CarMax Inc

Thank you for holding, ladies and gentlemen. You are online for this CarMax earnings release conference call. At this time, we are still gathering additional participants. We will get started momentarily. We thank you for your patience and ask that you please continue to hold. Thank you. Thank you. Please stand by. We're about to begin. Thank you for standing by. Welcome to the fourth quarter fiscal year 2022 CarMax earnings release conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. David Lowenstein, AVP Investor Relations. Please go ahead, sir.

Thank you, Jess. Good morning. Thank you for joining our physical 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, CarMax Auto Finance Operations. Let me remind you our 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, please see the companies Form 8K issued this morning in 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.

Let me thank you in advance for asking only one question in getting back Bill great thank you David good morning everyone and thanks for joining us for the fourth quarter of FY22 our diversified business model delivered total sales of 7.7 billion dollars up 49 percent compared with last year's fourth quarter

driven by growth in average selling prices and wholesale volume gains, partially offset by a decline in used units sold. Net earnings was $159.8 million for the fourth quarter and $1.2 billion for the fiscal year.

During our call in December, we shared that we were pleased with our sales performance at the start of the fourth quarter.

However, we began to see pressure after the holidays that continued through the end of the quarter. In our retail business, total unit sales in the fourth quarter declined 5.2%, and used unit comps were down 6.5% versus the fourth quarter last year. We believe several macro factors weighed on market-wide used car sales, including consumer confidence, vehicle affordability, the Omicron COVID surge, and lapping stimulus benefits paid in the prior year period. While the fourth quarter used market was challenging, we are extremely proud of it. We believe we are well positioned for continued long-term success across our retail and wholesale business and CarMax Auto Finance. Our full year results reflect significant growth in sales, market share, and earnings, as well as a solid progress on our strategic initiatives. In fact, our retail market share growth this past year was the highest it's been during my tenure as CEO, and is a reflection of our focus on delivering the most customer-centric experience in the industry. Our market share data indicates that our nationwide share of zero to 10-year-old vehicles grew 13% from 3.5% in calendar 2020 to 4.0 in 2021. Despite posting a decline in sales during our fiscal fourth quarter, comparing our results to published used vehicle SAR data suggests that we continue to take share during the quarter. We believe we are well positioned to deliver profitable market share gains in any environment.

Across our region, we are up 11% versus last year's period.

For the fiscal year, we sold approximately 1.6 million retail and wholesale cars combined, up 38% year over year. We continue to be the nation's largest buyer of vehicles from consumers. We bought approximately 324,000 cars from consumers. During the quarter, up 69% versus last year's period. For the fiscal year, we bought approximately 1.4 million cars from consumers, up 95% year over year. Self-sufficiency continued to be strong during the fourth quarter, remaining above 70%. We reported fourth quarter retail gross profit per use unit of $2,195. up $109 per unit versus the prior year period. With used car prices remaining elevated, we chose to pass along some of our self-sufficiency acquisition cost savings to consumers via lower prices. We believe we struck the right balance between covering inflationary costs, maintaining margin, and keeping our vehicles more affordable. Our approach reflects our continuation of our commitment to doing what's right for the customer, which ultimately drives the growth of our business. Wholesale unit sales were up 43.8% from the fourth quarter last year, and gross profit per unit was $1,191 compared to $990 a year ago. The strength in wholesale units was primarily due to valuations remaining historically high during the quarter, which supported margin relative to the fourth quarter last year. Formax Auto Finance or CAF delivered income of $194 million, up from $188 million during the same period last year. In a few minutes, John will provide more detail on customer financing and CAF contributions, but at this point, I'd like to turn the call over to Enrique.

Total gross profit was $711 million, up 11% from last year's fourth quarter.

This increase

This increase was driven primarily by wholesale vehicle margin of $177 million, which was up 73%.

The continued growth of the wholesale business is providing us with a strong gross profit lever. The used vehicle margin of $427 million was relatively flat over last year's fourth quarter. with the decrease in units largely offset by an increase in margin per unit. Another gross profit was $107 million, down 4% from last year's fourth quarter. This decrease reflected a $33 million decline in policy impacts from the Omicron COVID-19 surge in the fourth quarter. Our intent continues to be to operate service as a profit center, which from quarter to quarter can be impacted by sales trends and staffing disruptions. Partially offsetting this decline was favorability in EPP and third-party finance fees, as well as $20 million of margin contribution from admins. EPP grew by $6.3 million or 5% stable at approximately 60%.

This favorability was driven by an $11 million adjustments to our cancellation reserves. Recall from our second quarter call in September timing shift in their performance period for profit sharing revenues.

All of our providers now utilize the same timing, which aligns recognition as applicable to our fourth quarter. Third party finance fees improved by $4.7 million with income of $1.8 million compared to a cost of $2.9 million last year.

This improvement was driven by lower Tier 3 volume compared with last year's fourth quarter.

On the SG&A front, expenses for the fourth quarter increased to $621 million in investment in our strategic initiatives and in marketing. The consolidation

related to the increase in appraisal buys, new stores, and customer support at our customer experience centers, or CECs. SG&A, as a percent of gross profit, this deleverage was primarily due to the decline in sales that occurred in the quarter. The increase in STNA dollars over last year was a $43 million increase in total compensation and benefits, including a long ramp in staffing, including proactive staffing in anticipation of tax season and wage increases. Additionally, we had a total increase in total compensation, plus the inclusion of Edmunds Payroll this quarter versus a year ago. partially offsetting the $40 million increase in other overheads. The primary drivers of this are technology platforms and strategic initiatives, as well as growth-related costs. Third, we want to amplify the CarMax brand by continuing to build awareness of our Omni For the full year, SG&A's percentage of gross profit was 70.7%, leveraging approximately one point over last year's percentage of 71.6%.

Our approach to SG&A and costs heading into next year remains consistent. We will continue to invest in our business. At the same time, we will continue to target areas of focus that we expect will deliver results over time. We expect to require an increase beyond the 5% to 8% range of gross profit growth to lever in FY23.

This is largely due to strategic investments and growth-related costs.

While we expect to remain in investment mode over the next few years,

go back down after FY23. Our capital allocation philosophy, we will continue to invest in our core business communities through investments, partnerships, and return excess capital to our shareholders.

In regard to our share repurchase program, we repurchased approximately 872,000 shares in the quarter for approximately $102 million. We repurchased approximately 4.5 million shares for $561.6 million. And as of March 31, 2022, we had $721.7 million of authorizations remaining. As communicated today, our Board of Directors has expanded our share report

with no expiration timeline. This authorization reflects CarMax's ongoing commitment to long-term shareholder value creation through growth and return of capital.

For capital expenditures, FY23, this includes long-term growth capacity initiatives for auction, sales, and production facilities.

In addition, In FY23, we plan to open 10 new locations, including our first in the metro market.

Our extensive nationwide footprint and logistics network continue to be a competitive advantage for Carmex, and we remain committed to an appropriate level of investment on these differentiated assets.

Now I'd like to turn the call over to John. Thanks, Enrique. For the fourth quarter, Cal, penetration net of three-day payoff with 43.5% last year.

Tier 2 increased to 23.7% of used unit sales compared with 21% last year. And Tier 3 accounted for 6.7%. Year-over-year reduction in caps penetration is attributed to a larger percentage of customers coming in. Our Tier 2 partners continue to provide highly competitive credit offers and as they compete for additional volume within the CarMax channel.

These strong offers, along with the decrease in conversion in the lower portion of the credit... ...average selling prices and corresponding... ...swap and penetration between tiers two and three. During this year's fourth quarter... ...nearly $2.1 billion. The weighted average contract... rate charged to new customers was 8.2%, down from 8.5% a year ago and 8.3% in the third quarter.

The difference in APR is primarily a result of the credit mix of customers booking with CAF.

CAF income for the quarter was $194 million, an increase of 3%,

or $6 million from the same period last year. Total interest margin increased $64 million, driven by $42 million in higher interest and fee income from our continued growth in receivables and $22 million in lower interest expense from the past ABS deals that continue to provide value over time. This improvement in caps margin and the growth in average managed receivables more than offset the substantial increase in the current year's fourth quarter versus $4.6 million in the prior year's fourth quarter.

In the prior year's fourth quarter, the provision for $54 million results in an ending reserve balance of $433 million, or 2.77% of managed receivables.

consistent with the 2.75% at the end of the third quarter and includes a three basis point adjustment for additional tier two and tier three volume originated by CAF. The opportunity to highlight a few of the accomplishments made since our last call regarding our online finance experience. As a reminder, nearly two-thirds of our customers begin their financing process on CarMax.com, applying for credit on any vehicle in our inventory or simply a requested dollar amount. our unique finance-based shopping engine available to most of our customers and lenders to decision a single customer or co-applicants on our entire suite of personalized decisions available at the consumer's fingertips. This tool is incorporated into the search page within CarMax's important filter, not only on the vehicle's characteristics, but also on important financial and down payment. During the month of March, we further enhanced this experience and are now testing a no-impact tier credit score feature application process that provides real-time credit decisions on our full inventory. We believe this platform, coupled with these and additional enhancements that are on the horizon, will further strengthen our digital shopping experience. Now I'll turn the call back over to Bill.

Great. Thank you, John. Thank you, Enrique. As I mentioned earlier in this call, I am very proud of how we performed in fiscal 2022. We bought and sold more vehicles than ever before through our retail and wholesale platforms. We've continued to innovate, to aggressively invest in core areas of our business, and to pursue new growth opportunities. As a result of these efforts, we've achieved double-digit year-over-year growth in our market share and even more share.

We have continued to build out new and enhanced capabilities, and as those capabilities have come to market, we have continued to see positive returns.

Some highlights from this year that will have a lasting impact are, first, enabling online self-progression capabilities currently available to approximately 90% of our customers. with full availability for every customer anticipated by the end of this first quarter. Next, leveraging our online instant appraisal offering to buy a record number of cars directly from consumers, which enable us to nearly double our self-sufficiency as well as drive sustainable wholesale unit growth. Also, transitioning CAP's legacy auto loan receivable servicing system to brand new technology, which provides CAP a modernized foundation for growth and allows us to enhance our customer experience. And finally, rolling out the finance-based shopping capabilities that John just described. Our e-commerce engine, combined with our unparalleled nationwide physical footprint, is a key value to our customers and helps us provide what we believe is the best experience in the used car industry. It gives us access to the largest total addressable market and is a key differentiator, one that we will continue to enhance. line metrics approximately 11 online up from prior year's quarter of 5% our wholesale auctions remain sales which represents 23 percent of total revenue are considered online transactions total revenue resulting from online transactions this is up from 17 percent and last year's fourth quarter Approximately 55% of retail unit sales were Omni sales this quarter, up from 51% in the prior year's quarter. In the fourth quarter, we bought approximately 162,000 vehicles from customers through our online instant appraisal. That represents about half of our total buys from consumers. The fiscal year, we bought approximately 707,000 cars through this channel, again, representing roughly half of our total buys from consumers. Going forward, we will continue to evolve our online and in-store capabilities to enable a more seamless experience for our associates and customers. I would like to highlight four key areas of focus for FY23. First, as John mentioned earlier, we're deploying a more sophisticated version of our finance-based shopping capability that enables real-time decisions and offers our customers the ability to pre-qualify for a loan with no impact to their credit score. Second, adding self-service capabilities to enhance in-store interactions, including appraisals and express pickups. Third, growing vehicle acquisition through attracting new customers and pursuing partnerships as we expand our appraisal offering to dealers and other businesses. And finally, continuing to leverage data science, automation, and AI to improve efficiencies and effectiveness across our buying organization, business offices, and CECs. Again, we're very proud of the strong results for Fiscal 22. They are in large part due to our relentless focus to provide our customers the best experience in the industry. We are in a strong position moving forward and will continue to invest and innovate to achieve profitable market share growth. During our analyst day last May, we announced long-term targets of achieving 2 million combined retail and wholesale units sold and $33 billion of revenue in FY26. up from $1.2 million and $19 billion respectively during FY21. Though we don't anticipate updating our targets annually, our strong performance in FY22 has given us new perspective on these targets that we believe is appropriate to share at this time. We're revising our FY26 targets to reflect a range of 2 to 2.4 million combined units with revenue between $33 and $45 billion. These ranges reflect the macro factors we caught earlier that could result in ongoing volatility in consumer demand and vehicle pricing. In regard to market share, I'm excited for the future and confident that we will expand it beyond 5% by the end of calendar 2025. Last, but most importantly, I want to thank all of our associates for the work that they do. They are truly the keys to our success. Just yesterday, Fortune magazine named CarMax as one of its 100 best companies to work for for the 18th year in a row. I'm incredibly proud of this recognition as it is due to our associates' commitment to supporting each other, our customers, and our community every day. I want to thank and congratulate all of our associates. With that, we'll be happy to take your questions.

Thank you. Ladies and gentlemen, if you do have a question or comment, it is star 1 on your touchtone telephone.

If you're on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Once again, that was star one for any questions or comments at this time.

Your first question comes from Craig Kennison with Baird.

Your line is open, sir. Please go ahead.

Good morning. Thanks for taking my question. I guess I'm curious about the online instant appraisal tool, just a number of questions about that. How would you assess your competitive positioning and the competitive landscape in that market? How are you different? Are you putting enough marketing spend behind that effort while you have this competitive advantage? And then, Bill, I think you mentioned plans for fiscal 2023 to roll this out to other dealers. Maybe you could shed some light on that.

Sure. Good morning, Craig. There's a lot in that question. So first of all, I feel really great about our IO success. I think it's really been so successful because of a bunch of reasons. One, I think it's really the experience and the ease of use of the product. I think it also has the backing, the brand recognition of CarMax. And let's not forget, this is what we do. We've been buying cars from consumers since 1993. We have started advertising, obviously, for it. If I look at the fourth quarter and think about our advertising spend, we break it down between brand uh awareness and acquisition awareness i would tell you the acquisition awareness awareness we spend a little bit more on vehicle acquisition awareness is passported and obviously i think everybody in the marketplace is benefiting a little bit from higher valuations but you know i think that's the minority of the the bump that we've seen so we're excited about that uh as far as my comments earlier yeah look we're first of all going to continue to to But we're also, we've been testing and we'll continue to roll this out to make it available to other dealers as an easy way to get rid of inventory that they're looking to get rid of, as well as we'll look for other partnerships where we can leverage this.

Our next question comes from Sharon Zexia with William Blair. Your line is open. Please go ahead. Hi.

Good morning. I'm Sharon Zexia. Thanks, Paul, for the color on the long-term plans. I'm sure everyone's interested in kind of how you can pivot in the current consumer environment, particularly with used car prices where they are. And you talked a little bit about kind of passing on some better prices to consumers in this quarter. But I'm wondering, first, I guess, if you have any – kind of additional insight on how much stimulus related to the fourth quarter. I think that would be helpful to know. And then just given where gas prices are and used car prices, are you seeing any kind of fall off in demand for SUVs?

How are you pivoting for that? And then are you shifting average ages?

of your inventory is somewhat older to try to make the price points more affordable. I know there's a lot there, but I think it's important to kind of cover all of that. Sorry. It's like a 12-part, one-part question.

Yeah, that's a great question. Just on the last two, the gas prices. Look, for the quarter, we really didn't see much of an impact on gas from the sales standpoint. Very similar year over year. So I do think that's an area that we need to continue to monitor as we go forward. We have seen an uptick, for example, in things like very successful as consumers want something different, we're right there for them. So I'm really not worried about that, and we'll be able to pivot on that.

Your question on average age of vehicles, we did, from a retail standpoint, we did see

a shift to a little bit older car, which obviously is a little bit cheaper. You know, I think the mix, if I'm looking at zero to, let's see, zero to four, Year over year, I think there was about a 10-point swift change from that bucket into the little bit higher, maybe the 5 to 7 bucket. So we have seen a little bit of shift there. And, again, the beauty of our business is we see customers' commentary around the comps. Look, I highlighted a whole bunch of different things that are macro factors that I think are weighing on the overall used car industry. If I had to quantify each one, but, you know, I would probably say the high prices are are at the top of the list, followed by the COVID surge.

You know, we did see a COVID surge in January. And then I think coming out of the COVID surge, I think it kind of transitioned into this whole lower consumer confidence.

And then I also think the time frame, primarily more in January than in March.

So I think, you know, the quarter. And I think it's also –

probably just to the first quarter as well.

How did I do? Did I get all your questions?

Yeah, I think so. I'll get back in the queue. Thank you.

All right. Thanks, Sharon.

Our next question comes from Rajat Gupta with JP.

Great. Thanks for taking the question. You know, maybe, you know, just on the SG&A run rate, you know, $130 million in overhead costs, you know, is that kind of like a good, you know, just curious how did that, you know, with any changes on the volume side, given things are a little weak here in the near term.

And then maybe, notably the environment,

in terms of being able to pass through, you know, benchmark rate increases or widening in, you know, ADS markets, you know, how confident are you in terms of being able to pass that through to the consumer?

How should we think about the implications, you know, to the cash system?

Thanks.

Yeah, I'll let

Enrique, talk about the SG&A, and then the cap business will let John answer that.

As a whole. Other overhead.

Yeah, so other overhead this quarter really was it's a continuation of our investment in our technology spend and also cost-related to growth. So you've got to keep in mind the tremendous amount of cars that

business. So I would say that was certainly up this quarter. I would expect it to continue to be up.

I think taking a step back, though, and taking a look at overall SG&A and all its components, you know, heading into next year, we do expect, as I mentioned, up to 5% to 8% growth in growth profit in order to deal with the timing of our

successful in staffing the business up. As you recall, at the beginning of the year, we had some staffing challenges, and we ramped up that staffing throughout the year, and that'll come into next year.

So really, when we look at that higher, and we find that timing of that staffing investment, that we need to continue to grow this business.

Affordability question. Appreciate that question.

Yeah, I think we've mentioned before in the kind of the non-cap customer, the lower credit spectrum customer, certainly we feel affordability has maybe often priced them out of the market. You can see that probably reflected in our tier three percentage of sales. But if you look at the cap bacteria, a customer last year was coming in purchasing a $20,000 car, maybe putting $1,000 down. Now they're coming in and they're financing $19,000 and they you know, if they saw that $10,000 down, they're asking for $27,000. You know, CAF has a decision to make as a person borrow that much more money. So there is an affordability question there.

I think what we're seeing is in the case of CAF, you know, CAF was not necessarily just potentially their income didn't request an amount. So, you know, there are other lenders out there that maybe were willing to provide that larger dollar amount. So, People are taking longer terms out there. You know, right now you see much higher prevalence of used car loans, higher than 72 months. It's clear.

It's marked year over year. CAF actually does not provide a loan greater than 72 months, even though people are trying to manage that affordability for the customer. The last thing To your point on rates, we clearly have seen a signaling that rates are going to go up. They've gone up initially. They're going to probably continue to go up this year.

The back half of this quarter, CAP actually did do some price testing. It went up this quarter. We did see that clearly impact our penetration. We managed our margin. We think as prices go up, we will continue to do that.

do that testing, and we think other lenders will follow in kind or be compressed. So we will pass that along as we see fit. We want to remain highly competitive in the marketplace, but, yeah, we want to make sure that we're managing margin as well. I think it's important to remember as well that we're focused on capturing the opportunity.

and fragmented industry, right? So whether it's the right time to invest for us and whether it's periods of our goal is to take profitable market share, which as Bill talked about in his prepared remarks, we do believe in the fourth quarter

despite sales being down, that we still market share in our segment. And, again, that is our objective as we continue to move forward, which means we're going to continue to invest. It's just a huge opportunity for us, and that's what we're going to continue to do.

I'll take our next question from Brian Nagel with Oppenheimer. Your line is open. Please go ahead.

Hi, this is William Dawson. I'm for Brian Nagel. Good morning.

Good morning. Good morning.

So the question that we wanted to ask was on the nature of the deceleration in the used car business from fiscal Q3 to fiscal Q4. You spoke about the factors previously. How should we think about the fact of declining consumer confidence? When did it come about in Q4? And how should we consider this dynamic into fiscal Q3?

Yeah, I think, you know, as I said earlier, consumer confidence was obviously one of the factors. I think we actually, right after we saw the COVID surge, I think as we were kind of transitioning out of that, we started to see kind of just lack of consumer confidence. And I think that's a very similar situation that we're in right now, just for the reasons that we've talked about from an affordability standpoint. You've got, you know, interest rates going up, inflation. You've got the Ukraine-Russia war. There's just a lot weighing on the When that turns around, I don't know.

But, again, I think to Enrique's point earlier, I mean, we're going to continue to manage this.

We've managed through cycles like this before, and we think we're in a position to do it in a way that we can continue to gain market share.

We'll go next to John Healy with North Coast Research. Your line is open.

which makes us all kind of realize that with higher rates, maybe values need to come lower. So maybe you could give us your thought in terms of the relationship between unit and ASP and maybe how you think ASPs and the used car market kind of maybe fluctuate over the next six to 12 months. And with that, is there still a lot of confidence that you guys are going to protect GP you know, potentially at the expense of same-store sales? And, you know, is the $2,100 GP kind of benchmark, you know, in your view, achievable even in a kind of softening used car market where, you know, maybe values of what you have in inventory, you know, maybe are pressured a little bit?

Yeah. Good morning, John. Thank you for the question. You know, first of all, the affordability, while you're right, it's a headwind for retail, it's actually good for wholesale, as you saw our wholesale margins. And I think that's one of the benefits of having the diversified business, because as you saw, our GPU for wholesale was up. You know, I think the unit ASPs, you know, if you'd asked me probably three or four months ago, I would have said I was hoping, you know, later this year we'll see some relief. I'm just not sure. You know, especially given the war in Ukraine and Russia, I'm not sure. new car supply is going to come around later this year. That's to be determined. I think that's a big factor that will help mitigate just some of the overall price inflation in both new and used cars. But what I will tell you is, though, to your question about GPU, I think that we're in a great spot. I mean, if you look at the benefit that we've got with self-sufficiency, and I talked a little bit about that, everybody's seeing inflationary pressures.

Well, the 90%, The nice thing is we have a lever that's offsetting those inflationary pressures.

So if you didn't have a lever offsetting inflationary pressures, that's obviously going to be either cutting into your margin or it's going to be raising your average selling prices. And then we still have benefit left over beyond that to pass along to the retail consumers. And I think our self-sufficiency benefits are still kind of maturing. I think there's more potential there in how we manage that and how we do our offers, that kind of thing. So as I think about the future, even if you get into a depreciating environment, which we've shown over time in a depreciating environment, we're still able to maintain very consistent GPUs. I think with you know, self-sufficiency, I think, with our diversified business, which the cap property can be generated, wholesale, additional wholesale property can be generated. I think we can maintain very good margins per unit as well as having great retail front prices. So, you know, I think we're well positioned for however the market, if it's going forward.

Great. Thank you, guys.

Thanks, John.

So, Ben, please go ahead.

Hey, thanks, guys. I wanted to ask one just on the tax refund season. I mean, I think they started earlier this year, and total dollars paid are actually up. Enrique, I think you mentioned you hired proactively ahead of tax season. So I'm curious, did you guys see the expected pickup maybe in transit as those got paid out? And, you know, have the trends you've seen as tax refunds got paid out changed your opinion of the underlying health of the consumer kind of as you look for the rest of fiscal 23 ahead of us?

Yeah, Daniel, I think when I look at the tax season this year, I think it's very representative of what we saw last year. Now, remember, last year it was a late tax season in comparison to what we normally see. So this year was, timing-wise, was very similar last year. I do think the refunds are a little bit higher this year versus last year. But I think the other complicating factor that you don't have this year that you had last year was the stimulus that was paid out in January and March. So it's really hard to decouple that. all that. I would just go back to my comments on the consumer confidence earlier, which I think is regardless of the taxis. I just think the consumer isn't in as strong a position as they were a year ago.

We'll go next to Michael Montani with Evercore ISI. Your line is open. Please go ahead.

Hey there. Good morning. Thanks for taking the question. I wanted to ask if I could, you know, on the capacity front, you know, if you could just bring us up to speed now in terms of, you know, some of the incremental hires that you were looking to do and the ability to recondition the vehicles, you know, in light of some COVID disruptions, et cetera. You know, do you feel that you all are kind of appropriately staffed and now, you know, able to get kind of the full recon work through that you would have hoped for? So that was kind of the first question.

Yeah, so we feel great about both our capacity, production capacity, and our staffing at this point. Pretty much the whole year, first, second, third quarters, I talked about trying to get staffing ramped up. I talked about lower inventory. And coming out of the third quarter, I had made comments, look, we're well on our way to getting inventory to where we need to be. I don't think inventory was necessarily a big topic for the fourth quarter. When I look at our inventory levels, I always look at it on kind of a per average store, and I've always said historically on average it's about 320. The capacity we need, we obviously can, right currently we have, we can, you know, build more than a million cars a year. And the capital expenditures are all part of our natural plan to the future. We already have some production facilities we're working on, but these are additional production facilities. as well as just given the success of our wholesale business, we want to make sure that we can accommodate all the space. So, really, it's just us doing business as we normally do it.

Yeah, from a CapEx perspective, we're really just matching our capacity to the longer-term demand. And like Bill said, it's just... natural kind of steps we're taking, just being very thoughtful in our approach to capacity expansion to make sure that over time we can meet the longer-term targets that we've set out there.

Yeah, I think the only difference in the capital expenditures, which Enrique's called out on a couple different calls now, is just the stepped-up investment in technology. just it's a bigger percent of our overall capex spend.

Yeah, it's actually fairly interesting. And I talked about this in analyst day, but if you go back a few years, about 15% of our capex spend was on technology. And now that we've been transforming our business as we look to this year and next year, we're looking at about 30% of our overall capex spend is related to technology. So certainly, you know, a nod in the direction of becoming an omnichannel retailer.

And then one of your major competitors did an acquisition in the wholesale channel recently. And I guess what I wanted to do is build on the comment you just made. So, you know, do you feel that given the step up in CapEx spend towards tech and then given some of the alternative profit opportunities you have, do you think that there's enough in-house or is there, you know, potentially an opportunity set to kind of bolster the core capabilities, you know, inorganically?

Are you talking about from a production capacity standpoint?

I think one is just in the wholesale business, right? You guys have done a great job this past year there. Is there an opportunity to potentially grow that platform even faster inorganically? And then also, as it relates to the tech side, given the stepped-up investment in CapEx, is that kind of adequate? Or potentially, is there some inorganic capabilities that you might be targeting as well?

Yeah, no, look, we feel great about the auction business. As you know, we continue to run that 100% virtual right now. When you think about the CapEx, your auction expense is a lot less than your overall production expense. Because production, you're building out facilities. They're expensive. Auctions, you just essentially need space at this point. I mean, there is some build-out on some larger auction facilities to hold this inventory. But we feel great about the plans and are very comfortable with how we've been operating and the fact that we can continue to grow the wholesale business. really at a quicker pace than just kind of along with the normal growth that it sees when it's growing as we sell more retail cars.

We'll go next to Seth Basham with Wedbus Securities. Your line is open. Please go ahead.

Thanks for having me. Good morning. There's been a fair amount of talk about market share on this poll. And I know you don't measure market share on a quarterly basis, but in the fiscal fourth quarter, according to Cox, the used vehicle retail saw a decline of 4%. Your unit sales retail basis declined more than that. So you would have lost market share. give us some sense as to is that because you're protecting GPU, or are there other reasons why you might have lost market share in the quarter?

Yeah, Seth, when we look at market share, and even in the fourth quarter, we had great market share growth. And we go off of Polk data, which is title data. The reason we only look on an annual basis is because there's really like a two- to three-month lag there. So we are very confident that we gained not only market share for the whole year, but we gained it for the fourth quarter. And as my comment said earlier, you know, we feel really good about market share gains in the first quarter, despite what's going on in the macro factors. And when I look at the market share, you know, it doesn't matter if you break it down zero to four-year-old cars, five to seven, eight to ten. We've got double-digit growth in all those buckets. So we feel great about it. And the other thing I'd point out is that market share growth is primarily coming through comps. It's not like we've opened a whole bunch of new markets, and that's what's driving the market share, which, again, we're excited about.

Got it. Okay. And then just to follow up on the cap business, if you don't mind, your loan loss provision was in a normal range, I guess you planned it, John. And as you think about the credit environment now and to go forward, we have seen deterioration. But from your perspective, you don't expect any further deterioration, so there's no need to further increase your loan losses as it's going forward.

Yeah, fair comment, Seth. Yeah, no, I would say just point to our reserve to receivable ratio steady from last quarter to this quarter. Yeah, we mentioned we felt like we were kind of returned to pre-pandemic levels. We think we're there. You know, we feel real good about our reserve right now, and we have a good handle on the business there. So if all things perform as we expect, really the focal point on the future provision will be on the new originations, and then obviously there's a mix of Tier 1, Tier 2, Tier 3, and the volume we originate. But, yeah, I think we're pretty steady and in a good spot.

We'll move next to Chris Bottiglieri of BNP Paribas. Your line is open. Please go ahead.

Yeah, thanks for taking the question. So the first question is on the EPP program. Obviously, they kind of cure up given the change in accrual status. How do we do that for next year? Should we just take, like, a four-quarter average and that's kind of like the new run rate? Or is it going to be kind of like this year where it's Q4-weighted on EPP?

Yeah, I think there were different considerations in EPP, right? There's the kind of core business, which is driven by sales and an attach rate from our ESP and EPP products. And then there's the year-end – profit sharing that we have with our partners. I think on the prior, you know, I think it's growing our business, growing our penetration, that'll continue to grow. And then the consideration in the fourth quarter this year was that we had more profit sharing revenue than we did last year in the fourth quarter. Just our profit sharing was higher. And so given the timing of when we recognized that, if you recall last year, we actually had one of our partners in profit sharing revenue that was in the second quarter They were recognized on a quarterly basis. They have moved in fiscal year 22 to an annual basis. So now all of our recognition of profit sharing is in the fourth quarter, which is why we saw a little bit higher this year of profit sharing in the fourth quarter. But taking a look at our business again, you take a look at the core sales, you take a look at EPP attachment rates, which has been going really well. We're stable at about 60%, and we would expect that to continue moving forward as well.

Yeah, the only other thing I would add to that, Chris, is our goal isn't to generate a bunch of profit sharing. I mean, we want to have these things priced fairly for the consumer. We've got some profit sharing. I think it was more driven by people's lack of driving, things like that. But our goal is not to necessarily drive a big revenue recognition at the end of the year.

That's a bigger picture question on customer sourcing. So you talked about the instant appraisal business and the customer sourcing. I know it's difficult to tease out, but based on the age profile of the vehicle that you're buying from those, how much of this is incremental purchases? Do you think it would have come from a private party market, as in expanding the TAM, versus do you think you're coming from other dealers, like indirectly the cars that would have gone to auction or would have been traded in retail? Do you make sense internally for how much of the TAM you're growing versus taking share? And lastly, give me some perspective on buy rates. Once you appraise it,

Okay. So, Chris, just on kind of incremental share, you know, we're in the process of developing kind of a buy share, you know, that looks at vehicles that originally were with a consumer. The last person that they were with was essentially with a consumer. And so we're working on a metric there. We feel great about we've certainly increased that buy share. We know that. And now we're just trying to be able to quantify more. So that's something we're looking at. But we certainly are comfortable that the bulk of this is coming from other consumers. As far as the buy rate, historically the way we talked about buy rate before instant offer was how many people came into the store and ended up getting an appraisal and then what percent of those cars did we actually buy. Then we added the instant online appraisal and the way we measure buy rate now is you take, because we're we're issuing probably a couple to three million instant offers in a quarter. And, you know, there's a lot of folks who are just kind of shopping to see what their vehicle's worth. So the way we calculate buy rate now is on the instant offers when they show up at the store, how much of those actually convert in addition to the traditional way that we looked at it. And, you know, we're in the 40% on buy rate. If you look at it the more traditional way that we used to look at it, it's probably in the low 30-ish percent. So, yeah. Hopefully that's the color that you needed.

Yeah, far more complex. I appreciate it. Thank you. That's helpful.

We'll go next to David Whiston at Morningstar. Your line is open. Please go ahead.

Thanks. Good morning. On calf penetration, more three-day payoffs, we're going to say fiscal 17 or so. It is down. And I'm just curious, it looks like you have a feature, too, is taking more business. And is that just an intentional thing on your part, or is there something else driving that decline? And then by roughly mid-decade, where do you want your penetration, either gross or net, to be?

Yeah, I appreciate the question, David. As I mentioned in earlier comments around affordability, let's just talk about penetration and appreciate you going back to pre-pandemic levels. Historically, Q4 is not going to be one of the highest cap penetration quarters, obviously being wedged up against tax time. But that being said, it is down. We are losing penetration to outside financing. I mentioned previously, we really believe this is an affordability aspect. People are coming in looking to borrow more money, given the ASPs that are out there. As a lender, we have a decision to make, which is are we going to ask for more money down? Are we going to let them borrow that full amount? In some cases, we're not letting them borrow that full amount that they're asking for, given the higher ASP. And perhaps there's another lender externally that's willing to provide that full amount, even though the income may not have gone up at the same level. So we think we're losing in that case. I also mentioned around the longer terms. People are clearly managing affordability through extending that term. That is far more impactful than to lowering the monthly payment than any rate adjustment. So we do not provide a greater than a 72-month term on a used loan right now. PATH does not. Actually, in fact, at CarMax, none of our lenders do. So we think there are people out there that are absolutely providing that. That's been shown in the data. So I think those two things are contributing to penetration. I also mentioned we did price testing up, which, again, trying to be in line with where interest rates are headed and manage our margin there. So we did see some impacts there. So I think that's what's changing the actual penetration for this quarter. It's your question of where do we want it to be. I think we probably think more about it as we want to be highly competitive. There are ebbs and flows all the time based on what external folks do. But we want to remain highly competitive and provide our competitors our higher-end customers an opportunity to finance internally. But that's what we love about our platform. You can do a three-day payoff. We do have other lenders to pick us up if we don't want to extend the full amount, and we can still sell the car in CarMax. So I don't think we're targeting a penetration, and I would expect it to ebb and flow over time, especially as prices come down. I think approaching our cash business that way is really what leads us to have a really strong portfolio. of receivables out there and a really strong and consistent performing business in CAF.

Well, and I think it's also the reason that you want to have also other lenders so that if, you know, we keep our portfolio and paper very, very consistent, having other lenders there in CarMax's camp is a great thing.

And let me just clarify something you said. Did you say not only CAP but also Tier 2 and Tier 3 partners do not use over 72 months?

Right now in the CarMax stores or in the CarMax business, we do not offer a used loan greater than 72 months. It's something that, you know, we may or may not consider in the future, but right now that is not what we're doing across CAP or our other lenders. Okay. And do you think inevitably you're going to have to go over 72 months? We have chosen not to. Again, we're trying to make the right decision for the customer. We're not necessarily convinced that 84 months is best on a used car. So we'll see what the market dictates, and we obviously know that prices are increasing and terms are increasing, but we also expect prices to probably normalize as well, and it might not be necessary. But, again, we want to make the best decision for the customer, and we feel like we're still able to sell vehicles without providing that today.

All right. Thank you, Dennis. Thank you.

Next, we'll go to Sharon Zexia with William Blair. Sharon, your line is open. Please go ahead.

Hi, I just had a quick follow-up. I know that you have planned more investments in marketing, but CAC really floated up in the fourth quarter. I think it ended up at around 350 for the full year. Is 350 like a right run rate? And I'm wondering how you think about the guardrails around marketing in an environment where the consumer just may be incredibly distracted.

Yeah, no, great question, Sharon. And look, I think back on kind of pre-pandemic, if I look at our overall advertising spend, we're spending, as we said we would, we said we're going to spend more, we're spending about 70% more than pre-pandemic, which if you look at it on a unit basis, it's probably about a 55% or so increase on a per unit basis. you know, I think we kind of came right in the range of where we talked about being this year. You know, we started out this year, you know, in that, you know, mid 300 per unit. And I would tell you, I think we're at a point where there are certain things we want to make sure that we advertise and get out there, especially as we have new functionality. And I can't see us necessarily taking a step back on our advertising. Now, to your question, you know, do you continue to step up? That's where we'll figure out, you know, what's going on with the dynamics. Where is the consumer right now to figure out if we go beyond that? But I think, you know, a good way to think about it is the spend on a per unit basis this year will be similar to what it was for last year.

Thank you.

Thank you.

We'll go next to Daniel Imbra with Stevens. Your line is open. Please go ahead.

Yes, thanks so much for taking a follow-up question. I just want to follow up on the instant offer with consumers. You know, right now consumers having positive equity in their cars, I would think that makes it easier to buy from them just because they're making money on each one. But as we return to negative equity in vehicles over the coming years, do you think that will make it harder for you guys to customer source or just how do you anticipate that impacting your ability to source and kind of have success with instant offer as we return to negative equity? Can you just roll that into financing, or how do you handle that?

Yeah, so Daniel, I mean, surprisingly, there's still folks that have negative equity out there today, albeit it's down just because the prices are up high. But, you know, that's an environment that we have lived in for the last almost 30 years. We have consumers coming in with negative equity. Now you've got, obviously, this price appreciation. You know, is there a risk down the road that some customers, it may be harder for them because they can't come up with a big enough down payment or whatever. And John talked a little bit about this. If you look at loan-to-values, loan-to-values have actually gone down. People are putting more down payments.

That's a good sign. I think the other thing is, All these customers that are buying today, it's not like they're going to all decide to trade in a year from now or two years from now or three years from now.

They're going to be sprinkled throughout time, and we'll manage the business just like we have in the past with other customers that have negative equity. So we feel like we'll be able to manage it both from a sales standpoint but also, to your point, on the buy standpoint as well.

Great. Thanks so much. Best of luck.

Thank you.

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

Great. Thank you, Jess. Well, listen, I want to thank all of you for joining the call today and your questions and your support. You know, I look back, FY22 was a great year. It was great sales. It was great earnings. It was great market share. You know, we've been making investments, and those investments are paying off. And, you know, we're really excited about the opportunities ahead of us as we continue to be that positive and disruptive force within the used car industry. And, again, I want to thank all of our associates, because they are the reason for our success. I appreciate everything that they do on a daily basis, and we will talk again next quarter. Thank you again for your time.

Thank you, ladies and gentlemen. That concludes the fourth quarter fiscal year 2022 CarMax earnings release conference call. You may now disconnect.