CarMax Inc

Good morning. My name is Carol and I will be your conference operator today. At this time, I would like to welcome everyone to the CarMax fiscal 2020 third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. Thank you. I would now like to turn the call over to Stacey Shirley, Vice President, Investor Relations.

Thank you, Carol. Good morning. Thank you for joining our fiscal 2020 third quarter earnings conference call. I'm here today with Bill Nash, our president and CEO, Tom Reedy, our executive vice president of finance, and Enrique Mayamora, our senior vice president and CFO. Let me remind you our statements today 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 management's current knowledge and assumptions about future events that involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see the company's annual report on Form 10-K for the fiscal year ended February 28, 2019, 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? Thank you, Stacey, and good morning, everyone. Before we get started, I want to take a moment to personally congratulate Enrique on his recent promotion to CFO. Enrique and I have worked together for many years, and he has made a lot of great contributions during this time. I also want to thank Tom for serving as our CFO for the past nine years. I look forward to continuing to work with him as he shifts his focus to our strategic initiatives in addition to continuing to oversee all of finance. For today, I'll start with our third quarter highlights before turning the call over to Enrique, who will discuss our financials in more detail. Tom will then provide additional color around customer financing, and I will wrap up with an update on our omnichannel experience before opening it up for your questions. As you read in earnings release, we delivered a strong sales performance this quarter, with revenues up 11.5% on a 7.5% increase in used unit comps, and an 11% increase in total used units sold. Net income and EPS for the quarter were down 9% and 4.6% respectively. This is largely the result of significantly higher stock-based compensation due to an increasing share price during the quarter, combined with a planned increase in third-quarter expense due to the timing of advertising. As a reminder, volatility in stock-based compensation expense is driven by restricted stock units that are awarded broadly to our non-executive associates. Enrique will provide additional details on these items shortly. Keep in mind, despite these third quarter cost headwinds, year-to-date comps are up 6.7%, EPS is up 10.1%, earnings are up 3.6%, and while we have delevered SG&A by $37 per unit, this includes $42 per unit of stock-based compensation. We attribute our sales growth to a variety of factors, including solid execution in operations, finance, customer progression, and marketing, in addition to an overall favorable used car sales environment. Web traffic increased 15% year-over-year as we continue to benefit from our various marketing efforts. During the third quarter, our markets offering an omni-channel experience had slightly stronger comp sales than our non-OMNI markets. The strong performance in both was supported by many of our OMNI-related digital initiatives that have been rolled out nationally. This includes improved customer lead management tools, finance self-service tools, and digital merchandising. And we believe all stores benefited from our national marketing campaign launched in October, which reinforces the strength of our brand. For the quarter, gross profit per huge unit was $21.45, up slightly when compared with the prior year. Our teams have done an exceptional job in continuing to drive efficiencies, allowing us to maintain margins while offering competitive prices. Wholesale unit sales were also higher this quarter with volume up 3.3% year over year. The increase in wholesale volume was slightly offset by a small decrease in gross profit per wholesale unit due to heavier depreciation at auction since the beginning of the third quarter. As a percentage of sales, zero to four year old vehicles are 77% similar to last year. Total SUVs and trucks accounted for about 49% of sales up from 45% last year. At this point, I'll turn the call over to Enrique to provide more information on the third quarter financial performance.

Thanks, Bill, and good morning, everyone. For the quarter, other gross profit decreased slightly. EPP profits grew by $11 million, or 13.3%, due to the combined effects of strong use volume growth and increased margin. Like the prior year, we did not recognize any additional EPP profit sharing revenue. This increase was offset by an $11 million decline in service department profits for the quarter versus a year ago. The decrease in service profits was largely due to three factors. First, we increased our post-sale warranty period from 30 to 90 days back in May. We view this as an investment in providing a better customer experience. Second, we experience near-term inefficiencies due to a sharp ramp in technician hiring to support future sales growth. And finally, a portion of stock-based compensation runs through the service department. On the SG&A front, expenses for the quarter increased $75 million to $485 million. SG&A deleveraged by $157 per unit. A material component of this growth and the resulting deleverage was driven by stock-based compensation. $11 million, or 25% of the overall year-over-year growth in SG&A on the quarter was due to the 17% increase in our share price for the quarter versus a 15% decrease in the prior year period. This resulted in a $94 per unit deleverage to SG&A and represents 9 cents of EPS. We also had a planned increase of $14 million, or 39%, in advertising costs for the new ad campaign and the rollout of our omni-channel experience that Bill mentioned earlier. This spend on the quarter brings our year-to-date advertising expense per unit to $225. On a year-to-date basis, this is slightly higher than last year and consistent with our earlier communications that our intention is to spend slightly more per unit for the full year. Other notable expense drivers included the opening of 19 stores since the beginning of the third quarter last year, which represents a 10% growth in our store base, higher variable costs associated with our strong sales growth, and continued spending to advance our technology platforms, digital initiatives, and our omni-channel rollout. During this period of investment, we continue to believe comps in the range of 5% to 8% will be needed to leverage SG&A on an annual basis. As part of our expansion strategy, we opened four stores in the third quarter, two in new markets, Palm Springs, California, and Gulfport, Mississippi, and two in existing markets, Dallas and Atlanta. Over the next 12 months, we anticipate opening 11 more stores. Earlier this month, we also opened our Phoenix Customer Experience Center, or CEC. We continue to enhance shareholder returns through our repurchase program. During the quarter, we repurchased approximately 1.3 million shares for $115 million. This program has contributed to our 10% year-to-date EPS growth that Bill mentioned earlier. We have $1.67 billion remaining in our current authorizations. Now I'll turn the call over to Tom to discuss customer financing.

Thank you, Enrique, and good morning, everybody. CarMax Autofinance and our partner lenders continue to deliver solid results with cash income growth and strong conversion in Tier 2 and Tier 3. During the quarter, we saw modest growth in application volume and strong performance across all credit tiers. Tier 2 accounted for 20.4% of used unit sales compared with 18.3% last year. Tier 3 was up slightly to 9.5% compared with 9.3% a year ago. And CAF penetration net of three-day payoffs was 43.3% versus 44.1% in last year's third quarter. Year over year, CAF net loans originated grew by 13% to $1.7 billion. as the increase in used cars sold and the average amount financed was somewhat offset by the decrease in CAP's net penetration rate. For loans originated during the quarter, the weighted average contract rate charged to customers was 8.1%, down from 8.5% a year ago and 8.6% in the second quarter. Portfolio interest margin increased to 5.7%, Cap income was up 3.9% to $114 million, primarily driven by the 7.5% growth in average managed receivables and a small increase in interest margin, offset by an increase in the loss provision as presented percent of average receivables. The provision for loan losses was $49 million in Q3 versus $40.8 million in the prior year period. The increase arises from portfolio growth and a modestly higher allowance based on loss experience we began to see earlier this year. At $153.6 million, the allowance represents 1.15% of ending managed receivables, up slightly from 1.12% a year ago and comparable to the second quarter. This remains well within our range of expectations given our origination strategy and portfolio mix. Before I turn the call over, I will touch on the impending current expected credit loss accounting standard, which is commonly referred to as CECL. CECL will be effective for us at the start of our fiscal 2021, and a number of you have inquired about it. This is a non-cash accounting change and won't impact our previously disclosed cumulative net loss expectations. The most significant element of the new standard is that it requires companies to reserve for the expected lifetime losses, whereas currently we reserve for the following 12 months. As a result of the adoption, we will increase our allowance for loan losses by $200 to $250 million. This is based on information as of November 30th, 2019, and the adjustment will flow through retained earnings. Post adoption, CECL could also create more volatility in the quarterly provision for loan losses, as any true-ups will be projected over the life of the portfolio versus the 12 months we're currently estimating. Now I'll turn the call back over to Bill.

Thanks, Tom and Enrique. Now I'll provide an update on the rollout of our omnichannel experience and how we're continuing to innovate and improve the business for the future. First, the numbers. We now have four CECs that we continue to staff, Raleigh, Atlanta, Kansas City, and our newest in Phoenix, which opened earlier this month. Approximately 40% of our customer base currently has access to our omnichannel experience, and we are on track to reach the majority of our customers by the end of this fiscal year in February. We plan to complete the rollout in the next fiscal year. ESP penetration in our Omni markets is slightly lower than our overall penetration, which is a little above 60%. We have not seen a material change in finance penetration or mix with the rollout of Omni. We are pleased to achieve 7.5% comps while at the same time implementing the largest transformation in the company's history. While we continue to run some inefficiencies in both our CECs and stores, we are confident we will be able to improve productivity as we roll out and mature the new experience. We also still believe our unique omni-channel experience will be more cost efficient than our current model. We've already begun to drive cost efficiencies in our Atlanta CEC quarter over quarter. We're also excited about the opportunities ahead as we continue to improve our customer offerings. Two key areas where we see opportunity are our customer relationship management or CRM platform and our new delivery options. Our CRM platform enhances the experience for both our customers and our associates. It provides associates with valuable insights and data about our customers that allow us to better personalize their experience. It provides customers with the access to our customer hub. This hub makes it easier for customers and our sales associates to have full visibility to the status of their journey and to continue to progress further while either online or in-store. We also see tremendous opportunity with our express pickup and home delivery offerings. Our conversion rate on these sales is very high, and the customer experience of these delivery options is extremely well received. While combined, they still represent less than 10% of sales in eligible markets. These offerings steadily increase throughout the quarter. Going forward, we expect more customers will take advantage of these delivery options as we expand our omnichannel experience into new markets, and increase customer awareness through various marketing channels. Our associates are doing an amazing job in structuring and delivering a systematic yet aggressive rollout of the new Omni experience, an experience that personalizes each customer's journey, whether in person, online, by phone, or a seamless combination of channels. Our ability to leverage the infrastructure, analytics, and processes we've built over the last 26 years and continue to improve with state-of-the-art technologies and new digital capabilities is a significant competitive advantage, an advantage that, when combined with our ongoing store expansion, positions us well to continue to lead the industry, profitably grow sales, and gain market share. I'm extremely proud of our associates and all of their accomplishments, and we're all excited about the future. With that, we'll be glad to take your questions.

At this time, we will be conducting our question and answer session. In order to ask a question, please press star then the number one on your telephone keypad. To allow for as many questions as possible, we ask that you please limit your questions to one question with one related follow-up. You may then re-enter the queue for any additional questions. Our first question today comes from Scott Ticcarelli from RBC Capital Markets. Please go ahead.

Good morning, guys, and happy holidays to you. Good morning, Scott. Can you guys talk about the change that you had in your service policy, specifically what caused you to make that change, the 30 to 90 days? And was there any financial catch-up in the quarter, or is this more of a reset that will continue for the next few quarters?

Sure, Scott. So for the longest time, we had a 30-day break. limited warranty program. And as Enrique said, we changed that over in May to 90 days, and we feel like that's best for the customer experience. So what you're seeing is that now that it's everywhere, it's been in place since May, from an expense standpoint, it's a couple of dollars per unit that's a little bit of additional headwind.

And so we should expect, let's call it similar to that service department revenue for the next three quarters, let's call it?

Well, keep in mind, you know, when Enrique was talking about the service profits, there's really three different buckets that are going in there. Part of it was the shift from 30 days to 90 days. And of that, I would say that's about a third of the overall change. Another third was stock-based compensation. and the other third of the staffing inefficiency that we see because we're ramping up our technicians, and as we ramp up technicians, until we get a critical mass, it's hard to turn on new shifts. So each one of them make up about a third, and on the 30- to 90-day warranty of that third, about half of it is the little step up on a per-unit basis of the expense. We also had in that third a mixed shift where we did more 90-day warranty work than retail service work.

Got it. And just for clarification purposes, the 90 days, does that basically put you a par with most CPO programs that are out there?

I'm not sure about the CPO program, Scott. I would have to go and look at that. I think that we feel like 90 days is certainly best in class for used cars.

Got it. All right. Thanks, guys.

Thank you. That's a program that will anniversary itself in the first quarter of fiscal year 21, as we rolled it out in May of this past year.

Thank you.

Our next question comes from Brian Nagel from Oppenheimer. Please go ahead.

Good morning. Thank you for taking my question.

Good morning, Brian.

So, first off, Enrique and Tom, congratulations on your new roles.

Thank you.

So, the question I want to ask, I guess my first question, really just from a bigger picture perspective, clearly, The business has turned much healthier here lately with used car unit comps in this quarter now tracking it over 7%. So, Bill, as we look at this, as we look at the improved trajectory in used car unit comps, how should we think about, or maybe you can help us understand better, you know, this split, so to say, between the data we're looking at suggests the overall environment has gotten better, maybe with some help from used car pricing and other factors. But you also clearly have a number of initiatives taking place at CarMax, a lot of these tied to the Omni channel. So how much of this strengthened in used car unit comps is internal versus external? And if you look at the internal side, which do we think is kind of the bigger drivers with all that you're doing?

Yeah, that's a great question, Brian. Excuse me. As I noted earlier, you know, it is part of grid execution. It's also some favorable environment. When I think about the favorable environment, obviously favorable access to credit is New car prices at an absolute level are still high, although in the quarter we seem to see a little bit of narrowing of the new-to-use car gap, but the absolute prices of new cars are still high. You've got low unemployment. You've got good consumer confidence, inventory availability. So you've got those external factors, but I also – Salute a lot of the internal factors, especially from an execution standpoint. When you look at buying, acquiring the right car at the right price, especially in a time where we saw depreciation that we would normally see in this time of year, our operations teams continue to find efficiencies and ways that we can pass along to the customers. The customer progression, both in-store and online, we've made great strides there, moving customers along online in our CECs. We've got new tools that we've started to roll out to help our new associates there. CAF executed well, supporting sales, driving CAF margins, and still offering great customer offers. We've got the marketing campaign that launched. And as we look at it, there is no one factor that's the majority of that comp growth. I really do feel we really believe that it's a combination of all those factors. Okay.

Guys, that's very, very helpful. Then my follow-up question, my related follow-up question, just with regard to the marketing expense you called out here in Q3, which was somewhat of a headwind to earnings, how is the new marketing campaign, or how should we look at the new marketing campaign as an enhancement to what the changes you've already made to marketing over the past few quarters?

Yeah, I think, you know, periodically we rework our marketing process. This was a big change. We have a new outside agency. Between the outside agency and our internal team, I think they've done a great job really bringing to life not only our brand, but also the omnichannel experience in those markets. As you've seen in the past, when we go with a new marketing campaign, if you look at the last one with Andy Daly, we run that for a while. We build off that. I would think that this marketing campaign, the same type thing, will continue to build off of the the strength of this, and as we go forward, you'll just continue to see this new campaign versus running ads on old campaigns. In the third quarter, I've talked about this on previous calls, in the first and second, we knew that we were going to be heavy on the backside of the year. We ran light on advertising, as a matter of fact. through the second quarter year to date, on a per-unit basis, we were spending less than what we spent last year on an annual basis. And I've said all along, we're going to spend a little bit more to also help market our omni-channel experience. And I think as you look at where we are now year to date, Enrique cited earlier, we're about 225 per unit, slightly above last year. And I think that's a good proxy. You know, we'll be slightly above where we finished the year last year. We still expect That's where we'll come in on a per unit basis.

Got it. Thank you and happy holidays to everyone.

Thank you too, Brian.

Our next question comes from Sharon Saxon from William Blair. Please go ahead.

Hi. Good morning. A question on SG&A. There's obviously a lot of moving parts on there this quarter and I appreciate the commentary on the five to eight to leverage comps, I guess, going forward. Can you talk about whether that five to eight would be applicable for the fourth quarter? And then as we go into fiscal 21, I know there's still continued investments in Omnichannel, but does that start to abate somewhat in terms of the incremental spending and inefficiencies that you're seeing?

Yeah, I'm going to let Enrique take the first part. I'll take the second part.

Yeah, you know, on a quarterly basis, there can be so much variability that when we refer to the five to eight, it's on the longer annual basis. If you take a look at this quarter, between stock-based comp and between the advertising timing, that alone causes us to be leveraged. So, you know, within any particular quarter, it's difficult to say, but certainly on an annual basis, that is our expectation.

Yeah, and Sharon, on the second part of your question about what we should expect to see in the new year, you know, I said earlier in previous calls that Last year was a step-up year. We expect this year to be another step-up year. Next year we expect it to be a continued step-up year, but less to a degree than what you've seen from a growth percent, less so than what you saw this year or last year. And, of course, we'll provide some more direction in our fourth quarter call when we're back here then.

Okay. Thank you.

Thank you. Thank you.

Our next question comes from John Murphy from Bank of America. Please go ahead.

Good morning, guys. I just wanted to, you know, follow up on one of the comments you made on the call, you know, the development of the CRM system and making it more advanced so there's more data available to your sales team. And I'm just curious, is there an intention to maybe go more proactively and market sales directly to individual consumers to drive same-store sales as you're developing that CRM system? Or is this more just as people come in and inquire about vehicles, you just have more information to help out the process? It just seems like there may be an opportunity here to get more directed advertising going.

Yeah, I think when I think about the CRM, the CRM is more of a tool to help our associates, whether they're in the customer experience center or in the store, I think the beauty of the CRM is we collect data and we can analyze data. We can do what we call smart routing to make sure that we handle those leads, how we handle those leads, and who handles those leads. We're becoming much more savvy at that, which is one of the areas that I'm excited about as we go forward continuing to pick up efficiencies. As far as being able to directly target more customers, We've already shifted that way. When you think about our total advertising spend, probably half of it is more on a digital advertising, which is much more pinpointed than what I would call traditional advertising, which is more of the broadcast, TV, radio type of stuff. I do think that the data that we're collecting from the CRM can assist us in helping to target future customers, but I kind of think about them in different buckets, if that makes sense.

Okay. And then just one follow-up on the express pickup and in-home delivery. You said it's a little bit less than 10% in the eligible market, so it sounds like it's somewhere between, you know, 5% to 10%. I mean, would you call those folks that are doing the express pickup and in-home delivery incremental consumers or buyers in your stores, or is there some kind of cannibalization? Just trying to understand what's incremental and what's cannibalized.

Yeah, at this point, I would say it's probably both. And when I look at those two – We're doing more express pickups than we are home deliveries at this point. It's interesting because, you know, sometimes we'll have customers that think that they want to be home delivery and then they start working through the process and they realize, you know, I'd like to come in and test drive a couple cars. And so they convert over to in-store. The express pickup, just as a reminder, that allows the customer to really do everything online and still come into the store, get their keys. If they want to take the car for a test drive, maybe learn about the options. But we can have them out. and less than 30 minutes. So I see both of those, as I said earlier, I see both of those as continuing to grow as we mature the experience and also as we highlight the experience in our marketing efforts.

Great. Thank you very much.

Thank you, John.

Our next question comes from Armentis Sinkovicius from Morgan Stanley. Please go ahead.

Great. Thank you for taking the question. You know, 7.5% Same sort of sales growth year over year. That's quite a strong number. How do we think about how much of that comes from a favorable used car sales environment versus how much of that comes from the omni-channel rollout? Any way you can help us contextualize that, that would be very much helpful.

Yeah, you know, as I said earlier, there's a lot of different factors. I don't think any one of those factors is the majority, so I don't think necessarily that the favorable environment is the majority when you add all those things I talked about earlier. I think a lot of these execution things that we highlighted, I think the, especially the digital initiative improvements that we made as part of OMNI and rolled that out to the other locations that don't have OMNI, We don't believe any one of them lines up and has the majority of that lift. It's really a combination of all of them.

And when you talk about lift, does that mean versus the comp a year ago or just the 7.5% number itself?

When I think about that 7.5% number and what contributes to that performance, That's where I'm saying I don't think, you know, we don't believe that any one of those items is the majority of that 7.5%. Okay.

Okay. Much appreciated.

Thank you.

Our next question comes from Craig Tennyson from Robert W. Baird. Please go ahead.

Hey, good morning. Thanks for taking my question. I guess first I want to tell you that my daughter contributed to your comp this quarter. We had a great experience, so thank you for that.

Oh, that's great. Thank you, Craig.

Yeah, it was a good experience. We didn't get to do the internet omni-channel experience yet, but I'm sure that'll come. The question I had was on your recon business or your recon work. You always seem to drive costs out of the reconditioning process. Has that trend continued? And as a follow-up, is it still your policy mostly to return that to the consumer rather than trap some of that in the gross profit line?

Yeah, Craig. To answer your question on giving it back to the customer, yeah, at this point we like passing that along to the customer. It helps make the prices as competitive as possible. You know, the reconditioning, we continue to look for efficiencies there. I would say the area that we're seeing a little bit more improvement on is more of the procurement. So think about parts, that kind of thing. We've equipped our associates in the field with certain tools that allow them to buy the right part at the right time at the right expense. I would also tell you picking up some efficiencies in our transportation as we move more vehicles with our internal and dedicated suites. That helps as well. And then, of course, I always put an emphasis on our buying because that's really – when you think about price competitiveness, it really starts with where you purchase the cars. And I think the buyers have helped to – to make sure that we're buying them at the right price and the right time. The other thing I would just say is that, you know, not only does it help us be competitive on prices and all those savings, but it also helps us manage our margin and keep that stable as well.

Great. Thank you.

Thank you.

Our next question comes from Rick Nelson from Stevens.

Please go ahead. Thanks. Good morning. So the New York Fed this week pointed to a higher rejection rate for auto loans. I'm curious if you see any need for tightening CAF. I did notice a shift toward the Tier 2 and Tier 3 finance providers away from CAF.

Rick, could you just repeat the first part of your question, please?

So with the New York Fed, This week, they had a report out that pointed to a higher rejection rate on auto loans. And, you know, here is if you need to type CAF.

Now, I think, as I mentioned, we've seen real strong performance from both our partner lenders who are originating in our system, which is, you know, Bill mentioned providing a little bit of a lift year over year. Any calf, you know, we saw losses tick up a little bit earlier in the year, and our increased provision this quarter kind of reflects us just going at that run rate that we've been experiencing all year versus a little bit more favorable environment last year. But we've seen no need to adjust our credit appetite. We're still generating a portfolio that we're very comfortable with and happy with the business.

Thanks for that. Also, on the GPU front, another solid quarter, you talked about gaining leverage from Omnichannel. Is your intent, Bill, to pass that leverage on to the customer to drive more volume?

Right now, the leverage that I referred to on the call was we started to see one of our – the oldest customer experience, the Atlantic customer experience, we started to see some cost leverage there. And that would really show up more in the SG&A line versus the GPU or passing along to the customer in the form of the price. So you'll see that show up in SG&A savings. Okay. And good luck. Thank you, Rick.

Our next question comes from Derek Glenn from Consumer Edge Research. Please go ahead.

Good morning. Thanks for taking our question. We had a follow-up on the home delivery attach rate at a little less than 10% of sales in omnichannel markets. Where do you think that steady state number is? You know, what percent of your overall sales do you think home delivery can be in the long run?

Well, just for clarification, Derek, the 10% that I cited is both home delivery and express pickup. Express pickup is home delivery. It's higher than home delivery. Both are still, if you pick each one individually, very small percent of our overall sales. As far as where I think it can go, to be honest with you, I don't know. To be honest, it doesn't really matter to us because we're there to support the customer and give them the experience they want. If more want home delivery, great. We'll be able to satisfy that. If they want to come into the store, we'll be able to satisfy that. I don't know where it's going to go. We did see throughout the quarter we saw more people leveraging express pickup and home delivery, but I don't know, you know, what the top end of that could be.

Got it. Great. And then just as a follow-up, I mean, as we think about your SUV and truck mix, I would think that follows a pattern unfolding in the new market where the mix of those vehicles is much higher. To what extent do you view that as a tailwind to your ASPs, and is there any opportunity – or appetite to take more price to drive higher GPUs?

Remember, when we look at GPUs, it's not driven by the expense of the car. We don't make necessarily more money on a more expensive vehicle. As far as how do we see this going forward, the truck mix, I think, and I'd have to go back and confirm for sure, but the truck mix has been ticking up a little bit, and that's more representative of what's coming into the marketplace either through our appraisal lane or through the off-site auctions. So I would continue to see that pattern exist in the upcoming quarters.

Okay. Thanks, guys.

Thank you.

Our next question comes from David Whiston from Morningstar. Please go ahead.

Thanks. Good morning. My question is on new vehicle leasing as a substitute to buying a used car from CarMax. I think leasing has very much peaked for the cycle, but in the past there's been some very attractive offers at the consumer. So do you see new vehicle leasing as less of a substitute threat than, say, 12 months ago, or is that about the same?

Well, I think the industry data would say that this year probably the off-leasing vehicles will peak. Between this current year and last year, they'll be at a peak level. As far as where we think leases might go next year, again, it would be a shot in the dark. I'm certainly not a leasing expert, but wherever it goes, whether leases continue to persist in the next quarter or if they drop off a little bit in the next quarter, inventory availability for us will still be in good shape as far as acquiring inventory and as leases continue the peak of off-lease has come down, there will be something else that fills in that spot. I mean, we've seen this cycle run many times over the years that we've been in business.

Okay, thank you. Thank you.

Our next question comes from Chris Pettiglieri from Wolf Research. Please go ahead.

Hey, everybody. First question is on advertising to step up. Was most of this incremental spend distributed nationally, or was it more targeted to where you have omnichannel markets?

I'm sorry, go ahead and finish your question.

Well, yeah, then it was just like kind of related to that was kind of like as you push more online, have you rethought like what the right advertising budget is? Like maybe advertising more makes more sense. I'm just curious how you think about that.

Yeah, the majority of the spend on the quarter was actually the national spend, not the omni-market spend.

Yeah, okay. That's helpful. And then I wanted to talk more about the wholesale business. You know, you talked about, like, the web traffic looks great. You talked about lower, you know, like your unit growth was great, but I talked about lower appraisal traffic at wholesale. So anyone in the sense for me who think drove that is the competitive environment for trade is getting more difficult. just given we are in the cycle of competitive threats? And then two, can you talk about the supply of the 8- to 10-year-old vehicles that should be increasing? Has that manifested the way that you thought it would have earlier in the cycle? Thank you.

Yeah, so, Chris, I mean, I think that it's been – there's been robust competition for what we would consider A-lane vehicles. I mean, a lot of different dealers are, you know, focused on trying to buy more outside of the auction. But that's nothing new. The comments I made earlier about wholesale was more around GPU, and with that, the GPU went down a little bit, but that's more of a function of what we saw in the marketplace from a depreciation standpoint. As the vehicle is depreciating, we put less on the offer, which also has an impact on buy rate and volume. We had a little bit of pressure on buy rates, still up around 30%, a little over 30%, so we're still pleased with that. But any time you have a depreciating market, it puts a little headwind on your offers, which then puts a little headwind on your volume.

Yeah, so that makes sense. Did the number of wholesale locations change this quarter? It looks like you closed a couple, but it might just be the way I'm reading the schedule.

No, we did not close any auctions.

That's helpful.

Thank you. Sure.

As a reminder, if you would like to ask a question, please press star, followed by the number one on your telephone keypad. Our next question comes from Seth Bashan from Wedbush Securities. Please go ahead.

Thanks a lot, and good morning. Good morning. Stock-based comp was a big headwind this quarter. You mentioned some additional stock compensation to Service Lane Associates, which is in capture in SG&A. But are you also giving more stock-based comp to associates that would be captured in that SG&A?

Yes, stock-based compensation, the majority is going to be in SG&A, but there's also components in service profits, as we mentioned, related to service associates. There's also a component related to cap as well, but by far the largest component. is within SG&A. I think it's also just important to emphasize again, this is our broad-based equity program. It's targeted at non-executive management. It's settled in cash and runs through the P&L.

Yeah, and Seth, just to also clarify, we didn't increase that program. It's not like there were more shares or anything out there. It's just the market volatility, the change from quarter over quarter.

Got it. Thank you for that clarification. And then secondly, as it relates to the performance of your comparable store sales overall relative to your Omnichannel markets, you mentioned Omnichannel is slightly better. That sounds a little bit different than the way you're describing the Omnichannel outperformance in prior quarters. Is that A, correct, and B, is that surprising? And C, is it still a good investment if you're not getting a big lift on those Omnichannel sales?

Well, there's a lot of different questions in that one question, but I'll try to do my best to remember all of them. You'll have to keep me honest. But is it surprising where we are? Absolutely not. I mean, if you're comparing it to what we have seen in the Atlanta market, it is different than that. But I said all along, look, every market is going to be a little bit different. We're going to have different levers that we pull. I actually feel really good about where we are with the Omni rollout and the contribution to that because right now we have a – We have a headwind in our Omni markets as it relates to our customer experience centers. If you think about it, when a market rolls on to the Omni experience, the day it rolls on, we turn the e-offices off in the stores. Well, the e-offices have been manned by associates that have been around a long time. They know what they're doing when it comes to progressing customers. We have now turned them on to the customer experience centers. And I would just remind you that our customer experience centers, the most tenured associates that we have, working with customers has only been doing it for about six months. So as we continue to roll out and we continue to stand up and open these new customer experience centers, the Kansas City one, the Phoenix one, you have a lot less tenured associates that are handling the customer progression. I think it's a great opportunity for us, and it's one of the things that I think about when we think about efficiencies going forward and productivity gains. But I feel good about where we are, given that our Omni markets actually have a headwind working against them.

Understood. Thank you very much. Happy holidays, guys.

You too.

This concludes our question and answer session. I'm now trying to call back over to Bill Nash for closing remarks.

Great. Thank you, Carol. I want to thank all of you for your interest in CarMax and for joining us today. As always, our success is because of our associates and the culture that they have created. I want to thank them for what they do every day, for driving what's possible for each other, for our customers, and for our communities. I want to wish all of them and all of you all a happy holiday, and we will talk again next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.