Yahoo Finance CarMax, Inc. (NYSE:KMX) Q4 2024 Earnings Call Transcript
CarMax, Inc. (NYSE:KMX) Q4 2024 Earnings Call Transcript April 11, 2024
CarMax, Inc. misses on earnings expectations. Reported EPS is $0.32 EPS, expectations were $0.49. CarMax, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by, welcome to the Q4 Fiscal Year 2024 CarMax Earnings Release Conference Call. At this time, all participants are in a listen-only mode. After the speakers' 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, David Lowenstein, AVP, Investor Relations. Please go ahead.
David Lowenstein: Thank you, Shelby. Good morning, everyone. Thank you for joining our fiscal 2024 fourth quarter earnings conference call. I'm here today with Bill Nash, our President and CEO; Enrique Mayor-Mora, our Executive Vice President and CFO; and Jon Daniels, our Senior Vice President, CarMax Auto Finance operations. Let me remind you our statements today that are not statements of historical fact, including statements regarding the Company's future business plans, prospects and financial performance are forward-looking statements we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our current knowledge, expectations and assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially from our expectations.
In providing projections and other forward-looking statements, we disclaim any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our Form 8-K filed with the SEC this morning and our annual report on Form 10-K for the fiscal year ended February 28, 2023, previously filed with the SEC. Should you have any follow-up questions after the call, please feel free to contact our Investor Relations department at 804-747-0422 extension 7865. Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow-ups. Bill?
Bill Nash: Great. Thank you, David. Good morning, everyone, and thanks for joining us. We're encouraged by the performance of our business during the fourth quarter. We're continuing to leverage our strongest assets, our associates, capabilities, experience and culture to build momentum as we manage through the cycle. While affordability of used cars remains the challenge for consumers, pricing improved during the quarter. We continue to achieve efficiency improvements in our core operations and believe we are well positioned to drive growth as the market turns. In the fourth quarter, we posted our fifth consecutive quarter of sequential year-over-year retail used unit improvement and reported growth in total used unit sales and comps.
We delivered strong retail and wholesale GPUs. We increased used saleable inventory units more than 10%, while holding used total inventory units flat year-over-year. We continue to actively manage our SG&A and we grew CAF income significantly as we delivered a substantial reduction in the provision for loan losses year-over-year, while maintaining stable net interest margins sequentially. For the fourth quarter of FY ‘24, our diversified business model delivered total sales of $5.6 billion, down 2%, compared to last year. This was driven by lower retail and wholesale prices and lower wholesale volume, partially offset by higher retail volume. In our retail business, total unit sales increased 1.3% and used unit comps were up 0.1%. Average selling price declined approximately $600 per unit or 2% year-over-year.
Our market share data indicates that our nationwide share of zero to 10-year-old used vehicles declined from 4% in calendar ‘22 to 3.7% in 2023 as we prioritized profitability over near-term market share growth. As always, we continue to test price elasticity to validate our decisions. External title data shows that our market share initially accelerated relative to our performance across the second-half of 2022, but then came under pressure during multiple periods of steep depreciation. We remain confident in our ability to accelerate market share growth as used vehicle affordability continues to improve and as the volatility of vehicle value stabilizes. Fourth quarter retail gross profit per used unit was $2,251, relatively consistent with last year's fourth quarter record of $2,277.
Wholesale unit sales were down 4% versus the fourth quarter last year. Average selling prices declined approximately $250 per unit, or 3% year-over-year. Fourth quarter wholesale gross profit per unit was $11.20, slightly down from $1,187 a year ago. As a reminder, last year's fourth quarter wholesale GPU was within $4 of our all-time record and benefited from appreciation and strong dealer demand, particularly at the end of last year's quarter. This prior year appreciation dynamic impacted our year-over-year performance and buys as well. We bought approximately 234,000 vehicles during the quarter, down 11% from last year. Of these vehicles, we purchased approximately 213,000 from consumers, with slightly more than half of those buys coming through our online instant appraisal experience.
With the support of our Edmond sales team, we sourced the remaining approximately 21,000 vehicles through dealers up 45% from last year. For our fourth quarter online metrics, approximately 14% of retail unit sales were online consistent with last year. Approximately 55% of retail unit sales were omni sales this quarter, up from 52% in the prior year. All of our fourth quarter wholesale auctions and sales were virtual and are considered online transactions. This represents 17% of total revenue. Total revenue from online transactions was approximately 30% in line with last year. CarMax Auto Finance or CAF delivered income of $147 million, up 19% from $124 million during the same period last year. John will provide more detail on consumer financing, the loan loss provision, and CAF contribution in a few minutes.
But at this point, I'd like to turn the call over to Enrique, who will provide more information on our fourth quarter financial performance. Enrique?
Enrique Mayor-Mora: Thanks, Bill, and good morning, everyone. As Bill noted, we drove another quarter of sequential improvement in our used unit sales with strong per unit margins for both used and wholesale and strong CAF contribution growth, while staying focused on managing SG&A. With quarter net earnings per diluted share was $0.32 versus $0.44 a year ago, last year's quarter benefited from an $0.08 tailwind due to the receipt of Extended Protection Plan, or EPP, profit sharing revenues, as well as $0.04 from a lower tax rate, compared to a more normalized tax rate this quarter. Total gross profit was $586 million, down 4% from last year's fourth quarter. Used retail margin of $387 million was flat, with higher volume partially offset by a slightly lower per-unit margin.
Wholesale vehicle margin decreased by 9% to $129 million, with a decrease in volume and per unit margin, compared to last year. Other gross profit was $69 million, down 15% from a year ago. This decrease was driven primarily by last year's receipt of $16 million in profit sharing revenues from our EPP partners. As noted on our third quarter call, we did not expect to receive profit sharing revenues this year as our partners experienced inflationary pressures and consumers returned to more normalized driving patterns. Partially offsetting this dynamic was the positive impact from price elasticity testing on our extended service product. During the quarter, we tested raising MaxCare margins per contract sold, which resulted in a slight decrease in product penetration, while driving overall profitability.
We are encouraged by these results, and we have rolled out the margin increase nationally. Our expectation is that this action will drive approximately $20 per retail unit of incremental EPP margin in FY ‘25. Service decreased by $4 million, as compared to last year's fourth quarter. This decrease was primarily driven by wage pressures and planned lower production in the quarter as we pre-built inventory in the third quarter, due to holiday timing. For the full-year service improved by $75 million year-over-year. Our expectation is that we will continue to see significant year-over-year favorability in FY ‘25. The extent of this improvement will be governed by sales performance given the leverage, de-leverage nature of service. Third-party finance fees were down $3 million from a year ago, driven by higher volume in Tier 3 for which we pay a fee and lower volume in Tier 2 for which we receive a fee.
On the SG&A front, expenses for the fourth quarter were $581 million, up 1% from the prior year's quarter. Our continued discipline in spend and investment levels allowed us to come in flat year-over-year when excluding share-based compensation. As a reminder, in the fourth quarter, we passed the year mark since initiating our significant cost management efforts. SG&A dollars for the fourth quarter versus last year were mainly impacted by three factors. First, other overhead decreased by $16 million. This decrease was driven primarily from reductions in spend for our technology platforms and from the continued favorability in non-CAF uncollectible receivables. Second, total compensation and benefits increased by $7 million, excluding an $8 million increase in share-based compensation.
This increase was mostly driven by a higher corporate bonus accrual in the quarter. Third, advertising increased by $5 million. This reflects an increase as communicated last quarter due primarily to the timing of per unit spend. For full-year FY ‘24, we strongly outperformed the target we set out at the beginning of the year of requiring low-single-digit gross profit growth to lever SG&A, even when excluding the benefits from this year's legal settlements. Our ability to materially drive SG&A costs down year-over-year was led by favorability and non-CAF uncollectible receivables that reflects improved execution at our stores, at our corporate offices and by external partners. Our focus on driving efficiency gains in our stores and CECs, the planned reduction of technology spend and by aligning staffing levels and marketing spend to sales.
In FY ‘25, we expect to require low-single-digit gross profit growth to lever SG&A, when excluding FY ‘24's favorable legal settlements. This reinforces our pathway back to a lower SG&A leverage ratio with our initial goal of returning to the mid-70% range over time once we see healthier consumer demand. We anticipate that SG&A will be pressured in the first quarter. As a reminder, we received $59 million in illegal settlement during the first quarter of FY ‘24. Additionally, in this year's first quarter, we expect an approximately $25 million impact due to share-based compensation for certain retirement eligible executives and a lapping of favorable reserve adjustments related to non-CAF uncollectible receivables during last year's first quarter.
With regard to marketing going forward, we plan to speak to our spend on a per total unit basis, inclusive of total retail and wholesale units. We believe this more holistically reflects the impact of our marketing initiatives, which support both vehicle sales and buys. In FY ‘25, we expect full-year marketing spend on a total unit basis to be similar to FY ‘24 at approximately $200. Regarding capital structure, during the quarter we repurchased approximately 686,000 shares for a total spend of $49 million. Starting in the first quarter, we intend to modestly accelerate the pace of our share repurchases above the pace that we implemented in our third quarter of fiscal year ‘24. As of the end of the quarter, we had $2.36 billion of repurchase authorization remaining.
For capital expenditures, we anticipate an investment level between $500 million to $550 million, up from the $465 million in FY ‘24. The year-over-year increase in plan spending is primarily related to the timing of spend for new stores. Like in FY ‘24, the largest portion of our CapEx investment remains related to the land and the buildout of facilities for long-term growth capacity and offsite reconditioning and auctions. In FY ‘25, we plan to open five new store locations. Consistent with our strategy, these new locations will be smaller cross-functional stores that complement our omni-channel strategy and leverage our scale. We also plan to open our second standalone reconditioning facility, which will be located in Richmond, Mississippi, as well as one offsite auction location in the Los Angeles metro market.
We currently expect to open multiple offsite reconditioning and auction locations in FY ‘26. Our extensive nationwide footprint and logistics network continue to be a competitive advantage for CarMax. Now I'd like to turn the call over to Jon.
Jon Daniels: Thanks Enrique and good morning everyone. During the fourth quarter CarMax Auto Finance originated approximately $1.8 billion, resulting in sales penetration of 42.3% net of three-day payoffs, which was down 240 basis points from the same period last year. The weighted average contract rate charged to new customers grew to 11.5%, an increase of 60 basis points from the last year's fourth quarter and 20 basis points sequentially. Tier 2 penetration in the quarter was 18.2%, down from 19.4% observed during last year's fourth quarter. Tier 3 accounted for 8.2% of sales, up 130 basis points from last year, as a partner began to ease previously implemented tightening. Also impacting each of these year-over-year results is CAF's continued decreased percentage in Tier 3, as well as the increased test volume in Tier 2.
CAF income for the quarter was $147 million, up $23 million from the same period last year. This improvement was primarily driven by a $26 million year-over-year reduction in the provision for loan losses, slightly offset by a $3 million reduction in total interest margin. Note fair market value adjustments from our hedging strategy accounted for $4 million in expense this quarter versus $1 million of income in last year's fourth quarter. The $72 million provision within the quarter resulted in a reserve balance of $483 million or 2.78% of receivables, compared to 2.92% at the end of the third quarter. This highlights the significant impact that originations under our tightened credit policy are having on the Reserve as they continue to become a larger percentage of the full portfolio.
In addition, observed performance within the portfolio aligned closely to our reserve expectations at the end of the third quarter and contributed to the reduction in the reserve. The margin to receivable rate of the portfolio remained steady at 5.9% for the quarter. We remain pleased with our ability to maintain a stable interest margin despite keeping our credit tightening in place. As I noted earlier, CAF continues to test across varying parts of the credit spectrum. Ultimately, CAF is building the capability to scale its participation across all credit Tiers, which will help to capture finance economics, drive sales, and fully complement our valued lending partnerships that are a key foundation of CarMax's best-in-class credit platform.
Now I'll turn the call back over to Bill.
Bill Nash: Thank you, Jon and Enrique. Fiscal 2024 was a challenging year across the used car industry as vehicle affordability and widespread macro factors continue to pressure sales. In response, we focused on what we could control and took deliberate steps to support our business both the near-term and long run. In addition to achieving the efficiencies across our entire organization that Enrique talked about, I am proud of the progress we've made in further enhancing our omni-channel capabilities as we prioritize projects designed to optimize experiences for our associates and customers and drive operating efficiencies. Some examples include, for retail, we leverage data science, automation, and AI to make it even easier for customers to complete key transaction steps like vehicle transfers on their own.
We also enhance digital checkout functionality for appraisal customers, enabling them to submit their documents remotely and unlocking their ability to participate in our 30-minute express drop-off experience. Additionally, we expanded capabilities for Sky, our 24/7 virtual assistant, to include managing finance applications, vehicle transfers, appointment reservations, and appraisal offers. Customer adoption of Sky has been strong, and this has not only created efficiencies, but also widened bandwidth for our associates. For wholesale and vehicle acquisition, we modernized our auction platform to offer new services, including single sign-on across all of our systems, AI enhanced condition reports, early bidding capabilities, and automated bills of sale.
Additionally, we streamline Max offer by rolling out our instant offer experience to all participating dealers. In the credit space, we have now incorporated all of our lenders into our finance-based shopping platform, expanding the breadth and depth of offers available to our customers. We continue to see great adoption with more than 80% of the consumers utilizing the best-in-class pre-qualification product as they begin the credit process. Finally, Edmunds launched a number of research and buy tools in support of its goal to be the leader in [Technical Difficulty] research. These include range tests, charging efficiencies, VIN-level battery health assessments, and EV tax credit incentive guides. Looking ahead to fiscal 2025, we will build on our progress from last year to further expand our competitive mode.
We are confident that the actions we are taking will enable us to grow sales, profitable market share, and buys while also driving additional operational efficiencies as the market turns. Some examples include, for retail we plan to launch an evolved hub within our customers' online shopping accounts that will make it even easier to seamlessly go back and forth between assisted help and self-progression. Customers will be able to see the steps they have taken on their shopping journey, whether on their own or with help from a CEC or store associate. The hub will also guide next steps and promote MaxCare, our extended service plan offering. Additionally, we will continue to digitize work in support of our focus to build a leaner and high value assistance model for our CECs. This will enable existing resources to support higher transaction volume as we grow traffic and drive stronger conversion.
As part of this effort, we will further integrate Sky into key communication channels and prove its ability to serve as the initial point of contact across many points in the customer's shopping journey. Sky will manage next steps on its own or seamlessly transition customers to a CEC associate via the customer's channel of choice. For vehicle acquisition. we'll focus to bring even more vehicles into our ecosystem. A key component of this will be our continued partnership with Edmunds to acquire vehicles from dealers. In the credit space, we plan to further optimize our prequalification product by integrating the customer's instant offer into the application process. As Jon mentioned, we will also continue to test CAFs participation across varying parts of the credit spectrum.
As always, we will continue to pursue opportunities that enable us to provide outstanding offers for consumers, while driving sales and economics for the business. In regard to our long-term financial targets, we're maintaining our goal to sell more than 2 million combined retail and wholesale units annually. However, we are extending the timeframe for this goal between fiscal 2026 and fiscal 2030, due to the uncertainty in the timing of the market recovery and as we continue to focus on profitable market share growth. We will adjust the timeframe as we gain greater visibility into the industry's pace of recovery. Given higher average selling prices, we expect to achieve the $33 billion annual revenue target sooner than units. And similarly, we also expect to achieve more than 5% nationwide market share of zero to 10-year-old used vehicles sooner than units.
Given the recent volatility in vehicle values, we will provide an updated timeframe for our expected achievement at the end of fiscal year 2025. Before turning to Q&A, I want to recognize two significant milestones. First, CarMax celebrated its 30th anniversary during fiscal 2024. I want to thank and congratulate all of our associates for the work that they do. They are the differentiator and the key to our success. Second, Fortune magazine recently named CarMax as one of the 100 best companies to work for, for the 20th year in a row. I'm incredibly proud of this recognition, particularly as we face a challenging year. It's due to our associates' commitment to supporting each other, our customers, and our communities every day. In closing, I'm proud of the progress we've made on our journey to deliver the most customer-centric experience in the industry.
I'm encouraged by the sequentially quarterly improvements. We're driving across our business, and I'm excited about our focuses for fiscal 2025. Our core operations are strong and we are well positioned to drive growth as macro conditions improve. With that, we'll be happy to take your questions. So Shelby?
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