The paragraph is an introduction to the CarMax Third Quarter Fiscal Year 2025 Earnings Release Conference Call. David Lowenstein, VP of Investor Relations, greets the participants and introduces other key executives present, including the President and CEO Bill Nash, CFO Enrique Mayor-Mora, and the Senior VP of CarMax Auto Finance Operations, Jon Daniels. He mentions that the call will include forward-looking statements subject to risks and uncertainties, and refers attendees to company filings for more information on these risks. He also provides contact information for further questions and requests that participants limit themselves to one question during the Q&A session.

In the third quarter, the company experienced positive trends across its diversified business, achieving year-over-year gains in retail, wholesale, and cap segments. The stable vehicle valuation environment and solid execution led to robust EPS growth and increased unit sales. The omni-channel strategy proved to be a major differentiator with significant access to the used car market. The company reported increased retail and wholesale unit volumes and gross profits, setting a record for vehicle purchases from dealers. Total sales reached $6.2 billion, with a 1% increase from the previous year, driven by higher volumes despite lower prices. Retail unit sales rose by 5.4%, but average selling prices declined by 4% for retail and 6% for wholesale units year-over-year.

In the third quarter, the company experienced growth in several areas, including an increase in wholesale gross profit per unit to $1,015 and the purchase of approximately 270,000 vehicles, an 8% rise from the previous year. They acquired around 237,000 vehicles from consumers, with over half through an online appraisal experience, and sourced about 33,000 vehicles from dealers, a 47% increase from last year. Adoption of the omni-channel retail experience increased, with 15% of retail unit sales occurring online, up from 14%, and 56% as omni sales, up from 55%. Online transaction revenue was 32%, up from 31%, with all wholesale auctions considered online, comprising 19% of total revenue. CarMax Auto Finance (CAF) reported a 160 million income, an 8% increase. Third quarter net earnings per diluted share reached $0.81, a 56% increase, with total gross profit at $678 million, an 11% rise from the previous year.

In the third quarter, the used retail margin increased by 7% to $425 million due to higher volume, while the wholesale vehicle margin grew by 12% to $138 million due to both volume and unit margin increases. Other gross profit rose 25% to $115 million, driven by gains in EPP and service, with EPP benefiting from higher Max care margins and service margins improving through cost efficiency and positive sales growth. SG&A expenses rose 3% to $576 million, influenced by a $28 million increase in compensation and benefits primarily due to corporate bonus accruals, though advertising expenses were $9 million lower due to timing. Despite this, fourth-quarter advertising spend is expected to be higher than year-to-date figures and the previous year’s fourth quarter.

In the third quarter, the company incurred a one-time $5 million charge related to logistics equipment and leasing, which was offset by operational efficiencies. They repurchased 1.5 million shares for $115 million, with $2.04 billion remaining in repurchase authorization. CarMax Auto Finance originated $1.9 billion in loans with a 43.1% sales penetration and an average contract rate of 11.2%. The third-party Tier 2 and Tier 3 volumes were steady from last year. CAF income rose to $160 million due to a net interest margin increase, while the provision for loan losses was $73 million, reflecting confidence that past adjustments covered future losses.

The paragraph discusses a $479 million reserve balance, resulting in a reserve to receivables ratio of 2.7%, which is 12 basis points lower than at the end of Q2. This reduction is due to normalized provisions and existing credit tightening. The company is exploring account servicing strategies, such as payment extensions, to assist customers, noting that these have affected less than 1% of the portfolio monthly and are below industry levels. They began testing a policy enhancement for payment extensions to help delinquent customers, recognizing that some will return to delinquency, and have reserved for potential charge-offs. Additionally, they tested new credit scoring models across various tiers and executed a higher prime ABS deal, anticipating growth opportunities for CAF. The call is then turned back to Bill Nash, who expresses satisfaction with the company's momentum and omni-channel capabilities.

The paragraph discusses the company's focus on enhancing customer and associate experiences to drive growth. It highlights the nationwide rollout of customer shopping accounts, which help streamline the shopping journey and improve operational efficiency. Additionally, tools like the AI-powered virtual assistant, Sky, are mentioned as contributing to operating efficiencies and supporting remote customer engagement, which is improving conversion rates. The company has introduced more informative features on their website, such as vehicle-specific battery health information for EVs and tax credit eligibility filters. Furthermore, they have improved their online appraisal experience, offering digital appraisals to nearly all customers, and are testing new credit scoring models to expand financial offerings.

The company is focusing on cost efficiencies by expanding a new transportation management process that uses data science and AI for improved planning and execution. This process automates communication between drivers and stores, positively impacting the cost of goods sold. They are optimistic about future growth, leveraging their omni-channel experience, technology, and innovation to differentiate themselves in the market. The company is now shifting from building these capabilities to enhancing them for growth. At the end of the call, they invite questions, with Brian Nagel from Oppenheimer congratulating them on a successful quarter and inquiring about sales momentum, which Bill Nash confirms showed improvement throughout the quarter.

The paragraph discusses the company's expectations for its performance in the fourth quarter, which they believe will be stronger in terms of comparable performance than the third quarter despite some challenges like losing a Saturday and leap day. The company is optimistic about sales momentum and is making progress towards achieving a mid-70% SG&A to gross profit ratio. This improvement is tied to better sales volumes, cost management efforts, and moving past the heavy investment phase into leveraging existing capabilities for growth and efficiency. While committed to their SG&A leverage goal, the company remains open to investment opportunities that promise significant growth for both the top and bottom lines.

Sharon Zackfia questions whether recent improvements are more due to increased conversion rates or traffic to the website and stores. Bill Nash attributes the performance primarily to improved conversion rates, with flat web traffic but better conversions both online and in-store. Nash credits a combination of both external factors, like stabilized and slightly reduced sales prices, and internal efforts focused on enhancing the customer experience and efficiency. Initiatives like improving the customer shopping hub and implementing new tools for customer experience centers (CECs) have helped reduce friction and improve conversions.

The paragraph discusses efforts to improve cost efficiency and inventory management to maintain competitive pricing. In a Q&A session, John Murphy from Bank of America inquires about the company's strong same-store sales performance despite a shortage of used vehicles in the industry. He notes a decrease in average prices and questions if the company is intentionally sourcing slightly older or lower-priced vehicles to avoid competition in the high-end market. Bill Nash responds by highlighting the company's effective sourcing from both consumers and dealers and states that there hasn't been a significant shift in the age mix of vehicles sold, with newer vehicles even slightly increasing.

The paragraph discusses a company's strategy for sourcing vehicles directly from consumers and dealers, which has helped them acquire hard-to-find vehicles. John Murphy inquires about any changes in the company's vehicle age and trim level approach, aiming for better pricing, to which Bill Nash responds that there isn't anything particularly notable, though they've increased their under $20,000 vehicle sales by 5% year-over-year. Enrique Mayor-Mora highlights that 30% of their sales are now cars under $20,000, up from 25% the previous year. Seth Basham from Wedbush Securities questions their retail and wholesale Gross Profit per Unit (GPU) and cost-saving measures, asking if they’re still on track to save $200 per unit through reconditioning and logistics, half of which they've achieved so far.

The paragraph discusses the company's strategy regarding reconditioning and logistics, with emphasis on how most benefits are being passed to consumers while maintaining solid margins. Seth Basham inquires about improvements in the wholesale side, attributing them to both market conditions and initiatives like the "Max offer." Bill Nash responds, acknowledging the favorable market conditions and a stable pricing environment that have helped, along with a significant increase in active dealers participating in the "Max offer." This combination has positively impacted buying rates and overall performance.

The paragraph discusses the financial company's approach to managing its credit loss provisions. Enrique Mayor-Mora explains the adjustments to the provision for new loan originations, noting that it involves considering expected losses over the life of the receivables and any necessary true-up adjustments based on observed performance. The previous quarter had a significant true-up, bringing the total provision to $113 million, but this quarter's provision is more normalized. The company originated $1.9 billion this quarter, mostly in Tier 1, with some testing in Tiers 2 and 3. The provision for originations is estimated to be in the $60 million range, with tightened guidelines in Tier 1 helping mitigate losses, although testing in lower tiers offsets some of the benefits. The focus remains on maintaining a reasonable level of true-up adjustments.

In the paragraph, Craig Kennison and Bill Nash discuss the perception of market share and its impact on stock performance, with Nash noting stability in prices and confidence in gaining market share. Scot Ciccarelli then asks about the factors behind industry improvements and payment extensions. Nash responds, highlighting the volatility in the used car market, price stabilization, and the growing price gap between late-model used cars and new cars as contributing factors to the industry's current state.

The paragraph discusses strategies in the automotive industry to support consumers facing financial difficulties, particularly in the context of an inflationary environment. Consumers are increasingly turning to used cars as alternatives due to economic pressures. The company mentioned, through Enrique Mayor-Mora's comments, is focusing on payment extensions to help customers mitigate temporary financial hardships. Historically, their extension policy required customers to be caught up on missed payments, but they have recently adjusted this approach to accommodate those who can make at least one payment, thus helping more customers manage their finances and retain their vehicles. This adjusted policy aims to lower loss and support the consumer during tough economic times.

The paragraph discusses the positive outcomes observed from a recent policy implementation, despite some anticipated setbacks with certain customers reverting to delinquency. The company feels confident in its provisions and reserves, and is satisfied with early results impacting a relatively small customer base. The conversation then shifts to the wholesale business, with Jeff Lick pointing out significant growth in wholesale units and dealer buys. Bill Nash emphasizes the company's focus on expanding its car acquisitions, both wholesale and retail, and sees potential for further growth, aiming to maximize participation from dealers in the program.

The paragraph features a discussion involving Jeff Lick, Bill Nash, and David Bellinger about the car auction market and lending environment. Bill Nash explains that providing an additional option for dealers to sell unwanted cars complements existing methods like brick-and-mortar and virtual auctions without replacing them. He notes that dealers appreciate the extra valuation tool. David Bellinger inquires about changes in lending partners' behavior post-election, particularly if they are more aggressive in taking on volume, including lower credit spectrum loans, as we move towards 2025. Nash responds that lending partners remain stable and supportive but cautious, with no significant changes recently. Bellinger also highlights CarMax's significant earnings growth from a 4% comp and queries the potential for leveraging past investment for increased volume.

The discussion involves expectations for future earnings growth and store expansion. Enrique Mayor-Mora expresses optimism about robust top and bottom-line growth, thanks to past investments, despite recent challenging conditions. He highlights recent positive sales trends, indicating the company is well-positioned for continued growth. Michael Montani from Evercore compliments the quarterly performance and inquires about potential store expansions, asking if it's feasible to increase from 245 to 300 stores, and about labor compensation. Bill Nash responds, confirming they've reached 249 stores and believe they can expand beyond 300. Enrique will address labor compensation implications, suggesting potential leverage from a fixed-cost structure.

The paragraph discusses the company's ongoing evaluation of its store pipeline, highlighting opportunities for expansion even in existing markets. The strategic footprint is considered crucial, despite enhancements in the omni-channel experience that may reduce the need for more physical stores. Enrique Mayor-Mora mentions that comp and benefits costs have been leveraged more efficiently due to the direct selling and omni-channel models, resulting in higher efficiency and gross profit per unit. The company's web chats have increased by 10% year-over-year, reducing labor needs, and the containment rate has improved significantly from 41% to 51%.

The paragraph discusses the changes in consumer behavior regarding used versus new car purchases. It highlights that there has been a decline in the number of used cars exchanged, particularly in the segment of late model cars, as consumers face financial constraints. Despite this industry-wide downturn, the speaker views it as an opportunity, anticipating that consumer demand will eventually return to higher levels. Additionally, improvements in customer service and efficiency are mentioned, which are expected to reduce labor costs.

In the paragraph, Rajat Gupta from JP Morgan discusses the continuation of industry acceleration into December and notes that recent results have benefited from factors like rising used car prices. Gupta asks if changes in the consumer mindset, such as pent-up demand or events like elections or hurricanes, have influenced this trend. Bill Nash responds, indicating no significant shift in consumer mindset but attributes the improvements to internal efforts to enhance consumer experience, reduce prices, and broader macroeconomic factors. He also notes that lower-income consumers are still struggling and downplays the impact of hurricanes on business outcomes.

In the paragraph, Bill Nash discusses the progress and benefits of their omni-experience initiatives, highlighting improvements in customer conversion both in-store and online. He notes that while changes have been building over time, they have seen continued improvement in activities like remote progression (e.g., vehicle reservations, pre-qualifications) and in-store execution. The focus has shifted from capability building to reducing friction, with recent developments such as the rollout of order processing and shopping accounts. Nash emphasizes that these enhancements are expected to be increasingly important to consumers moving forward.

The paragraph discusses a conversation between Rajat Gupta, Jon Daniels, and Bill Nash about the reserve adjustments in CAF (possibly a financial context such as Credit Acceptance Finance). Rajat notes there wasn't a significant change in the macroeconomic backdrop driving the reserve adjustment, to which Jon responds by explaining that the adjustment was based on a performance review that led them to adequately refill the reserve in the previous quarter. Bill Nash supports Jon's explanation, suggesting that the adjustment was anticipated, and highlighting that the reserve is actually slightly higher year-over-year. The paragraph concludes with the operator indicating that the next question comes from David Whiston of Morningstar, who mentions that inventory was a free cash flow drain for the quarter.

The paragraph discusses preparations for the upcoming tax season, focusing on inventory management and pricing strategies. Bill Nash mentions that inventory levels have increased slightly as the company ramps up production for tax season, a typical seasonal adjustment. The team has improved inventory management and expects to be well-prepared. Jon Daniels adds that prices were raised last year, leading to increased margins but reduced penetration. He anticipates a slight price increase year-over-year. Michael Montani asks about the company's strategy for tax season, and Bill Nash emphasizes the importance of flexibility and preparation based on last year's performance.

The paragraph discusses the importance of maintaining flexible inventory levels to adapt to changing market conditions. The speaker expresses confidence in the company's pricing strategy due to diversification in sourcing and mentions that they are likely running lighter year-over-year. The operator states that there are no more questions and hands the call back to Bill Nash, who thanks everyone for their participation and expresses gratitude to the associates. He wishes everyone a happy holiday season and looks forward to the next quarterly discussion. The call then concludes.

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