Release Date: April 11, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- CarMax Inc (KMX, Financial) posted its fifth consecutive quarter of sequential year-over-year retail used unit improvement.
- The company reported growth in total used unit sales and comps.
- CarMax Inc (KMX) delivered strong retail and wholesale gross profit per unit (GPU).
- Used salable inventory units increased more than 10% while holding used total inventory units flat year-over-year.
- CarMax Auto Finance (CAF) income grew significantly, with a substantial reduction in the provision for loan losses year-over-year.
Negative Points
- Affordability of used cars remains a challenge for consumers, potentially impacting demand.
- Total sales of $5.6 billion were down 2% compared to last year, driven by lower retail and wholesale prices and lower wholesale volume.
- Average selling price declined approximately $600 per unit or 2% year-over-year.
- Nationwide share of 0- to 10-year-old used vehicles declined from 4% in calendar '22 to 3.7% in 2023.
- Wholesale unit sales were down 4% versus the fourth quarter last year.
Q & A Highlights
Q: I have one quarterly specific question, then one big picture question. On the quarter, it seems like service gross profit was weaker than we anticipated. Can you help us understand how much of that pressure was transitory and how much of an improvement we should see in the service line in 2025?
A: Enrique N. Mayor-Mora, CarMax, Inc. - Executive VP & CFO, indicated that the weakness in service gross profit is transitory. Factors such as planned lower production and wage pressures contributed to the headwinds. However, initiatives for labor efficiency, such as RFID tracking of inventory and leveraging technology for enhanced reporting, are expected to drive significant year-over-year improvements in FY '25, although this is also related to sales performance due to the leverage/deleverage nature of service.
Q: And then secondly, Bill, in regards to market share, you indicated on your last call that you started to see an improvement in market share towards the end of the fiscal third quarter. It seems like things slipped a little bit in the fourth quarter. Can you help us understand why? And when should we expect to see market share increases going forward as the cycle turns?
A: William D. Nash, CarMax, Inc. - President, CEO & Director, explained that market share was impacted by affordability and periods of steep depreciation. In the fourth quarter, dealers were adjusting to depreciation trends, which led to fluctuations in market share. However, CarMax saw an improvement in market share in January and feels good about February. Nash remains confident in the company's ability to accelerate market share growth as used vehicle affordability improves and vehicle value volatility stabilizes.
Q: On media improved affordability, can you give us some metrics around that? And then secondarily, just on that market share dynamic, is there any region or any particular cohort of demographics that you've been more susceptible to this market share loss as some competitors may have been less rational?
A: Jon Daniels, CarMax Business Services, LLC - SVP, provided metrics on loan payments, indicating that the average used car loan payment decreased from around $570-$580 at its peak to approximately $520-$530 this quarter. The decrease is primarily driven by lower vehicle prices, with interest rates being a secondary factor. William D. Nash added that the market share loss has not been significantly different geographically, but lower-income customers and Tier 3 customers have been more impacted. He also noted that many customers are simply waiting on the sidelines rather than switching to competitors.
Q: I wanted to just quickly ask on how the first quarter was trending, given you exhibited or you had positive comps in the fourth quarter. Should we expect that trend to continue here because seasonality would imply like comps should move lower or negative again in the first quarter. But curious like what you're seeing. Any update you can give us there. And then just a broader question on the long-term targets. It's a 4 -- it's almost like a 4-year range, 2026 to 2030. Could you explain the thought process behind such a wide range? And where is the uncertainty really coming from? Is it on the demand side? Or is it on the supply side? Any more color there would be helpful.
A: William D. Nash mentioned that the first quarter has been choppy with a mid-single-digit negative comp so far, although it's still early. Regarding long-term targets, the wide range is due to uncertainty in market recovery. Enrique N. Mayor-Mora added that they will provide more visibility once there's more stability in the market. The uncertainty comes from both demand and supply sides, and they expect to narrow the time frame for their goals as they gain better insight into the market's recovery.
Q: My first question with regard to used sales, and maybe a bit bigger picture. But I guess it's much in the business. Look, you got the positive comp, albeit slightly. You got positive used car unit comp here in Q4. And then in response to the prior question, you talked about maybe some incremental weakness here in early Q1. But the question I have is as you're looking at this business, recognizing that you don't give guidance, there's a lot of moving parts out there. What has to happen? Because it seems like a lot of the key factors are starting to turn more favorable for CarMax whether it be used car pricing moderating, rate stabilization, we're seeing the data, a better tax refund season. So I guess as you look, what's the kind of the equation, if you will, to get back to that normalized used car unit comp?
A: William D. Nash responded that affordability needs to continue to improve, and he is encouraged by the recent decrease in average selling price. He also mentioned that interest rate stabilization and potential decreases would be beneficial. Nash is optimistic about the efficiencies CarMax has been working on, the potential for CAF to become a full credit spectrum lender, and opportunities in omni. However, he emphasized that volatility in vehicle values needs to stabilize for normalized used car unit comps to return.
Q: That's very helpful. And if I could ask just one follow-up. You've talked now -- forget about tightening lending standards. We're seeing -- we're clearly seeing the benefits of that in the CAF data and particularly, I guess, the loan loss provision. I guess the question I have is to what extent is -- are your -- what potential is that, your tighter lending now impacting demand for used cars at CarMax?
A: Jon Daniels acknowledged that tightening lending standards is a headwind for sales, but CarMax's lending partners are picking up some of the slack. He emphasized that CarMax is careful when adjusting rates and underwriting to minimize the sales impact. William D. Nash added that the tightening in the industry is definitely having an impact, particularly as Tier 3 volume has decreased.
Q: I wanted to ask about sourcing, Bill. You bought 11% fewer cars. I know depreciation is a headwind, but you also have these innovative new tools like instant offer and MaxOffer that I thought might provide like a secular lift. So I'm wondering on instant offer, can you shed any light on just overall appraisal activity and buy rates to give us a feel for the kind of traction you have with that tool? And then on MaxOffer, how much of that 45% growth, albeit from a small base, is attributable to adding new dealers versus momentum with the existing dealers?
A: William D. Nash explained that the decrease in cars bought from consumers is more of a year-over-year dynamic, with a slight decrease in buy rate this year. He highlighted that MaxOffer has seen a 50% increase in active dealers using the tool, attributing the growth to both an increase in the overall number of deals and the number of active
