or minuses and I don't know you don't know, we all fixated on kind of the monthly trends, but anything relating to tax season. How you guys are feeling like that might impact this year's business.
Or any kind of other exogenous factors that might go into kind of maybe how we see <unk>.
March demand levels kind of materialize.
Yes, I'd tell you Jon if you know I appreciate a call afterwards, it let's talk about if you know the answer that you know I don't right now I don't foresee there's nothing I can say that would say okay tax seasons can be dramatically different than last year. I mean, I think in tax season, you expect to sell more cars I think it would be somewhat I think what's going to be interesting is.
Last year at the beginning of the calendar year, there was really steep appreciation in vehicles and I think it'll be interesting we aren't counting on that steep appreciation. So it'll be interesting to see the year over year dynamics of of of that from a pricing standpoint, but as we sit here right now we're kind of planning a tax season that was similar to <unk>.
Last year, because we don't really see any side will make a dramatically different.
Got it thank you.
Sure.
Yes.
We'll go now to Sharon Zackfia with William Blair.
Hey, good morning, I guess, a follow up on that.
Have you changed the way you show inventory on the website because it doesn't look like there's been a big inventory build.
So far in the last few months and.
If youre not expecting kind of a sea change in the tax refund season I'm just curious on why we're seeing that inventory build yeah. Sharon. It's that's a great question and what you're seeing there is if you look at the average saleable inventory for the quarter year over year and the average it's very similar to.
Last year, if you look at the end of the quarter to your point it is up and the reality is.
Total inventory is up a little bit and it's up in saleable versus non salable and the reason it's up in saleable is because we're planning.
Some production shutdown if you remember last year the holiday fell on the weekend, but we don't build cars on the weekend. This year. It falls on a day both January but the first and a December 25th first fifth fall on weekdays and we want to give our folks time off and be able to join the holidays. So we actually did a little bit of a pre build early on to make.
Sure that we took in consideration that we want to have the shops closed and give tom's off for the holiday. So it's really a.
That's kind of what you're seeing.
There is a little bit of year over year dynamics as well, but that bulk of what you are saying.
Okay, and then a subcontract yet on kind of higher viewing expansion from a unit standpoint for next year.
For new locations.
Yeah, Yeah, we will provide that.
And when you usually provide that guidance in our Q4 call and Thats, how we will intend to do.
Okay. Thank you thanks Sharon.
Well go next to Chris <unk> with BNP Paribas.
Hey, guys. Thanks for taking the question.
But just hoping you could elaborate on that comment I'm not expecting to see a profit share to ESP would you expect F&I in Q4 to be similar to Q3 as the historical seasonal difference primarily.
Profit share and then does that have any spillover effect into next fiscal year like in terms of how you set the I don't know like anyway. You just is there any spillover effect from the lower Q4.
Sure.
Yes, thanks for the question Chris.
The seasonal effect is really more related to sales right and as sales map, so well ESP penetration in dollars. So the <unk>.
Only thing we've seen in the past couple of years is really in the fourth quarter and what we've seen that profit share from our partners. Our materialize at the end of the quarter and in last year was pretty material I think it was over $15 million and so wanted to make sure we call that out just given the inflationary pressures that our partners have seen over the past year.
Just made their profitability a little bit more pinched and at the end of the day. When we look for profit share now there needs to be a certain amount that they are seeing for us to have that to share in that so what we have anticipated. So far for this year is that we will not see that profit share, but again, that's really due to inflationary pressures that our partners are saying.
Got you, Okay, and then I was hoping you could kind of elaborate on the warehouse portfolio. It's roughly two thirds the size of the <unk>.
Securitize stuff like could you just maybe tell us a bit more about what's in there what's the average age today versus the securities portfolio.
If you were to look at these like non securitized non tier two or three tests receivables like how does the loss performance.
Of those vintages compare to like the like for like visitors that are the securitized book It sounds like you're signaling that it is better but so if you can just kind of elaborate a little bit more.
Sure Yeah, I'll take that one Chris.
Really our warehouse lines provide provide that short term funding until we take it to an ABS market or we look at other instruments to do more permanent funding solution. There, but you are kind of what lines right now primarily hold the newest assets until we take them to the market.
So you've got this quarter stuff is going to sit there last quarter stuff is going to sit there, let's call that $4 billion, there could be some spillover as well so.
As we've mentioned we've done significant tightening.
It was certainly from the tier three and tier two but if we isolate the tier one we've tightened in the tier one space. So we would absolutely expect those tier one assets to perform better than what's in the securitization again all of it we think it performs very well, but from a loss perspective in particular that conduit stuff is going to be a lower loss than what youre seeing in the most recent securitizations.
Yes.
The receiver Basel tend to sit in our warehouses are between three to six seven months right until the time. We then go into the Securitizations and so that's why you see it a little bit of a timing delay between the performance of those two buckets of receivables.
Okay. That's okay. Just one last quick one the suites brought it up to see how things may tick it up picking up a little bit is that is there any I know some of it's the tier two tier three but is that just the ABS market is still aren't perfectly loose you're just not securities as much as you would like to or why I guess why is the seasoning up a little bit versus what we might've seen frito there sure Yeah, I think that really comes down to volume.
We're obviously a ton of sales gap continues to originate to.
$2 billion a quarter, we look at the securitization market and we try and match the amount of the volume that we put into the each deal with the demand that's out there obviously with our growth.
We're doing about $1 5 billion each deal times four deals were originating about $8 billion that is a year that has grown over time. So therefore naturally it has to set a live a little bit longer in the warehouses that I don't think its anything.
The unique going on there, it's just purely a timing thing.
Got you, Okay that makes sense. Thank you.
Yeah.
Yeah.
We'll go now to Michael Montana with Evercore ISI.
Yeah.
Yes. Good morning, Thanks for taking the questions I wanted to ask first off on the provisioning front, we were thinking kind of $90 million plus seem to be a run rate trend and obviously came in better. So is that the right way to think about this maybe starting with a six handle in the near term given some of the tightening that you've done and all that we know and then just had in SG&A.
All of them.
Sure Yeah. So.
Just to touch on the provision once again again.
Again, two main components, it's any change we believe in the existing book of business versus what we had reserved for in the preceding quarter and then the new originations.
Way I think about that is let's let's take the second one first if new originations, we did $2 billion. This year Theres a piece of tier one tier two tier three business, we'd say the tier three is limited tier two is in test volume tier one is the bulk of it you.
You sign up and anticipated a lifetime loss rate plus the cost.
To recover from.
From a repossession standpoint.
Which is relatively small, but you sign up and overall expectation of the $2 billion. That's one piece of your provision and then it's a function of how you know how well we've reserved for it from the preceding quarter as we mentioned this quarter. We felt like we've done a good job nothing we saw within the quarter performance suggested we were materially off.
And so that's how you ended up at $6 million to $8 million. So I think you've got to bifurcate those two pieces and Thats, how you set your provision each successive quarter.
And I guess just to follow up then on SG&A to gross you know is the mid seventy's kind of near term target still the right way to think about that level and just overall I mean, do we think that SG&A dollars can continue to come down in the near term. If this is kind of the demand backdrop or do we start to build.
SG&A dollars to try to drive volume and share.
Yeah. So a couple of questions. There in terms of the mid 70% SG&A as a percent of gross profit that's absolutely. Our next step that we've communicated we've made material strides in driving efficiency in our business and are hitting that mid 70 is our next school.
But in addition to the cost management efforts that we've undertaken and we're also going to require the consumer to return with some strength SG&A efficiency is also a function of gross profit and so to hit that mid 70%, we are going to need to see some decent gross profit growth as well, but it is absolutely our next step.
When it comes to SG&A kind of moving forward.
Again, we're proud of the material year over year reductions that we've been able to to deliver and what I'll point out is that we've done that at the same time that we've improved our customer and our associate experience as we migrate further along in our omni channel.
And this focus on efficiency really positions us well for when sales rebound.
Now for Q4, it will be a little bit more challenging as we largely anniversaried over our cost levers.
Q4, I would tell you would be more impacted by our sales performance in terms of that year over year SG&A dollar movement, and then generally historically Q3 to Q4 gross G&A does go up to the reasons Youre, pointing which is more volume and as Enrique said volume driven.
Thank you.
Yes.
Our next question comes from John Murphy with Bank of America.
Good morning, guys I'm just wondering.
<unk> or on inventory I don't know if you can disclose this or do you have any information with you.
What do you think the average ASP is and your inventory that you feel sell out.
I mean, we've seen asps come down about $2000 from the peak and we're still not getting the same store sales comp.
We have you might expect is that pricing is coming down but I'm. Just curious what's in inventory and are you able to acquire inventory at lower levels lower prices going forward just to drive the cost.
Thanks for the question John Yes.
What's the name, but the inventory now keep in mind, when we sold through the quarter.
You know, it's more than 50% of that was bought prior to the to the quarter. So whats in inventory now is stuff that was bought during the quarter, which <unk> talked about theres been some steep depreciation during the quarter and we're continuing to see depreciation so that should that should bring prices down keep in mind, though just to kind of ground everyone in any given year you need about.
Just during the year you need about $500 of depreciation just to keep your sales prices flat and that's just because of the new cars come out they're more expensive. So.
You really don't get much benefit until after you get over $500 on an annual basis. So I do we do feel while.
While we don't disclose what we think the average price is it is our inventory saleable inventory.
At this point is cheaper than what was sold in the quarter.
That's very helpful. And then just one follow up on the <unk>.
Market share I mean, obviously, that's been that's an output of what's going on in the market and your actions and competitive forces.
How do you how do you think about what's going on in the competitive landscape because I mean I think.
A company like an autonation it about 1.39 used vehicles last year.
We're on a LTM basis.
They just stepped up their buying outside of their dealerships. They did about 100000 units.
After I think which puts it hadn't been doing before so it just seems like that the franchise side.
One unique example, right.
We're going after some of the same vehicles that you are even outside the traditional channels are you seeing that as you're going out there and acquiring.
Or is that just you know as I had kind of a one off you.
You mean as far as the acquisition of vehicles.
Well I mean, the franchise dealers traditionally would take flow from their new vehicle.
The trade ins and Brian another other sources, but they've stepped outside of that traditional channel theyre going out.
Going out to third parties or right not in auctions would get direct to consumer as well.
That was an incremental source of 100000 units for them.
OPM basis, and that's just new right that's just incremental.
New activity. So I'm just curious if that's unique to them or are you seeing that sort of more general.
Yeah, No I think look you're very aware of just kind of the volume that's out there in auctions, especially zero to zero to four year old vehicles, and you know if folks are looking for that inventory they've got to be a little bit more creative so it doesn't surprise me that other other folks are doing that ours here to for sale is actually year over year went up a little bit.
So you know I.
I would I mean, that's one data point that you have I think all the dealers are you just trying to get vehicles from wherever they can and that's why I'm excited about some of the product innovation when it comes to things like Max offer when we talked about self sufficiency. That's just from the consumers. We don't we don't add in there what we're getting from from other dealers in.
That product skews more retail than it does then it does wholesale so it doesn't surprise me that you have an example of that I think folks that can do things like that they're going to try to do that and then there's a lot of competitors I mean keep in mind, where there's tens of thousands of competitors and sales year to 10 year old cars some of them don't have that ability.
Great Alright, Thank you very much happy holidays guys. Thank you. Thanks, John you too.
We'll take our final question from David Whiston with Morningstar.
Yeah.
Thanks. Good morning, just wanted to ask about advertising expense, which did go up.
Year over year.
Whereas for the nine months it's down.
What was the catalyst to make you increase spending this quarter's one I'm curious about yes, that's going to be very much a function just of our capex spend and depreciation there. But then also when it comes to our technology spend a good portion of our technology spend is going to be depreciated right and so youll see that impacted in our a D. A.
Hi.
Yeah, I think on the on the average the advertising piece.
We're in this for the long haul and so we're going to we're going to spend money on brand, we're going to spend money on acquisition keep in mind and we're trying to think about in the new year, how to talk about advertising when we talk about advertising keep in mind that the advertising for sales thats advertising for by that advertising on Edmunds.
So all along we've said hey, we're going to spend more in the back half of the year, but it's going to be similar on a full year basis and so we're actually executing now I don't want you to think that we're just like going in advertising, we're absolutely measuring the ROI, but what you got to realize is sometimes if the aurizon has grown sales you may shift some to buys or you may shift some to Edmund so it just depends on what's going on.
You know in the given quarter, but we would expect and in generally you you spend a little bit more in the fourth quarter. Because it's you know you've got tax season, coming which is an increase in volume. So that's really what you are saying.
David I apologize I thought you were asking about depreciation.
Hello.
You get the clarification and an extra answer.
[laughter] are you guys being more aggressive on.
Your offers to consumers who want to sell a vehicle deal because with wholesale units up nearly 8% I'm just curious if you're looking to acquire more vehicles look we want to we want to acquire all the vehicles, but we're going to do it in a very thoughtful profitable way I mean, you could we could buy a lot more cars, but it wouldn't make sense from a profitability standpoint. So I think the team has done a phenomenal.
Job, especially given the steep depreciation that we've seen how they've been able to stay on top of it because that's definitely a short term headwind.
Okay. Thanks, guys.
Okay.
And at this time, we have no additional questions standing by I'd like to turn the call back over to Bill for closing remarks, great. Thank you Jamie I want to thank all of you for joining the call today and for your questions and your continued support.
I don't want to thank our associates for everything they do to how to take care of each other and our customers and the communities I want to wish all of them a happy holiday season, as well as all of you all and we will talk again next quarter. Thank you.
Yeah.
Once again, ladies and gentlemen that does conclude today's program. Thank you for your participation you may disconnect at this time.
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