Q3 2025 Carmax Inc Earnings Call

December 19, 2024

So all signs on hold we do appreciate your patience and holding we ask that you. Please continue to standby.

Speaker Change: Uh huh.

[music].

Speaker Change: Ladies and gentlemen, thank you for standing by welcome to the third quarter fiscal year 2025, Carmax earnings release Conference call.

Speaker Change: At this time all participants are in a listen only mode.

Speaker Change: After the speaker's presentation, there will be a question and answer session.

Speaker Change: Please be advised that today's conference is being recorded.

Speaker Change: I would now like to hand, the conference over to your Speaker today, David Loewenstein VP Investor Relations. Please go ahead.

David Loewenstein: Thank you Todd good morning, everyone. Thank you for joining our fiscal 2025 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.

David Loewenstein: Finance operations, let me remind you our statements today that are not statements of historical fact.

David Loewenstein: 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.

David Loewenstein: 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.

David Loewenstein: For additional information on important factors and risks that could affect these expectations. Please see our form 8-K filed with the SEC. This morning, our interim report on Form 10-K for fiscal year 2024, and our quarterly reports on Form 10-Q previously filed with the SEC.

David Loewenstein: <unk>.

David Loewenstein: Should you have any follow up questions. After the call. Please feel free to contact our Investor Relations Department at 8047, 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.

Speaker Change: Ups Bill great. Thank you David Good morning, everyone and thanks for joining us.

Speaker Change: We're very pleased with the continued positive trends across our diversified business during the third quarter with retail wholesale and caf all posting year over year gains our solid execution in a more stable environment for vehicle valuations enabled us to deliver robust EPS growth as we drove unit volume increases in sales and buys maintained strong margins stabilized.

Speaker Change: The provision for loan losses and realized cost efficiencies.

Speaker Change: Our results reflect the strength of our business model and we're excited about the opportunities that lie ahead, our best in class Omnichannel experience is and will continue to be a key differentiator. So it gives us access to the largest total addressable market and the used car space and provides a strong runway for future growth.

Speaker Change: In the third quarter, we grew retail and wholesale unit volume year over year, we delivered strong retail and wholesale Gpus expanded E. P. P. Gross profit and improved service gross profit year over year.

Speaker Change: We bought more vehicles from both consumers and dealers year over year, achieving a third quarter record with dealers.

Speaker Change: We grew caf income year over year and continued to advance our full credit spectrum underwriting model.

Speaker Change: We materially elaborate SG&A as a percent of gross profit and we achieved double digit EPS growth.

Speaker Change: For the third quarter of FY 'twenty five our diversified business model delivered total sales of $6 2 billion up 1% compared to last year, reflecting higher volume, partially offset by lower prices.

Speaker Change: In our retail business total unit sales increased five 4% and used unit comps were up four 3%.

Speaker Change: Average selling price declined approximately $1100 per unit or 4% year over year.

Speaker Change: Third quarter retail gross profit per used unit was 2000 and $306 in line with last year's $2277.

Speaker Change: Wholesale unit sales were up six 3% versus the third quarter last year average selling price declined approximately $500 per unit or 6% year over year.

Speaker Change: Third quarter wholesale gross profit per unit was $1015 up from $961 a year ago.

Speaker Change: We bought approximately 270000 vehicles during the quarter up 8% from last year.

Speaker Change: We purchased approximately 237000 vehicles from consumers with more than half of those buys coming through our online instant appraisal experience.

Speaker Change: With the support of our Edmond sales teams, we source the remaining approximately 33000 vehicles through dealers, which is up 47% from last year.

Speaker Change: We continue to see increased adoption of our omni channel retail experience.

Speaker Change: For the third quarter, approximately 15% of retail unit sales were online up from 14% last year, approximately 56% of retail unit sales for omni sales this quarter up from 55% in the prior year.

Speaker Change: Total revenue from online transactions was approximately 32% up from 31% last year.

Speaker Change: All of our third quarter wholesale auctions and sales where virtual and are considered online transactions, which represents 19% of total revenue for the quarter.

Speaker Change: Carmax auto finance or Cas delivered income of $160 million up 8% from the same quarter last year and.

Speaker Change: In a few minutes John will provide more detail on customer financing the loan loss provision caf contribution and our progress on full credit spectrum lending at this point I'd like to turn the call over to Enrique who will share more information on our third quarter financial performance <unk>.

Enrique: Thanks, Bill and good morning, everyone. The momentum that we have been building over the last several quarters carried into the third quarter as we delivered on all key financial fronts positive retail unit comps growth in wholesale unit volumes robust vehicle margins material growth in other gross profit per retail unit growth and Kathy.

Enrique: Income and strong flow through to the bottom line.

Enrique: Third quarter net earnings per diluted share was <unk> 81 up 56% versus a year ago.

Enrique: Total gross profit was $678 million up 11% from last year's third quarter.

Enrique: Used retail margin of $425 million increased by 7% with higher volume and relatively flat per unit margins.

Enrique: Wholesale vehicle margin of $138 million grew by 12% due to increases in both volume and unit margins.

Enrique: Although gross profit was $115 million up 25% from a year ago. This was driven primarily by a combination of TPP and service.

Enrique: <unk> increased by $15 million as we continued to benefit from higher Max care margins per contract.

Enrique: We expect margins per unit to be up slightly year over year in the fourth quarter not by as much as we have experienced year to date as we will be lapping over the initial rollout of margin increases that took place in last year's fourth quarter.

Enrique: Service margin improved by $10 million over last year's third quarter recording an $11 million loss. We achieved this performance improvement to successful cost coverage and efficiency measures and positive sales growth.

Enrique: We expect continued year over year improvement in the fourth quarter.

Enrique: As Gavin by sales performance, given the leverage deleverage nature of service.

Enrique: On the SG&A front expenses for the third quarter with $576 million up 3% or $16 million from the prior year.

Enrique: SG&A leverage by 640 basis points.

Enrique: Driven by the growth in gross profit and our continued expense efficiency actions.

Enrique: SG&A dollars in the third quarter versus last year were mainly impacted by two factors first total compensation and benefits increased by $28 million. This was primarily driven by our corporate bonus accrual, which had been reduced in the last year's third quarter.

Enrique: Second advertising was favorable by $9 million due to timing.

Enrique: Regarding advertising, we expect that our spend in the fourth quarter on a total unit basis will be higher than our year to date rate and last year's fourth quarter, which was $219 per total unit.

Enrique: This aligns with the previous guidance, we have given on advertising that we expect full year spend to be approximately $200 on a total unit basis.

Enrique: I also want to point out one noteworthy item.

Enrique: As discussed last quarter as part of our focus on efficiency, we have been evaluating our logistics operations. This quarter, we incurred a one time charge of $5 million related to.

Enrique: Equipment and leasing arrangements that hit the other expense line. This.

Enrique: This is more than offset by efficiencies gained in our logistics operations.

Enrique: Regarding capital allocation during the third quarter, we repurchased approximately one 5 million shares for a total spend of $115 million.

Enrique: As of the end of the quarter, we had approximately $2.04 billion of repurchase authorization remaining.

Now I'd like to turn the call over to John Thanks, Enrique and good morning, everyone.

Speaker Change: During the third quarter Carmax auto finance originated approximately $1 9 billion, resulting in sales penetration of 43, 1% net of three day payoffs as compared to 44% during last year's third quarter.

Speaker Change: The weighted average contract rate charged to new customers was 11, 2% decrease of 10 basis points from a year ago.

Speaker Change: Third party tier two penetration in the quarter was 17, 9% in line with a year ago, while third party tier three volume accounted for six 5% of sales compared to the six 9% seen in last year's third quarter.

Speaker Change: Caf income for the quarter was $160 million, which was up 11 million from the same period last year and it was predominantly impacted by a net interest margin, which increased 35 basis points year over year to six 2%.

Speaker Change: The provision for loan losses was $73 million versus last year's provision of $68 million and results in our reserve balance of $479 million.

Speaker Change: While the $113 million provision for losses in the second quarter of this year was outsized and included a significant adjustment, but the preexisting receivable base this quarter $73 million provision represents our belief that based on observed performance within the quarter our adjustment in Q2 adequately accounted for future lifetime losses.

Speaker Change: The $479 million reserve balance results in reserve to receivables ratio of 270% as compared to $2 eight 2% at the end of Q2.

Speaker Change: This 12 basis point reduction is due to the combined effect of the more normalized provision within the quarter and the previous credit tightening still in place.

Speaker Change: As a normal course of business, we are continuously exploring opportunities to help our customers through adjustments in our account servicing strategies. One such example is with payment extensions, which have historically impacted less than 1% of our portfolio in any given month and have been below industry levels.

Speaker Change: This tool has proven successful in helping customers navigate temporary challenges.

Speaker Change: During the quarter, we began testing an enhancement to our policy that further empowers delinquent customers to take advantage of a payment extension and more aligns with industry levels.

Speaker Change: While early performance results are encouraging and similar to those witnessed under the existing policy. We recognize that some customers will eventually return to delinquency and result in a charge offs and for this we have reserved accordingly.

Speaker Change: Regarding our full spectrum lending initiative. During Q3, we continued to test, our new credit, scoring models and corresponding strategies across the entirety of both the tier one and tier two spaces and in November we began initial testing of our new tier three model.

During the quarter. We also successfully executed our second higher Prime ABS deal in the next several quarters, we will remain disciplined in our testing plan, but we are excited for the significant growth opportunity that lies ahead for cast now I'll turn the call back over to Bill. Thank you, Jon and recap as I mentioned at the start of the call I'm pleased with the continued momentum we're seeing.

Speaker Change: Across our business the differentiated omnichannel capabilities, we built over the past few years have strengthened our business model and are key to our performance with these core capabilities in place. We are focused on refining the experience for associates and customers and are well positioned to leverage what we have built to support future top and bottom line growth across our diversified business. Some.

Speaker Change: Examples include this quarter, we completed the nationwide rollout of our customer shopping accounts as a reminder, these make it even easier for customers to see the steps they have taken on their shopping journey, whether on their own or with help from an associate. In addition, these accounts guide customers next steps and create operational efficiencies by empowering associates to seem.

Speaker Change: We'll see search and update customer records, regardless of where they originated.

Speaker Change: In addition to the customer shopping accounts tools, such as Sky, our AI powered virtual assistant are creating operating efficiencies and providing help when consumers need it.

Speaker Change: Our data show that customers are completing more remote steps year over year and this increase in remote steps is also improving conversion across all of our channels online in store and through our <unk>.

Speaker Change: We continue to add helpful shopping information tools to our website. For example, now we show vehicle specific battery health information on most Tvs. We also highlight tax credit eligible vehicles and allow customers to filter searches buy cars that are eligible for the used EV tax credit.

Speaker Change: For supply we've enhanced our industry, leading online appraisal experience. We are now able to give digital offers to approximately 99% of the customers who come to Carmax dot com for an appraisal.

Speaker Change: For finance as John mentioned, we recently began testing our new tier three origination model, we're now testing new credit, scoring models and the corresponding strategies across the full credit spectrum, which positions us to further grow caf income over time.

Speaker Change: And finally, we continue to focus on cost efficiencies. For example, we expanded our test of new transportation management process that Leverages data science algorithms and AI to provide new planning and execution capabilities. The process essentially dispatches moves and automates communication between drivers in stores. We're pleased with the results and expect to see benefits to cost of goods sold.

Speaker Change: Over time.

Speaker Change: In closing, we're excited about the future and our ability to grow sales and earnings are best in class Omnichannel experience, which is enabled by our great associates physical footprint technology and digital capabilities. All tied seamlessly together is a key differentiator that strengthens our competitive moat and we believe will be increasingly important to win consume.

Speaker Change: For us going forward.

Speaker Change: We're excited to be in a position to pivot from building capabilities to leveraging and enhancing them to drive growth through better execution innovation efforts and experiences with that we'll be happy to take your questions Todd.

Speaker Change: The floor is now opened for questions. If you would like to ask a question at this time. Please press star one on your telephone keypad, you may remove yourself at anytime by pressing star two.

Speaker Change: Again to ask a question please press star one.

Speaker Change: Your first question comes from the line of Brian Nagel with Oppenheimer. Please go ahead. Your line is open.

Speaker Change: First off congratulations nice quarter.

Speaker Change: Thanks, Brian.

Speaker Change: So I'm going to I have two questions I'll merge them into one just to comply with <unk> rules.

Speaker Change: The first question. So when you look here now we have the the second consecutive quarter solid policy of used car unit comps. The question. We'd ask there is I mean, if youre thinking about the model and recognizing you don't get you don't provide guidance but.

Speaker Change: If you look at the model Flex now I mean, what what's the what should we consider it to be I kind of normalize to a normalized used car unit comp for for Carmax and then the second part of the question you know what we're seeing now starting to see really nice expense leverage as these comps to turn positive how should we think about the kind of the path forward about assuming <unk>.

Comps now are on a better trajectory.

Speaker Change: Okay on the on the first part of the question, Brian as far as the normalized unit comp I think it's a I think it's a little hard to say at this point what I would tell you is we're really pleased with the sales momentum if we look at the comps during the quarter.

Speaker Change: And you go back to some of my commentary at the end of the second quarter, where I said, we were running a little bit a little bit lighter.

Speaker Change: We actually performed better throughout the quarter and even if you normalize for the the day of week adjustments that I talked about last quarter sequentially. Each month got better and quite honestly as we're going forward. Obviously December is a little early on but december's performance month to date has accelerated as beyond the comp of the of the <unk>.

Speaker Change: Third quarter. So we feel good about that and we feel good about the trajectory of sales and you know all else equal I would tell you as we think about the fourth quarter. What I would tell you is we think the fourth quarter, we stronger from a comp performance than the third quarter and that's despite having some headwinds there.

Speaker Change: Day of week, we lose a Saturday in the fourth quarter. We also lose a leap day, which we had we had last year. So.

Speaker Change: Again, we feel good about the momentum going forward and what was the what was the second part of your question. So on SG&A and the leverage I can I can okay. So yeah, Brian we continue to make progress on our goal of hitting a mid 70% SG&A to gross profit that's going to require continued improvement in sales volumes and bill has talked about or recent trends here. In addition to the cost management efforts.

Speaker Change: That we have been undertaking after a couple of years.

Speaker Change: And just to point you back to some of Bill's prepared remarks, yeah, we're well past the heavy investment phase.

Speaker Change: Our evolution, we're at a point, we're pivoting from building capabilities to leveraging and enhancing them to drive growth and efficiencies right. What this means is lower gross profit goes to leverage SG&A as compared to a heavy investment phase. So we feel really good about our ability to leverage at the same time, we're going to take a look at investment opportunities, we're not going to leverage just for the sake of leveraging.

Speaker Change: If there are opportunities to grow the topline and Bottomline robustly, we will do that.

Speaker Change: Yet we remain committed to our mid 70% SG&A leverage ratio as well so we're encouraged by the trends.

Speaker Change: I appreciate all the color. Thank you congrats again thanks.

Speaker Change: Thanks, Brian.

Speaker Change: Thank you. Your next question comes from Sharon Zackfia with William Blair. Please go ahead.

Speaker Change: And I.

Speaker Change: You know when you think about the improvement you've seen over the last six seven months.

Speaker Change: Has it been a reflection more of a conversion then traffic to the web before the stores and I guess, if it has been more conversion how much of that would you attribute to kind of prices coming down industry wide versus what you've been doing internally to kind of lessen the question of the <unk>.

Consumer experience.

Speaker Change: Good morning, Sharon look when I think about it like if I look at this quarter. For example, I would tell you I think the performance is primarily driven.

Speaker Change: Even by conversion because if you look at our web traffic. It was it was it was fairly flat and its conversion both looking at remote engage customers, but it's also conversion improvements in the actual store when customers are coming into the stores and I think at the heart of your question is really.

Speaker Change: What's driving this and what I would tell you is I do think it's a combination of internal and external factors to your point you know obviously this is I think our eighth eighth quarter down our eighth quarter in a row, where we have sales price is actually down a little bit year over year. So certainly as prices come down I think that's a that's a tailwind for us I think having price.

Speaker Change: Stabilization not a bunch of big price swings from an appreciation or depreciation more specifically depreciation I think that's a tailwind, but I would tell you equally important is.

Speaker Change: Is the focus internally on execution through like experiences inefficiencies and when I think about remote progression conversion or in store conversion improvements. It's because we've improved the experience I mean, even this quarter talking about the customer shopping hub that is helping us convert more customers I've taken out friction the CEC as we've been rolling out.

On Tuesday, our knowledge management tool, which will will finish rolling out in the fourth quarter, helping our cec's to provide better experiences. It's the it's the work we're doing on our cost of goods sold and taking waste out of the process. There. So that we can take that and make sure. Our prices continued to be a more competitive as the inventory management into quicker turns that we're doing there.

Speaker Change: Just a lot of different things that we're working on internally that I think are also complementary to some of the tailwind that we see externally.

Speaker Change: I wouldn't I wouldn't say, it's all one or the other I think it's somewhere in between.

Speaker Change: Okay. Thank you.

Speaker Change: Sure.

Speaker Change: Thank you. Your next question comes from John Murphy with Bank of America. Please go ahead.

Speaker Change: Good morning, guys just.

Speaker Change: Just bill what did you ask about the same store sales comp and in a different way everybody in the industry, including folks at the auction houses are saying that there's a real shortage of of you supply and it's tough to get vehicles.

Speaker Change: But you are putting up good numbers, obviously youre doing well on the sourcing side, but one thing was interesting I think the average price was down about 1000 bucks year over year. So I'm just curious if youre, making you could sort of decision on sourcing to maybe go down market a little bit.

And in age and maybe trim to open up the market to yourself and get away from some of the competition, where things are tighter sort of at the high end of that if that's something that might be able to.

Speaker Change: We continue going forward to support same store sales comp.

Speaker Change: Yes.

Speaker Change: Great question first of all we feel great about our diversified sourcing both from consumers and dealers and specifically to your question is when you think about the age if you look at.

Speaker Change: Year over year mix like zero to five five to seven eight plus year over year, they're very similar I mean zero to four is up a point, it's actually up a little bit a little bit newer newer vehicles. So there really wasn't a big mix shift in an age of vehicles and I think from a supply standpoint for us.

Speaker Change: Because we are buying so many vehicles both from consumers and dealers directly I think that's a that's a nice benefit and helps to allow us to source vehicles that are just hard to find out there to your point, if you're having to rely on third party.

Speaker Change: Got it so no change no changing in what you're doing as far as age obviously, what you just mentioned or trim. I mean are you able to kind of go downstream levels to try to open up a better pricing go musical pricing sequentially is not actually going down it's actually gone up a little bit in the industry.

Speaker Change: Yes no.

Speaker Change: Say theres anything remarkable there I think the only the only thing to notice the team has done a great job. If you look at our under $20000 vehicles, we've done a great job bumping that number up kind of year over year.

Quarterly sequentially, it's pretty similar but year over year, it's a nice little a little bump up and again I think that goes back to.

Speaker Change: The work that the team is doing on sourcing.

Speaker Change: 30% of our sales for cars less than 20 grant so tremendous work there.

Speaker Change: Last night, you very helpful.

Speaker Change: Yeah.

Speaker Change: What was that last year I'm, sorry 'twenty.

Speaker Change: 25%, so pretty material.

That's a good focus thank you very much guys I appreciate it.

Speaker Change: Thank you. Your next question comes from Seth Basham with Wedbush Securities. Please go ahead.

Speaker Change: Thanks, a lot and good morning, and nice quarter.

Speaker Change: First question is on your GP performance in retail and wholesale within retail can you give us an update on your cost out initiatives are you still on track for $200 per unit. How much have you achieved so far and what are you doing with that savings how much are you reinvesting in price.

Speaker Change: Great. Good morning, Seth Yes. The 200 is just to remind everybody that's really being driven by two large buckets, our reconditioning and our logistics and I've spoke previously about the fact the way to think about it is probably 50 50 split of 100 100, and I would tell you on that journey, we're probably realizing about half of that and I would split it up about half on.

Speaker Change: <unk> can have on our logistics with the remainder coming in the in the upcoming quarters. We got a lot of good work going on there I feel really good about it and so far what we're doing is we're passing the bulk of that onto the consumers, but it also allows us to make sure that we've got solid margins as well, so and I would think that.

Speaker Change: You should think about that going forward, we will continue to look at it and we'll have decisions to make as we find it but right now it says it does.

Speaker Change: The bulk of that is going to the consumer.

Speaker Change: That's helpful and then as a follow up on the wholesale side, how much of the improvement. There do you think you get the market conditions relative to some of the things Youre doing like Max author E plus some really good numbers.

Speaker Change: Yes, I think similar to the response to see I think it's a combination I mean, certainly this is a better environment than a year ago. You can remember there was some big depreciation and depreciation steep depreciation happens like that were generally ahead of the curve marking down our offers so that impacts your buy rates.

Speaker Change: You, certainly can't discount that and having a more stabilized price environment.

Speaker Change: Has helped but on the Max offer I'd tell you the team the admin team has done a phenomenal job with that product.

Speaker Change: You know as I look at it.

Speaker Change: We increased our active dealers on that pretty pretty substantially.

Speaker Change: From where we were before to where we are now I mean, I think our active dealers is up probably close to 40% or so year over year and so when you have more dealers in there.

Speaker Change: Duo Max off you can also buy behind so I think it's a combination of the two.

Speaker Change: Michael Thank you and happy holidays.

Speaker Change: <unk>.

Speaker Change: Thank you. Your next question comes from Chris, particularly Aerie with BNP Paribas. Please go ahead.

Speaker Change: Hey, guys. Thanks for taking the question.

Speaker Change: Yeah, just wanted to.

Speaker Change: The allowance a little bit more detail hopefully.

Speaker Change: Give a sense like.

Speaker Change: Whats your.

Speaker Change: The past you've given like the expected loss on new originations.

Speaker Change: I get a sense like what kind of let the cut to the allowance.

Speaker Change: Is it more just the remaining part or are you cutting the provision on new originations as well.

Speaker Change: Sure Yes.

Speaker Change: Just to clarify.

Speaker Change: The cut to provision I just wanted to clarify how to think about that.

Speaker Change: Our provision as we've laid out is gonna be obviously on new originations, Chris you referenced that new originations, what our expected loss over the life of those receivables are and then any true up that we need to do on the existing receivables based on observed performance in the quarter and again, we said theres always going to be some form of a true up obviously, we said last quarter there was a sizable true.

Speaker Change: No doubt that brought that brought the total of the provision to $113 million, but theres always going to be a composition of those two things. If you look at our provision this quarter of those two things again, it's a much more normalized level, which suggests that.

Speaker Change: To your point, the originations plus the true up or true up was just not to the size that it was before which is really ideally what we want to have happen to you.

Speaker Change: Question of origination so we did $1 $9 billion. This quarter remember that's against tier one and the testing that's happening in tier two and tier three if you can assign some loss rate to that.

Speaker Change: You can see where it'd be maybe in the $60 million range from an origination standpoint again, we've tightened to remember in tier one so that's helping us to some degree but we are testing in tier two and tier three is going to offset that a little bit and then the remaining obviously, it's going to be the true up but again.

Speaker Change: A true up in a reasonable level very different than last quarter, and probably again, that's why we refer to it as a normalized level of provision.

Speaker Change: Okay. Thank you.

Speaker Change: Thank you. Your next question comes from Craig Kennison with Baird. Please go ahead.

Hey, good morning, Thanks for taking my question Bill I know you like to measure market share annually, but I think perceived market share has probably been.

Speaker Change: That held back your stock relative to peers at least this year.

Speaker Change: I am curious as prices stabilize do you have any evidence that you're.

Speaker Change: Back to gaining share.

Speaker Change: Yeah, Craig what I would tell you the last two quarters I've said look at market share I want to get back onto the annual cadence.

Speaker Change: Barring any type of big price.

Swings and we just haven't seen any big price swings. So we'll update it at the end of the year, but I'd tell you is we feel great about our sales momentum and we feel great about our ability to gain market share.

Speaker Change: Okay.

Speaker Change: Thank you. Our next question will come from Scot Ciccarelli with Truest. Please go ahead.

Speaker Change: Good morning, guys. Two two part question first outside of the price stabilization what else would you attribute the magnitude of industry improvement to Bill just given your long experience in the industry and then kind of part two there is can you guys provide some more color around the <unk> extension like how does that process work and how is it reflected in the.

Speaker Change: P&L. Thanks.

Speaker Change: Sure.

Speaker Change: Scott on your first question as far as the the market I mean, I think there's conflicting numbers out there as far as the growth of the overall used car market I think it's yes, it's very volatile from a month to month standpoint, but outside of price stabilization and I assume what you're talking about there is kind of how I referred to it as you don't see a lot of appreciation or depreciation.

Speaker Change: <unk>, which sets in fact.

Speaker Change: When you look at the depreciation curves historically for this time of year. They line up fairly nicely, which we haven't seen that in a while I think the other thing is just something that I talked about earlier, it's just the prices continue to moderate and I think having.

Speaker Change: Having a gap between the late model used car and a new car I think that has continued to expand a little bit I think that helps the industry and especially on the late model.

Speaker Change: Late model used cars so.

Speaker Change: The only other thing that I would tell you is I think consumers are still pinched from an inflationary standpoint. So they are looking for alternatives and used cars, whether it's a.

A two year old used car, our 14 year olds, who used car I think that helps the industry as well.

Speaker Change: Alright, Scott and I'll take your payment extension question first of all level set on kind of how we think about extensions and then specifically what we did.

Speaker Change: So we really wanted to cite an example of where we're continuing to look for opportunity to help the consumer.

Speaker Change: Navigate temporary hardship, it's something that we've always done it's very standard in the industry historically as I said in my prepared remarks, that's generally less than 1% of our units in any given.

Speaker Change: And we've done some testing that has brought it just slightly above that level, but we think this is a really good opportunity to help the consumer.

Speaker Change: And ultimately lower loss, that's the goal that we're trying to do to help people stay in their car. So specifically what happened within the quarter is if you look at our extension policy.

Speaker Change: Shortly it's been and we're really kind of trying to that customer. That's a couple of payments behind so if there are a few payments behind historically, we've said look I need you to make both of those payments and then we can give you a payment extension in this environment certainly higher payments.

Speaker Change: People weren't able to take advantage of those opportunities. So we look at customers, who said hey, if you cannot make too we tried to see if they can make both but if they can't can you make one payment and there are incremental customers that we're able to do that and so that allows them to take then a period to kind of get their finances in order now we've started that at the begin.

Speaker Change: Of the quarter, we've been able to watch people come out of that extension period, and then see how they are behaving and we're very pleased with what we're seeing it's very much in line with our previous policy and so we feel really good about this this action we've taken for the consumer now that being said, we know that some customers may Unfortunately revert back into delinquency and loss.

Speaker Change: That being said, we need to make sure that we have reserved accordingly for the actions that we've taken.

So that's how it plays through on the P&L, it's embodied in our provision and in our reserves and we know that will happen, but we feel good about what we've done we like the early results again relatively small number of customers will be impacted but we like what's occurred.

Speaker Change: Understood happy holidays. Thanks.

Speaker Change: You too.

Speaker Change: Yeah.

Speaker Change: Thank you. Your next question comes from Jeff Lick with Stephens. Please go ahead.

Jeff Lick: Good morning, Congrats on the second consecutive positive quarter on the progress.

Speaker Change: Thanks, Yes, good question.

Speaker Change: Question revolves around the wholesale book.

Speaker Change: Pretty interesting growth dynamics, 70, 374 units wholesale to retail.

Speaker Change: The percent growth of dealer buys.

Speaker Change: And with gross profit margin.

Speaker Change: I'm just curious.

Speaker Change: Where you think you can take that I think that's kind of a hidden source of gross profit dollar growth.

Speaker Change: Oh well.

Speaker Change: This is going and how sustainable these game yet.

Speaker Change: Yes, Jeff I'll look I want to take it as high as we can get it I mean, there's a big focus internally we've had it for a while to continue to to buy more cars, whether they're retail cars or whether they're wholesale cars and like I said earlier. This is a focus edmonds has been able to really get more dealers signed up for this I kind of think about the product.

Speaker Change: The product is in.

Speaker Change: Let's call it a majority of the.

Speaker Change: The population, but in that majority of the population.

Speaker Change: There's a lot more opportunity with dealers out there. So we'll continue to push this as hard as we can because again, we want every single car, whether it's a wholesale car or retail car.

Speaker Change: And what do you think youre taking share from.

Speaker Change: Well I think it's just a nice alternative for dealers you know they have different avenues of getting rid of unwanted cars.

Speaker Change: Whether it's through your traditional brick and mortar auctions, whether it's through virtual auctions with other wholesalers. This is just one more tool that they have in their toolbox to to leverage and you know.

Speaker Change: We see where a lot of dealers they like they like using it and so we don't expect it to replace those other things, but it just gives them another another.

Speaker Change: Opportunity to.

Speaker Change: To look at a different valuation.

Speaker Change: Well congrats again.

Speaker Change: I look forward to speaking.

Thanks, Jeff.

Speaker Change: Thank you. Your next question comes from David Bellinger with Mizuho. Please go ahead.

David Bellinger: Hey, good morning. Thanks for the question in terms of the operating environment any noticeable differences lately or change in tone from your lending partners have they turned more aggressive post election and willing to take on additional volume, maybe even though it's down the credit spectrum.

David Bellinger: Any additional color you can add as we gave some of that the lending appetite into 2025. Thank you.

David Bellinger: Yes. Thanks for your question David Yeah, I think short answer there is I think they're kind of steady as she goes right now they really haven't.

David Bellinger: Significant adjustments I think that plays through in the penetration that they see and again thats going to be a function of the lender and also the consumers that are coming to shop, but yeah, I think generally our partners love the Carmax business.

David Bellinger: They are supportive in tough times and they're obviously, it's part of in good times, but they are being as careful as any lender should be right. Now. So I don't think a lot has changed over the quarter.

Great and if I could just add one other quick one so you had pretty significant earnings growth this quarter on that to four comp maybe a bigger picture question, but as you begin to leverage and harvest a lot of this investment spend in the past few years and pushing more volume through the system.

David Bellinger: Should we expect a comp in that low single digit mid single digit type range to yield.

David Bellinger: Double digit earnings growth from here and then maybe the buyback as an accelerant on top of that.

David Bellinger: How should we think about the earnings growth and the sustainability from here.

Yes.

Our objective is for robust <unk>.

Topline and bottom line growth and I think thats the position that we've put ourselves in with the investments that we've made the operating environment out there has been challenging for the past couple of years, which is kind of hit some of those benefits and I think as we come out of that here you are at two positive quarters of comps.

David Bellinger: And as Bill talked about.

Speaker Change: Elevated our comps have accelerated here into the fourth quarter I would expect moving forward that like you said, we're in a position to harvest. The investments. We've made so we're excited about where we are today and kind of our path moving forward.

Speaker Change: Great. Thank you.

Speaker Change: Thank you. Your next question will come from Michael Montney with Evercore. Please go ahead.

Michael Montney: Hi, yes, good morning, congrats on the quarter and thanks for taking the question.

Speaker Change: Yeah.

Speaker Change: Good morning, Mike.

Speaker Change: Just wanted to ask follows a two parter trend you know first bill can you just talk about I think.

Speaker Change: 245 stores today.

Speaker Change: Is there opportunity to get that to 300 stores again, and how should we think about the cadence of build out or you know can you elaborate multichannel at this point and then I guess the related question is on the.

Labor compensation and benefits growth now.

Speaker Change: Given that the model is more fixed cost structure should we assume that our compensation and benefits will grow slower than kind of topline units at this point for some nice leverage or how should we think through that.

Speaker Change: I'll take the first part and I'll, let Enrique weigh in on the second part so yes, we actually 249 stores so Michael.

Michael Montney: Michael one credit for those other four 249 stores and look we think we can go beyond.

Enrique: So I would say 203 hundred stores obviously.

Enrique: Well, that's a 200 stores, we can go past 300 stores and I think the way we think about it is every year, we're evaluating the pipeline and theres plenty of stores out there.

Enrique: To go and although we're reaching a lot of the population there is a lot of opportunities still put some stores even in markets that we're in and then there are some markets that were still not in yet so.

The way, we think about it is we look at that pipeline every single year, sometimes stores get out of that pipeline Tom stores get taken off the pipeline and what I would tell you is I think we've got a strategic footprint.

And as we continue to go on that this is the <unk>.

Enrique: <unk> with the Omnichannel experience if consumers are continuing to do more and we can sell more out of the existing footprint that we have and we end up taking some stores off of the end of the pipeline <unk> been great, but I think you should feel pretty good about getting beyond the 300 stores, even with improvements of the army because I think are having.

A strategic footprint is as critical.

Enrique: Yes in regard to our comp and benefits in terms of leverage yet we would expect to de lever more strongly than we had in the past on that line item as we have been.

Enrique: Lower than the variable cost of our business. We have certainly been talking about are our direct selling model. The omnichannel model right and but I would tell you is that we're in the very late innings.

Enrique: Efficiency relative to having that direct selling model, it's more efficient than the previous model. This quarter at previous prion New model. This quarter, we were more efficient year over year. When it came to per retail unit total unit gross profit as well and I'll point to a couple of things. So they can keep it really gives you a sense of what's driving that.

Enrique: This quarter year over year, our web chats to sky were up 10% year over year. So that's driving again, the consumer doing more of those activities on their own less need for labor.

Enrique: Containment rate was up 50% to 51% from 41% that's more than a 25% increase in containment rate again customer being able to do more to work on their own at the same time, our SLA is on the web and phone were up year over year. So from a customer service standpoint, it's getting better. So you can see we're really fine tuning that model, we feel really good and what that means at the end of the.

Enrique: Des is less labor, but more effective labor and that should help us drive down our comp and benefits relative to what we had been on a leverage standpoint moving forward. So we're really excited about it.

Speaker Change: Thank you and good luck.

Speaker Change: Thank you.

Speaker Change: Thank you as a reminder, if you would like to ask a question at this time. Please press star one.

Speaker Change: Next question will come from Chris Pierce with Needham. Please go ahead.

Yeah.

Speaker Change: Hey, Bill you sort of mentioned it on your.

Speaker Change: Remarks to a prior question, but do you guys keep data on hey, the consumer is pinch there transferring from they're shifting from new to use like do you have data that you're picking up new customers and that's why their preference and you used and could that be by these market's been strong.

Speaker Change: Yes, the data if I think about it we look at kind of overall used.

Speaker Change: The overall used industry. So if I go back to two last calendar quarter.

Speaker Change: Traditionally $40 million 40 million used cars basically exchanged hands last year last calendar year, only like $35 5 million exchanged hands and when so when you think about that that decline.

Speaker Change: The biggest part of that decline was in the zero to four so while the whole decline was down whatever that is 12% I think the zero to four zero to six was down more like 18%, that's obviously a sweet spot.

Speaker Change: For us so I think just overall consumers have been pinched I think the fact that the used car industry has been depressed a little bit and I think it has impacted everybody sells late model cars, a little bit more.

Speaker Change: Over the last couple of years has been something to navigate but I also look as this is an opportunity that consumers will come back we will get back to the $40 million plus I just think at this point consumers have been managing their own.

Speaker Change: Pressures that they are realizing from an inflationary standpoint on everything else that they they basically have to deal with on a on a daily basis.

Speaker Change: Okay. Thank you.

Speaker Change: Sure.

Speaker Change: Thank you. Your next question comes from Rajat Gupta with J P. Morgan. Please go ahead.

Speaker Change: Great Yeah, thanks for taking the questions and good execution on the cost side here.

Speaker Change: Just kind of day.

Speaker Change: One clarification on the palms, and then had a GAAP question.

Speaker Change: On the comps I mean, just to die targeting a ball you know, it's one of the problems getting made.

Speaker Change: The industry acceleration that you've seen in November it looks like it's continued into December.

Speaker Change: Results are benefiting as well.

Speaker Change: Hey, guys John mentioned earlier I'd like used car prices are actually probably gone up recently.

Speaker Change: Curious like what what do you think has really changed in terms of.

Speaker Change: Just the consumer mindset here.

Speaker Change: Pent up demand.

Speaker Change: Unleashed somewhat you know both election anxiety I don't know whether you have some hurricane benefit.

Speaker Change: Just curious if you could just add some color on those aspects I just had one quick one on the gas reserves.

Speaker Change: Yeah, I don't I can't SSA that something has changed in the consumer mindset I would go back to some of my comments that I said earlier about the things that we've done internally to make the experience better make friction less friction improve conversion. The fact that our prices are down year over year, I think that that certainly helps.

Speaker Change: As well I mean, there's still some consumers that are pinched out there for example, the consumers I've talked about this in the past that make less than $3000 in monthly household.

Speaker Change: Still half of what they used to be for us and so there is still they are still struggling so I'm not sure that the consumer mindset is a slight change I think it's more being driven by things that we're doing and just overall bigger.

Speaker Change: Kind of macro factors as far as Hurricanes go I mean, it was it was immaterial.

Speaker Change: Less than less than half a point I would think.

Speaker Change: It's small.

Speaker Change: Got it got it that's helpful Gary.

Speaker Change: Clearly there was like some meaningful shift around.

Speaker Change: You know just the omni experience.

Speaker Change: This quarter I mean, I know you mentioned that the analyst event in October that you bought in the later innings of.

Speaker Change: Getting the fruits of those investments it does look like that.

Speaker Change: That's kind of you had a big benefit would you say this quarter relative to.

Speaker Change: Last quarter.

Speaker Change: I think we.

It's not like it just happened this quarter. This is a build and I think we saw some of the nice benefits last quarter I think.

Speaker Change: In the second quarter and now this quarter third quarter I think we just see continued building here I mean, when you look at conversion, especially like the remote if you can get customers to do more things remote they're going to convert theyre going to convert better and when we look at remote activities like a vehicle reservation or a pre qual or an appointment and instant offer the more customers that do that.

Speaker Change: More are going to convert and we saw a nice little a continued improvement in customers doing remote progression and then like I said, we also saw nice conversion improvements in the stores, where the stores are doing a great job executing leveraging some of the tools that they have been giving.

Speaker Change: Some of the Seamlessness between working with customers that may start in the store and maybe they go online later, having that information for our sales folks. There's just a lot of goodness. It once we got past building the capabilities. We've really been focused on now removing that friction and I think last quarter with <unk>.

Speaker Change: Order processing being rolled out everywhere. This quarter, yet you had a order processing and we're ready to have the shopping count this quarter getting the shopping account out there. There's just a lot of good momentum here and we're going to we're going to continue this and like I said in our in my opening remarks, I think this is going to matter as we go forward I think consumers are going to they're going to want this type of experience and the more that you.

Speaker Change: Can have it seamless and frictionless I think that's who's going to win.

Speaker Change: Got it that's good color and I think you've probably answered like my Caf question as well I mean do you. It doesn't seem like there was a big change in the macro backdrop.

Speaker Change: So the reserve the lowering of the reserve and Caf was just based on its recent tightening in your initial observed performance is that fair and then nothing Thats changed in your Michael your macro outlook too to drive that reserve lower.

Speaker Change: Yeah, and again I, probably wouldn't think about like the reserve is being cut I know that you were looking at a benchmark from like last quarter, but I'd I'd, probably reverse the thinking and say hey look last quarter, we looked at the overall performance and we made an adjustment that really kind of refill that reserve buckets significantly and we feel like that was adequate in this kind of what we said in our prepared remarks, so I think about.

Speaker Change: <unk> returned to normal if you will as just a recognition that that volume that we put aside at the end of Q2 was adequate for the receivable base that we have so that's just how I just ask you to rethink about it yeah I would definitely echo what John said, because let me just put it a different way if we didn't get that adjustment last quarter than it would have been higher.

Speaker Change: We would expect it to come down because last quarter. We thought hey, this is what we need well sure enough John and his team did a great job on estimating that so you would expect it to come down so I agree with John don't think about it as a cut.

Speaker Change: Cause if it went the other way that would have been.

Speaker Change: I didn't get it right last quarter. So I think that this is and really year over year, it's actually up a little bit so.

Speaker Change: Got it got it great.

Speaker Change: Thanks for all the color and good luck.

Speaker Change: Thank you. Thank you.

Speaker Change: Thank you. Your next question will come from David Whiston with Morningstar. Please go ahead.

David Whiston: Thanks, Good morning.

David Whiston: It looks like inventory was our free cash flow drain for the quarter. I was just curious is that building up for tax season or was there something else going on there working capital wise.

Speaker Change #100: Yeah, So inventory total inventory was up a little bit.

Speaker Change #101: And that's really all that is is just built we're in production mode right now obviously with the upcoming tax season, and all of that is a normal seasonal thing that we do I think the team has done a phenomenal job on inventory management. This year. They really focused on it I think are seeing our turns are.

<unk> for the quarter year over year.

Speaker Change #101: Like where we are in good shape for the upcoming tax time.

Speaker Change #101: Okay.

Speaker Change #101: Penetration or <unk>.

<unk> growth was that penetration growth or did you raise prices.

Speaker Change #102: Yes, no we raised prices starting in the fourth quarter of last year, we are fairly price inelastic.

Speaker Change #102: That we have and we raised prices last year, so we'll be lapping over that in the fourth quarter here and so we would expect less of an increase year over year actually expect a slight increase year over year. When it comes to the right, but that was a base.

Speaker Change #102: Basically a margin increase that we took last year and can measure the penetration has fallen but at the end of the day, we're making again, making more money there.

Speaker Change #102: Okay.

Speaker Change #102: Sure.

Speaker Change #103: Thank you have a follow up question from Michael Montney with Evercore. Please go ahead.

Michael Montney: Oh, Hey, guys. Thanks for letting me sneak back in.

Michael Montney: Just wanted to get some early thoughts that you might have around the upcoming tax season, and how you're thinking about and planning for that and then also we did notice some uptick in pricing recently that was alluded to before so you know is.

Michael Montney: As it stands early in the quarter or are you starting to see prices rise year over year as well.

Speaker Change #104: Yes, so Mike on the tax season look I think tax season for us is all about flexibility.

Speaker Change #104: We're planning on having a decent tax season, you just kind of do a baseline well.

Speaker Change #104: About what it was last year and make sure you're prepared for that but I think more importantly is to make sure you have that inventory that you need to have the flexibility to go up or down depending on what you see and I think the team has put us in a in a great position there regardless of if it materializes like last year, if it's better than last year. If it's softer I think we're in a good spot as far as.

Speaker Change #104: As prices again I think.

Speaker Change #104: Some of the durable actions, we've taken and the diversification of sourcing.

Speaker Change #104: I feel good about our pricing right off top of my head I can't tell you for the December how we're how we're running but I think we're probably a little bit lighter year over year. So we'll see how it how it pans out.

Speaker Change #105: Thank you.

Speaker Change #106: We don't have any further questions in queue. At this time I will now hand, the call back to bill for any closing remarks, great. Thank you Todd well listen thanks for joining the call today for your questions and support as always I want to thank our associates for everything they do how they take care of each other and the customers and the communities.

Speaker Change #106: I wish all of our associates all of you a great holiday season, and we will talk again next quarter. Thank you.

Speaker Change #106: Thank you. This does conclude todays third quarter fiscal year 2025, Carmax earnings release Conference call you may now disconnect.

Speaker Change #106: Yeah.