CarMax Inc

Q2 2022 Earnings Conference Call

9/30/2021

spk09: Ladies and gentlemen, thank you for standing by and walk through the Q2 FY22 CARM-X earnings release conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to turn the call over to your host, David Lowenstein. You may begin.
spk04: Thank you, Kevin. Good morning. Thank you for joining our fiscal 2022 second round Quarter Earnings Conference Call. I'm here today with Bill Nash, our President and CEO, Enrique Mayor Moore, our Senior Vice President and CFO, and John Daniels, our Senior Vice President, CAF Operations. 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 Form 8K issued this morning and its annual report on Form 10K for the fiscal year ended February 28, 2021, filed with the SEC. Should you have any follow-up questions after the call, please feel free to contact our Investor Relations Department at 804-747-7000. 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.
spk16: Bill? Great. Thank you, David, and congratulations on your new role. Welcome to the call. To everyone else, good morning and thank you for joining us. As you read in our earnings release this morning, we delivered a record level of used sales for the second quarter and an all-time record for wholesale vehicle sales as well as robust CarMax Auto Finance income growth. For the second quarter of FY22, our diversified business model delivered total sales of $8 billion, up 49% compared with the second quarter of FY21, driven by higher average selling prices and volume gains. Net earnings per diluted share was $1.72, down 7 cents from a year ago, as we rolled over last year's pandemic-driven expense reductions and also continued to invest in our growth. Across our retail and wholesale channels, we sold approximately 420,000 cars in total, up 20% versus the second quarter last year. For the six months of FY22, we've sold approximately 872,000 retail and wholesale cars combined. We also bought 59% more cars from consumers in the second quarter this year versus last year and achieved record self-sufficiency of approximately 70%. Our omnichannel platform, unique customer offerings, solid execution, and macro factors are driving performance across our company. In our retail business, total unit sales in the second quarter were up 6.7%, and used unit comps were up 6.2% versus the second quarter last year, despite headwinds from inventory levels, staffing, and overall used car valuations. Our teams made steady progress in building our saleable inventory during the quarter and we achieved sequential growth each month despite the strong retail demand that carried into the second quarter. While it remains below our targeted levels, we are on pace to grow our saleable inventory during the balance of the year. In addition to strong unit sales, we reported $2,185 of retail gross profit per used unit in line with our historical second quarter performance. For wholesale, units sold were up 41.4% from a record second quarter last year. Wholesale gross profit per unit was $1,005 compared with $1,086 for the same period last year. The strength in wholesale units was primarily driven by the ongoing success of our instant online appraisal offering that rolled out nationwide on CarMax.com in February after launching on Edmunds.com last year. We also benefited from still elevated valuations of used autos in the broader market. CarMax Auto Finance, or CAF, continued to deliver solid results with income of $200 million. In addition, CAF and our partner lenders delivered strong offers in all credit tiers, though we did see a sequential decline in Tier 3 volume relative to the first quarter. John will provide more details on customer financing and CAF contributions shortly. Now I'd like to turn the call over to Enrique, who will provide more information on our second quarter financial performance, followed by John. After that, I'll update you on the progress against our strategic priorities and then open up the call to Q&A. Enrique?
spk13: Thanks, Bill, and good morning, everyone. Total gross profit was $815 million, up 8% over last year's second quarter. This was driven by wholesale vehicle margin of $189 million. which was up 31% and used vehicle margin of $507 million, which was up 5% from last year's second quarter. Other gross profit was $120 million, down $7 million from last year's second quarter. Favorability in the quarter included $22 million of margin contribution from Edmunds since our June 1st, 2021 acquisition. This was on revenues of $34.5 million, which is noted as advertising and subscription revenues in the earnings release. Other gross profit also benefited from an $18 million improvement in third-party finance fees, with income of $3 million, compared with $15 million in costs last year. This was driven by lower Tier 3 volume compared with last year and our renegotiated third-party finance fees. Offsetting this favorability, service was down $40 million, primarily the result of rolling over favorable items from the prior year's quarter and short-term headwinds during this year's quarter. Specifically, we copped over last year's COVID-related cost reductions. Additionally, we experienced higher 90-day warranty cost timing stemming from the significant increase in sales during the first quarter of fiscal year 22 compared to last year's first quarter. We also realized lower retail service margin as production capacity was focused on reconditioning retail cars. Also impacting other gross profit, EPP was down $6 million, or 5.4%. While penetration was stable at above 60%, last year's second quarter included a benefit of approximately $8 million in profit-sharing revenues that was not recognized this year due to a timing shift in the performance period for one of our providers. On the SG&A front, expenses for the second quarter increased to $574 million up 30% from our COVID impacted quarter a year ago, and as we continue to invest in our strategic initiatives and growth. As a reminder, last year during the pandemic, we took aggressive cost containment actions, particularly during the first half of the year. SG&A as a percent of gross profit was 70.4% compared to 58.8% during the prior year's second quarter. The increase in SG&A dollars over last year was primarily driven by three main factors. First, a $55 million increase in total compensation and benefits driven by staffing and sales growth and by the inclusion of Edmunds payroll this quarter. Second, a $41 million increase in other overhead due to investments to advance our technology platforms and strategic initiatives. Third, a $35 million increase in advertising expense, as previously communicated, to amplify the CarMax brand, build awareness of our omnichannel offerings, and drive customer acquisition. We estimate that the COVID-related cost savings in SG&A in the prior year quarter was between $25 million to $30 million. For the first six months of FY22, SG&A as a percent of gross profit is 64.8%, leveraging five points over last year's first half rate of 69.3%. We remain committed to ensuring we are efficient in our spend, and we expect that targeted areas of focus will continue to deliver improvements over time. We achieved an additional reduction year-over-year from our core CEC cost structure during the second quarter. Additionally, our omnichannel capabilities will unlock new opportunities as we leverage automation to reduce expenses and streamline operations. For example, our online instant offer program is resulting in more efficient buying organization as we continue to leverage the power of automation, AI, and data science. On capital allocation, Our ongoing focus is to deploy capital in our business to grow market share and deliver long-term shareholder value. That includes investing in digital capabilities to enhance all aspects of our omnichannel experience, such as online vehicle acquisition, which is already generating a strong ROI. We also continue to invest in the strategic expansion of our store footprint and look for additional paths to create incremental value. In regard to our share repurchase program, we remain committed to returning excess capital to shareholders and repurchased approximately 1.8 million shares in the quarter for approximately $220 million. Now, I'd like to turn the call over to John.
spk14: Thanks, Enrique, and good morning, everybody. Once again, our finance business has delivered outstanding results. For the second quarter, caps penetration, net of three-day payoffs, was 43% compared with 42.6% a year ago. Tier 2 decreased to 21.6% of used unit sales compared with 22.3% last year. Tier 3 accounted for 7.2% compared with 11.1% a year ago. As a reminder, last year, CAP decided to strategically route a portion of its Tier 1 volume and all of its allocated Tier 3 volumes to partners. preserve the high quality of its portfolio during the start of the pandemic. These changes were rolled back by the end of Q2 last year. During the quarter, we observed strong offers from our Tier 2 partners as they competed for additional volume within the CarMax channel. We also saw a decrease in application volume and conversion to sale for applications in the lower portion of the credit spectrum. We believe these decreases are due in large part to the higher average selling prices seen across the industry. During this year's second quarter, on the strength of record used unit sales, CAF's net loans originated was nearly $2.4 billion. The weighted average contract rate charged to new customers was 8.5%, up from 8.2% a year ago, but down from 9% in the first quarter. Similar to the first quarter, this year-over-year difference in APR is a result of the change in credit mix of customers rather than an increase in the rate charged. For our portfolio, overall interest margin increased to 7.2% versus 6% in the same period last year, resulting in a year-over-year increase of $65 million, or 33%. This strong net interest margin highlights the strength of our ABS program and the favorable state of the capital markets. Given we recognize income over the life of our loans, we will benefit from this higher net interest margin across multiple years. CAF income for the quarter was $200 million, up from $147 million a year ago. This significant year-over-year increase comes as a result of the stronger net interest margin and higher receivables. Our expense related to the provision in the second quarter was $35 million and results in an ending reserve balance of $398 million for the second quarter, or 2.66% of managed receivables. This is in line with the 2.62% at the end of the first quarter, while also reflecting a modestly higher percentage of Tier 3 loans in the portfolio as a result of our decision to retain 10% of Tier 3 volume. We believe our future outlook on losses and corresponding reserve is appropriate given the current macroeconomic environment. With regard to our lending platform and specifically where CAF participates across the credit spectrum, we are constantly evaluating the landscape and remain committed to making decisions that we believe are sustainable in the long term and in the best interest of our customers. During the second quarter, in coordination with our business partners, we began a small test of CAF originating in the Tier 2 space. Much like when CAF entered Tier 3, this test will remain in place at low volumes for an extended period as we take the time to understand both the Tier 2 customer and how CAF's participation in this space can best enhance the range of credit options, improve the customer experience, and drive profitability. Now I'll turn the call back over to Bill.
spk16: Thank you, John. Thank you, Enrique. I'm very proud of how our teams have driven strong results this quarter across our diversified business model, and we're excited about the incredible opportunity that lies ahead. We've intentionally built our omnichannel platforms to give every customer the ability to progress to a sale or a buy regardless of how they shop with us. We've found that most customers don't want to shop for a car in a way that is tied solely to an in-store or digital experience. While we provide the ability for customers to buy a car 100% in-store or 100% online, our omnichannel capabilities really differentiate CarMax by enabling our customers to personalize their experience with a mix of digital and physical interactions to meet their needs. In the second quarter, approximately 9% of our retail unit sales were online, consistent with our first quarter and up from the prior year's quarter of 3%. As a reminder, We consider it an online retail sale when a customer completes all four of the major transactional activity remotely. So that's reserving a car, financing the vehicle if that's needed, trading in or opting out of a trade-in, and creating a sales order. Our wholesale auctions remain virtual. So 100% of wholesale sales, which represents 21% of total revenue, are considered online transactions. Total revenues resulting from online transactions was 28%. This is up from 24% in the first quarter and up from 18% in last year's second quarter. Approximately 55% of retail unit sales were omni-sales this quarter, flat to the first quarter and up from the prior year's second quarter of 49%. Omni sales are those where customers complete at least one of those major transactional activities remotely. We've been focused on completing the rollout of our 100% self-service experience where customers can independently complete the entire car buying process online if they so choose. Currently, a little more than 50% of our customers have access to a complete end-to-end unaided online experience. and we are on track to bring this capability to all of our retail consumers by the end of the fiscal year. Remember, while rolling out access to these capabilities will enable more customers to complete a 100% self-service online experience, all customers currently can buy a car online with assistance from an associate. In the second quarter, we bought approximately 188,000 vehicles from customers through our online instant appraisal. which represents about half of our total buys from customers. That's a 15% increase from our record first quarter number. This growth supports our belief that we've become and are further expanding our position as the largest online buyer of used autos from consumers in the US. We are continuously enhancing our e-commerce offerings to exceed customer expectations and to seamlessly integrate with our best-in-class store experience. Let me share a few examples. One of the areas we've enhanced is our digital capabilities, our digital capabilities is our financing process. Nearly 65% of our finance customers start their loan process online with a pre-approval application. And as of the second quarter, 100% of those customers now receive a digital decision that includes customized loan terms. A majority of those customers, through no additional time or effort, are provided digital access to their personal and financing terms on every card in our inventory, allowing them to shop with more confidence. In addition, what differentiates our experience is the ability to provide these inventory-wide credit offers using multiple finance partners, including CAF. This ensures we provide our customers with the most attractive rates and terms. We're excited about our progress on this crucial part of the car buying journey. We also continue to advance what we believe is industry-leading digital merchandising, which is critical to providing customers an immersive experience with our inventory as they shop remotely. This quarter, we added 360-degree interior views from the driver's side and the backseat of the vehicle and continued to advance vehicle hotspots, which are call-outs to help the customer understand key vehicle features. We also continue to leverage artificial intelligence to ensure that our photos are consistently high quality to best represent our inventory. We're hearing very positive feedback on these advancements that help customers understand and fall in love with our vehicles as they shop online. In relation to our acquisition of Edmunds, we're very pleased with our progress as our teams have hit the ground running on new innovations. We will continue to invest in the Edmunds brand and work together to unlock opportunities to compete across the larger used auto ecosystem. We are really proud of the quarter and the significant progress we have made in advancing our omnichannel strategy. We are well positioned to deliver the most customer-centric experience in the used auto industry, which will enable sustainable growth and create meaningful long-term shareholder value. With that, we'll be happy to take your questions. So, Kevin?
spk09: Ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touch-tone telephone. If your question has been answered or you wish to move yourself from the queue, please press the pound key. Our first question comes from Brian Nagel with Oppenheimer.
spk08: Hi, good morning. Good morning, Brian. David, congratulations on the new role. Oh, thank you. So I guess the question I want to ask, and I know you've talked about this a bit in your prepared comments, but just as we look at this quarter and the 6.2% use unit comp, maybe help us better contextualize that. I mean, against the backdrop, and clearly with COVID, maybe coming out of the COVID crisis, a lot of the internal initiatives, is there a way to think about that number on a more normalized basis? I mean, how is it tracking versus what you view as the real health, the underlying health of your business? And as a follow-up, you know, just from a positioning standpoint, you and your team are talking more and more now about used cars together with wholesale cars as a measure of overall sales. Does that reflect more of a strategic shift on the part of CarMax? Thank you.
spk16: Great. Thank you for the questions, Brian. So on the first question, look, we're really pleased with the – roughly 6% comps. And I say that because you also have to put a little context around the environment. So we had several headwinds that we also faced during the quarter. First of all, inventory. Inventory is lower than where we want to be. It's probably about 30% off of, at the end of the quarter, probably about 30% off of where we would normally target. In addition to the inventory headwind, we were understaffed And we still are understaffed, but not to the degree. We were understaffed pretty much across the board. And that's important not only because it hinders our ability to hit our SLAs, but in some cases, we just weren't able to get back with customers, which is never a good thing. And so we're working on that. And then I think also just a broader macro thing is just the used car valuations. I mean, year over year, acquisition prices are up about $6,000. And I think Enrique talked about it in his opening remarks. or John talked about in his opening remarks about how that may push some used car customers just out of the market. And I think when you take the comps in that light with those headwinds, those headwinds, when you add them all together, are material headwinds. So we feel great about the comps for the quarter, and we also feel great about the overall progress. On your second question, how we talk about used and wholesale, yeah, we do talk a little bit differently about that, but I think that really goes back to a little bit of what I talked about on Analyst Day, which is You know, people always think about us as this used car retailer, and that is, in fact, great, but we're much more than that. We're, you know, a great retailer, a great wholesaler, a great financier. You know, we've added Edmunds. We've got new dealer services, and it really goes to this broader used auto ecosystem. So that's really kind of the change as to why we talk about both.
spk08: That's helpful, Bill. Just to follow up on the initial question, I mean, is there a way to quantify – what that 6.2 would have been had you not faced these headwinds in the quarter?
spk16: Yeah, I tell you, Brian, it's hard. And I'll give you one example. Like the inventory, being that substantially down in inventory would be just in itself a significant headwind. Now, I will tell you, I don't think the normal elasticity applies right now because a lot of folks are under-inventoried. But what I will tell you is we feel like when you take all three of those things and add them up, they're material headwinds. So, again, we're pleased with how the quarter came out from a comp perspective and just overall.
spk09: Thank you. Our next question comes from Sharon with William Blair.
spk01: Hi, good morning. Good morning. Good morning. So the inventory dynamic has been, I think, pretty obvious throughout the quarter for anyone kind of looking at your website. What is your line of sight into getting inventory back into kind of, more normalized levels? I know you mentioned you expected to continue to improve as it did during the August quarter, but just, you know, is this something where you're three, six months out? And just to quantify, is it a staffing issue? Is it the acquiring of vehicles that's the issue? Help us understand kind of where the pinch point is right now on the inventory side.
spk16: Great. Yep. Thank you, Sharon. Well, first of all, it's not acquiring the vehicles. You know, I talked about in the opening remarks just about the fact that we're you know, approximately 70% self-sufficient. So it's definitely not the sourcing. You know, as I talked about with Brian's question, it certainly has been a headwind. And it really all relates back to what happened in the fourth and the first quarter. You know, in the fourth quarter typically is a time where we build our inventory up. We weren't able to do that because of COVID and some winter disruption productions. Then we had, you know, record sales in the first quarter. So we're still digging out of that hole. And like I told Brian, we're about 30% light to target. We're about 15% year over year. If you look at last year's second quarter, where we're this second quarter, we're about 15% light. We did make great progress sequentially. Every month we grew our inventory. And look, we plan to continue to build inventory over the rest of the year. And I think the timing is really going to be, when we get back to where we want to be, will really depend somewhat on the demand. As far as staffing, yeah, during the quarter, although we were able to build inventory, we did have some headwinds even on the staffing side. But again, I think staffing in general, we're making great progress. We made great progress staffing across the board throughout the quarter, and we continue to make great progress in this quarter as well.
spk01: And I know you mentioned to Brian that it's kind of hard to quantify the impact of the inventory. But I'm curious if you've seen conversion go down, just because obviously every used car is like a snowflake. And if you don't have as broad of inventory, I mean, you have to be losing sales. Is there any way to look at conversion as like a metric that might indicate what's been left on the table?
spk16: Yeah, I think conversion was down a little bit. We look at conversion a couple different ways, both conversion from when they start top of funnel, but then also in the store. Store was fairly strong, but up top of the funnel, We saw conversion go down, which we think is a great opportunity because we've always said one of the main reasons people don't buy from us is because we don't have the vehicle that they're looking for, and that certainly is magnified when your inventory is down.
spk09: Thank you. Our next question comes from Rick Nelson with Stevens.
spk12: Thanks. Good morning. Good morning. I'd like to follow up on CAF and the strategy to do more Tier 3s. business at CAV. Can you compare the profitability of a Tier 3 unit sale to a third-party lender and what are the risks, I guess, with the strategy?
spk14: Sure. Yeah, I appreciate your question, Rick. Yeah, so with regard to a Tier 3 unit, a Tier 3 sale from a finance perspective, You know, obviously there's generally a higher cost to fund. There's a higher risk customer there. But it's going to be just a little south of maybe a more prime loan, if you will. So depending on the funding environment and obviously the APR we can charge. But let's say in that $2,000 to $2,100 range, if you're able to capture all the finance economics, potentially. But there is higher risk there. So there's a funding aspect there. Now, obviously, with our partners, we were able to renegotiate fees. We're currently paying $750 to those Tier 3 loans that our partners pick up. And obviously, we mentioned beginning over the course of Q1, we started taking now 10% of the volume within the Tier 3 space. And we're happy with that volume, and we appreciate it, and we'll continue to assess the mix that we should have. But ultimately for us, We want to make sure that whether we take more Tier 3, our partners take more Tier 3, we want to make sure that we're able to provide great credit offers to those customers. And in our current credit platform construct, we feel we do that. So those are the economics. Hopefully that answers your question. But, again, we love the way it's constructed today, and we provide great offers to those customers.
spk16: Yeah, and Rick, the only thing I would add to that is whether it's Tier 3 or Tier 2, for that matter, it really is about balancing the sustainability of the program, the profitability, and then the customer experience. So we take all that into consideration.
spk12: Fair enough. Thanks, and good luck.
spk16: Thank you, Rick.
spk09: Our next question comes from Craig Kennison with Bayard.
spk06: Hey, good morning. Thanks for taking my question, Bill. Uh, the surgeon vehicles source from your online appraisal tool. It's really impressive. Do you have a feel for what those sellers would have done without the tool? Would they have shown up, showed up at a, at a Carmack store? Would they have gone to another dealer? Would they have sold through some person to person listing service? Where are they coming from?
spk16: Yeah, Craig, I think, uh, Look, we're pleased with the online. I think we're getting a lot of incremental units there, because even our traditional appraisal lane is still very strong. So I'm not sure where they would have gone, but we absolutely feel there's a tremendous incremental value there by the fact that we are offering this service. So maybe they would have gone and sold other channels, but I don't know which channels, but we feel good about the incrementality.
spk06: And what percentage of online offers are you able to purchase, and does that tell you anything about the competitiveness of your offer?
spk16: Yeah, so our buy rate, you know, traditionally how we've talked about the buy rate is through our appraisal. And our appraisal lane buy rate is still, I mean, it's very high. It's in the low 30s. On the online offers, the way we really look at that at this point is, you know, If you get an online offer, because think about it, we're putting millions of online offers out there each quarter. The way we think about it is, okay, once we put an offer, of those customers, how many show up at the store? And of those customers that show up at the store, how many of them actually sell? And as you can imagine, that buy rate, the customers that show up with an online offer that sell is actually much higher than the traditional A-length.
spk09: Thank you. Our next question comes from Rajat Gupta with J.P. Morgan.
spk05: Great, thanks for taking the question. Just had a question on some of the investments that you had made in the second quarter. Clearly advertising picked up, the other investments picked up, you've added more headcount. Could you give us any color on how much of this has started to benefit comms? Maybe if you could give us some color on how September is tracking, that would be useful. And then just on GPU, you know, just given the rising used vehicle pricing environment we are back in again here, you know, late August into September, likely into October, November as well. You know, you've previously given us some color on, you know, like a Creative in 2000 number for retail GPU. Any similar color you could provide us for the third quarter as well, that might be useful. And that would be all. Thanks.
spk13: Hey, Rajat. In regards to SG&A, we firmly believe that now is the right time to invest in growing our business. We're very bullish about our future, given the strength and trajectory of our business, and we're going to continue to invest in our growth. We're going to continue to invest in the Omni and e-commerce functionality as we move forward. Again, we are on track by the end of this year to offer up to all of our retail customers 100% self-sufficiency online. our self-service online. We're going to continue to invest in the acquisition of customers by marketing. The investment in marketing is something that we had communicated last year that we were going to step up our marketing, advertising, and other channels as well. Again, we believe we have a superior platform. We want to make sure that we're communicating that in an effective way to our consumers. But at the same time, there's also a very targeted ROI opportunities in advertising as well that we're investing in. And then lastly, we're going to continue to invest in the acquisition of vehicles. And the instant offer program that we launched that has had tremendous success is just an example of one of those investments that just provide an outstanding ROI. But we're going to continue to invest now. That being said, we do expect to lever over the longer term because at the same time that we're investing, we also have cost efficiency plays whether it's the CECs or whether it's the buying organization or whether it's other channels as well, we have opportunities to get more efficient in how we work. And so we'll continue to do that. But I think it is important to remember that we're on track with our investments. We're on track with our performance at this point.
spk16: Yeah, and Rajat, the only thing I would add to that is on the advertising, for example, we're really pleased with the performance of that. We saw about a 19% increase in web traffic. Our average flow to our website was about a little more than $34 million a month. So that's another example where we feel like the investment's paying off. As far as the second part of your question, the GPU, it's a great question. So I kind of think about we're in a very similar situation today that we were last quarter when we talked about this. We're constantly testing. A couple quarters ago we talked about doing some broader scale testing just because of some of the other factors, some of the other profit channels that were coming through the organization. And while those still exist, just like last quarter, you know, we really wanted to make sure we – you've got to monitor the macro factors and does it make sense. You've got to look at your inventory levels. You've got to understand the elasticity, which, again, we're still getting the read on elasticity with the tests that we always have going. You want to see what competitors are doing. And it just didn't make sense, you know, to deviate more from that historical – uh trend that we have on on margins and you know we at the end of the day we want to have very very competitive uh competitively priced inventory i think with the self-sufficiency that certainly helps i think going forward is how you should think about the third quarter is probably gpus more in line with historical uh averages just like the the second quarter was thank you again ladies and gentlemen if you have a question or a comment at this time please press the star then the one key on your touchtone telephone
spk09: Our next question comes from Michael Montani with Evercore.
spk03: Hi, thanks for taking the question. I just wanted to follow up on the cadence of the comps throughout the quarter and then to start the third quarter. From our work, it looked like the trend had accelerated nicely into August and basically could have been up double digits into September. So just wanted to see if you all would comment on that, if you could do it quantitatively, and if not that, if you could provide some color as to why trends may have strengthened, if it's inventories or enhanced multi-channel?
spk16: Yeah, good morning, Michael. Yeah, so obviously I've already said we're pleased with overall comps for the quarter. We had positive comps every single month, and we really continued a trend that started since March. You know, March was not only a record, all-time high record, but it was a record for the month. April, May, June, July, August have all in their respective been a record month for us. So we feel great about that. And to your point, we're also very pleased with the start of the third quarter. Now, obviously, we'll talk more in detail about that at the end of the third quarter.
spk03: Okay. And then if I could, just on the margin front, kind of two questions there. One was some folks had been anticipating a little upside on GPU due to pretty inelastic demand at the moment. So I just wanted to understand if there's something we need to also consider in terms of the volatility of the pricing in the environment. or if perhaps there's more investment you all are making. And then the other one was just on advertising spend, you know, for the year, and if there's any kind of cost reductions to consider as we cycle 3Q and 4Q. What you called out in 2Q was helpful, 25, 30 million.
spk16: Okay, yeah. So on the margins, look, we're always looking at our margins. And, you know, I know we probably have some competitors that where the big spike up in average selling price is, they'll take more margin. You've followed us long enough to know that ASPs don't really drive our margins. We feel very comfortable about where our margins are. For us, it's about making sure we get a great margin, but also having great, great prices. Again, to the question I answered earlier, I think the third quarter, you can think about you know, margins more in the historical trend. You know, could you have taken more margin? Yeah, but again, we're in this for the long haul, and we want to make sure our prices are super competitive all the time, and we feel great about that. I'll let Enrique speak to the advertising.
spk13: Yeah, so two questions. On advertising, you know, we had communicated earlier this year that our expectation for advertising on a per-unit basis for this year was going to be similar to what we spent in the back half of last year, so somewhere in the mid-300s. And we're on track so far this year, and our expectation is that we're going to meet that for the full year. In regards to, you know, copping over COVID and the $25 to $30 million that we estimate that last year, kind of one-time savings, that was really focused on the front half of the year. There still are some of those that will carry over into Q3, but not to the same level of materiality as what we saw certainly in the first two quarters of the year.
spk09: Thank you. Our next question comes from Seth Basham with Woodbush Securities.
spk15: Thanks a lot and good morning. My question is around GPU and the pricing environment. Bill, maybe you can comment on what's happened with wholesale price trends and retail price trends through the quarter and how that's impacted your retail GPU.
spk16: Yeah, so obviously retail, if I look at it from a mix of justice standpoint, retail pricing was up about, from an acquisition standpoint, was up about $6,000. Wholesale was up probably around $3,000. So both are, actually as long as I've been doing this, those are the biggest jumps I can remember ever seeing. Now I think the fact that self-sufficiency is so high for us, I think that provides us a lot of opportunities as we go forward because that comes into play on not only your margin but your pricing structure. I think during the quarter what we saw was we came out of the first quarter very high elevated prices. It hung in there for a little while. We then actually saw a little bit of depreciation take place. But surprisingly, it started to appreciate again. And we went back. I think we finished the quarter probably at the high that we finished the first quarter. So it's a very interesting dynamic. And I can only speculate. Because the chip shortage looks like it's going to be longer than I think what people originally thought of for new cars, I think maybe there's some folks out there buying more used cars to replenish their lots since they're not going to have new cars. But it is an interesting dynamic that we're seeing.
spk15: Yeah, so the fact that prices started to appreciate again through the back half of your quarter unexpectedly should indicate that you could have captured incremental margin on those unit sales. So your GPU X in the quarter was probably stronger than it was in the beginning of the quarter. Is that the right way to think about it?
spk16: no i would just think that pretty much you know you know the way we manage our gpu really doesn't it doesn't take into consideration the average selling prices there's other factors that go into that so i think you know it's fairly consistent throughout the quarters the way you should think about it thank you our next question comes from adam jonas with morgan stanley why are you guys still buying back stock i mean you have such an un once in a generation
spk02: growth opportunity. You're up against competitors that have a license to lose money and zero expectation to return cash. I understand the business spins off cash and everything, but isn't it time to change the philosophy and just double down on the growth of the business and cut the buyback stuff?
spk13: Like you said, we're blessed with an operating model and a business model that generates a significant amount of cash. And we're making the investments we think are the right investments at the right time to generate our growth. And still with that in mind, we believe we have excess cash to buy back stock and return it back to shareholders. So we're not holding back on our level of investments. And you can see that in our spend and in our CapEx that we are investing aggressively. We'll continue to do so. And even in that scenario, we have enough cash to buy back shares. But we are not holding back on our investments.
spk09: Thank you. Our next question comes from John Murphy with Bank of America.
spk11: Good morning, guys. Just a question on two pressure points. I mean, first on inventory. I mean, it certainly seems, Bill, as you just alluded to, and based on what we know on the new vehicle side, that this inventory shortage on the new vehicle side is going to persist well into next year and, you know, certainly probably past, you know, mid-next year, calendar year 2022. So I'm just curious, you know, if you think any of these dynamics are will be relieved until we get there. And then also, as you think about sort of the staffing levels, you know, finding folks at, you know, reasonable prices is getting harder and harder. So that cost inflation on the SG&A side and staffing up might be difficult as well. I mean, I'm just trying to understand, you know, if you can change strategy, alter strategy, or this changes your growth strategy as you fight through these two macro scenarios. you know, factors and when they'll be relieved. Because it's kind of masking all the good stuff you're doing, and it's, you know, it's muddling the story, but it's not your, you know, it's not your fault, and it's, you know, there's macro issues that you're just going to have to fight through.
spk16: Yeah, I think, you know, whatever I tell you on, like, the chip situation, probably the only thing I can guarantee you is it'll be wrong, but I, you know, I do agree with you. I think it's going to persist throughout this year, which could keep used cars at an elevated, you know, it'll persist through this year, and I think, you know, pretty much through next year or a good part of next year, which will keep, I think, prices elevated. But it's also the reason why I'm so excited about the investments we've made in vehicle acquisition and things like our instant offer, because that really helps to offset some of those headwinds and really gives us a lot of opportunity. And like I said earlier, we're making strides, continuing to get our inventory up, so we feel good about that. On the staffing, look, we've always invested in our associates. I mean, they're the reason of our success. You know, during this time period, you know, I mean, every employer is out there looking for staffing, and we're no different, and we continue to invest more in this quarter in our associates. We've made pay changes that we feel really great about. We also, look, for 17 years in a row, we've been one of the best places to work, which is a great thing from an employer brand standpoint. So, again, even on the staffing side, we feel great about the trajectory that we're going on. So, yeah, there's some headwinds there, but we're progressing both on the inventory side and both on the staffing side. and feel great about some of the opportunities that we have that things like self-sufficiency and IO give you.
spk11: Is it fair to say, or maybe just a follow-up, that the SG&A leverage is going to be difficult to get through this period of macro pressure? It just seems like you guys have executed incredibly well on same-store sales and grosses despite these headwinds. I think some people are concerned about it, but what you've done this quarter is fantastic. pretty remarkable, you know, on the grosses and the volumes. You know, I mean, are you going to be able to get SG&A leverage until we get through sort of the end of calendar year 2022? It just seems like it's going to be hard to pull off. I mean, what's your thought about that and where should we think about that inflection point?
spk13: Yeah, you know, we certainly are in investment mode as, you know, we've made clear and you can go back to our analyst day and say we're really focused on driving our top line We are focused on driving market share and meeting and exceeding our target that we laid out there, which is greater than 5% market share by FY26. And that does require investments, like we've been talking about, the investments in the different areas that we've mentioned, certainly. So will it be harder to leverage? Well, in that kind of environment, it is a little harder to leverage, right? And our expectation is that our gross profit will continue to grow. It will grow robustly. And on the back of that gross profit growth, you know, there are opportunities to leverage. Specifically for this year, for the entire year, our expectation continues to be that we should be able to leverage for this year. It's hard to look quarter to quarter. You just can't look at quarter to quarter just because there's so many things that pop in and out of a quarter. But for the full year, we feel pretty good about that. And then moving forward, again, we are in growth mode and we're investing accordingly. And at the same time, and as I speak to every quarter, you know, we do look at opportunities to get more efficient. They're investments we're making to drive the top line. They're investments we're making to help pull out costs as well. And we always have a sharp eye to that. So we'll continue to do our best on that. And at the same time, we are focused on market share growth and the opportunities that lay ahead of us. And we're really excited about them.
spk09: Thank you. Our next question comes from Ali Figueroa with Guggenheim.
spk10: Good morning. Thanks for taking my question. So I'm sorry about another question on retail GPU here. So I recognize that retail prices don't really drive CarMax's GPU, but just the self-sourcing improvement from sub-50% to 70% this quarter by itself should have been a big boost to GPU, given the cost advantage from acquiring from consumers versus auction. I know you said you kept your prices competitive, but it also doesn't seem... at least based on our work, that you are meaningfully outperforming peers on volumes either. So how do I tie that all together?
spk16: Yeah, well, first of all, you know, we feel really good about our pricing position, and we've been looking at this for a very long time. So we feel very good about where we are from a pricing standpoint. And, look, this is one quarter. Some things have a longer tail. But I would also go back to the fact that, look, we had some major headwinds that when you add them all up together – they were, you know, hard to overcome, which I've already talked about, you know, the inventory, just the pricing, the staffing. So, you know, those are headwinds over the self-sufficiency. I think what we're most excited about is this self-sufficiency and the opportunity that that gives us as we continue to move forward.
spk09: Thank you. Our next question comes from David Wishton with Morningstar.
spk17: Thanks. Good morning. I hear you say you're happy with pricing, but then when I look at page six at the GPU gross margin per unit there, it's down considerably year over year and also down versus the quarter two years ago. It's obviously a competitive marketplace, though, too. I mean, do you have leeway to raise prices?
spk16: Well, David, just so we're clear, like the GPU, if you look at it, like last year's second quarter was a record GPU, right? And we're only a little bit off of that. So I would say if you look at our historical average, we're on the higher end of GPUs. So I think there might be a little disconnect there. Could we raise GPUs? Absolutely. And look, we're going to continue to monitor the macro factors to see what makes sense. Self-sufficiency gives us a lot of opportunity as we go forward. But I think at the same time, we are in this for the long term. And we want to make sure customers are getting great value. you know, every day. And so we're going to continue to kind of weigh all factors as we go forward.
spk17: Okay. Just to be clear, I was talking about the 8.3% versus the 11%, and then the 10.5% two years ago. That's why I asked about pricing.
spk16: Oh, I'm sorry. So you were talking more as it relates to ASP. Yeah, and again, we just – I would just throw that out.
spk13: You need to look at it on a per-unit basis. It's going to be artificially skewed. as a percent of revenue just because retail prices are just up like 30% since the beginning of the year. So it's hard to look at kind of as a percent of revenue. We really look at the businesses on a per unit basis.
spk16: Yeah, and we manage it differently than a lot of the other publicly traded auto retailers.
spk09: Thank you. Our next question comes from Chris Bolliger with XA and B&B Paribas.
spk07: Hey, thanks for taking the question. Just kind of two quick ones on other gross profit. So I guess just first trying to understand the service gross profit seemingly went negative this quarter because of the warranty issue. You know, like next quarter or whatever, like does this go back to the 20 to 30% gross margin rate you've historically had? Or is there something like some kind of like lag to all this warranty stuff that we should be thinking about?
spk13: Yeah, service this quarter, you know, we're upside down $40 million year over year on the quarter. And we estimate that a material amount of that were headwinds we faced in the quarter that were really shorter term in nature. So the two largest ones I tell you, number one was the 90-day warranty that you mentioned. And when you think about it, right, our comps this year in the first quarter were 99%. Last year in the first quarter, they were negative 42%. And so you're looking at a lot more volume from a 90-day perspective, warranty work that carries over into the subsequent quarter. So that very much is a timing play right there. And then the second piece is similar to SG&A. We just had prior year kind of one-time COVID-related savings and support pay and the employee retention credit plan as well that are more kind of, you know, shorter term in nature. So the material amount of that is really shorter term. What I'd say is, you know, historically, we've run service as a positive margin contributor. The exception was last year, certainly during COVID. It was not, but prior years, it had been a positive margin contributor. And as we move forward, on an annual basis, you know, we do expect that to continue to be a positive margin contributor as well. But this quarter, certainly those two headwinds, you know, made it a little bit harder.
spk09: Thank you. Again, ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touch-tone telephone. Our next question is a follow-up question from Rajat Gupta with JPMorgan.
spk05: Hey, thanks for letting me get back on the queue here. Um, yeah, I just wanted to follow up, you know, um, you know, in terms of like a housekeeping question around SG&A, uh, how much of the quarter over quarter pickup in SG&A was, uh, due to the Edmonds acquisition? Um, and if you could frame it within some of the buckets in SG&A also, that might be very helpful. Thank you.
spk13: Yeah, as regards to Edmonds, you know, I spoke in my prepared remarks that from a gross profit standpoint, Edmonds contributed about $20 million. You're going to see that in the 10Q tomorrow when we file. Overall, so it's an operating segment. Edmonds is, we're going to be reporting on it as an operating segment, not a reporting segment. So we're going to be reporting moving forward on their revenues, on their gross profit, but that's the extent to which we're going to report on them. What I can tell you, though, Brijat, is that overall they were slightly accretive. to CarMax so you can kind of back into their SG&A using that kind of approach.
spk09: And I'm not showing any further questions at this time. I'd like to turn the call back to Bill Nash for any closing comments.
spk16: Great. Thank you, Kevin. Well, listen, thanks for joining us today, for your questions and your continued support. We're confident in our ability to seamlessly merge our world-class in-person and online experiences with Add to that our diversified business model, and we'll be able to continue to drive growth and market share gains as we move forward. As I always do, I want to thank our more than 27,000 associates for your continued dedication to living our values each day, taking care of each other, the customers, and our communities. You all are the reason that we remain a positive, disruptive force within the used car industry. Again, thanks for everyone's time today, and we will talk again next quarter.
spk09: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-