David Lowenstein:

Thank you, Shelby. Good morning, everyone. Thank you for joining our fiscal 2024 fourth quarter earnings conference call. I'm here today with Bill Nash, our President and CEO; Enrique Mayor-Mora, our Executive Vice President and CFO; and Jon 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. In 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 annual report on Form 10-K for the fiscal year ended February 28, 2023, previously filed with the SEC. Should you have any follow-up questions after the call, please feel free to contact our Investor Relations department at 804-747-0422 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?

Enrique Mayor-Mora:

Thanks, Bill, and good morning, everyone. As Bill noted, we drove another quarter of sequential improvement in our used unit sales with strong per unit margins for both used and wholesale and strong CAF contribution growth, while staying focused on managing SG&A. With quarter net earnings per diluted share was $0.32 versus $0.44 a year ago, last year's quarter benefited from an $0.08 tailwind due to the receipt of Extended Protection Plan, or EPP, profit sharing revenues, as well as $0.04 from a lower tax rate, compared to a more normalized tax rate this quarter. Total gross profit was $586 million, down 4% from last year's fourth quarter. Used retail margin of $387 million was flat, with higher volume partially offset by a slightly lower per-unit margin. Wholesale vehicle margin decreased by 9% to $129 million, with a decrease in volume and per unit margin, compared to last year. Other gross profit was $69 million, down 15% from a year ago. This decrease was driven primarily by last year's receipt of $16 million in profit sharing revenues from our EPP partners. As noted on our third quarter call, we did not expect to receive profit sharing revenues this year as our partners experienced inflationary pressures and consumers returned to more normalized driving patterns. Partially offsetting this dynamic was the positive impact from price elasticity testing on our extended service product. During the quarter, we tested raising MaxCare margins per contract sold, which resulted in a slight decrease in product penetration, while driving overall profitability. We are encouraged by these results, and we have rolled out the margin increase nationally. Our expectation is that this action will drive approximately $20 per retail unit of incremental EPP margin in FY ‘25. Service decreased by $4 million, as compared to last year's fourth quarter. This decrease was primarily driven by wage pressures and planned lower production in the quarter as we pre-built inventory in the third quarter, due to holiday timing. For the full-year service improved by $75 million year-over-year. Our expectation is that we will continue to see significant year-over-year favorability in FY ‘25. The extent of this improvement will be governed by sales performance given the leverage, de-leverage nature of service. Third-party finance fees were down $3 million from a year ago, driven by higher volume in Tier 3 for which we pay a fee and lower volume in Tier 2 for which we receive a fee. On the SG&A front, expenses for the fourth quarter were $581 million, up 1% from the prior year's quarter. Our continued discipline in spend and investment levels allowed us to come in flat year-over-year when excluding share-based compensation. As a reminder, in the fourth quarter, we passed the year mark since initiating our significant cost management efforts. SG&A dollars for the fourth quarter versus last year were mainly impacted by three factors. First, other overhead decreased by $16 million. This decrease was driven primarily from reductions in spend for our technology platforms and from the continued favorability in non-CAF uncollectible receivables. Second, total compensation and benefits increased by $7 million, excluding an $8 million increase in share-based compensation. This increase was mostly driven by a higher corporate bonus accrual in the quarter. Third, advertising increased by $5 million. This reflects an increase as communicated last quarter due primarily to the timing of per unit spend. For full-year FY ‘24, we strongly outperformed the target we set out at the beginning of the year of requiring low-single-digit gross profit growth to lever SG&A, even when excluding the benefits from this year's legal settlements. Our ability to materially drive SG&A costs down year-over-year was led by favorability and non-CAF uncollectible receivables that reflects improved execution at our stores, at our corporate offices and by external partners. Our focus on driving efficiency gains in our stores and CECs, the planned reduction of technology spend and by aligning staffing levels and marketing spend to sales. In FY ‘25, we expect to require low-single-digit gross profit growth to lever SG&A, when excluding FY ‘24's favorable legal settlements. This reinforces our pathway back to a lower SG&A leverage ratio with our initial goal of returning to the mid-70% range over time once we see healthier consumer demand. We anticipate that SG&A will be pressured in the first quarter. As a reminder, we received $59 million in illegal settlement during the first quarter of FY ‘24. Additionally, in this year's first quarter, we expect an approximately $25 million impact due to share-based compensation for certain retirement eligible executives and a lapping of favorable reserve adjustments related to non-CAF uncollectible receivables during last year's first quarter. With regard to marketing going forward, we plan to speak to our spend on a per total unit basis, inclusive of total retail and wholesale units. We believe this more holistically reflects the impact of our marketing initiatives, which support both vehicle sales and buys. In FY ‘25, we expect full-year marketing spend on a total unit basis to be similar to FY ‘24 at approximately $200. Regarding capital structure, during the quarter we repurchased approximately 686,000 shares for a total spend of $49 million. Starting in the first quarter, we intend to modestly accelerate the pace of our share repurchases above the pace that we implemented in our third quarter of fiscal year ‘24. As of the end of the quarter, we had $2.36 billion of repurchase authorization remaining. For capital expenditures, we anticipate an investment level between $500 million to $550 million, up from the $465 million in FY ‘24. The year-over-year increase in plan spending is primarily related to the timing of spend for new stores. Like in FY ‘24, the largest portion of our CapEx investment remains related to the land and the buildout of facilities for long-term growth capacity and offsite reconditioning and auctions. In FY ‘25, we plan to open five new store locations. Consistent with our strategy, these new locations will be smaller cross-functional stores that complement our omni-channel strategy and leverage our scale. We also plan to open our second standalone reconditioning facility, which will be located in Richmond, Mississippi, as well as one offsite auction location in the Los Angeles metro market. We currently expect to open multiple offsite reconditioning and auction locations in FY ‘26. 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 Jon.

Bill Nash:

Thank you, Jon and Enrique. Fiscal 2024 was a challenging year across the used car industry as vehicle affordability and widespread macro factors continue to pressure sales. In response, we focused on what we could control and took deliberate steps to support our business both the near-term and long run. In addition to achieving the efficiencies across our entire organization that Enrique talked about, I am proud of the progress we've made in further enhancing our omni-channel capabilities as we prioritize projects designed to optimize experiences for our associates and customers and drive operating efficiencies. Some examples include, for retail, we leverage data science, automation, and AI to make it even easier for customers to complete key transaction steps like vehicle transfers on their own. We also enhance digital checkout functionality for appraisal customers, enabling them to submit their documents remotely and unlocking their ability to participate in our 30-minute express drop-off experience. Additionally, we expanded capabilities for Sky, our 24/7 virtual assistant, to include managing finance applications, vehicle transfers, appointment reservations, and appraisal offers. Customer adoption of Sky has been strong, and this has not only created efficiencies, but also widened bandwidth for our associates. For wholesale and vehicle acquisition, we modernized our auction platform to offer new services, including single sign-on across all of our systems, AI enhanced condition reports, early bidding capabilities, and automated bills of sale. Additionally, we streamline Max offer by rolling out our instant offer experience to all participating dealers. In the credit space, we have now incorporated all of our lenders into our finance-based shopping platform, expanding the breadth and depth of offers available to our customers. We continue to see great adoption with more than 80% of the consumers utilizing the best-in-class pre-qualification product as they begin the credit process. Finally, Edmunds launched a number of research and buy tools in support of its goal to be the leader in [Technical Difficulty] research. These include range tests, charging efficiencies, VIN-level battery health assessments, and EV tax credit incentive guides. Looking ahead to fiscal 2025, we will build on our progress from last year to further expand our competitive mode. We are confident that the actions we are taking will enable us to grow sales, profitable market share, and buys while also driving additional operational efficiencies as the market turns. Some examples include, for retail we plan to launch an evolved hub within our customers' online shopping accounts that will make it even easier to seamlessly go back and forth between assisted help and self-progression. Customers will be able to see the steps they have taken on their shopping journey, whether on their own or with help from a CEC or store associate. The hub will also guide next steps and promote MaxCare, our extended service plan offering. Additionally, we will continue to digitize work in support of our focus to build a leaner and high value assistance model for our CECs. This will enable existing resources to support higher transaction volume as we grow traffic and drive stronger conversion. As part of this effort, we will further integrate Sky into key communication channels and prove its ability to serve as the initial point of contact across many points in the customer's shopping journey. Sky will manage next steps on its own or seamlessly transition customers to a CEC associate via the customer's channel of choice. For vehicle acquisition. we'll focus to bring even more vehicles into our ecosystem. A key component of this will be our continued partnership with Edmunds to acquire vehicles from dealers. In the credit space, we plan to further optimize our prequalification product by integrating the customer's instant offer into the application process. As Jon mentioned, we will also continue to test CAFs participation across varying parts of the credit spectrum. As always, we will continue to pursue opportunities that enable us to provide outstanding offers for consumers, while driving sales and economics for the business. In regard to our long-term financial targets, we're maintaining our goal to sell more than 2 million combined retail and wholesale units annually. However, we are extending the timeframe for this goal between fiscal 2026 and fiscal 2030, due to the uncertainty in the timing of the market recovery and as we continue to focus on profitable market share growth. We will adjust the timeframe as we gain greater visibility into the industry's pace of recovery. Given higher average selling prices, we expect to achieve the $33 billion annual revenue target sooner than units. And similarly, we also expect to achieve more than 5% nationwide market share of zero to 10-year-old used vehicles sooner than units. Given the recent volatility in vehicle values, we will provide an updated timeframe for our expected achievement at the end of fiscal year 2025. Before turning to Q&A, I want to recognize two significant milestones. First, CarMax celebrated its 30th anniversary during fiscal 2024. I want to thank and congratulate all of our associates for the work that they do. They are the differentiator and the key to our success. Second, Fortune magazine recently named CarMax as one of the 100 best companies to work for, for the 20th year in a row. I'm incredibly proud of this recognition, particularly as we face a challenging year. It's due to our associates' commitment to supporting each other, our customers, and our communities every day. In closing, I'm proud of the progress we've made on our journey to deliver the most customer-centric experience in the industry. I'm encouraged by the sequentially quarterly improvements. We're driving across our business, and I'm excited about our focuses for fiscal 2025. Our core operations are strong and we are well positioned to drive growth as macro conditions improve. With that, we'll be happy to take your questions. So Shelby?

Seth Basham:

Thanks a lot. I have one quarterly specific question and one big picture question. On the quarter, it seems like service gross profit was weaker than we anticipated. Can you help us understand how much of that pressure was transitory and how much improvement we should see in the service line in 2025?

Seth Basham:

Understood, thank you for that color(. And then secondly Bill, in regards to market share, you indicated on your last call that you started to see an improvement in market share towards the end of the fiscal third quarter. Seems like things slipped a little bit in the fourth quarter. Help us understand why and when should we expect to see market share increases going forward as the cycle turns?

Operator:

And we'll take our next question from Sharon Zackfia with William Blair. Your line is open. Please ask your question.

Jon Daniels:

Sure, Sharon. It's Jon here. I'll take the first one on the loan payment. So historically, our average used car was $20,000 forever. So that translated typically, depending on the interest rate, $400 monthly payment. I think that's a good round number to think about. With the appreciation, you saw really a peak probably hit in kind of later, at calendar ‘22 of about $570, $580. That was -- I think we cited that was primarily driven by that financed amount. I mean, rates were on their way up, but that financed amount really was driving that. So that increase we kind of attributed to maybe an 85-15 split on the financed amount versus the interest rate going up. Now as we've cited, clearly, the vehicle prices are coming down. The financed amount is coming down to some degree and rates are going in the other direction. So we probably say this quarter we probably saw roughly a $525, $530 payment. Still two-thirds of that driven by that vehicle price still higher. Now the rates are a bigger contributor, but hopefully that gives you some perspective on how affordability has improved to some degree. Still a bit of a shock to a consumer that's used to a $400 monthly payment coming in at a $530 monthly payment. They're going to have to figure out how they work that into their budget going forward, but that hopefully gives you some context.

Operator:

And we'll take our next question from Rajat Gupta with JP Morgan. Your line is open. You may ask your question.

Bill Nash:

Yes, so thanks for the question, Rajat. On the first question, kind of comp cadence, for the quarter, December, January negative comps, February was a positive comp resulting in a positive for the quarter. Since the quarter ended, it's been a little choppy. We've seen some weakness and right now, quarter to date, albeit early, and again choppy. We're seeing about a mid-single-digit negative comp right now, but again, it's early on and it's been choppy the last month and a half. On the second question, the market -- oh, the long-range targets -- well, keep in mind on the market share, we'll come back at the end of this year and update that. On the units one, yes, you're right, it is a wide range. We're going to come back and provide more visibility into that once we just get a better idea of the market recovery. Keep in mind, I think COGS latest numbers had this year finishing up about 35.5 million units, where traditionally we're at 40 million. And so I think their expectation to ours going to be fairly flat, maybe up a little bit in total used units in the zero to 10, it might be flat to even up a little bit less. So I think you're expecting when it comes to total used units, there's probably more growth in the over 10-year-old vehicles in the zero to 10. And so that's something of -- we want to get some visibility into that, especially when it comes to the units. The volatility also plays into it, though, because it also impacts -- vehicle volatility plays into it because it impacts your buy rate, which ultimately can impact your wholesale. So as we get more visibility into this market recovery, we'll come back and narrow that time frame for you.

Rajat Gupta:

Just to clarify on the zero to 10-year-old comment. I mean if you look at what's happened with like new car sales the last few years and just users originated on them, is there a chance that the zero to 10-year-old market takes another step down in calendar ‘25 before turning positive? Because that should be fairly visible, right, given what we know that's happened over the last three, four years?

Rajat Gupta:

Great. Thanks for all the cover.

Operator:

We'll take our next question from Brian Nagel with Oppenheimer. Your line is open. You may ask your question.

Bill Nash:

Good morning, Brian.

Brian Nagel:

Okay. Just my first question with regard to used sales, and maybe a bit bigger picture. But I guess it's much in the business. Look, you got the positive comp, albeit slightly. You got positive used car unit comp here in Q4. And then in response to the prior question, you talked about maybe some incremental weakness here in early Q1? But the question I have is as you're looking at this business, recognizing that you don't give guidance, there's a lot of moving parts out there. What has to happen? Because it seems like a lot of the key factors are starting to turn more favorable for CarMax, whether it be used car pricing moderating, rate stabilization, we're seeing the data, a better tax refund season. So I guess as you look, what's the kind of the equation, if you will, to get back to that normalized used car unit comp?

Enrique Mayor-Mora:

I think a couple of other just demand signals that we've seen. Web traffic was up again this quarter, year-over-year. Finance applications were up again this quarter. So there's demand signals that we're seeing out there just boils down to like we've been talking about really to the affordability question.

Jon Daniels:

Yes, appreciate the question. I mean, certainly, I think that's the benefit of our platform, right? CAF is able to tighten, and it's able to slow down to partners that are willing to -- maybe they're going to ask for a little more money down, it's going to be a little bit higher rate. But they are going to have the option to buy, and we see people get picked up down the line. We're very careful when we test rates. And we do any underwriting adjustments. We watch it very carefully. We test it. We know what's going to get picked up, and we're very thoughtful about the sales impact and any decision we make, whether it’d be pricing or underwriting. So certainly, there's going to be a few people that might not choose that higher rate that more down payment from our lenders down the line. But we believe, generally, they are very excited, Tier 2 partners are, when CAF passes on stuff, and they can go pick it up.

Brian Nagel:

Got it. I appreciate it, thank you.

Operator:

And we'll take our next question from Craig Kennison with Baird. Your line is open. You may ask your question.

Bill Nash:

Yes. Thanks for the question, Craig. On the -- from consumers, again, I think it's more -- I think when you're talking about the decline, it's more of a year-over-year dynamic. Buy rate this year was down a little bit versus last year. But keep in mind, last year, I think in the fourth quarter, we saw about $2,000 of appreciation. We didn't see that this quarter. It was much, much less than that by the end of the quarter. That has an impact because consumers always think their cars are worth more money. When you can put more on it, that helps buy. On the Max offer, the increase there is really -- well, we've increased the overall number of deals. The way we think about it, how many active dealers do you have. And of the deals we have, we saw about a 50% increase in active dealers actually using the tools. So we're encouraged by that. We haven't expanded to other areas. We think there's a lot of opportunity to continue to move this along, which is what I said earlier in my prepared remarks. It's going to be a focus for us.

Bill Nash:

Thank you.

Michael Montani:

Hey guys, good morning. Thanks for taking the question. Just wanted to ask to start off. If you think about this year, is there any reason that this wouldn't be another year for CarMax to take market share? And then is there a need at all to either sacrifice gross profit per unit or potentially loosen credit standards to take share?

Enrique Mayor-Mora:

And as far as the CAF lending standards, I mean, I think that's one of the things that we're optimistic about. We've tightened. We've tightened for a very for very purposeful reason. Obviously, we have partners down the line. But as Bill mentioned, yes, you do lose sales when CAF tightens. But we believe that the cycle will turn. The consumer will get healthier. And we're excited to go after more market share up and down the credit spectrum. So I think it absolutely is an opportunity on the other side of this.

Michael Montani:

Just how to think about the mid-70s SG&A ratio target as well. Is that feasible for this year? Or how should we think about that?

Bill Nash:

Well -- and I think also just given that they think that the market is overall going to be fairly flat.

Michael Montani:

Got it. Thank you.

Operator:

We'll take our next question from John Healy with Northcoast Research. Your line is open. You may now ask your question.

Bill Nash:

Yes. Thank you for the questions. On the wholesale margin, yes, I was especially pleased with the wholesale margin. Just given some of the year-over-year dynamics, the team did a phenomenal job. And I think it speaks to just some of the improvements we made in our overall auction process with technology, that kind of thing. I think you're thinking about it the right way. If you look at it on a yearly basis, I think a good target, give or take a little bit, is similar to what we ran for the year this year on wholesale margins. So I think you're thinking about that the right way. And I think it speaks to a lot of the improvements that we've made in the business. As far as the standalone auction facility, it is -- it's interesting because we actually have a couple of standalone auction facilities that we've built over time, just that are generally located right close to one of the stores from a extra capacity. But this -- you're right, this will be the first time that we've gone out and really kind of built the facility with the intention of it having to be an auction facility. I think going forward, you're going to see some of the standalone auction/production. The one that we're talking about for next year is just an auction facility. We may run some logistics hub out there. But right now, it's an auction facility. And it's really going to help us in a couple of different ways. The facility will be close to existing stores. And we'll be able to take wholesale vehicles out of existing stores, allow them to leverage the lots more from a service standpoint, more from a sales standpoint. We're ending up moving a lot of cars anyway from satellite and XF stores. And now taking them to this location will just help us continue to make benefits or improvements at standalone facilities, and I think they'll pan out well for us going forward. So our intention as we go forward is to build more of these things, get more of some of the wholesale sales out of the stores to free up space, free up capacity that we think will have other benefits to the business, whether it's, hey, you can do a little bit more MaxCare retail service. There's a lot of benefits to that, plus just the standardization of having these bigger locations in closed proximity to stores will also help us to innovate even quicker than what we've been able to do.

Bill Nash:

Thanks John.

Scot Ciccarelli:

Good morning guys. Another market share follow-up, I guess. Bill, why do you think you lose share in disruptive periods? I mean historically, industry leaders in various retail verticals actually accelerate share gains during disruptive periods. What is different about the CarMax model why that may not follow a similar pattern?

Scot Ciccarelli:

So just philosophically, like is that the right decision over time? Like I understand like you can capture more profit. But if you want to be a growth vehicle and you have been for 20-plus years, I think you said 38, right? Is that the right decision to kind of hold the line on price and protect profit? Or should you be seeking market share? I'm just wondering philosophically how you guys are thinking about that? Thanks.

Scot Ciccarelli:

Got it. Thank you very much.

Operator:

And we'll take our next question from Christopher Bottiglieri from BNP Paribas Exane. Your line is open. You may ask your question.

Jon Daniels:

Sure. Yes, I can take that one, Ian. Yes, I mean, I think you said excluding Tier 2 and Tier 3, so we're talking focused on the Tier 1 business. Yes, I mean, our focus is generally to bring in all the volume from Tier 1 into our warehouse facilities, and our goal would be to get it all into the ABS market. Now fundamentally, there are things that you need to pare back. There are certain criteria they need to meet. You need to have a title, they need to have made the first payment, et cetera. So you're going to have some higher risk stuff fall out. It's always going to happen. But our goal is to move all that volume from originations through the warehouse into ABS. Inherently because of those exclusions, you're going to have probably a little bit higher FICO in the ABS deals. If you look at deal over deal over deal, that change in FICO is coming from us changing what we're originating and that ultimately flowing through. Remember, it's going to take six, seven months to get into an ABS deal for when we originate it. But that movement over time in ABS is really what we're underwriting, probably less so what we're holding out into in a warehouse line.

Ian Davis:

Got it. That's helpful. And if I could just slip another question in. We had read that CarMax may be removing the 30-day return policy. Is there any truth for this? And if there is, could you contextualize maybe how material abandoning the policy would be to earnings? And perhaps any other context in terms of customers valuing it or maybe using it, any context there would be helpful.

Ian Davis:

Yes, that's right. Yes, that's helpful. Thank you.

Operator:

And we'll take our next question from Chris Pierce with Needham. Your line is open. You may ask your question.

Bill Nash:

Yes. Chris, I'm not necessarily seeing what you're calling excessive depreciation. I'm really seeing more depreciation that's more in line with kind of what you would see between 2015 and 2019. It's actually, if look at it, appreciate a little bit more. But again, your average sales price is up higher. Just recently have we started to see some depreciation. So I haven't seen what you're referring to as far as excessive depreciation. And I think we may see more of a historical type of appreciation, depreciation throughout the year, but we'll see.

Bill Nash:

Well, I'm just going off of what I've seen so far kind of calendar year-to-date and comparing it to historical averages. The last 2, 3 years, it's kind of been all over the board from an appreciation standpoint and a depreciation standpoint. If you kind of take those years out and look more historical like 2015 to 2019, what does the depreciation curve look like? What does the NAAA data look like? I would say this year, calendar year-to-date is falling more in line with kind of what those cycles look like. So that's what I'm referring to.

Bill Nash:

Thank you, Chris.

John Murphy:

Good morning, guys. I just wanted to see if you could talk about sort of the split of the zero to six and the seven to 10-year-old vehicle sold in the quarter and maybe on a year-over-year basis. And as we think about this, unless there's some massive economic boom that is not really expected, seems like through ‘24 and ‘25, the zero to six year old car population will continue to shrink, which is a supply issue for you guys, unless you shift a little bit more to the seven to 10-year-old bucket but also would help you out a lot on affordability. So it just seems like it could be a small strategy shift here that could alleviate some of the issues that we're facing. Just curious if you could comment on that as well. So mix and then potentially pushing a little bit more to seven to 10s.

John Murphy:

Got it. And then just one follow-up on the sourcing side that you just talked about. You said dealer sourcing was up 21,000 units, about 45% on a year-over-year basis in the quarter. Is that something you think could increase? I mean, I think there's some concern that vehicles, late-model vehicles get caught further up funnel as openly, Manheim and ATB all kind of help with their virtual auctions to keep vehicles further up funnel. But it sounds like you actually kind of refute that with the increase in dealer sourcing. How much of an opportunity do you think dealer sourcing could be over time or maybe a risk as they hold on to more vehicles?

John Murphy:

Great. Thank you very much.

Operator:

We'll take our next question from David Bellinger with Mizuho. Your line is open. You may ask your question.

Bill Nash:

Yes. Actually, from a -- I was encouraged because this quarter, if you look at our sales are less than 20% -- or less than $20,000 vehicles, while year-over-year, it was similar. It actually was better than the third quarter. So we had more less than $20,000 cars. I think as far as what do the vehicles look like for consumers, buying vehicles from consumers is just a huge benefit. I mean you're buying vehicles that people in that area generally like. And the reason why it's important is to self-sufficiency is because those are more profitable than having to go off-site. And if you're having to go and secure all your vehicles off-site, that's an expensive channel to go through. And we have the luxury of having such a high self-sufficiency that we have to really kind of go out and obtain vehicles off-site on a limited basis.

Bill Nash:

Yes. I think it just -- it's probably more just speaks to consumer. I think the consumer is still in a tough spot. The tax season -- I think overall, the tax season this year has been a little softer, although refunds are higher, the actual -- the refund dollar amounts are higher, the actual number of refunds is behind where it was last year. And while prices have gone down, obviously, interest rates are higher than a year ago. I think you still have the pressure of the consumers on everything else that they're basically buying food and housing, get inflationary pressure there. So I think it speaks more to the consumer mindset at this point. And like I said, it's been choppy. I mean there's been a -- we've had some weather things going on. It's just -- there's been a lot going on. So we'll continue to monitor and make adjustments as we can as we go through.

Bill Nash:

Okay, thank you, David.

David Whiston:

Thanks. Good morning. Just a two-part question on affordability. You mentioned ASPs are continuing to fall, which is good. But are consumers even noticing the lower ASPs at this point? Are they entirely focused on unfavorable monthly payment due to interest rates? And also on that trading trade-offs scenario for affordability, is the consumer moving into cars away from light trucks? Or is it more just shifting into older than 5-year-old vehicles?

David Whiston:

Yes. Are they also moving away from light trucks into cars? Or are they just focused on an older vehicle to try to...

David Whiston:

Okay. Are you worried about the off-lease shortage ramping up with the anniversary of the start of the chip shortage?

David Whiston:

Okay, thank you.

Operator:

Thank you. We don't have any further questions at this time. I'll hand the call back to Bill for any closing remarks.

Operator:

Thank you. Ladies and gentlemen, that concludes the Q4 fiscal year 2024 CarMax earnings release conference call. You may now disconnect.

David Lowenstein:

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-Mora, our Executive Vice President and CFO; and Jon 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. In 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 annual report on Form 10-K for the fiscal year ended February 28, 2023, previously filed with the SEC. Should you have any follow-up questions after the call, please feel free to contact our Investor Relations department at (804) 747-0422 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?

Enrique Mayor-Mora:

Thanks, Bill, and good morning, everyone. As Bill noted, we drove another quarter of sequential improvement in year-over-year performance across our business and our P&L. Notable areas of improvement included used in wholesale unit sales and their respective margin dollars, total gross profit, CAF contribution, SG&A leverage and EPS. Third quarter net earnings per diluted share was $0.52 versus $0.24 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 a slightly higher per unit margin. 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 improvement over last year with this year's quarter reporting a $21 million loss. The efficiency and cost coverage measures that we put in place towards the end of FY '23 continued to drive improved year-over-year performance in FY '24. Extended protection plan or EPP 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 2 for which we receive a fee and higher volume in Tier 3 for which we pay a fee. On the SG&A front, expenses for the third quarter were $560 million, down 5% from the prior year's quarter as we continue 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 non-GAAP uncollectible receivables and, to a lesser degree, from reductions in spend for our technology platforms and from favorability in 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 CECs 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 spend and 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 649,000 shares for a total spend of $42 million in the quarter. This pace is in line with the guidance we provided last quarter. As of the end of 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 stand-alone 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 Jon.

Bill Nash:

Great. Thank you, Jon and Enrique. As I mentioned at the beginning of the call, we're excited about the contributions we are seeing from our omnichannel investments. Our omnichannel 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 progress digitally. We are seeing this in our data. At the end of fiscal year '20 when we completed our initial omnichannel 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 omnichannel has delivered to our business, so I want to share some proof points that we are seeing. First, our data indicates that omnichannel is driving incremental retail customers to CarMax. Customers who fully complete an online transaction are 10% more likely to be new to CarMax compared with our omnichannel and in-store customers. We have also found that our online consumers skew younger, which creates the opportunity to participate in more of their lifetime purchase cycles. Additionally, since initially completing our omnichannel rollout, we have seen outsized market share growth in 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 '22, the market share average annual growth rate for these older markets continue to exceed their pre omnichannel average growth rate. Second, instant offer, our online consumer-facing appraisal tool that is a core part of our omnichannel capabilities is significantly driving our vehicle purchases and wholesale sales. We doubled our bots 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 buyouts 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 Max offer vehicle sourcing application. Third, our omnichannel 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 receive 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, omnichannel is on track to be a more efficient cost structure compared to our store-only model. Our omnichannel cost structure has more fixed costs than our historical store-only structure. We continue to show sequential year-over-year improvements in key cost efficiency metrics for omnichannel overhead model. With a more fixed cost structure, we expect to lever more strongly than in the previous model as demand picks up. We expect the impact of our omnichannel 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?

Daniel Imbro:

Jon, Enrique, maybe just want to circle back on the cash provision just given the impressive results here. I'm trying to understand the puts and takes. So, the allowance came down quite a bit, Jon, I think you talked 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 provisions has the credit improvement meant that nominally this is the right level of provisions going forward? Or how would you think about those trends as we move through the end of the year and the tax refund season?

Operator:

Our next question will come from Brian Nagel with Oppenheimer. Please go ahead.

Bill Nash:

Thank you.

Bill Nash:

Yes. Great. Thank you for the questions, Brian. So yes, we are pleased with 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 were going on in the marketplace, we actually pulled back on our offers. So I think you've got a little bit of that reflecting in kind of the year-over-year growth. But I also feel really good about the innovation on the product side of things. So when you think about Max offer, one of the things with 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 want to take pictures, they still can. So that's some of the innovation there that I think that helps. 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's some encouraging signs out there. I mean besides the fact that we have continued to have sequential improvements we saw a lot of depreciation this quarter, really steep depreciation. And while that causes some headwinds on in the near term, and it's 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 benefits the overall used car industry, and it will benefit us because that will continue to come out on front-lit prices. You saw we're about $1,300 down this year, year-over-year on sales prices. From an acquisition standpoint, it was more like $1,500, 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 will help. And if they come down, I think that will be kind of extra icing on the cake. Another thing that I would point to is our market share. October, which is the latest period that we've gotten market share data on is the first month that we've actually comped our market share year-over-year. So I think that's encouraging. And then the other thing I would tell you is -- 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 of the customers that apply for a loan through CAF, where do they go? And it seems like from the analysis we've done, there's a lot of customers that just once they decide they're not buying, they're not buying. So it's almost like there's a -- maybe hopefully, there's some pent-up demand that I think we'll see as the market comes back. So again, I think while there's some signs of encouragement, yes, the industry is still challenged. We're encouraged by that. And I think taking all that into consideration, also just bearing in mind, this whole time we've been working on cost control, becoming more efficient, having better experiences for our customers and our associates. I think all that plays well to into the future. So hopefully, that's helpful.

Seth Basham:

My question is also on CAF. Jon, could you give us some more color on those securitizations from late '21 through 2022 in terms of your expectations that the loss curves are going to flatten out because we haven't really seen that in the data yet.

Seth Basham:

That's helpful. Of the securitizations you have outstanding, are you forecasting losses for any of them above that 2% to 2.5% range?

Enrique Mayor-Mora:

As Jon had mentioned, a lot of the receivables that we don't see are in our warehouses, right? It's about, what, 60% roughly of what you'll see, are in the securitization data that's public, but there's a good chunk of receivables that are not necessarily public because they're an warehouses there in alternative facilities. And that's really where you see a lot of that tightening. That's blending into the overall loss rate.

Craig Kennison:

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 as a technology that is going to level the playing field for other used car retailers or rather might be a wedge technology that really does ultimately separate winners from losers.

Operator:

We'll turn now to Rajat Gupta with JPMorgan.

Jon Daniels:

Sure. Yes. I appreciate the question, Rajat. Yes, I think that's a fair thought, right? I mean we signaled a couple of quarters ago that we felt like that 6% range was about where we're going to level off. Remember, we're coming off of relatively historic high. So, we've been pleased that our ability to pass this rate along to the customer. Obviously, there was a shock in the interest rate market. So said it was coming, those higher interest rates were coming 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 with where the Fed heads, hopefully, rates aren't going up. If they remain stable, we think we're in a good spot. If they come down and turn down as a reminder, typically rate increases lag when rates go up and rate decreases lag when rates come down. So hopefully, potentially, we could enjoy some added margin on the way down. But right now, I think we're in a stable spot.

Rajat Gupta:

Understood. And just on SG&A, I mean, it looks like there are some continued actions you are taking there on the head count side. Can you give us a sense of what areas are these taking place at? Is it the CECs, or salespeople or Edmond? And any -- and is this an indication of your view on the market backdrop in any way in the near to medium term? And relatedly, could you quantify how much the impact was from the bonus accruals this quarter as well?

Rajat Gupta:

Sorry.

Rajat Gupta:

The other was like just the continued reductions in any way trying to -- or is it an indication of like the market backdrop in any way? Is there a view that you're taking on the volume recovery here, over the next few quarters? And then the third part of the question was just what would the -- if you could quantify the impact from the bonus accruals in the third quarter.

Enrique Mayor-Mora:

Yes, but the corporate bonus pace within compensation. So very specifically, that was about $5 million in the quarter in terms of favorability.

Scot Ciccarelli:

So I have a follow-up on the affordability issues. Do you guys think you need to get back to 2019 levels and affordability to get your 2019 volume levels back to -- get back to on a 2019 levels on a per store basis? And then related to that, any insight you guys could provide in 4Q? I think investors have generally been expecting comps to turn positive in 4Q just due to easy comparisons, but I believe some of the third-party data suggest trends might be still negative. I appreciate that.

Scot Ciccarelli:

Correct?

Scot Ciccarelli:

Bill, I guess my question is on the affordability issue. Like do you need -- how much improvement do you need in affordability to get your volume back on a kind of a per store basis to what you saw in 2019?

Operator:

We'll go now to John Healy with Northcoast Research.

Bill Nash:

Yes, I'll tell you, John, if you know, I appreciate a call afterwards, and let's talk about it if you know the answer to that. I don't -- right now, I don't foresee there's nothing I can say that would say, okay, tax season is going to be dramatically different than last year. I mean I think in tax season, you expect to sell more cars, I think it will be similar. 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 will be interesting. We aren't counting on that steep appreciation. So it will be interesting to see the year-over-year dynamics 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 last year because we don't really see any signs that make it dramatically different.

Sharon Zackfia:

I guess a follow-up on that. Have you changed the way you show inventory on the website? Because it does look like there's been a big inventory build so far in the last few months. And if you're not expecting kind of a sea change in the tax refund season, I'm just curious on why we're seeing that inventory build.

Sharon Zackfia:

Okay. And any thought process yet on kind of how you're viewing expansion from a unit standpoint for next year?

Sharon Zackfia:

Yes.

Operator:

We'll go next to Chris Bottiglieri with BNP Paribas.

Enrique Mayor-Mora:

Yes. Thanks for the question, Chris. The seasonal effect is really more related to sales, right, and as sales map, so ESP penetration in dollars. So the only thing we've seen in the past couple of years is really in the fourth quarter where we've seen that profit share from our partners materialized at the end of the quarter. And last year was pretty material. I think it was over $15 million. And so I wanted to make sure we called that out. Just given the inflationary pressures that our partners have seen over the past year, it's just made their profitability a little bit more pinched. And at the end of the day, when we look for profit share, there needs to be a certain amount that they're seeing for us to have that -- to share in that. So what we've 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 seeing.

Jon Daniels:

Sure. Yes, I'll take that one, Chris. Yes, really, our warehouse lines provide that short-term funding until we take it to an ABS market or we look at other instruments to do a more permanent funding solution there. But our conduit 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 certainly from the Tier 3 and Tier 2. But if we isolate the Tier 1, we've tightened in the Tier 1 space. we would absolutely expect those Tier 1 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 you're seeing in the most recent securitizations.

Chris Bottiglieri:

Got you. Just one last quick one, just we brought it up. The season has been ticking up a little bit. Is that -- is there any -- I know some of it is the Tier 2, Tier 3, but is that just the ABS markets still aren't perfectly loose, you're just not secure as much as you would like to or why I guess why is it seizing up a little bit versus what we might have seen pre-COVID.

Operator:

We'll go now to Michael Montani with Evercore ISI.

Jon Daniels:

Sure. Yes. So just to touch on the provision once 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. The way I think about that is, let's take the second one first. New originations, we did $2 billion this year. There's a piece of Tier 1, Tier 2, Tier 3 business. We've cited Tier 3 is limited. Tier 2 is in test volume. Tier 1 is the bulk of it. You sign an anticipated lifetime loss rate plus the cost to recover from a repossession standpoint, which is relatively small, but a sign up an overall expectation of the $2 billion. That's one piece of your provision. And then, it's a function of 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 with $68 million. So, I think you've got to bifurcate those two pieces and that's how you set your provision each successive quarter.

Enrique Mayor-Mora:

Yes. So a couple of questions there. In terms of the mid-70% SG&A as a percent of gross profit, it's absolutely our next step that we've communicated. We've made material strides in driving efficiency in our business. And hitting that mid-70 is our next school. But in addition to the cost management efforts that we've undertaken, 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 in 70%, we are going to need to see some decent gross profit growth as well, but that's 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 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 omnichannel, right? 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've largely anniversaried over our cost levers. So Q4, I would tell you it will be more impacted by our sales performance in terms of that year-over-year SG&A dollar movement.

Operator:

Our next question comes from John Murphy with Bank of America.

Bill Nash:

Yes. Thanks for the question, John. Yes, the within inventory now. Keep in mind, what we sold through the quarter it's more than 50% of that was bought prior to the quarter. So what's in inventory now is stuff that was bought during the quarter, which talked about, there's been some steep depreciation during the quarter, and we're continuing to see depreciation. So 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 $1,500 of depreciation, just to keep your sales prices flat, and that's just because as new cars come out, they're more expensive. So you really don't get much benefit until after you get over $1,500 on an annual basis. So I do -- we do feel 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.

Bill Nash:

You mean as far as the acquisition of vehicles?

Bill Nash:

Yes. No, I think -- look, you're very aware of just kind of the volume that's out there in auctions, especially zero- to four-year-old vehicles. And if folks are looking for that inventory, they got to be a little bit more creative. So, it doesn't surprise me that other folks are doing that. Our zero to four sales actually year-over-year went up a little bit. So, I would -- I mean that's one data point that you have. I think all the dealers are 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 talk about sales efficiency, that's just from the consumers we don't add in there, what we're getting from other dealers. And that product skews more retail than 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. Let me keep in mind, there's tens of thousands of competitors that sell zero to 10-year-old cars. Some of them don't have that ability.

David Whiston:

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 is what I'm curious about.

Bill Nash:

Yes. I think on the advertising piece. Look, we're in this for the long haul. And so, 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's advertising for sales, that's advertising for buy, that's advertising on Edmond. 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 it. 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 ROIs not go on sales, you may shift some to buys or you may shift some to Edmond. So, it just depends on what's going on in a given quarter, but we would expect -- and generally, you spend a little bit more in the fourth quarter because it's -- you've got tax season coming, which is an increase in volume. So that's really what you're seeing.

David Whiston:

I appreciate the clarification.

David Whiston:

Are you guys being more aggressive on your offers to consumers who want to sell a vehicle to you with wholesale units up nearly 8%? I was just curious if you're looking to acquire more vehicles.

Operator:

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.

Operator:

Once again, ladies and gentlemen, that does conclude today's program. Thank you for your participation. You may disconnect at this time.

David Lowenstein:

Thank you, Chelsea. Good morning everyone. Thank you for joining our fiscal 2024 second quarter earnings conference call. I'm here today with Bill Nash, our President and CEO; Enrique Mayor-Mora, our Executive Vice President and CFO; and Jon 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. In providing projections and other forward-looking statements, we disclaim any intent or obligation to update them. For additional information on important facts that could affect these expectations, please see our Form 8-K filed with the SEC this morning and our Annual Report on Form 10-K for the fiscal year ended February 28, 2023 previously filed with the SEC. Should you have any follow-up questions after the call, please feel free to contact our Investor Relations Department at 804-747-0422, 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?

Enrique Mayor-Mora:

Thanks Bill and good morning everyone. As Bill noted, we drove another quarter of sequential improvement in year-over-year performance across key financial metrics, including unit sales, wholesale margins, gross profit, SG&A, and EPS. Second quarter net earnings per diluted share was $0.75 versus $0.79 a year ago. Total gross profit was $697 million, down 5% from last year's second quarter. Used retail margin declined by 9% to $452 million, driven by lower volume at similar per unit margins. Wholesale vehicle margin declined by 3% to $137 million with a decrease in volume partially offset by stronger per unit margin performance. Other gross profit was $108 million, up 6% from last year's second quarter. This increase was driven by service, which delivered a $20 million improvement over last year with this year's quarter reporting a $14 million loss. As we communicated in our last two earnings calls, our expectation is that service will deliver improved year-over-year performance for FY '24 as a result of the efficiency and cost coverage measures that we've put in place. The extent of the improvement will also depend on sales performance given the leveraged deleveraged nature of service. The improvement in service was partially offset by reduction in extended protection planned or EPP revenues and third party finance fees. EPP revenues were down $8 million primarily due to lower sales and were to a lesser degree impacted by slightly lower penetration rates, partially due to recent pricing increases taken to offset cost pressures experienced by our third party providers. These items were partially offset by favorability in year-over-year reserve adjustments. Third party finance fees were down $4 million from last year's second quarter, driven by lower volume in Tier 2 for which we receive a fee. On the SG&A front, expenses for the second quarter were $586 million, down 12% from the prior year's quarter as we continue to see the benefits of our cost management efforts. To a lesser degree, we also had some timing favorability in the quarter. SG&A as a percent of gross profit was 84%, a leverage of 6.3 points as compared to last year's second quarter. The decrease in SG&A dollars over last year was mainly due to the following. First, other overhead decreased by $41 million. This decrease was driven by several factors, including continued favorability in non-CAF uncollectible receivables, favorability in costs associated with lower staffing levels, and from reductions in spend for our technology platforms and strategic initiatives, which included a timing benefit this quarter. We also had two smaller items in the quarter that largely offset each other. These consisted of additional settlement dollars from the same class action lawsuit we spoke to in the first quarter, offset by unfavorable self-insured losses related to multiple hailstorm events. Second, total compensation and benefits decreased $28 million, excluding a $7 million increase in share based compensation. This decrease was primarily driven by our continued focus on driving efficiency gains and aligning staffing levels in stores and CECs to sales. Third, we reduced advertising by $17 million. This decrease was due to a reduction in per unit spend as compared to last year's peak per unit spend, lower volume and timing. As we communicated on our fourth quarter call, as we enter the back half of FY '24, we will have largely anniversaried over the year-over-year benefits from our cost management efforts. With that said, we remain disciplined with our spend. We also expect timing in marketing and technology spend to impact the back half of FY '24. In regard to marketing, we still expect our full year spend on a per unit basis to be similar to FY '23 spend level. Accordingly, our spend in the back half of FY '24 will exceed the per unit spend from the front half. Regarding technology spend, approximately $10 million of the year-to-date, the year-over-year favorability experience and other overhead will hit the back half of FY '24. We remain committed to effectively managing our cost structure. Our performance in the first half of the year has us on track to deliver on our goal of low single digit gross profit growth to lever SG&A for the full year, even when excluding the benefits from this year's legal settlements. Regarding capital structure, while we paused the repurchase of our common stocks during the third quarter of fiscal 2023, we intend to restart our share repurchase program this quarter. We expect a modest initial pace that would be below the average quarterly paces prior to our pause. Our objective is to appropriately manage our net leverage to maintain financial flexibility and to efficiently access capital markets for both CAF and CarMax as a whole, while also returning capital back to shareholders. As of the end of the quarter, we had $2.45 billion of repurchase authorization remaining. Now, I'd like to turn the call over to Jon.

Bill Nash:

Thank you Jon and Enrique. As I mentioned at the start of the call, we believe the steps we are taking in response to the current environment are supporting our business in the near-term while also positioning us well for the long run. We will continue to focus on delivering what we believe is the most customer centric experience in the industry as we prioritize initiatives that drive operational efficiencies and make our omni channel experience faster, simpler and more seamless for our associates and customers. Some examples from the second quarter include for online, we're rolling out a number of new capabilities that enhance our digital shopping experience and our customer experience centers or CECs. We launched a new order processing system. Sales orders generated through the new system automatically connect to customers' online accounts and to our progression tracker. This tool guides customers through each step of the car buying journey and provides a more seamless experience for customers who prefer to blend self-progression with assistance from associates. We've begun testing this system in our stores, which will unlock this functionality for all of our customers, regardless of where they start their buying journey. We are also expanding capabilities for Sky, our 24/7 virtual assistant. As you might recall, Sky enables us to officially assist customers via automated chat functionality while taking work out of our CEC system. In addition to supporting workflows related to the finance applications, vehicle transfers and appointment reservations, Sky is now able to identify customers who have an appraisal instant offer. Sky helps these customers complete the next steps for their trade in. Previously, associates would have to reach out to provide further support. We've been pleased with our customers' adoption of Sky as they progress in their shopping journey. For our stores, we're continuing to leverage data automation to reduce costs and improve transaction speed and accuracy. We have deployed an integrated payoff service in our business office, which allows associates to obtain automated payoff amounts for over 40% of the lenders holding titles for the cars we buy from consumers. In many instances, this service also enables us to receive titles faster by expediting payoffs. For auctions, we continue to test enhancements to our platform by upgrading the information we provide dealers, which enables them to submit more informed bids. For example, we launched the test using technology from our investment and partnership with UBI [ph] that provides more detailed information on tire conditions including brand, speed, size and tread depth of each tire. Dealer feedback on this offering has been positive and we plan to roll out other enhancements in the upcoming quarters. Before turning to Q&A, I want to recognize two significant milestones in the company's history. First, this June, we celebrated the two-year anniversary of welcoming all the talented Edmunds associates to our team. We're very excited with the value that we have created together so far as we continue to build out our vehicle and customer acquisition programs. For example, as I've previously mentioned, we utilized the Edmunds sales team to sign up and support dealers for our Max software product, which has enabled us to extend our market leading position as a buyer of cars. We also recently launched an appraisal tool for dealer websites that makes instant offers based on CarMax's algorithm that are redeemable via Max offer. We have received positive feedback from dealers that are utilizing this service and are pleased with the initial results.

Operator:

And our first question will come from Craig Kennison with Baird. Your line is open.

Bill Nash:

Yes, Craig, good morning. I think what we're seeing is, there's absolutely some customers that are because of either the affordability issue which really goes into their monthly payment, customers staying on the sidelines, which would answer the question, are the trade in cycles a little longer? Yes, I would say the trade in cycle is a little longer. As far as how to quantify that, I can't give you a specific number, but we absolutely see traffic flow coming in at the top of the funnel where there's interest and again continue to fall off at the conversion point when people actually start to see their monthly payments and this is especially true in the lower credit customers.

Bill Nash:

Sure.

Brian Nagel:

Hey, guys. Good morning.

Enrique Mayor-Mora:

Good morning.

Brian Nagel:

So I have a couple of questions, I'll merge them together. First off with regard to the buyback, just maybe talk a little about the decision to restart here and then maybe explain a little bit your comment about the modest start, how you expect to start modestly? Then the second question just with respect to demand, so as we're seeing as you highlighted in your comments, there's been a sequential improvement in your used car unit comps and they are still negative, but better than they have been. Comparison is getting easier because you look at the data, are you seeing anything that suggests that, that in certain pockets you're actually seeing real demand improve or maybe some benefits of what you've done to merchandise better older lower priced vehicles? Thanks.

Bill Nash:

Yes, and Brian on the second part of your question, I'll go back to a little bit of what I told Craig. We're seeing good top of funnel folks shopping. It's just when it comes to actually meeting the monthly payments that's where we see the fall off. I think specific to your question, we are seeing still an increased demand for the little bit older vehicles. In our own sales for the quarter, if I think about cars over six years old, 60,000 miles, the sales for that pocket sequentially ticked up not only quarter-over-quarter but certainly year-over-year. So there still is that demand. I think the market data would also tell you if you look at vehicles that are older than 10 years old that sector of vehicle is actually performing a little bit better than the zero to 10 at this point.

Bill Nash:

Thank you, Brian.

Seth Basham:

Thanks a lot and good morning. My question is on the competitive environment. How are you thinking about the outlook here over the next six months or so based on a shift in demand to those older vehicles as well as the potential ripple effects of the UAW strikes?

Enrique Mayor-Mora:

In terms of affordability as well, we still have over a quarter of our inventory is priced less than $20,000. So in terms of hitting that affordability, it certainly is a focus for us.

Bill Nash:

No, we aren't seeing any anymore. In fact this quarter I think compared to the previous quarter, we actually went up a little bit in the 0 to 4 category as far as sales go. And again I think the fact that our self-sufficiency is above 70% which doesn't take into consideration anything that we're getting through our Max offer and Max offer there's a nice selection of retail cars in there as well. So I haven't really seen much of a change there and again we've been through cycles like this where we've seen a shortage of late model cars to a more extreme degree than we're seeing right now.

Bill Nash:

Thank you, Seth.

John Healy:

Thank you. I just want to ask a follow-up question to your comment Bill about the conversion cycle. What's happening after that initial disappointment with the consumer that they can't afford the vehicle? Are you seeing them come back a couple of weeks later? Do you think they're going to the private market? Are they just sitting on the sidelines? I know your sales folks are persistent, so we'd just love to kind of get perspective of what's happening after they meet that surprise affordability roadblock.

Enrique Mayor-Mora:

Yes, and I'll tack onto that, John. I think, and that's one of the real values of our finance product. You can easily apply online and then providing the answers back on all the vehicles, you again can very easily pivot and find something in your range, sort, filter accordingly. So I think that's one of the things that we're real excited about being able to provide that to our customer.

John Healy:

Great. Thanks guys.

Operator:

Thank you. Our next question will come from Scot Ciccarelli with Truist. Your line is open.

Bill Nash:

Yes, Scot, if we look at the quarter specifically, I think I talked about the last call at the beginning of the quarter we're starting out how the last quarter ended on average. And we did, as I said in the call, we did see improvement each month of the quarter and September so far is very similar to similar with a little bit of improvement to where August was. We're not going to give guidance on the rest of the year, but as you said, I mean the comps do because of last year's performance, the comps do get a little bit easier.

Enrique Mayor-Mora:

Well, the two-year stack in the second quarter was better than the first quarter. So I think when it comes to intra quarter, we try not to talk too much about the details of month-to-month especially when looking over year, but I would tell you that second quarter, two-year basis better than the first quarter, as like Bill said.

Bill Nash:

Thank you.

Sharon Zackfia:

Hi, good morning. I apologize if you answered this, my cell cut out and I had to redial in. But obviously you're resuming the share repurchase program. What are the thoughts at this point on store openings? I don't know if you even reiterated the plan for this year and I know you had kind of left the door open and maybe accelerating next year. So just thoughts on that or if perhaps the idea has changed in terms of harvesting more sales at existing locations rather than growing the store base meaningfully?

Enrique Mayor-Mora:

Yes and that's regular routine. We provide that update on an annual basis along with our CapEx guidance for the year.

Bill Nash:

Thanks, Sharon.

Michael Montani:

Great. Thanks for taking the question. I just wanted to ask on the credit front, if you can provide an update on credit availability? And then also to the extent some of the credit behavior was less favorable, how should we think about provisioning, given the current background is kind of $90 million the right number for now? Any color you can give there would be great.

Michael Montani:

Thank you.

John Murphy:

Good morning, guys. I just wanted to ask Bill, as you go through periods of steep depreciation, like you're talking about, and we've seen in the used car market on pricing, typically they're accompanied by supply increases, which would drive same-store sales higher. I'm just curious what you're seeing, in the market right now as far as availability and flow of vehicles, maybe in the 0 to 6 year old bucket, which is the target, and then maybe in the 6 to 10 year old, which is a growing target for you over time?

John Murphy:

And maybe just a followup, I mean, do you think you could ever get meaningfully above that 70% self-sufficiency that you're at right now, which is pretty damn good to start with, but I mean, are there other avenues maybe through Edmunds or other ways that you could increase that meaningfully?

John Murphy:

Okay. All right. Thank you very much.

Operator:

Our next question will come from Chris Bottiglieri with BNP Paribas. Your line is open.

Enrique Mayor-Mora:

Thanks for the question, Chris. Yes, at this point with compensation, as I mentioned in our prepared remarks, we have pretty much anniversaried over the benefits of some of the stronger levers we put in place. So when thinking of compensation that I would think of that for the back half of the year one or more pressured clients, if you will, relative to what we've been here for the past couple quarters. So we've copped over those levers. At the same time, we go through the decision process at this time of year about staffing for tax time, right? And depending on what the expectation is for tax time, we start to ramp up our associate level there as well. So I do expect compensation will be one of the line items moving forward that will be a little bit more pressured relative to what we've been for the past few quarters here.

Enrique Mayor-Mora:

Yes, which we believe we're appropriately staffed. So those cost management efforts we undertook successfully at this point we're largely successfully staffed and appropriately staffed and so…

Chris Bottiglieri:

Got it. That makes sense. And then just quickly on car buying, I think you called that out, it seemed like it was July and August when pricing was the worst, or sorry, June and July, as pricing kind of stabilized a bit in September and lesser extent August, have you seen, are you buying cars more often or more frequently higher conversion from customers, has that kind of trend maintained its pace?

Chris Bottiglieri:

And that helps your car buying, like you expect that to pick back up from here or is that, or do you think it's like the level?

Chris Bottiglieri:

Got it. That makes sense. Thank you for the help. I appreciate it.

Operator:

Our next question will come from Rajat Gupta with JP Morgan. Your line is open.

Bill Nash:

Yes. Thanks for the question, Rajat. Yes, when I think about this quarter, actually, I'm pleased. I'm pleased because we talked about last quarter coming in to more in line with where we were last year, which remember last year was a record high for us and as you pointed out, I mean, $30 is within the, in the noise for us. So, I feel good about that, especially considering the environment, that's out there. I think, the first quarter obviously was a record high, and I think there was some dynamics in that quarter where you purchased the vehicles and then we saw some appreciation in that quarter, which keeps you from having to do markdowns, that kind of thing. So I look at the first quarter as more of an anomaly, which is why we set the, said what we did last quarter. We thought we'd be more in line in the second quarter with the second quarter last year. And we reiterate, we think we'll be more in line for the whole year with the whole year of last year, which is still a step up from where we've historically run of $80 to a $100.

Rajat Gupta:

Right, right. Yes, that's helpful. And just you mentioned earlier around the supply situation and the fact that there are several cars in the 0 to 10 year old that may not meet your reconditioning needs. As we look into later this year, into the next couple years, it looks like, you're building more dependency on the greater than 6 year old cars to grow your business. Yes, how do you get around some of those quality constraints, reconditioning constraints for those cars, because the 0 to 4 year old supply is likely going to get worse before it gets better. So how do we manage through that to return to growth in the business in the next couple of years? Thanks.

Rajat Gupta:

Understood, that's helpful color. Thank you.

Operator:

Our next question comes from Daniel Imbro with Stephens. Your line is open.

Bill Nash:

Good morning.

Enrique Mayor-Mora:

Sure. Yes, great question Daniel. A couple of things that are subtle in there to point out. First, the flat quarter-over-quarter also realize we did some tightening in there. If you pull back in the Tier 3 space, we pick pockets in the Tier 1 space, that's going to offset any sequential growth in the APR. I can tell you that we did continue to test and raise APRs within the quarter, but bear in mind, I think one of the key things for us is, we're not looking to maximize finance margin. When we do our testing and pass this along to the customer, we're taking into accounts, are they able to purchase the car? Are they going to end up paying off with someone else where we wouldn't gain any finance income? So we very carefully test different rates and then adjust those rates in smaller pockets to optimize the overall CarMax value. So I think that's why you're seeing the sequential piece. But certainly, obviously there are payment pressures as Bill mentioned, so we continue to be very careful with that. But that's why you're seeing sequential quarter-over-quarter flat. It's -- the tightening is offsetting it.

Jon Daniels:

No. I would say we contemplate that in the decision. We look at units sold, we look at amount of finance margin that CAF captures and also contemplate, remember they can pay off in three days. So we could sell the car, but CAF could lose the financing if they choose to go down the street to their bank or their credit union. So we put all that together to optimize for CarMax in total, not just maximize one dimension or the other. That's CarMax's total profitability, right? How we think about it. That's right.

Operator:

Our next question will come from David Whiston with Morningstar. Your line is open.

Enrique Mayor-Mora:

Sure. Yes, David. I think there's a couple things going on there. First I think what you really do see is the affordability is definitely a challenge in the bottom portion of the credit spectrum, kind of that mid-tier to the subprime space. We see great demand across the credit spectrum, but ultimately when they see the monthly payment it's the higher end guys that are able to follow through with the purchase. So that's going to benefit both cash and kind of the outside financing population. You did see some pullback, as I mentioned the back half of last year in the Tier 2 space, so there's also some tightening that's hurting the penetration there just around it out in Tier 3, they did benefit from that tightening, right. Those customers flow down to the Tier 3 space. But I think it predominantly is, it's affordability. Those higher end customers can buy and that's why you see the percentage of sales are a little more skewed to the high end. I think there's demand everywhere, but that's really what's driving it.

Enrique Mayor-Mora:

Yes, so those are going to be, so this hits in the SG&A bucket, right? And these are going to be receivables that our finance partners originate and underwrite that end up having a title processing issue or a down payment challenge that we end up having to buy back. So that's an area of focus for us. Over the past year, we've made material improvements, as I've talked about on previous quarters, both in execution in our stores, in our home office. The DMVs have also got better in terms of turning around those titles as well as the banks in terms of turning around the processing. So, we saw another quarter of benefit this quarter, we expect to see some more benefit in the back half of the year. Probably not as strong as the first half of the year as we start to lap over that accentuated focus last year that we had on making sure we're managing those.

Enrique Mayor-Mora:

No, we do not. That's, we do not underwrite it. That's the third party partners that would underwrite it and then service it. That's right.

Operator:

We do have another question from Michael Montani with Evercore ISI. Your line is open.

Bill Nash:

Okay. Yes, so as I said earlier, I mean, we're seeing the biggest pinch probably on the, not probably on the, we are seeing it on the lower consumer. And think about it, from a monthly household income of let's say $3000 to $4,000 that had, that segment of sales for us has shrunk dramatically. So it's probably in the last couple of years it's down probably and it's probably down about 50% in the $3,000 and less household incomes about 50% less than what it used to be. So that's absolutely a headwind, which again speaks to the affordability. As far as advertising goes, that's an area where Jim and Sarah and team, they constantly are looking at it. And I think an interesting thing that everybody needs to keep in mind is, because we've got this big buying engine also, when we talk about advertising, it's advertising for sales, but it's also advertising for buy. So while you may pull back on sales, you may do more on buy. So it's a walk that we do, and that team does a great job measuring the ROI. So to Enrique's comments earlier, what we're expecting to do in the back half, that certainly could shift if we see something in the marketplace that says, hey you don't need to spend as much, it's not fruitful or on the flip side, hey you may want to spend a little bit more and so we're constantly monitoring that. But I think the guidance that Enrique gave is really the way to think about it and then we'll continue to monitor it.

Operator:

Thank you. We don't have any further questions at this time. I'll hand the call back to Bill for any closing remarks.

Operator:

Thank you ladies and gentlemen. That concludes the second quarter fiscal year 2024 CarMax earnings release conference call. You may now disconnect.

David Lowenstein:

Thank you, Chelsea. Good morning. Thank you, everyone for joining our fiscal 2024 first quarter earnings conference call. I'm here today with Bill Nash, our President and CEO; Enrique Mayor-Mora, our Executive Vice President and CFO; and Jon 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 that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our current knowledge, expectations and assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially from our expectations. In 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 Annual Report on Form 10-K for the fiscal year ended February 28th, 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 804-747-0422, extension 7865. Lastly, let me thank you in advance for asking only one question and getting back in queue for more follow-ups. Bill?

Enrique Mayor-Mora:

Thanks, Bill, and good morning, everyone. Our continued focus on managing what is in our control drove another quarter of sequential improvement in year-over-year performance across key financial metrics, including unit sales, SG&A leverage, gross profit and EPS. First quarter net earnings per diluted share was $1.44, down from $1.56 a year ago. Included in our EPS this quarter was the equivalent of $0.28 or $59 million related to a legal settlement. Total gross profit was $817 million, down 7% from last year's first quarter. Used retail margin of $515 million and wholesale vehicle margin of $168 million declined 9% and 12%, respectively. The year-over-year decreases were driven by lower volume across retail and wholesale. This was partially offset by strong margin performance with both retail and wholesale per unit margins up slightly from last year's numbers. Other gross profit was $135 million, up 12% from last year's first quarter. This increase was driven by service, which delivered $4 million in margin, a $26 million improvement over last year. As we communicated in our Q4 FY'23 year-end earnings call, our expectation is that service will deliver improved year-over-year performance in FY'24, driven by the efficiency and cost coverage measures that we put in place. Our first quarter has us off to a solid start. The improvement in service was partially offset by reductions in extended protection plan or EPP revenues and third-party finance fees. EPP revenues were down $5 million, primarily due to lower sales, partially offset by stronger margins that were implemented at the end of last year's first quarter. Third-party finance fees were down $3 million to last year's first quarter. Lower volume in Tier 2, for which we receive a fee, was partially offset by a reduction in Tier 3 volume for which we pay a fee. On the SG&A front, expenses for the first quarter were $560 million, down 15% from the prior year's quarter. Excluding the benefit from the legal settlement, SG&A was down 6% from the prior year's quarter, as we continue to see the benefits of our cost management efforts. SG&A as a percent of gross profit was 68%. Excluding the benefit from the settlement, our SG&A leverage was 76%, roughly flat to last year's first quarter. The change in SG&A dollars over last year was mainly due to the following factors. First, other overhead decreased by $79 million, of which $59 million was due to the settlement. The balance of year-over-year favorability was driven by several factors, including favorability in non-CAF uncollectible receivables, which benefited partially from timing, favorability and costs associated with lower staffing levels and a variety of other smaller costs. Second, we reduced advertising by $17 million. While our advertising expense on a total dollar and per unit basis was lower year-over-year on the quarter, our investments for the quarter on a per unit basis remained aligned with last year's second half spend level. Third, total compensation and benefits, excluding a $13 million increase in share-based compensation decreased $15 million. This decrease was primarily driven by our continued focus in stores and CECs on aligning staffing levels to sales and driving efficiency gains. As I noted in our Q4 FY'23 year-end call, we expect to require low single-digit gross profit growth to lever SG&A for the full FY'24 year, well below the levels we guided to during the investment heavy phases of our omni transformation. As a result, we expect to deliver stronger flow through of gross profit to profitability. Our first quarter performance has us on track to deliver on this goal. While we delivered SG&A leverage point in the mid 70% range in the first quarter, it is important to remember that the first quarter is typically our strongest for SG&A leverage as it's historically our highest used unit volume and margin per unit quarter. Regarding capital structure, our first priority remains to fund the business While our adjusted net debt to capital ratio was slightly below our 35% to 45% targeted range, given ongoing market uncertainties, we continue to appropriately manage our net leverage to maintain the flexibility that allows us to efficiently access the capital markets for both CAF and CarMax as a whole. In keeping with this goal of maintaining flexibility, we continue to pause our share buybacks in the first quarter. Our $2.45 billion authorization remains in place, as does our commitment to return capital to shareholders over time. Additionally, post quarter calendar end, we successfully renewed our $2 billion revolving lending facility with materially similar terms. We plan to include additional information in our forthcoming 10-Q, which we plan to file on Monday. Now, I'd like to turn the call over to Jon.

Bill Nash:

Thank you, Jon. Over the past several years, we've built a leading omni-channel platform that enables us to deliver what we believe is the most customer centric experience in the industry. Our ability to offer integration across digital and physical transactions gives us access to the largest total addressable market and is a key differentiator. With our core omni capabilities now in place, we are continuing to prioritize projects that drive operating efficiencies and optimize experience for our associates and customers. We believe the steps we will be taking enable us to further expand our competitive moat and will position us well for the future. Some examples from the first quarter beyond what Jon just spoke about related to CAF include one, as we work to deliver a seamless digital first shopping experience, we are increasingly leveraging Sky our 24/7 virtual assistant. Sky enables us to efficiently assist customers via chat functionality while taking work out of our CEC system. During the first quarter, we expanded these capabilities to include workflows related to finance applications, vehicle transfers and appointment reservations. Since going live, we've had great success reducing CEC work volume routed to associates, enabling us to provide a quicker response at a lower cost per transaction. We anticipate rolling out additional functionality to Sky throughout fiscal 2024. Second, we are currently rolling out express drop off, which enables customers with instant offer or store generated appraisals to progress the selling process from home. When utilized, this option offers customers the ability to complete their transaction at one of our stores in under 30 minutes and our research shows that customers and associates both love this experience. Finally, we're continuing to modernize our auction platform to enhance the experience for dealers. This quarter, we launched an integrated check-in experience that enables single sign-on across our systems and streamlines access to the information that dealers rely on the most when bidding on vehicles. Additionally, we initiated proxy bidding capabilities in a limited number of markets. This allows dealers to bid on vehicles in advance so they don't have to participate live during each auction. It also unlocks the ability to take part in multiple auctions and bid on multiple vehicles simultaneously. Feedback on both of these capabilities has been positive. We plan to expand proxy bidding to additional markets as well as launch other enhancements in upcoming quarters. With our focus on improving experiences and gaining efficiencies, we believe we are well positioned to emerge from the current environment and even stronger company. We're confident in the future of our diversified business model and believe that the deliberate steps that we are taking will enable us to drive robust growth as the market improves. With that, we will be happy to take your questions. Chelsea? Chelsea, can you remind folks of how to enter the question portal.

Brian Nagel:

Hey, good morning, everyone. Thank you for taking my question.

Brian Nagel:

So the question I'll ask with one question, but I'll have two parts of it. Just maybe you could talk about the market share dynamic you witnessed here early in, I guess, so far in the year? And then secondarily, as you talked about in your script, we are seeing this improving [indiscernible] in used car sales, obviously, still down year-on-year, but better than it had been in the prior two quarters. If you look at the drivers behind that, is that more what CarMax is doing? Or you've seen an excess solidifying backdrop within the sector? Thank you.

Brian Nagel:

I appreciate all the color, Bill. Thank you.

Operator:

Thank you. Our next question will come from Craig Kennison with Baird. Your line is open.

Bill Nash:

Yes. That's a great question, Craig. It's one that we've actually talked about internally, both from a sales standpoint and from a finance standpoint. I think from a sales standpoint, it's hard to tell because folks have been taking consumer loans out for longer periods of time. And I would think probably the majority of our customers are outside of the student loan -- the majority of our retail customers are outside of that period. I think when you think about the CAF business, and Jon, you might have some different thoughts on this. But when you think about the CAF business, because we skew to a higher credit customer, that probably puts us in a little bit better position, but I don't know if you have any additional thoughts beyond that?

Craig Kennison:

Thank you.

Operator:

Thank you. Our next question will come from Daniel Imbro with Stephens Inc. Your line is open.

Bill Nash:

Good morning.

Daniel Imbro:

I wanted to start on our focus on the SG&A results, obviously impressive in the quarter. Maybe two-parter related to that. First, within other maybe overhead, historically, I thought a lot of that was IT kind of e-commerce investment. Other than headcount reduction, can you maybe talk about Enrique some of the operational changes you made to drive that improvement in that line item and maybe the sustainability? And then related, I think you said there was a onetime benefit from the timing of some CAF receivables in the quarter. Could you quantify that just to help investors underwrite that outlook as well as in the SG&A line? Thanks.

Daniel Imbro:

Okay. Thanks for all the color, guys.

Bill Nash:

Thank you.

Sharon Zackfia:

Hi. Good morning. I wanted to actually ask some questions about Sky because I don't recall you talking about Sky previously. So how - I mean, how far do you think you can take, I guess, what I'll call an AI technology to help kind of make the CECs more efficient? And how should we think about if there's any kind of step-up in investment that would be related to kind of enhancing or optimizing Sky further, if that makes sense.

Enrique Mayor-Mora:

What I'd say as well just building on that is Sky has been a pretty strong contributor to helping us get our operating model even more efficient than where we've been in the past. We've shown sequential improvements now in quarter-over-quarter costs when it comes to the CECs and the operating model, and that's on a per retail unit basis. And when you consider total units, so use and wholesale or even gross margin dollars, we -- the progress has been even stronger. So it has been a pretty material -- it's had a pretty material impact to the efficiency of our model, and it's contributing to the SG&A gains that we're seeing.

Bill Nash:

Thank you, Sharon.

John Murphy:

Good morning, guys. Just one very quick follow-up. Is there a way to quantify the timing that you got from -- or timing benefit you got on SG&A from the non-CAF uncollectible receivables just in a dollar sense?

John Murphy:

Okay. And then just a question, Bill, as you think about the same-store sales comps, I mean, it's tough to call exactly when things will inflect. I'd love to hear your opinion about when you think they may inflect. But if they don't, is there an opportunity to potentially get more aggressive on SG&A costs through headcount reduction or other areas in case we're in an environment where affordability and supply remain a pretty material issue?

John Murphy:

And that target of low 70%, I mean, is that a one or two year target? Or is that an eventual? How should we think about getting there, the time frame?

Bill Nash:

Yes, John, I think we talked about last quarter that well, for this year, we need the macro conditions to continue to improve to get there. If that doesn't happen this year, we wouldn't expect this to be a two-year thing. We would expect to get back there next year.

John Murphy:

Great. Thank you very much.

Operator:

Thank you. Our next question will come from John Healy with Northcoast Research. Your line is open.

Bill Nash:

Yeah, great. Thank you for the questions, John. So I think from a affordability, look, there's still an affordability issue out there. Even though our average selling price is down, it's still up substantially over where it used to be. And I think in the previous calls, we've said, hey, if you think about the affordability, 85% has been driven by the vehicle price, 15% is driven by the interest rates. I think we're probably more in a 75-25, which is more driven by the prices coming down, which automatically gets your interest rates makes a little bit more. But I think we've knock on wood, I think we've kind of peaked on what the increase in payments. I think we were running. If you look at just the CAF business, we were running about 150 monthly higher than pre-normal times and I think we're probably down to 130 or so. So there is still absolutely an affordability issue. I think your question is great when you think about the mix. Our prices were down roughly $1,600. But the interesting thing, while your acquisition price is down almost and that was more than 50% of the price swing. There's also a bit of an age mix thing here as well. And what I mean by that is if you look at the zero to four-year-old cars that we sold a year ago compared to the zero to four-year-old cars that we sold this year, we had less percent of those. So we dropped a few points, which means less of those newer cars and what you've shifted to is we've actually seen a little bit of uptick in the eight plus. And so that obviously is going to drive down your overall selling price. It's also a little bit of a tailwind for us on margins as well, which played out in the quarter. I think the last part of your question, which was the supply. We've gotten this question in the past. And what I would tell you is the fact that the new car sales rate has been off of what it traditionally is, that's not an environment that we're unfamiliar with working in because if I think back in the past, we've seen that before back in the '08, '09, the reduction in new car sales was actually more dramatic than it is now. If you look at the new car sales that we've been experiencing here more recently, we still haven't hit some of the numbers that you saw back coming out of '08 and '09. So and we were able to manage through that period very well. And I would tell you, we have a better tool in the toolbox this time with self-sufficiency being so high. So we're not worried about the availability of inventory just like we haven't really been worried about it over the last year.

Operator:

Thank you. Our next question will come from Scot Ciccarelli with Truist. Your line is open.

Bill Nash:

Hey, Scot.

Bill Nash:

I'll take the comps and I'll pass it over to Jon to talk about the other questions. So the way I think about the kind of the comp cadence, it was pretty steady throughout the whole quarter. I mean there wasn't any remarkable difference month-to-month. If you look at the quarter as a whole, that's kind of how each month basically performed. And then Jon I'll toss it to you on the credit.

Scot Ciccarelli:

Right. Can I have a follow-up question on that?

Scot Ciccarelli:

If everyone's tightening credit, how does the approval rates stay flat? Is it just fewer and fewer people and it's better qualified people coming in? Like, is that the way to interpret that?

Scot Ciccarelli:

So the approval includes changes in what those terms are. So like you know we'll still preview.

Scot Ciccarelli:

Got it. Super helpful. Thank you.

Operator:

Thank you. Our next question will come from Michael Montani with Evercore. Your line is open.

Bill Nash:

Yes. So I think as far as comp trends quarter-to-date, I would look to similar to where we ended the quarter. I think on the inventory levels, look, I was really pleased the team has done a phenomenal job. As I said in my opening remarks, we actually took the total dollar amount down yet we increased our saleable and they're doing a great job making sure that we're getting cars through even with delays on parts that kind of thing. So we typically go down a little bit of inventory. And this month, this quarter, we actually -- when you go from Q4 to Q1. And this year, we actually went up a little bit. So we feel good. We're still -- if I think about the traditional stores, we're a little bit lighter than where we normally are, but I think that's appropriate in this type of selling environment. So I think from an inventory standpoint, we're in good shape.

Bill Nash:

Yeah. I feel good about where we are right now. Obviously, you've got to continue to monitor the competitive landscape. You've got to come in, continue to monitor price elasticity, especially when it comes to the GPUs. But as I said earlier, we're working on efficiencies regardless of market share. But again, I would just reiterate that I feel good about the growth that we're seeing so far. And I'm positive about the outlook in front of us.

Bill Nash:

Thank you.

Seth Basham:

Thanks a lot and good morning. My question is really around GPU and the better performance in retail GPU for the quarter. Can you give us a sense of how much of that was driven by market pricing dynamics relative to other internal factors?

Seth Basham:

And as a follow-up, do you think you can hit that $2 million unit sales both for fiscal '26 with retail GPUs in that $2,100 to $2,200 normalized range?

Seth Basham:

Fair enough. Thank you.

Operator:

All right. Thank you. Our next question will come from Rajat Gupta with JPMorgan. Your line is open.

Enrique Mayor-Mora:

Yeah. Thanks for the question, Rajat. So really two things drove that, right? Within bucket of service, service is really where we saw the year-over-year increase, about $26 million. And actually, we're able to deliver profitability and service, which we haven't done in a couple of years in the quarter here. So we're really pleased with the progress that we've made. Two things have driven that. Number one is we took cost coverage metrics -- measures, I'm sorry. So as you recall, we've been hit by inflation for a good period of amount of time here. And we took increase in rates in labor. We took increase in rates and parts, and that has allowed us to cover the inflationary pressures that we've been facing. That's number one. Number two, really strong focus on efficiency still a headwind year-over-year, especially with sales still being challenged. But we've shown now sequential improvement in driving efficiency in the service department. So we've reduced labor along with retaining our tech, which is critical right? But we have been able to reduce labor. We're also in a little bit more of a stable sales environment, which allows for more effective scheduling. And so those are the primary reasons why we've seen that benefit. I would expect that year-over-year benefit to continue for the rest of the year. Whether or not service will be profitable for the year, we'll see, right? But what we do know is that we do expect from a year-over-year basis to show some pretty considerable improvements year-over-year for the rest of the year.

Jon Daniels:

Sure. Yeah, I appreciate the question, Rajat. Yeah, I'll just talk about the provision sequentially quarter-over-quarter. I think that's driven primarily by some of the tightening that we've done. Obviously, you're going to provision for your new originations within the quarter. So if you tighten and that's going to come in at a lower loss rates then there's just less money that you need to put towards those receivables. I mean, obviously, we then make adjustments on existing portfolio accordingly. So I think that's some of what you're seeing there. With regard to your recovery rates, I'll just speak in general around that. Historically, we're between 40% to 60% on our recovery rate. Obviously, with vehicle values very high. We enjoyed recovery rates in the 70% range. Year-over-year, we're probably down 13 points -- 12 to 13 points were actually up sequentially. So, yes, I don't think recovery rate that was playing a large piece of that. I think units still carry the day here and again, hopefully, that explains the provisioning down quarter-over-quarter.

Jon Daniels:

So the recovery rate for the quarter was -- I think the numbers were let's see, I think we'll show it about 59% to 60% when all is counted. So which we were 73% to 74% last year, we were about 57% last quarter. So just obviously down year-over-year, but a tick up quarter-over-quarter.

Bill Nash:

Sure. Thanks, Rajat.

Chris Pierce:

Hey, Bill, you talked in your remarks about feeling better about the macro as wholesale prices come in quicker than they normally do at this time of the year, if I understood that right. Are you feeling better about the used car macro environment returning to a 40 million unit number at a sooner rate than you had previously thought based on kind of what you're seeing out there? Just wanted to get a sense of how you're thinking about bigger picture?

Chris Pierce:

Okay. And then on used GPU. The question was asked about of lack of new car sales leading the lack of used car sales and you guys retailing older vehicles, if I understood that right. If you're going to be retailing older vehicles for the next multiple years, is that a multiyear tailwind for used GPU? I know you raised it to $2,200 to $2,300, what we just saw come in above $2,361. So I'm just curious if there will be upside to that number even if you're retailing more aged vehicles than you normally would prior?

Chris Pierce:

Thank you.

Operator:

Thank you. Our next question will come from David Whiston with Morningstar. Your line is open.

Bill Nash:

Yeah, David, thank you for the question. So I think if you think about CarMax as a whole and the number of EVs we actually sell, it's a very small percent. And I think probably last quarter, it was roughly on pure EVs around 1%, maybe a little bit more. And we've seen that number tick up a little bit. As you can imagine, there just hasn't been a lot of EVs out there in the marketplace for you. Now, obviously, all the manufacturers are putting out more EV product. I do think, I mean, you point out a good thing on affordability. I think they have to become a little bit more affordable for the average consumer. But that being said just like we're the retailer of used vehicles. We want to be the retailer, the largest retailer have used EVs. And so we're preparing for that. While it's a small percentage of our sales now, we think that, that will grow over time. And so we're already taking steps to make sure that we can be prepared for that.

Enrique Mayor-Mora:

No. CAF is one of the six lenders that are currently operating on FBS. And again, that's the online shopping tool. So, yes, absolutely, all lenders -- all of those lenders are participating in CAF loans. We'll absolutely underwrite folks in FBS and it will go through our normal funding channels.

David Whiston:

Did you give an FBS penetration number?

Jon Daniels:

Yeah. I think what we would say is of the people that apply for credit, 80% plus are starting online and leveraging our online platform.

David Whiston:

Okay. Thank you.

Operator:

Thank you. We have no further questions at this time. I'd like to hand the call back to Bill for closing remarks.

Operator:

Thank you, ladies and gentlemen. This does conclude the FY'24 Q1 CarMax Earnings Release Conference Call. You may now disconnect.

David Lowenstein:

Thank you, Corless. Good morning. Thank you for joining our fiscal 2023 fourth quarter earnings conference call. I'm here today with Bill Nash, our President and CEO; Enrique Mayor-Mora, our Executive Vice President and CFO; and Jon 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 that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our current knowledge, expectations, and assumptions, and are subject to substantial risks and uncertainties that could cause actual results to differ materially from our expectations. In 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 annual report on Form 10-K for the fiscal year ended February 28, 2022, 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 804-747-0422 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?

Enrique Mayor-Mora:

Thanks, Bill, and good morning, everyone. Our continued focus on managing what is in our control drove a sequential improvement from the third quarter across key financial metrics, including EPS, gross profit and SG&A. Fourth quarter net earnings per diluted share was $0.44, down from $0.98 a year ago. Total gross profit was $611 million, down 14% from last year's fourth quarter. Used retail margin of $387 million and wholesale vehicle margin of $143 million declined 9% and 20% respectively. The year-over-year decreases were driven by lower volume across used and wholesale. This was partially offset by strong margin per unit performance. Used unit margins increased from last year's fourth quarter and wholesale margins per unit were flat year-over-year. Other gross profit was $81 million, down 24% from last year's fourth quarter. This decrease was driven primarily by a decline in extended protection plan or EPP revenues. In addition to the impact of lower retail unit sales, profit sharing revenues from our partners decreased from $33 million in last year's fourth quarter to $16 million in this year's quarter. This was partially offset by stronger margins and a favorable year-over-year return reserve adjustment. Penetration was flat year-over-year at approximately 60%. Third-party finance fees were relatively flat over last year's fourth quarter with lower volume and fee generating Tier 2 offset by lower Tier 3 volume for which we pay a fee. Service was also relatively flat over last year's fourth quarter, reflecting sequential improvement in year-over-year performance. We have maintained our technician staffing levels and have put in place key efficiency and cost coverage goals for our teams. This supports our expectation of improved performance in FY ‘24, compared to the full FY ‘23 year. The extent to this improvement will also be governed by sales performance given the leverage, deleverage nature of service. On the SG&A front, expenses for the fourth quarter were $573 million, down 8% from the prior year's quarter and down 3% sequentially from this year's third quarter. SG&A as a percent of gross profit was higher than the fourth quarter last year, due primarily to the 14% decrease in total gross profit dollars, compared to last year's quarter. The change in SG&A dollars over last year was mainly due to the following factors

Bill Nash:

Thank you, Jon and Enrique. As I mentioned at the start of the call, even as we navigated the challenges of fiscal ‘23, we achieved a number of key milestones during the year by focusing on making our omnichannel experience faster, simpler and more seamless for our associates and customers. I'm proud of the progress that we've made on our journey to deliver the most customer synthetic experience in the industry. Some highlights from this year that will have a lasting impact across our diversified business model are for retail we enabled online self-progression capabilities for all of our customers. As we evolve our omnichannel experience, we're also updating our operating models to drive efficiency gains in our stores. During the year, we launched self-checking capabilities for appraisal customers and also enhanced e-sign functionality to better enable self-progression. Our e-commerce engine combined with our unparalleled nationwide fiscal footprint is a competitive advantage. Our ability to deliver integration across digital and physical transactions is a key differentiator in both the experience we provide in the total addressable market available to us. For wholesale, we rolled out a modernized mobile friendly vehicle details page that displays the most relevant information from dealers they need to preview our wholesale inventory, creating a shopping experience for dealers that is similar to how consumers shop our retail inventory. We also expanded MaxOffer, our digital appraisal product for dealers to approximately 50 markets, which enable us to build on our leading position as a buyer of cars. We utilize our admin sales team to sign up new dealers for the service, which provides profitable incremental wholesale volume. For credit in CAFs, we completed the nationwide rollout of finance-based shopping, our multi-lender prequalification product. As Jon mentioned, this gives customers the flexibility to digitally receive quick credit decisions from a majority of our lenders across the entire vehicle inventory. Over 80% of our customers have used this online tool as they begin the credit process. In addition CAF is equally focused on coming out of this cycle leaner and more effective. The team is already leveraging the new loan receivable system that we deployed a little over a year ago to deliver on savings opportunities with many more expected in the upcoming years. Looking ahead to fiscal ‘24, we will build on last year's initiatives and prioritize projects that unlock operating efficiencies and create better experiences for our associates and customers. We are confident that the actions we will take position us better to capture the upside when the market improves. Some examples include

John Healy:

Guys, wanted to talk just a little bit about the CAF business to start off. Enrique, just hoping maybe you could hit us with kind of maybe your thoughts on where maybe some of the key metrics might look out maybe, say, the next quarter or so? Maybe on kind of losses as well as recoveries and maybe the crosscurrents there? But also just kind of on your cost of funds and where that's kind of moving to of late, as well as kind of the coupon rate that's going to the consumer? And is there a lag? Is there a catch-up period? Just how we can think about maybe some of those dynamics moving for -- as we start fiscal ‘24?

Jon Daniels:

Sure. And I'll jump in on the other metrics. Just to piggyback on the cost of funds, obviously the other component there is the kind of APR, that's in the deal as well. Last time, we were at 9.09%, we just cited that we were 10.9% on our originations in this quarter, we've done a great job of raising rates through the year. So you can imagine that to drive through into future deals as well. So if spread settles in and our APRs are higher, that should benefit us. With regard to losses and delinquencies, as mentioned in the prepared remarks, again, we've taken our reserve up to $507 million, that's 3.02% of receivables. Did mention that some of that is driven by unfavorability in the portfolio and the macro environment. I think the entire industry is feeling a higher sense of delinquency in the consumer for us in the existing book of business. You've got some -- you've got definitely higher inflation making it more challenging for consumers. Our newer originations are purchasing at a higher average selling price, therefore, there's a higher payment. So people are having to work through having a higher auto payment than they might normally be used to. So all of these factors or things we're watching very carefully. We've reserved accordingly for it, but definitely a rise in delinquencies that we've done a nice job with and hasn't fully trended its way into losses and we think we're going to be able to continue to serve the consumer well. The other thing I'll add to that is we did mention in the prepared remarks and we have tightened -- many lenders have tightened on their -- in our platform, as well as outside of the industry and we've tightened as well. But something that we've done on a regular basis, we did it in the great recession, we did it at the start of a pandemic. We've done it many times in between. So we have tightened just to make it a little more conservative to watch this consumer carefully. But again, with our tightening, our partners will be happy to pick up that volume as we've done. So looking out hard to say where losses and delinquencies are going to be, but we think we're in that 2% to 2.5% range as we always have. We think we're well reserved and we'll watch the consumer carefully.

Operator:

And the next question comes from Michael Montani with Evercore ISI. Your line is open.

Bill Nash:

Sure. Good morning, Michael. Yes, on the retail and wholesale GPU, obviously, they did come in stronger. I think the wholesale benefited a little bit we saw some appreciation in the latter part of the quarter, which when that generally happens, we usually trail whether it goes up or comes down. So I think that added a little bit of favorability there. I think as you go forward thinking about wholesale, I would land probably more in the line of where we've been historically $900 to $1,000. On the retail side again, we did expansive price elasticity testing and determined that we could have sold a few more cars, but we actually would have made less money. So we held the retail GPUs, they're pretty similar to the third quarter. They were up year-over-year and that's more of a function of the fact that we continue to have a higher mix of older vehicles, which carry a little bit more margin. I think just in the retail pricing environment in totality, we did see some depreciation at the beginning of the quarter, we saw a little bit of appreciation at the latter part. If you go back a year ago, not this year, they just completed the year before, prices appreciated about $7,500 and that's in the zero to five-year old cars this year. By the end of the calendar year, they had come back about $5,000, I would expect, even though we've seen some recent appreciation, I would expect to probably start to see a little bit more depreciation as we go forward. So that should continue to give a little bit of relief on the overall retail sales price.

Bill Nash:

Sure.

Craig Kennison:

Hey, good morning and thank you for taking my question. We're hearing that some banks [Technical Difficulty]

Operator:

Craig, your line is open.

Bill Nash:

Yes, we can hear you, Craig. Go ahead.

Bill Nash:

Yes. I think it's hard to say, I mean, what I would tell you is because our self-sufficiency is so high, we just really haven't had an issue on sourcing environment. It's not like we're going out and competing in the auction lanes as much as we used to. I think it remains to be seeing what the impact is on competitors and where they get their funding. I guess theoretically, it could cause prices to go down if they are not able to source financing to keep inventory on the lot. But that remains to be seen.

Bill Nash:

Yes.

Rajat Gupta:

Great. Thanks for taking the question. Just had like a question on SG&A and one within that. Maybe just on the store occupancy car, it was lower quarter-over-quarter by roughly 10%, despite five new stores opened. Is there something we're missing there? We would have expected it to be up sequentially given the new openings, but I just want to make sure, are we not missing any one-timers there? And then I have a quick follow-up.

Rajat Gupta:

Understood. That's helpful. And in terms of just budgeting purposes for SG&A for the year. What kind of view are you taking on the used car market this year? Do you expect the industry, especially the zero to 10-year old space to grow this year and do you expect to grow share within that -- with the level of ad spend that you're guiding to? Just curious like what kind of shape of recovery are you assuming in your budgeting plan?

Rajat Gupta:

Understood. Thank you.

Operator:

Our next question comes from the line of Brian Nagel with Oppenheimer. Your line is open.

Bill Nash:

Good morning.

Bill Nash:

Yes, everyone. Thanks for the question. I'll give you my thoughts first and I'm sure Enrique will have some thoughts as well. But you're exactly right, we are -- send in the message that we expect this to be at a lower rate going forward. And if you think about the past few years, every year we update and say, okay, this is what it's going to take to lever and we're running that five day in this past year, prior year we said, hey, it's going require more than that, because of the investments we knew we were making plus some of the carryover investments. We hadn't been giving longer term guidance, because quite honestly, while many companies have gone from a pure brick and mortar to more of an omnichannel, there really hasn't been any other example of companies doing that with what I call considered purchase where there's a lot of back and forth between physical and digital properties. And so I almost equate this to renovating an old house, which unfortunately haven't experienced with that too. You don't know what you don't know until you get into it. And every time you pull down a wall in old house there's some new surprise there. Well, with this, every time we would turnover a rock as it related to the omnichannel experience, there were two other rocks underneath it. And I think what we've gotten to the point of is that we've built out our product organization. We feel really good about the resources there. We've got the base of the capabilities. Now it's about enhancing, and then as we enhance and finish some things, we'll shift people to work on different things. So we feel good about the resources that we have at this point. And I'll let Enrique add any other…

Brian Nagel:

Alright, guys. I appreciate the color. Thank you.

Sharon Zackfia:

Hi, good morning. A few things around SG&A. Just want to make sure I understand the context around leverage. So are you referring to SG&A leverage as a percent of sales or SG&A to gross profit? So just want to make sure, well, level set on what metric you're using. I also want to clarify the cadence in the first quarter, are you referring to sequential moderation in the decline or year-over-year moderation? I think that's, kind of, important to quantify as well? And then lastly and I'm sorry it's a multipronged question. It's just on the ad spend, so it’s a little surprised to hear and I think I heard correctly that ad spend per car would remain consistent year-over-year. And I just wondered the thought process behind that given the environment we're in, which it sounds as if a lot of people are just priced out of cars' period. So I wonder about keeping that ad spend, kind of, at the same level versus retracting maybe more towards the $300 level that you had historically?

Sharon Zackfia:

Couple of clarifications, I'm using the clarifications [Multiple Speaker]

Bill Nash:

And Sharon, the only other thing I would add to that is, and Enrique said this in his comments, it can vary quarter-to-quarter. You may be up in some quarters, you may be down in some other quarters and that will really be dictated by some of the ROI that we're seeing. We're always going to have some brand spend out there, because I think it's important long-term. So the other thing I think of note here is that when we think about advertising, we also -- it's not just about customer acquisition, it’s also about vehicle acquisition. So there may be sometimes we spend up a little bit more in trying to buy cars from consumer. So again, we'll continue to monitor this.

Bill Nash:

Thank you.

Scot Ciccarelli:

Hey, guys. Scot Ciccarelli. Obviously, retail prices are still up quite a bit. Average rates also up and so monthly payments are up meaningfully? I know it's causing a double-digit decline in comps, but I guess what kind of impact is it having specifically on your conversion rate? In other words, like when we look at the sales decline, is it being driven more by reduction in traffic or kind of the first swing at the plate that you guys get? Or is it more kind of people get close to finish line and then just decide that they really can't afford what they're looking at? Like is it one more than the other or are they -- those factors about the same?

Scot Ciccarelli:

Thank you.

Jon Daniels:

Yes. And I'll just add on to that, Scot. Just one ahead of thing, what we mentioned the FBS platform and one of the things we're so excited about that, right? So many people are shopping for that monthly payment online out the gate, not in the store necessarily. And so being able to -- if they pick vehicle X and it ends up being a higher payment for them, we're providing them the capability to see payments on all the vehicles with multiple lenders so they can pivot relatively quickly. So we think again once the shock of the higher ASPs come down over time just having that tool out there to adjust that price when in that payment as needed will really benefit us. And we'll springboard out of this thing.

Bill Nash:

Yes, the interest is definitely there. And I think some of the web traffic continued strength in the web traffic is also because of the finance based shopping product that Jon just talk to people just trying to figure out what can I afford? Maybe they're not ready to buy a car, but maybe they're just looking to see what can I afford?

Bill Nash:

Thanks, Scot.

Daniel Imbro:

Yes. Good morning, everybody. Thanks for taking my questions.

Enrique Mayor-Mora:

Good morning.

Enrique Mayor-Mora:

Yes. I'm going to tell you is that we believe we're largely speaking appropriately staffed. There's still some pockets where there's probably some overstaffing that we're working through, right? And, we do it in a healthy way, which is just through attrition. And that's the approach we've taken for the past period here. But largely speaking, we think we're appropriately staffed, kind of, across the board. Compared to last year, right? We were down when it comes to like what flows through SG&A, because we do have a large service department and service associates that flows to our COGS. But just through SG&A, we're down about 10% year-over-year, right? And that's really, kind of, staffing in our CECs as we've rightsized in our stores as we've rightsized as well and that's where you'll see it offset a little bit by our corporate overhead staffing, but net-net we're down about 10%. So that's kind of where we are. When it comes to like the 70% mid-70%. Yes, we're actually striving to get there. Our goal is to get back to a leverage rate that's more reflective of a stronger flow through and a business model that we're striving to get to. Now to get to that number, we're also going to need some help in sales, right, as well to support that. And we expect to get there over time. I think to get there in FY ‘24, I would tell you it would be a strong stretch just, kind of, given where we ended FY ‘23 and kind of where volumes are at. And just the environment that we're operating in. But we are controlling what is in our control and I think we've done a pretty effective job here of taking our SG&A down and thinking about our business model and the maturity curve in terms of where we are with our omni transformation. And now it's really a matter of, kind of, reallocating resources internally to work on the most accretive projects that we have.

Daniel Imbro:

And if I could squeeze a clarifier, not another question. I guess you guys used to be in the mid to high-60s, it sounds like you reduced headcount 10% the CEC is making more efficient. I guess why wouldn't that or something better than that be the target you're working towards Enrique rather than the mid-70s. I guess have there been incremental expenses from the omni and admins that have just have raised that long-term SG&A margin?

Bill Nash:

Yes. And I think Daniel on that, keep in mind part of the omni transformation is we've gone from an organization that worked with all legacy systems that really didn't cost us anything to a combination of systems that we built in-house, but also software-as-a-service. And software-as-a-service is an expense that we used to not have. So things like software-as-a-service, the product organization that we built out, we've got 60 product teams that really enable having this omni channel experience both to have the store and the digital. So that expense isn't going away. We didn't use to have that expense. Theoretically, the CECs will be offset with the sale. So that should watch, but there are the things like cybersecurity that because we have so much of a digital presence now you had to step up your spend there. So there are some things which is why to Enrique’s point, our first goal is, hey, let's get back to the 70s because we know we've got some headwinds on things that we didn't use to have and then we'll continue to work on taking it below there.

Bill Nash:

Thank you.

Seth Basham:

Thanks a lot and good morning. My question is on retail GPU, pretty good performance this quarter. Curious to know whether or not you think the market dynamics helped you on that metric? And then looking forward, should we be thinking about that flat year-over-year for 2024 fiscal or should there be a movement one way or the other based on the price elasticity expectations and other factors?

Seth Basham:

Okay. And just as a follow-up thinking about the trade-off between unit sales and GPU market share is clearly an important goal of yours. Is there a point in time where you'll be more aggressive on price to regain market share to meet your long-term targets. You truly believe this is transitory? Is there any reason why it may not be?

Seth Basham:

Thank you.

Operator:

Your next question comes from Chris Bottiglieri with BNP Paribas. Your line is open.

Enrique Mayor-Mora:

Yes, Chris, thanks for the question. Yes, so year-over-year in FY ‘24, we expect our CapEx spend to be roughly the same as what it was, but what's making it up is changing a little bit, right? And so by far, the largest contributor to our CapEx in FY ‘24 is going to be really that's starting to build out our off-site production, our off-site auction capabilities to ensure that over time, over the longer term that we're able to meet our long targets, right? We feel good about our near-term and our ability to hit kind of our sales, our auction levels, but we also need to plan for the future at the same time. So that consists of buying land across the country. It also consists of this year building out and opening our first off-site production auction -- production site sorry which will be in Atlanta and the metro market there. And the way to think about that is the size of it will be roughly and this way to think about them moving forward in our off-site production locations will be roughly the size of our largest production locations that we have in our stores currently, right? Large acreage, so 20 plus acres as well is how to think about them. And from a CapEx spend, they'll be similar to the CapEx that we had spent in the past on, kind of, our production locations just for those. But that is actually driving the largest piece of our CapEx spend. There is some anticipation that stores will continue to grow in FY ’25, right? Still, it was going to kind of see how the market, how we perform, how the macro environment is. We have lowered that amount for FY ’24 as you know, we're at five new stores and we'll see in FY ‘25, but there is some planning for that, that goes ahead even this early on in the year, because it does take quite a bit of time to get a store open.

Chris Bottiglieri:

Yes. That's really helpful. And then just related, I think you mentioned something effective opening up simulcast to get on wholesale. Can you maybe just elaborate there? It seems you're getting really strong wholesale volumes in GPUs to understand like the motivation there and what that means for revenue and cost? Just any thoughts would be helpful.

Chris Bottiglieri:

That’s okay. Thank you for the time. Appreciate it.

Operator:

Your next question comes from the line of John Murphy with Bank of America. Your line is open.

Jon Daniels:

Sure. Yes, thanks John for the question. I'll take the NIM one. So I think first -- most important to point out is you're coming off of probably a 10-year peak in Q1 previous of this year. You really benefited from low funding costs. Lenders were able to capture a lot of margin there. You look at some of those deals you referenced, I mean, very, very strong margin. So while we'd love to have been to stay up there, it was probably never going to happen and you've seen us come down sequentially quarter-over-quarter. I think if you look at what -- how we have been able to raise rates for our consumers and obviously, Enrique already mentioned earlier, we do think that the ABS market is kind of improving. We're probably better matched with our rates to how we'll do long-term funding costs out there. And so we think that when we look out, you never know where funding costs are going to go, you never know what consumers are going to walk through the door. Ultimately, we need to remain competitive and make sure that we're able to sell cars and provide competitive rates for our consumers. But when we look out, we've come down off of this peak. We think that we're well matched with our rates versus what we can fund this stuff for in the future and we do think we can level off in ‘24.

Jon Daniels:

Sure. Yes. If you just look at those previous deals, you look at the ‘23 one deal, again, an APR of 9.09%, we just referenced that we're at 10.9% this quarter and I could tell you that's not where we ended the quarter, so you're going to see in subsequent deals APR is higher if funding costs are more reasonable, I think we're absolutely going to be better matched funding costs for rate out there, that's exactly what I'm referring to.

Bill Nash:

And John, on the market share the six, 10, remember, we always measure market share zero to 10. I do think six to 10 is an opportunity. I mean, if you look at our recent sales like even this quarter, vehicle is over six years over 60,000 miles. If I look at where we were year-over-year, we're probably 10 points higher, we're probably high 30s as a percent of sale. The real question will be is prices come down. Do consumers start to go back to newer model vehicles? So we'll see, I think we're in a great position. We obviously have shown that we can acquire those vehicles and recondition them. So it's a great lever as we go forward.

Bill Nash:

Yes, I think so. But again, some of it will be just on consumer demand. If the folks that are coming into our stores are looking for later model vehicles, lower mileage, we're certainly going to put more of those on our lot, so we'll manage to whatever the consumer is looking for.

Bill Nash:

Yes. Thank you.

Chris Pierce:

Hey, good morning. About halfway through Q1 here, I was just curious if you could comment on used ASPs, retail ASPs and what you're seeing? They came down 7% sequentially in Q4, but I know Q3 was a little bit artificially inflated. Just given that's been talked about wholesale demand and strong wholesale price increases as a trace, if that's flowing through the retail or not as much, because of the retail wholesale spread? Just kind of curious what you're seeing quarter-to-date for retail ASPs?

Chris Pierce:

Okay. Perfect. Thank you.

Operator:

And the next question comes from David Whiston with Morningstar. Your line is open.

Jon Daniels:

Sure. Yes, just to your first question, David. Yes, certainly when partners pull back, the pie sums to a 100, so CAF can benefit from that. But I think CAF's penetration is really again us remaining competitive in that tier space and winning the volume outright. But yes, we did see our Tier 2 partners certainly pull back, Tier 3 tends to benefit from that, because those customers who typically would be Tier 2 may move down and get picked up by Tier 3. But I think that just speaks to the quality of our platform, right? If CAF pulls back Tier 2 picks up, if Tier 2 pulls back Tier 3 picks up or other partners in Tier 2, but we did see pullback in the Tier 2 space certainly. And your second question was probably with regard to my prepared remarks and about adding a subsequent lender, we were referring to the FBS platform. We have five, again, long-term lenders on there, which means that they are operating with a soft pull they are decisioning all the vehicles using their models in minutes and getting it back to us so we can provide that to the consumer and provide as rich an offer as possible. Every lender you add, we added one in Q4, we hope to add another one in Q1 just further strengthens the set of offers across all the inventory that the customer can see and helps them to convert. So that's what I was referring to.

Jon Daniels:

Absolutely, it’s not adding a brand new lender, although I'm sure we have plenty of lenders that would love to come into our space. But this is existing in our typical in-store environments that we're going to add into this again very rich FBS environment.

Jon Daniels:

So if your question is, increased repossessions. Obviously, as losses go up, as you're seeing delinquencies certainly in the industry, it will lead to losses then you're going to see added repossession. So I think the entire industry is seeing that. We are seeing that to some degree, if that's your question.

Jon Daniels:

Yes.

Bill Nash:

Great. Thank you. I want to thank everybody for joining the call and your questions and support. I do want to congratulate all the associates again on being named a great place to work for 19-years in a row. And like I said earlier, we believe we're well positioned to navigate this environment and emerge even stronger. We look forward to talking with everyone next quarter. Take care.

David Lowenstein:

Thank you, Ashley. Good morning, everyone. Thank you for joining our fiscal 2023 third quarter earnings conference call. I'm here today with Bill Nash, our President and CEO; Enrique Mayor-Mora, our Executive Vice President and CFO; and Jon 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 the actual results to differ materially from our expectations. In providing projections and other forward-looking statements, we disclaim any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our Form 8-K, filed with the SEC, this morning, and our annual report on Form 10-K for the fiscal year ended February 28, 2022, 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 804-747-0422 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?

Enrique Mayor-Mora:

Thanks, Bill. Good morning, everyone. Third quarter net earnings per diluted share was $0.24, down from $1.63 a year ago. Total gross profit was $577 million, down 31% from last year's third quarter. Used retail margin of $403 million and wholesale vehicle margin of $115 million declined 21% and 46%, respectively. The year-over-year decreases were driven by lower volume across used and wholesale and lower wholesale margin per unit. As Bill noted, we continue to face depreciation and have been adjusting accordingly to better position ourselves to manage through the current environment. Other gross profit was $59 million, down 49% from last year's third quarter. This decrease was driven primarily by the effect of lower retail unit sales on service and EPP. Service results declined $37 million has lower sales and secondarily, our decision to maintain technician staffing levels drove some deleveraging. Technicians are among the most in-demand associates in the industry, and their retention will position us strongly to quickly grow inventory when we exit the current cycle. EPP fell by 14% or $15 million, reflecting the decline in sales that was partially offset by stronger margins and a favorable year-over-year returned reserve adjustment. Penetration was stable at approximately 60%. Third-party finance fees were relatively flat over last year's third quarter with lower volume and fee generating Tier-2 offset by lower Tier-3 volumes for which we pay a fee. On the SG&A front, expenses for the third quarter were $592 million, up 3% from the prior year's quarter, reflecting a slowdown from the year-over-year increases of 19% during the first quarter and 16% during the second quarter of this year. In the prior year's third quarter, we received a $23 million settlement from a class action lawsuit. Adjusting for that settlement, SG&A actually would have declined 1% year-over-year this quarter. SG&A as a percent of gross profit was materially pressured as compared to the third quarter last year, due primarily to the 31% decrease in total gross margin dollars compared to last year's quarter. The change in SG&A dollars over last year was mainly due to the following factors. First, a $41 million increase in other overhead primarily driven by cycling over last year's legal settlement. We also continue to invest, although at a reduced pace in our technology platforms and strategic and growth initiatives. Second, an $18 million reduction in compensation and benefits, including a $16 million decrease in share-based compensation, and third, a $17 million reduction in advertising. During the quarter, we continue to take steps to better align our expenses to our sales. This included further reducing staffing through attrition in our stores and CECs limiting hiring and contractor utilization in our corporate offices and continuing to align our marketing spend to sales. While our advertising expense was lower year-over-year, our investment on a per unit basis remains consistent with last year's third quarter. We remain focused on reducing expenses and anticipate continued progress in the fourth quarter. Regarding capital structure, our first priority is to fund the business. Given third quarter performance and continued market uncertainties, we are taking a conservative approach to our capital structure. While our adjusted debt-to-capital ratio was below 35% to 45% targeted range. We are managing our net leverage to maintain the flexibility that allows us to efficiently access the capital markets for both CAF and CarMax as a whole. In keeping with this goal of maintaining flexibility, we took the following steps this quarter in addition to the SG&A actions I spoke to. First, we paused our share buybacks. Our $2.45 billion authorization remains in place, as does our commitment to return capital back to shareholders over time. Second, we slowed the velocity of our CapEx spend, we expect CapEx will end the fiscal year at approximately $450 million versus our previous $500 million estimate. As Bill mentioned, we have also conservatively planned store growth of five new locations in fiscal year 2024. Our liquidity remains very strong. We ended the quarter with over $680 million in cash on the balance sheet and no draw on our $2 billion revolver. Now I'd like to turn the call over to Jon.

Bill Nash:

Thank you, Jon, and thank you, Enrique. As I mentioned at the start of today's call, we're taking steps to support our business by prioritizing projects that unlock operating efficiencies and create better experiences for our associates and customers. It starts with making our omni-channel experience faster, simpler and more seamless. Some examples include, we're enhancing online features to help customers feel more confident in completing key transaction steps on their own and make it easier to go back and forth between assisted help and self-progression. We're also making it simple for consumers to opt into express pickup through self-progression. This delivery option offers customers the ability to complete their transaction at one of our stores in as little as 30 minutes and represents a win-win opportunity. Our research shows that customers love this experience when utilized and it will enable us to lower our costs over time. Our final example is that we are working to seamlessly integrate our finance base shopping product into our stores and customer experience centers so that all consumers can enjoy this experience, not just those who shop online. At the same time, we are adding additional lenders to the platform to expand the breadth and depth of offers available to our customers. As we evolve our omni-channel experience, we are also updating our operating models to drive efficiency gains in our stores. For example, in our business offices, we have launched self-check-in capabilities for appraisal customers and have also enhanced e-sign functionality to better enable self-progression. Additionally, we are testing an improved digital customer queue to better manage appointments, as well as new software to improve title speed and visibility. We anticipate these tools will enable us to reduce associate time spent per customer and shorten customer transaction times. Our associates are key to providing an exceptional customer experience and we are focused on leveraging their skills in the most value-added manner. We will also continue to selectively invest in key projects that have the potential to deliver new capabilities while lowering our costs. Examples include first, we're updating Max offer our appraisal product for dealers, which is available in approximately 50 markets. Many of our dealers are still on the initial version, which does not provide instant offers and requires them to take and send us vehicle pictures. We are rolling out a new product which offers a fully digital instant offer experience to all dealers. We believe this will well position us to grow our dealer, dealer buys more efficiently and support higher volume over time. Second, we are leveraging technology to enhance our logistics capability. We move approximately 2 million vehicles each year. We estimate that our internal logistics operation drives about a 20% cost advantage over third-party providers and improves our speed, predictability and control of moves. Enhancements to our transportation management system will enable us to consolidate loads, increase our mix of full loads and reduce the truck volume in and out of our stores. This will support our ability to keep our costs low as we complete moves even faster and more efficiently. Third, we're continuing to upgrade our auction experience. During the third quarter, we scaled our modernized vehicle detail page to 50% of dealers. This page is mobile friendly provides more relevant data to our dealers, and improved search and filter functionality. It is also the springboard that we will use to launch capabilities we believe will further enhance our wholesale business, including AI enhanced condition reports and proxy bidding. We are confident that our focus initiatives will drive efficiencies and grow our business over the long-term. In closing, we have spent almost 30 years building a diversified business that can profitably navigate the ups and downs of the used car industry. We have a strong balance sheet and access to capital. Our experience in inventory and margin management is a strength and we will continue to be thoughtful and manage our expenses pulling levers as necessary. While we're not able to predict how long the industry will remain challenged, we believe the pressures are transitory and that we are well positioned to manage through them and emerge an even stronger company. I want to thank our associates for everything that they're doing to support each other, our customers and our business, our foundation remains strong, and we're excited about the future of our diversified business model. With that, we'll be happy to take your questions. Ashley?

Brian Nagel:

So I guess the question I have just with regard to sales. And maybe Bill, if you could discuss a bit more just this trend of sales through the quarters, we understand better, how the business is performing here. And then also, you mentioned in your comments that you saw market share declines, if you will, I guess later in the period. It sounds like that was a result of others taking more aggressive actions on price. You can elaborate further there. Who's doing what, what cohort of your competition is doing that? And how long should it -- how long would you expect that dynamic to persist? And then, I guess a follow up to that, as you look at your business and CarMax has historically been very, very good at managing inventories. But you're starting to see now others take more aggressive action on price, and you've held the wider margin. Could there be percolating issues within your inventory?

Operator:

We'll take our next question from Rajat Gupta with JPMorgan. Please go ahead.

Bill Nash:

So, Rajat great question. This is where I think we really shine when it comes to inventory management, I'm really pleased. If you notice, I talked about how much our total inventory has gone down, but we were able to maintain saleable units. And that's because the team did a phenomenal job, really cleaning up stuff that we had, whether we’re waiting on parts, missing titles, we really worked hard to clean up a lot. So to your point, the aging inventory, it's one of the reasons why you didn't see more movement in our ASPs. Our average selling price is given the depreciation, the team did a phenomenal job working through that getting it out there. And then with our sophisticated price testing, we just realized, look, there's no sense and given this away. And so again, we feel like we put ourselves in really good position going forward. And I think what you'll see going forward is, your retail average selling prices are going to come down a lot more than what you've seen up to this point. So we feel good about retail GPU. Obviously, we will continue to test the elasticity as we go forward. But if elasticity holds, I think you'll see us continue to have robust retail GPUs.

Enrique Mayor-Mora:

Yes, specifically with the other margin, what you really need to do is look within the service business, and this quarter a couple of things. Number one was just with sales volumes being where they were down 20% year-over-year, that places a fair bit of deleverage pressure on the service business. That's number one. But number two, have almost equal importance this quarter, about $15 million year-over-year was our decision, the correct decision is to hold on to technicians. It's a very difficult position to staff, it is that most important that we retain, and we recruit the technicians because when we come out of this cycle, we want to be in a position where we can actually ramp up our inventory quickly, faster than our competitors. But that being said, it is an investment that flows through that service line. And again, this quarter was roughly $15 million given the current sales levels, but it's absolutely the right decision for the medium-term and definitely for the longer-term. That was the biggest pressure this quarter, Rajat.

Rajat Gupta:

Sorry, just a follow-up. What's your view on the cycle recovery? I mean, like, are you anticipating things like rebound at some point next year? Or I mean, what kind of conviction do you have on that like, just so that you might have to take some of these kind of actions, more aggressively? Just curious on the thought process there.

Enrique Mayor-Mora:

Yes. I mean, we are laser focused on what we can control. And that's what we're taking actions on. And so you can take a look at our SG&A and how we've bent the curve there. You can take a look at service, yes, it's up. But again, there's -- the reason it's up is, that we're investing in our technicians, because we know that we're going to get through this cycle. And when we emerge from that, we want to be in a really strong position to reduce cars quickly.

Operator:

We will take our next question from John Healy with Northcoast Research. Please go ahead.

Enrique Mayor-Mora:

Yes, great. Thank you, John. Yes, like I said, in my prepared remarks, we have significantly bent the curve on our SG&A go back to the first half of the year as a whole, it was up 16% to 17% year-over-year. We've bend that down to 3%, year-over-year growth this quarter. But again, when you back out the $23 million settlement that we received last year in the third quarter, you're really looking at a slight decrease in overall SG&A. So pretty material change in the curve. We would expect that to carry forward into the fourth quarter and into next year. And why is that? It's because it's the actions we've been talking about, right. And that's really kind of two groups of actions. Number one is on the more variable perspective, we've been lowering our headcount, lowering our staffing, from an attrition basis in our stores. So that actually takes a little bit more time, right, because you're managing it through attrition, but we believe it's the right thing to do from a culture standpoint. And that has been bleeding down really, since the second quarter, when we started talking about it, we expect that'll carry forward to the fourth quarter and into next year. The second piece is really taking a look at our fixed costs and actively managing there as well. So I've talked about looking at our uses of -- our usage of contractors in the corporate home office, we've pulled back there, right. And we've also essentially paused our hiring in the corporate office. We are still hiring backfills and key positions that we have as well, kind of strategic positions as well, by materially, so we've kind of paused our corporate overhead hiring as well. So we've taken strong actions, we believe they're appropriate actions for the marketplace that we're operating in. If we need to take further actions, we would do that as well, if required, but we believe we're strongly positioned right now. And to answer your question about like the cadence, I would expect the fourth quarter to look similar to the third quarter once you back out the settlement from last year.

Enrique Mayor-Mora:

Yes. So it's more of a year-over-year SG&A and how that's moving, it's not to grow? So I think the challenge, John with the leverage ratio, the SG&A to gross profit is we can control SG&A. And I believe we've been doing that effectively. The challenge is the gross profit number. So depending on where that gross profit number ends up and sharp movements, quarter-to-quarter make it really difficult to manage that leverage ratio. So in terms of, as I mentioned earlier, we'll control what we can control. And that's what we're focused on. We're focused on that SG&A line. So I would -- my comments are specifically about SG&A growth year-over-year and the quarter.

Bill Nash:

Yes. Look, I think we feel very comfortable where we're running the retail GPUs. We'll continue to monitor the test. But look, I expect ASPs to continue to fall, which I think overall for the industry is a good thing to help drop some gap between new and late model use. So we feel comfortable with where our GPUs are and will continue to test.

Operator:

We will take our next question from Daniel Imbro with Stephens Inc. Please go ahead.

Enrique Mayor-Mora:

Yes. And what I'd say there is that, we did, and so as sales got more challenged in the third quarter, we went deeper into the staffing levels in the field. And so, it's still through attrition. So it does take a little bit longer. But at the same time, we did lower our staffing targets to reflect the current sales environments, I tell you, we did go deeper into managing those expenses. And in regards to your first question, I think you're asking about the other expense line, and what goes in there, because it was a 41% increase, if you just look at the release, right? That is primarily because we're comping over the $23 million settlement that we had last year, if you back that out, you're looking at less than half of that as an increase. And what that really is attributed to is our investments in technology and product, right. And that's what that's attributed to. What I will tell you, though, as well, if you compare it to prior quarters, there is a reduction in the pace of that investment from a year-over-year standpoint. And so we've been pulling back there as well. You also see that manifested in our CapEx guidance for this year. We've taken that down from 500 to 450, the largest chunk of that decrease, really comes from a slowing down some of those projects, in addition to just slowing down some of the capacity initiatives that we have out there in terms of growing our capacity with lower volume, we're just slowing down some of those investments.

Daniel Imbro:

Got it. I'll stick with one question. And I'll hop back in the queue for follow up. Thanks.

John Murphy:

I just wanted to focus, sort of on the supply side here just for a second. I mean, when you think about the one- to six-year-old car fleet that's going to continue to probably shrink for the next couple of years. Competition is more focused on the [indiscernible], as you mentioned in the dealer. So it seems like the available one- to six-year-old car fleet is -- it's why is going to continue to shrink. But certainly what's available to you and other folks in the secondary market. But you've kind of mentioned going lower in the agent price spectrum, to drive volume. And you've shown an ability to kind of manage that fairly well. So I'm just curious, how fast you can move on that to potentially drive volume back up here, lower price points, but higher grosses, and maybe better returns, just on the capital employed.

John Murphy:

But maybe a follow-up, Bill, I mean, how fast can you move on this to drive comps positive? I mean, we understand that kind of the headwinds in sort of what was traditionally your core. I mean, it is obvious, you know it. I mean, you're going after it. I mean, when do you kind of just push and just increase, maybe materially the penetration of these older vehicles to drive the volumes higher? Because, I mean, the one thing that, it's very admirable is that the variable, GPU or the focus on GPUs, which is a variable cost analysis, but you do have these fixed costs that are high, particularly as Enrique was talking about these technicians. So you got to cover these costs at some point not, I mean when can you do this? I mean, something you are stating to do and but you're not doing it?

John Murphy:

Okay. So I mean, it's really a supply, I mean, it's getting to the supply of the core product more than being able to push older.

John Murphy:

Okay. All right. Thank you very much.

Seth Basham:

Just to clarify for this sales environment where comps continuing to trend down 20%, you still expect SG&A to be flat to up year-over-year in the fourth quarter and going forward?

Seth Basham:

Okay. And again, how much down and when you think about the 20% decline persisting when you decide to get more aggressive on SG&A?

Seth Basham:

Got it. And my follow up question is just on the wholesale business, the wholesale to retail ratio in terms of units sold, declined sharply to 66% this quarter, would you consider this the new normal?

Seth Basham:

Thank you, guys.

Sharon Zackfia:

Following up on the SG&A question. I guess is there a way to contextualize how much you've taken out year-to-date of SG&A. And what that run rate is now in the fourth quarter because I'm assuming that those initiatives continued in the third quarter and into the fourth quarter.

Sharon Zackfia:

Yes. I think part of the confusion is, it sounds as if you're expecting SG&A to be down. Similarly, like down 1% in the fiscal fourth quarter year-over-year, but it also sounds as if you're continuing to proactively manage SG&A. And I think a lot of us are trying to reconcile that in our heads as to why we wouldn't see SG&A down a bit more year-over-year than what you saw in the third quarter, if that makes sense.

Sharon Zackfia:

Okay. Maybe separately? I mean, how should we think about SG&A on a full year basis for next year? So you've got a lot of moving parts, you kind of have to keep your muscle intact for a potential rebound. But at the same time, you're dealing with a very difficult macro climate. So as we think about next year, particularly with the curtailment in the opening, I mean how are you viewing SG&A dollar growth?

Bill Nash:

And I think Sharon, we will also have a lot more visibility after the fourth quarter to really be able to tell you more depending on how the business does between now and then.

Operator:

[Operator Instructions] We will go next to Craig Kennison with Baird. Please go ahead.

Enrique Mayor-Mora:

Yes, Craig. I think it about a little bit differently. I think similar to you, but we have competitors that are, obviously struggling. I don't think now is the time where, given our financial strength where we should be pulling back a whole bunch on SG&A. We have pulled considerably back. But at the same time, as I talked in my opening remarks, we also want to make sure that we're continuing to build for the future. And I think what everybody needs to remember is, we don't operate this business on a quarter-to-quarter basis, we operate the business for the success over the long-term. And there are some things that we're spending on that will absolutely help us longer term. Does it give us a headwind for EPS right now? Absolutely. But is it the right decision for the company long-term? Absolutely. So again, I think, really, my thoughts are on your questions, we're going to continue to walk this fine line. We want to continue to build out the muscle. We want to continue to find near term efficiencies, which we will do. And we'll continue to manage the business with a long-term view versus just a quarter-to-quarter view.

Bill Nash:

I think the surprise is coming from macro factors to Enrique's point that we really, those are things that you can't control. And so what you need to focus on is what you can control and obviously, I think our long-term messaging is still more intact than ever. Yes, we've got some pain here in the short-term. But guess what we've seen pain before in the short-term. We've seen, if you look at market share, for example, which is a proxy for how I think success is going, if you look at market share, we've historically we've gained market shares. I mean, even in the time we are at 08, 09, we lost a little market share in the near-term, but then we quickly got it back. And then some more. Even if you look in the last few years, when you look back at like FY 20, when we started really rolling out our online capabilities, we saw a step up in market share gains. Unfortunately, we went into COVID, we gave a little bit back, but the following year, we got that back plus more. Now we're in a recessionary period. So again, I think everybody just needs to kind of keep a perspective of what we're going after long term. And yes, the short-term can be a little noisy, but the long-term message is still intact.

Operator:

We'll take our next question from Michael Montani with Evercore. Please go ahead.

Jon Daniels:

Sure. Yes. Right on. Thanks for the question. The 2% to 2.5% is, again, our targeted range. I think we've done a great job staying within there. We've been in the Tier-3 business for since 2014, I think we've historically quoted, it's basically, you know, 1% of our receivables initially, it's now 2%. And obviously, substantially higher loss rates, I think we've put it's often 10% of our losses when it was 1%. So you're seeing maybe a 10x, 10-fold loss rate difference there in the Tier-3. Tier-2 is somewhere in between depends on where we choose to play there, there's obviously a wide spectrum. So hopefully, that gives us some color on how to expect losses, provisioning, whatever, around the different buckets, overall macro factors and delinquencies and losses, impacting our portfolio. I think it’s very clear delinquencies are on the rise in the industry, there's no doubt, you can see that within our ABS deals, we've mentioned that historically, there's certainly think pressure in the consumer. I think we've done a really, really strong job at working with that consumer. And while they might go 30, 35 days past due, helping them find solutions, such that it doesn't go into a charge off status. So we continue to fight that good fight and work with our consumers. As Bill mentioned, obviously, monthly payments are up, I think we've done a nice job of being responsible in our lending to our consumers and helping them through it. And ultimately, we reserve accordingly expecting all of this. So I think we're in a good position from a reserve standpoint, we'll watch the credit environment and the consumer very carefully. And hopefully that answers your questions.

Jon Daniels:

Sure. Yes, I think what you're seeing historically is, I would say, 07 and 08, you absolutely saw an impact across the entire credit spectrum substantially. I think what we've identified is, we're seeing a little more pressure on maybe the lower credit consumer, the Tier-3 into the Tier-2, maybe even a lower side of our Tier-1 space. So I see that definitely different. And again, I think that we're seeing delinquency pressure that that hint of a challenge for the consumer, but it really is not manifesting itself into loss. Again, we're going to watch it carefully. And we'll see what happens. But you absolutely saw more of an impact across the credit spectrum and into the loss side in 08, 09. And again, I think that's a very different environment. We can all agree with that, the labor pressure is back then versus now income for the worker. So we'll see where it translates. But I think those are the fundamental differences we've seen.

Operator:

We'll go take our next question from Chris Bottiglieri with BNP. Please go ahead. Your line is open.

Bill Nash:

I think to Enrique's point earlier, it is a two-piece equation. We're controlling the expense side, the gross profit, we're going to need the business to come back. We're going to need it to come back. So, I think wholesale gross profit. Obviously, we made some good improvements there retail. Actually, wholesale and retail GPUs I think are both strong. Now it's about getting some of the volume back. I think, wholesale, I'm hopeful we can grow that a little bit more. Like I said, we did some things this quarter that probably slowed that down a little bit. But I think that's where it's going to be. It'd be dependent that's going to -- that'll carry some weight.

Enrique Mayor-Mora:

Yes. Let me take them sequentially here. So just remark one overall penetration, yes, we mentioned in the prepared remarks, CAF penetration is up -- in tandem with actually us raising rates, I think that's something we're really pleased about. We know that generally, you're going to lag the market. Again, we're competing with credit unions at the higher end. But I think we've done a fantastic job at raising rates 40 basis points sequentially, 150 basis points year-over-year, and still captured that penetration. So we're pleased with that. You see, the Tier-2 penetration down from last year. And that's your three penetration down. I think that's a combination of two things. You absolutely see the consumer challenge there, as Bill mentioned. You still see an affordability issue there. But yes, absolutely. As we mentioned, lenders are being very -- what they need to do to operate independently and pull back where they need to. And I think there's the benefit of our platform, you've got a number of lenders, they're going to work together to figure out what's best for them, but collectively provides a good credit offer in the long run. So I think that's you definitely see pullback there. Chris, last part of your question, I think you mentioned -- not instant appraisal tool, but our pre-quarter tool. Just to clarify there. We mentioned that we're continuing to add lenders on to that tool. Again, we think it's a best-in-class tool, it requires a lot of nimbleness from our lenders, they're all coming on board. Are we seeing engagement there? Yes. I don't know that that's necessarily driving a ton into the penetration story, albeit that tool does bring a better credit quality consumer to the application process. But so does that answer your questions? What else have I missed?

Operator:

We'll take our next question from Chris Pierce with Needham. Please go ahead.

Bill Nash:

Yes, Chris. I think what you're saying is, there's competitors out there that just aren't -- weren't moving any inventory and depreciation has been very steep. And so what they're doing is they're trying to move some of that inventory. We've seen this in the past, in a lot of cases, it's not sustainable over the long-term, because you're just not making the money that you need to, but you're trying to get units moved. It's again, the reason why we did the expensive price. That's we wanted to see what the elasticity. And we did prices both up and down. So we did prices down, we also did price tests up just to kind of better understand it, which again, just gives us confidence that we made the right decision from a profitability standpoint.

Operator:

We'll take our final question from David Whiston with Morningstar. Please go ahead.

Enrique Mayor-Mora:

Yes. I think in this kind of environment, I think having some cash on hand isn't a bad thing. And we absolutely used the really effective management of inventory like Bill talked about. We decreased overall inventory year-over-year, but we actually increased our sellable inventory. So that's some impressive work by the teams to work through our WIP. And so that was really good news. We used that cash basically to, as you mentioned, to pay down the revolver, this quarter take it down to zero, that would be of no tap on our revolver. And at the same time, sit on some cash, I just think, David in this kind of environment, it's not a bad thing to have some cash as well. So it gives us ultimately the flexibility to manage through this kind of environment. And, we have a really strong balance sheet. We're proud of it. And we have flexibility that others don't have in the industry. And I think that puts us in a position of strength.

Enrique Mayor-Mora:

Well, it's important that we run a conservative balance sheet in this kind of environment. And as I mentioned, in my prepared remarks, we do look at our net leverage ratios in terms of something to manage to carefully to make sure we have ultimate flexibility when it comes to having funds and managing CAF. We do have a very large cap to finance organization. And that's just a key consideration that goes into it. So I think until the business kind of improves, and just as importantly, the macro backdrop improves, I expect that we will pause the share buyback. That being said, we remain fully committed to the share repurchase program, and we'll get back into it at the appropriate time when things improve, and the outlook improves.

David Whiston:

Yes, I hear you. Hopefully, it's not too long of a pause. I think your stock is very attractive here.

Bill Nash:

Thank you, Ashley. Well, listen, thanks, everyone for joining the call today and for your questions. As I said multiple times today, we believe we're well positioned to navigate this environment and I do think, we will emerge an even stronger company. I want to thank again, our associates for everything they're doing in their commitment to each other and the customer and the communities and the environment. And I want to wish you all a happy holiday season and we look forward to talking again next quarter. Thank you.

David Lowenstein:

Thank you, [Samira] [Ph]. Good morning, and thank you everyone for joining our fiscal 2023 second quarter earnings conference call. I'm here today with Bill Nash, our President and CEO; Enrique Mayor-Mora, our Executive Vice President and CFO; and Jon 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 the actual results to differ materially from our expectations. In providing projections and other forward-looking statements, we disclaim any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our Form 8-K, filed with the SEC, this morning, and our annual report on Form 10-K for the fiscal year ended February 28, 2021, 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 804-747-0422 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?

Enrique Mayor-Mora:

Thanks, Bill, and good morning, everyone. Second quarter net earnings per diluted share was $0.79, down from $1.72 a year ago. Total gross profit was $737 million, down 9.6% from last year's second quarter. This decrease was driven primarily by wholesale vehicle margin of $141 million, which was down 26%. The year-over-year decrease was driven by both lower volume and margin per unit. As Bill noted, we faced sharp depreciation throughout the quarter, and have been adjusting accordingly to better position ourselves to manage through the current environment. Total used vehicle margin was down slightly, at $495 million, a decrease of 2%. Total used unit volume, of negative 6.4%, was largely offset by higher margin per unit. Other gross profit was $102 million, down 15% from last year's second quarter. This decrease was driven primarily by the effect of lower retail unit sales on service. Service results declined $13 million as lower sales and, secondarily, impacts from inflationary pressures drove a deleverage in results. EPP fell by 3% or $3 million, reflecting the combined effects of stronger margins, stable penetration at approximately 60%, and a decline in retail unit sales. Third-party finance fees were flat over last year's second quarter as lower volume in fee-generating Tier 2 were offset by lower Tier 3 volume, for which we pay a fee. On the SG&A front, expenses for the second quarter increased to $666 million. Up 16% from the prior year's quarter reflecting a slowdown from the year-over-year increase during the first quarter. Approximately three points of the increase this quarter reflects a change in an accounting estimate in the prior year quarter. SG&A as a percent of gross profit deleveraged to 90.4% from 70.4% during the second quarter last year. A key contributor of deleverage was a 9.6% decrease in total gross margin dollars compared to last year's quarter. The increase in SG&A dollars over the last year was mainly due to two factors. First, a $50 million increase in other overhead. The primary drivers of this increase include investments to advance our technology platforms, strategic and growth initiatives, a $14 million onetime impact from a prior year change in an accounting estimate related to non-CAF uncollectible receivables, and a variety of other smaller cost headwinds. Second, a $34 million increase in compensation and benefits excluding share-based compensation. Primarily driven by the annualization of the strong growth in staffing we experienced in the back half of last year as well as wage pressures. Partially offsetting this increase was a $4 million decrease in share-based compensation. During our first quarter earnings call, we discussed how we have actively taken steps to better align our staffing expenses in our stores and customer experience centers or CECs to the sales levels we were experiencing at the time. However, as Bill noted, sales declined sharply in the second quarter versus our expectations, starting in July. Accordingly, during the second quarter we pulled additional levers to further align our expenses to our sales levels. We expect these savings will materialize more fully in the coming quarters. This included further reducing staffing through attrition in our stores and CECs, pausing on a portion of the hiring and contractor utilization in our corporate offices as well as better aligning marketing spend to sales. In regard to marketing, our intent is to continue to maintain a strong level investment on a per unit basis that is at least consistent with the full-year FY '22 levels. For the second quarter, total marketing dollars were flat year-over-year but reflected a robust investment on a per unit basis. As part of our omni channel journey, we have reduced the variable cost component of our operating structure. Given the macro-environment, our near-term priority will be on allocating resources towards those initiatives that will further drive efficiency and effectiveness across our fixed cost. At the same time, we will continue to selectively invest in customer facing initiatives that will enhance our omni channel experience and support our long-term growth. From a capital structure perspective, we ended the quarter with an adjusted debt-to-capital ratio in the middle of our targeted range of 38% to 45%. During the second quarter, we repurchased approximately 1.7 million shares from $163 million. Now, I would like to turn the call over to Jon.

Bill Nash:

Thank you, Jon. Thank you, Enrique. Given the realities of the macro environment, we will further sharpen our focus on driving additional operational efficiencies as we continue to navigate the near-term pressures facing the used car industry. At the same time, we will remain focused on continuing our work to achieve our long-term goals, including further improving our omni channel experience for both our customers and associates, as well as growing our diversified business model. Some of our key initiatives include first, we're leveraging data science, automation and AI to improve efficiency and effectiveness within our customer experience centers. During the second quarter, we expanded our Associate Facing Guided Action software, from chat to phone calls, and develop additional work streams for our consumer facing digital assistant. Over time, we anticipate these tools will enable us to reduce associate time spent per customer as we enhance our ability to provide live interactions at the highest value moments. Second, as Jon mentioned, we continue to scale our industry leading finance base shopping experience. This best-in-class pre-qualification product leverages a streamlined, simple application and generates multi-lender credit terms on cards within our retail inventory in just minutes. With this tool, customers have all the information they need to quickly understand APRs and monthly payments across different contract terms, and effortlessly compare vehicles to ultimately secure the right financing options for them. Third, we're expanding Max offer to acquire vehicles and build on our market leading position as a buyer of cars. As a reminder, buying directly from consumers and dealers lowers our acquisition costs, enhances our inventory selections, and provides profitable incremental wholesale volume. We're currently live in over 40 markets and anticipate launching additional markets later this year. Finally, we're upgrading our auction experience to be even more user friendly. We're testing a modernized vehicle detail page to be mobile friendly and efficiently display the most relevant information dealers need to preview our wholesale inventory, similar to how customers shop our retail inventory. We're also testing AI capabilities to enhance our online vehicle condition reporting. In addition, we have rolled out self-service checkout capabilities nationwide. These tools will enable us to drive incremental operational efficiencies as we continue to scale our wholesale volume, all while providing an even better experience to our wholesale dealers. As I close, I want to reiterate that while the market conditions and consumer behaviors remain challenging, we believe that these pressures are transitory and that our foundation remains strong. We're well-positioned to navigate this environment as we have during challenging times in the past and remain excited about the future of our diversified business. With that, we'll be happy to take your questions. Samira?