車美仕 (KMX) 2015 Q2 法說會逐字稿

Good morning.

My name is Charlene, I will be your conference operator today.

At this time, I would like to welcome everyone to the CarMax FY15 second quarter conference call.

(Operator Instructions)

Thank you.

Ms. Katharine Kenny, Vice President of Investor Relations, you may begin your conference.

Thank you, and good morning.

Thank you all for joining our FY15 second-quarter earnings conference call.

On the call with me today are Tom Folliard, our President and Chief Executive Officer, and Tom Reedy, our Executive Vice President and CFO.

Before we begin, let me remind you that our statements today regarding the Company's future business plans, prospects and financial performance are forward-looking statements, that 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, the Company disclaims any intent or obligation to update them.

For additional information on important factors that could affect these expectations, please see the Company's annual report on Form 10-K for the fiscal year ended February 28, 2014, filed with the SEC.

Before I turn the call over to Tom, I would like to mention that we have some spots left for our next two regular headquarters Analyst Days, which take place on September 30 and October 30.

If you're interested in attending, please let us know.

And as always, I know that you will all remember to ask only one question and a follow-up before getting back in queue, in order to let everyone get a chance to ask a question.

Thanks.

Tom?

Thank you, Katharine.

Good morning everyone.

Thanks for joining the call today.

In the second quarter, total revenues grew 11% to $3.6 billion.

Net earnings grew 10% to $155 million, and earnings per share increased by 13% to $0.70 per share.

Earnings per share for the quarter included $0.06 related to the receipt of the Toyota legal settlement proceeds.

In terms of other key drivers for the quarter, used unit comps increased slightly for the quarter, and total used units rose by over 6%.

Gross profit per used unit remained flat compared to last year at $2,173.

Total wholesale units grew by over 7%, and gross profit per wholesale unit expanded by 3%, or $25.

Other sales and revenue increased 11% year-over-year due to an $8.5 million improvement in third-party finance fees, and CAF income grew 10% to approximately $93 million.

I'll now turn the call over to Tom Reedy to discuss finance.

Tom?

Thanks, Tom.

Good morning everybody.

Overall, the CAF story is not too different from what we discussed in Q1.

In the second quarter, CAF income grew 10% compared to the second quarter of FY14, and average managed receivables grew 19% to $7.7 billion.

CAF's weighted average contract rate, the rate charged to customers, was 7% versus 6.8% in last year's second quarter.

This rate had been relatively stable at around 7% for the past several quarters.

The allowance for loan losses grew to $78 million.

This represents 1% of average managed receivables, which is consistent with last year.

As we saw earlier in the year, credit losses for the quarter were moderately better than our expectations.

CAF net penetration at 41% was relatively flat, compared to last year's second quarter, and net loans originated in the quarter rose 7% to $1.2 billion.

That's in line with the total growth in unit sales.

Tom?

Thank you.

SG&A for the quarter increased approximately 5% to $298 million.

Excluding the legal settlement gain, SG&A expenses increased 13%, primarily due to the addition of 18 stores since the beginning of the second quarter of last year, and a $6.4 million increase in stock-based compensation expense.

On a per unit basis, excluding the legal settlement gain, SG&A increased $116 to $2,183, compared to $2,067 in the first quarter of FY14.

During the second quarter, we opened four stores, three in new markets for us, Madison, Wisconsin; Lynchburg, Virginia; and Portland, Oregon, and one in our existing Dallas market.

Store traffic was up modestly in the quarter, and our web traffic also continued to expand.

For the quarter, average monthly web visits grew to nearly 14 million, up 15% compared to the same period last year.

Visitors to our mobile site continued to represent approximately 30% of total visits, while visits utilizing our mobile apps represented another 15% of the total.

And with that, we'd be happy to take your questions.

Operator?

(Operator Instructions)

Our first question comes from the line of Matt Nemer, your line is open.

So just quickly on SG&A expense, should we expect -- you've got fewer stores opening in the back half.

Should we expect that the growth rate in SG&A could go back to the single digits, or do you think we'll stay at this elevated level for the rest of the year?

I'm not sure, Matt.

We deleveraged in the quarter, but that was largely due to relatively low comp.

I'm not sure of the timing of openings during the rest of the year, but it was definitely impacted by a heavy weight of newer stores in the quarter.

We had a heavy weight of new stores at the end of last year and early this year, so it's definitely the most effective new locations we've had in recent history.

Okay.

And then secondly, could you just talk to the reasons behind the lower EPP penetration and the higher cancel rates?

Any change in the program that's causing that?

The changes in the program we discussed at the end of the year when we talked about having to make adjustments for the reserve.

So we had some price changes, and we saw some impact in penetration, but we've had price changes several times over the last 20 years that we've been doing this, and occasionally has a little bit bigger of an impact.

It's still a very strong ESP penetration for the quarter, and EPP is a combination of both ESP and GAAP, both of which had price changes, since the last time we talked.

Got it.

Okay.

Thanks so much.

Our next question comes from the line of Aram Rubinson.

Your line is open.

Thanks for taking my question.

Two things, one is, can you give us some color on the subprime?

I know it was down as a percent.

But can you tell us where the non-subprime creditors like this [Exeter] and others fit into the mix, and if you were to look at your prime business only, what comps you might have seen in prime only?

It's very hard to pull that all apart.

I think we're not in a position to talk about how much specific headwind Tier 3 was.

As you saw, it was down about 5 points year-over-year, as a percent of our sales, which is consistent with last year.

But we need to remember that Tier 3 is not only impacted by their behavior, but by what's going on above them and what's coming through the door.

Over time, we've seen the mix of Tier 2 to Tier 3 change.

Two years ago, Tier 2 was a bigger percentage of sales.

Last year, Tier 3 was bigger.

This year, we've seen Tier 2 pick up somewhat.

They've been picking up some of the penetration that Tier 3 lost.

As I said, it's difficult to discern exactly how that translates through to comps, because Tier 3's behavior is also a byproduct of what they're seeing and what they're experiencing in their portfolio.

If you remember, our waterflow of assets starts with CAF and goes on to Tier 2 and then from there to Tier 3. Tier 3 doesn't see any of the applications that's are approved and booked by anything above them.

Okay.

This change in percent of sales is similar to the change we saw in the first quarter.

And can you just tell us, is there any reason to think as the back half of your comparisons get easier, they go from 16% down to 10% and then to 7%, is there any reason to think the sales trend wouldn't improve commensurate with that?

We don't give any forward-looking guidance.

I was asking for it a little differently.

I appreciate that.

Have a good day.

Okay.

Thank you.

Our next question comes from the line of Brian Nagel from Oppenheimer.

Your line is open.

Hi, good morning.

Hey, Brian.

I wanted to maybe ask the subprime question a little differently.

If we look at, like you just mentioned in response to a prior question, you've had now a couple quarters where pretty significant decline in subprime as a percent of your total sales.

But does that reflect, should we think about what's happening behind that, is that just simply a mix shift, or are you seeing further tightening, if you will, on the part of your partners?

And then the follow-up question on that, I think you mentioned it briefly in your press release, but maybe just some update on your own subprime test, and how that's going, and what we should expect going forward?

I can comment a little bit on that.

The Tier 3, as I said, it's a combination of factors.

We're clearly seeing them continue to provide, I'll say less attractive offers than they were a year ago, less compelling offers for the customer, so therefore, we're seeing less conversion in that space.

But as I mentioned, it's a byproduct of their behavior, plus what they're seeing coming through the door, and we've seen some pick-up in the behavior of our other partner lenders.

With regard to our Tier 3 experiment, we're still early into it.

We just started -- I think the first wave of originations is just starting to anniversary six months.

We're really not in a position to talk about how that's going yet.

We'll have an update for you as soon as something makes sense to talk about.

It's on track.

We're expecting to continue to do it throughout the year, and get through that, the test, as we announced it.

If I could just follow up on that.

Not to get too cute with this.

We've been talking a lot about subprime and CarMax, and the point is last year when you really called out your partners for one reason or another, seemingly getting less -- well, pulling back some new business.

You comment again about year on year, but if we look at it maybe not year on year but Q2 versus Q1, is it still a further pullback, or has it stayed about the same?

I wouldn't know specifically.

I'd say we're seeing the same type of trend as we did in Q1.

Remember, we first talked about this at the very end of -- we saw it happening at the very end of Q3.

There was a notable shift in behavior.

We have no reason to think behavior's changing from where it is today.

We want those guys to run a profitable business, it's going to be sustainable, and support our customers for the long run.

They are going to test and make changes, as is appropriate for their portfolio, and we wish them all the best of luck in doing it.

As far as Q1 to Q2, though, I would say it's more of a continuation of the same.

We're seeing less attractive offers than a year ago being presented to the customer and, therefore, less take-up on the Tier 3.

It's a similar drop-off, Brian, in points of sale, about 5 points in the first quarter, 5 points in the second quarter.

It still represents 15% of our sales.

It's still business that we're really happy to do and really happy to have a credit offer that reaches all kinds of different customers.

Thank you.

Our next question comes from the line of John Murphy from Bank of America.

Your line is open.

Good morning.

This is Liz Suzuki on for John.

It looks like comps were a little lower than what we expected, even adjusting for the lost Saturday.

Do you think consumers are substituting new vehicles for used given the attractive financing rates available, and are you seeing more competition from new vehicle dealers, particularly on a monthly payment basis?

It's really hard to tell the reasons why somebody would buy new over used.

I think it's good for us when we see the SAAR continuing to grow, as we talked about over time.

I think it will have long-term benefits for us both on the supply side, and the fact that consumers are more willing to get out there and sign up for a loan and buy a car.

As far as our comps are concerned, I don't really view it as very much different from the first quarter.

It was 3 points in the first quarter.

If you add back 1 point for Saturday, we're really just not that far off.

I'm really pleased with the way the quarter turned out.

It's the most cars we've ever sold.

Thanks.

Just one follow-up.

Do you have what the typical monthly payment amount is for a CarMax customer?

I don't think we do off the top of our head.

It's $20,000 average sales price.

It's 90% or 95%.

We'll get back to you.

We can get back to you on that.

I'm not sure.

You can back into it with our contract rate from CAF, but then you would have to go all the way down the credit tier as well, so --

Thanks.

Our next question comes from the line of Matthew Fassler from Goldman Sachs.

Your line is open.

Thanks a lot.

Good morning.

My primary question here relates to SG&A.

We saw some volatility, I guess, in the year-on-year trends, particularly for compensation and benefits per vehicle retail.

I know that's the biggest line item in SG&A.

It was down a chunk year on year in the first quarter, up a chunk year on year in the second quarter, nets out to flattish year on year.

Anything significant driving that volatility, and how would you think about -- which quarter would you say is more representative of the trend that you'd expect to see going forward?

It's Tom Reedy.

If you look at that, I think if you remember last quarter we noted that stock-based comp was favorable in the quarter, and didn't want to take any credit for it.

This quarter it was taken -- it went back the other way because the stock price went up, and I think you're right to look at it in a year-to-date basis rather than a quarter-to-quarter.

Because that piece has been quite volatile.

Understood.

Okay.

And then secondly, just a follow-up on some of the questions that you've already gotten on subprime.

Presumably you have a long-range view about where subprime essentially lands.

Historically has been as low as mid single digits as obviously as high more recently as the low 20%s.

When all is said and done, I'm sure you're modeling the business out by source of finance, or at least have some sense of where you'd expect it to be.

Where do you think this ultimately settles in terms of subprime penetration?

Matt, we actually don't model it and we don't know where it's going to settle out.

As Tom mentioned earlier, it's a reflection of our partners' behavior, and the credit we have coming through the door.

We're happy to do every one of these deals.

We think they are 100% incremental.

Remember, Tier 3 lenders don't see an application until it's declined by every other lender.

It's a part of the business that's going to come out the way it comes out.

We expect some volatility there, but we don't really have any view into where we expect it to shake out long term.

Got it.

Understood.

Thank you so much.

All right.

Our next question comes from the line of Seth Basham from Wedbush.

Your line is open.

My question revolves around the finance lending program, as well.

Specifically, can you comment on what the approval rates were this year relative to last?

Down very slightly, but we're still seeing over 90% of our customers receiving an approval of some kind in our stores.

If you remember, as we've been talking about the last couple of quarters, the decline in attach on the subprime business is more a byproduct of the nature of the offers that the lenders are providing, whereas in the past, you might have had a $13,000 loan may have had a $100 or $200 down payment requirement.

That number may be several hundred dollars higher today, making it a more difficult transaction for the customer.

It's a combination of a number of things, but as far as actually receiving an offer, it's still a very strong in our stores, and overall, we're very happy with the finance environment.

We think we have a great array of lenders for our customers, and customers have a great access to financing in the CarMax system.

As Tom said, 90% of customers are getting approval from somebody in our hemisphere of lending and that number's then -- 90% has been as high as it's ever been for us, but it's been stable there for a couple of years now.

Got it.

Understood.

You mentioned that traffic was up a bit or flat, but conversion was down, a little bit different trend than in recent quarters, I believe.

When you think about conversion in credit tier, was there any change in the tiers other than the subprime?

This quarter was not very much different from last quarter.

Whenever we talk about conversion and traffic, my view is that you have to look at both of those things on a much longer-term basis than just one quarter, and I've always felt like our growth will come partially from both.

But it never seems to match up exactly in a quarter.

So like you said, conversion was flattish, traffic was slightly up, but I'm not sure that what that says for the quarters going forward.

You can look -- CAF was relatively flat as far as penetration for the quarter and we saw subprime down a few points.

We saw an increase in Tier 2 and an increase, a smaller increase in the customers that did not bring financing or did not need financing in our system.

Understood.

The last follow-up, just thinking about conversion.

Is there anything else besides credit that might have affected the conversion rate this quarter, relative to the last couple quarters?

No.

Great.

Thank you.

Our next question comes from the line of Scot Ciccarelli from RBC Capital.

Your line is open.

Can I clarify something?

So for -- what you outlined for subprime, for the 13.8% penetration, that is purely the Tier 3 providers, and some of the drop-off we saw there was picked up by what you consider Tier 2 providers, is that the right way to think about that?

Scot, that number is the Tier 3 providers plus the CAF test.

So it's all customers that are -- that would have been funded in that space, including our switches, is a very small portion of it is CAF.

Got it.

And then out of the CAF approvals that you have in the regular CAF program, how much of that -- I know you guys have your proprietary score card, but how much of that would you guys generally consider subprime?

Obviously if the you go through the securitizations, you're charging mid-teens interest rates for a lot of people.

I'm assuming those aren't what you and I would call prime customers.

As we talked about before, Scot, CAF by box, if you want to call it, that is across a broad spectrum of credit, and it's customers that we're experienced within our system, we have a good track record with, and we're able to securitize.

I'm very hesitant to define subprime, because I think it's different in the eyes of almost anyone you ask.

You can look at the strat tables and our deals and get a feel for it.

We like every customer we do at CAF.

That's why we're approving them.

As you know, Scot, we've been doing this for a long time, we've done lots of securitizations, and when you look at the aggregate portfolio that we're originating, it's delivering a very low loss rate, and is very attractive to investors.

The last question is inventory was up sharply this quarter.

It was up in 1Q as well.

Just what's the outlook for that, and the right way to think about inventory growth going forward?

Thanks a lot, guys.

Thank you, Scot.

Most of inventory growth in the first couple of quarters has been around a combination of new stores that are open and building inventory for new stores that are about to be opened.

We have some stores that are carrying more inventory than they did last year but -- and we were a little bit low last year, and we had relatively high turns with pretty good comps in the first and second quarter last year.

So it's a combination of -- we were probably a little behind where we wanted to be last year.

We intentionally are a little ahead this year.

It's mostly driven by either new stores that are opened or preparing to open new stores.

So we have to buy cars in advance.

We have to recondition them.

We have to have them in process, and in many cases, shipping some pretty significant distances to get new stores opened, like the last one in Portland.

But comfortable with the levels today?

Yes, absolutely.

Got it.

Okay.

Thanks, guys.

Our next question comes from the line of James Albertine from Stifel.

Your line is open.

Great.

Good morning, and thanks for taking my question.

Wanted to get a sense on an updated view from you on the broader supply environment.

I think most would expect, given the trail of who the new vehicle growth in the market, that perhaps we're earlier innings in the used supply ramp, and yet, your pricing for the used retail side was up, I think ahead of our expectations, it's pretty considerable, I would think, in the second quarter.

Just wanted to get your idea, maybe diagnose what's going on from the supply side and what's driving pricing, with respect to what you're seeing in the market?

Thanks.

Average retail was pretty close in the second quarter compared to the first quarter.

And in terms of supply, the first part for us is looking at self sufficiency.

Self sufficiency was slightly over 50%.

Those are the cars we buy through the appraisal lane, that then become retail cars for us, but not much of a change from the first quarter.

And in terms of the new car sales translating to future supply, I think you said we're in the early innings, and I would agree with you.

Although we've seen a nice pickup in SAAR, the supply trickle down will happen over the next couple of years.

So we're excited about that.

We have said in the past we historically overperform in two, three, four-year-old cars.

That mix of sales for us was slightly up in the quarter, but not very much, and so we still think that is yet to come.

Just as a quick follow-up, do you think pricing can hold at these levels as supply continues to ramp?

I don't really have much of a prediction on that.

The only time we've ever seen significant drop-off in our average retail is during the recession when we saw our average retail drop by over $2,000.

Other than that, due to inflation and due to just continued increased cost of new cars, a new car now is over $30,000, it's just not something that I think will go backwards.

Appreciate.

Thanks again and good luck in the third quarter.

Thank you.

(Operator Instructions)

Our next question comes from the line of Bill Armstrong from CL King and Associates.

Your line is open.

Back to subprime.

Is it fair to say that the traffic trends or maybe the number of subprime applications was down year-over-year?

We can't -- I can say overall through the quarter, we saw credit on applications down very slightly.

There's nothing specific to talk about as far as volume through the door.

I don't think there's much.

As Tom said earlier, if you look at our applicant flow, 90% of customers are getting approval of some kind from one of the lenders that we provide, or that partners with us.

But it's not just an approval.

It's the quality of the approval.

So it's a combination of a number of different things.

Everybody has their own scorecard.

Everybody runs their own business.

We do the best we can with the approvals that we get, and our stores, I think, do a fantastic job of trying to help customers get through whatever challenges that they may have, whether it's on the credit side or the trade-in side.

We're really proud of the offers we have from our consumers from top to bottom in the credit tiers.

Okay, and then just one quick one.

The EPP estimated cancellation reserve rates, was that something material?

And would we see more of that going forward?

If you remember, earlier -- at the end of last year, we adjusted the rates as which we reserve on both the ESP and the GAAP product.

This year, part of the reason that we're seeing increased cost, a lower amount of revenue and margin in those products, is that we are reserving at that higher rate.

As far as -- there's no major adjustments embedded in that, but we are reserving at a higher rate than we were a year ago, and have been all this year.

Remember, whenever we reserve at a higher rate, that's the rate we think we should be reserving at.

We have it set for what our best prediction is, of what's going to happen with returns going forward, both on the ESP side and on the GAAP insurance side.

Could you remind us when we will anniversary that higher reserve rate that you put in place?

Q1 of next year.

Q1 of next year, yes.

Got it.

Okay.

Thank you.

Okay.

Our next question comes from the line of David Whiston from Morningstar.

Your line is open.

Thanks.

Good morning.

Any detail you can give on for the quarter relative to prior-year quarter on traffic and the conversion rate?

We said traffic was up modestly and conversion was flattish.

Okay.

Thanks.

And then more strategic question.

Are you guys considering or actually doing basically a substitute to Craigslist, where two private sales, where two customers could buy a used vehicle at a CarMax store with a CarMax inspection done for a fee?

I'm not sure what you mean there but no, we're not doing that.

We're only selling cars that we own.

Okay.

Thank you.

All right.

There are no further questions in queue at this time.

I turn the call back over to the presenter.

All right.

Thank you very much.

Thanks for joining us today, and thank for your continued interest in CarMax, and of course thanks to all of our associates for all you do every day, and we'll talk to you again next quarter.

This concludes today's conference call.

You may now disconnect.