The operator introduces the participants and explains the format of the conference call. David Lowenstein, Bill Nash, Enrique Mayor-Mora, and Jon Daniels are present. The speakers will make forward-looking statements and disclaim any obligation to update them. Contact information is provided for follow-up questions. Participants are asked to limit themselves to one question. Bill Nash is then invited to speak.

The company's third quarter results reflect a continuation of their strategy, with improvements in key areas for four consecutive quarters. Despite challenges with affordability, their omnichannel investments are having a positive impact. Retail and wholesale GPU's were strong, with increased vehicle purchases and sales. SG&A was reduced, credit mix was improved, and share repurchase program resumed. Total sales for the quarter were $6.1 billion, down 5% from last year. Retail unit sales declined, but average selling price remained consistent. Wholesale unit sales increased, but average selling price declined. The company expects lower margins in the fourth quarter compared to last year's record margin, but similar margins for the full year. Price elasticity and competition will continue to be monitored.

In the third quarter, the wholesale gross profit per unit was in line with the previous year, and the company expects similar margins for the full year. The company purchased more vehicles from consumers and dealers compared to last year, with a majority of consumer purchases made through their online appraisal experience. The self-sufficiency rate remained above 70%. A significant portion of retail unit sales were made online and through omni sales. All wholesale auctions and sales were virtual, representing 19% of total revenue. CarMax Auto Finance delivered slightly lower income compared to the previous year. Enrique will provide more details on the financial performance for the quarter.

In the third quarter, the company saw significant improvements in various areas, including used and wholesale unit sales, total gross profit, and EPS. Net earnings per diluted share increased from $0.24 to $0.52. The company also saw a 6% increase in total gross profit, with notable increases in used retail margin and wholesale vehicle margin. Other gross profit also increased by 55%, driven by improvements in service. The company's cost management efforts also resulted in a 5% decrease in SG&A expenses and an 11 percentage point decrease in SG&A as a percent of gross profit compared to the previous year.

In the fifth paragraph, the company discusses the decrease in overhead and compensation and benefits, as well as an increase in advertising spend. They also mention their cost management efforts and their expectation to outperform their target for the full year. The company also resumed their share repurchase program in October and currently have $2.41 billion remaining in repurchase authorization.

During the third quarter, CarMax Auto Finance originated $2 billion in loans, resulting in a penetration rate of 44%. They also opened four new stores and their first stand-alone reconditioning center. The weighted average contract rate for new customers increased by 150 basis points from the same period last year. Tier 2 penetration remained consistent with Q2, but lower compared to last year due to partner tightening. CAF income for the quarter was $149 million, with a provision of $68.3 million. The total interest margin decreased to 5.9% from last quarter.

The slight reduction in CarMax's net interest margin is due to increased funding costs and credit tightening, but they have been able to maintain a relatively stable margin. The company's reserve balance has decreased due to credit tightening measures, but they believe it adequately reflects future loss performance. CarMax's omnichannel investments are contributing to a personalized car buying experience for customers.

The speaker is proud of the progress made in delivering a customer-centric experience in the used car industry. They believe that consumers will increasingly prefer digital options, and data shows that 70% of customers are using digital capabilities to complete transactions. Omnichannel has driven incremental retail customers to CarMax, with online consumers skewing younger and leading to increased market share growth in older markets. The online appraisal tool, "instant offer," has also significantly increased vehicle purchases and wholesale sales.

The company's self-sufficiency has increased to over 70% since the launch of their tool, which has also led to a 65% growth in wholesale volume. Their omnichannel products have resulted in double-digit web traffic growth and finance-based shopping is their top lead source. The omnichannel model is expected to be more cost-efficient than their previous store-only model, and the company is confident in their strategy and ability to deliver a personalized experience for customers. They are well-positioned to emerge from the current cycle as a stronger company.

The analyst asks about the decrease in the cash provision and the increase in net charge-offs. The CEO explains that the provision is made up of two components: changes in expected losses on existing loans and required reserves on new originations. He also notes that while the securitized loans are performing well, there is still a significant portion of loans that have not yet been securitized. Overall, the CEO believes there has not been a significant change in the expected losses on the existing book of business.

The company expected a return to normal levels and saw it in new securitizations. They believe there is front-loading occurring in the early securitizations. The company's provision is primarily made up of new originations, which are tighter and have lower loss amounts. The wholesale business saw an inflection in sales growth, which could have a positive impact on the used car business. The company is pleased with the wholesale growth and attributes it to a combination of factors.

The speaker believes that the company's decrease in offers last year has affected their year-over-year growth. However, they have implemented new innovations such as the instant offer component of Max offer. The industry is facing challenges, but there are some encouraging signs, such as steep depreciation which will benefit the overall used car industry and the company's sales prices.

The speaker is optimistic about the future of the business due to stabilizing interest rates and increasing market share. They have also done analysis on customers who have applied for loans and believe there is pent-up demand that will be seen as the market recovers. They attribute their success to cost control and improving experiences for customers and associates. The speaker also mentions upcoming securitizations and expects loss curves to flatten out in the future.

Jon Daniels, the CEO of a company, is discussing the performance of the company's securitizations from 2016 to 2018. He mentions that the data from 2021 and 2022 show a similar trend, with a potential increase in losses in 2022. However, he believes that the losses will still fall within their target range of 2% to 2.5%. He also notes that the company has not seen any securitizations with losses above this range and that their tightening measures have helped mitigate losses in the past year.

The speaker explains that as the company's receivables hit the market, the tightening measures implemented over the past year will become evident. They also mention that a significant portion of receivables are not publicly available as they are held in warehouses. The next speaker adds that AI has been used in various aspects of the business and generative AI is the future, with early adopters reaping the benefits. The company is currently leveraging AI in areas such as creative, coding, and customer service.

The company is currently conducting tests for conversational search with consumers and believes it will become necessary for success. They expect their net interest margin to remain stable at around 5.9% and are pleased with their ability to pass on rate increases to customers. However, if rates decrease, they may see a slight increase in margin.

The company reported a 6.1% increase in the last couple of quarters, but there may be some flexibility depending on the cost of funds. There have been reductions in head count across the board in various areas, such as CECs, salespeople, and Edmond. These reductions are a result of tight control on overhead and a focus on driving efficiency. The company has seen improvements in the efficiency of their omni model compared to previous years.

The company is making progress towards becoming more efficient and is well positioned for when sales rebound. They have been stable in terms of staffing and have the flexibility to manage hours if needed. The corporate bonus pace within compensation was $5 million in the quarter. Scot Ciccarelli has a follow-up question about affordability issues.

The speaker is discussing the potential for sales to return to 2019 levels in terms of affordability and volume. They believe there is room for improvement in average sales prices, but it may not reach 2019 levels due to the increasing cost of new cars. They also mention that the market has been choppy and consumer demand has been fluctuating, with September being the best month and December showing some improvement.

Bill Nash, the CEO of CarMax, explains that they are closely monitoring the elasticity of their prices and are hopeful that the industry will benefit from the depreciation of used car prices. When asked about the affordability issue, Nash says it is difficult to determine exactly how much improvement is needed to get back to 2019 volume levels. However, he believes they can achieve comp growth without reaching 2019 levels and notes that their market share data for the first 10 months of this year is better than the last six months of last year. Nash also mentions that October was the first month they saw year-over-year market share growth. The questioner then asks about expectations for tax season, but Nash does not provide a specific answer.

The speaker, Bill Nash, is asked about the impact of tax season on the business and any other external factors that may affect demand in February and March. He states that he doesn't foresee any major changes in tax season, but notes that last year there was steep appreciation in vehicle prices at the beginning of the year. He mentions that they are planning for a similar tax season as last year, but are not counting on the same level of appreciation in vehicle prices. The speaker also addresses an increase in inventory on the website, explaining that it is due to a slight increase in overall inventory and a higher proportion of saleable inventory compared to non-saleable inventory.

The company is planning a production shutdown for the upcoming holiday season, which is why there is a decrease in sales. They did some pre-building to account for the time off. They will provide guidance on new locations in the fourth quarter. The company does not expect to see a profit share in ESP, which may also affect F&I in Q4. The seasonal effect is mainly related to sales and there may be a spillover effect into next fiscal year due to lower Q4 profit share.

The company is not expecting to see profit share this year due to inflationary pressures on their partners. The warehouse portfolio is about 2/3 the size of the securitized portfolio and primarily holds the newest assets until they are taken to the market. The company has tightened in the Tier 1 space and expects those assets to perform better than those in the securitization. Overall, the company expects all assets to perform well.

The company's receivables will sit in warehouses for 3-6 months before being securitized, causing a delay in performance. The season has been ticking up due to high volume, but there is nothing unusual going on. The company's provisioning came in better than expected, and it may start with a six handle in the near term due to tightening measures. There is also an SG&A follow-up.

The company's provision for credit losses is made up of two main components: changes in existing business and new originations. The provision for new originations is based on expected lifetime loss rates and the cost of repossession. The company believes it has done a good job reserving for these losses in the current quarter. The company's target SG&A to gross profit ratio is in the mid-70s and they have made efforts to drive efficiency in their business. However, they also need a strong return from consumers for this target to be achieved.

The company is focused on achieving a 70% hit rate and plans to increase gross profit growth to reach this goal. They have successfully reduced SG&A costs while improving the customer and associate experience. However, Q4 may be more challenging due to sales performance. The company's inventory currently has a lower average selling price and they expect prices to continue to decrease.

The speaker explains that in order to keep sales prices steady, they need about $1,500 of depreciation each year. They also mention that their inventory is currently cheaper than what was sold in the previous quarter. The interviewer asks about the competitive landscape and mentions a specific company that has started acquiring vehicles outside of traditional channels. The speaker responds that they have also seen this trend in the market.

The company's sales of zero to four-year-old vehicles have increased slightly, indicating a high demand for inventory. The company is excited about its product innovation, such as Max offer, which skews more towards retail sales. The increase in advertising expense is due to CapEx spend, depreciation, and technology spend, as the company is focused on long-term growth and brand awareness. The company is considering how to discuss advertising in the upcoming year.

The speaker discusses the company's advertising strategy and how it is measured for return on investment. They also mention their plans to spend more in the fourth quarter due to an increase in volume during tax season. The speaker clarifies a previous question about depreciation and mentions the company's goal to acquire more vehicles in a profitable manner. The call is then opened for questions before the speaker thanks the listeners for their support.

The speaker expresses gratitude towards their associates and wishes them a happy holiday season. They also mention their commitment to taking care of each other, customers, and the community. The speaker concludes by thanking everyone and ending the call.

This summary was generated with AI and may contain some inaccuracies.