車美仕 (KMX) 2018 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the CarMax Fiscal 2018 First Quarter Earnings Conference Call.

(Operator Instructions) Thank you.

I would now like to turn the call over to Katharine Kenny, Vice President, Investor Relations.

Thank you, Victoria, and good morning, everyone.

Thank you for joining our Fiscal 2018 First Quarter Earnings Conference Call.

With me, as usual, are Bill Nash, 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 or 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, 2017, filed with the SEC.

(Operator Instructions) Bill?

Thank you, Katharine, and good morning, everyone.

We are pleased to report a strong start to fiscal 2018.

I will begin today with the highlights for the first quarter, and then ask Tom to review financing.

Then I'll come back and comment on our initiatives.

Our used unit comps for the first quarter increased by 8.2%, and total used units grew by 14.1%.

Total used unit comps were driven by a strong improvement in conversion, while store traffic was flat.

Strong sales results continue to be supported by a number of factors, including our continued focus on execution and the impact of our initiatives to enhance the customer experience.

While we believe there was some benefit from the delay in the tax refund season, we are pleased to have exceeded 8% used unit comps in both this quarter and last quarter.

Additionally, as more vehicles come off lease and as acquisition prices decrease, we believe it is beneficial to sales as cars become more affordable.

Website traffic grew 9%, which generated significantly more leads than a year ago.

This reflects our continued focus on the digital experience, both with the website and online functionality.

Gross profit per used unit remained consistent at $2,212 compared to $2,002 in the first quarter of last year.

Compared to last year's first quarter, our wholesale units were flat.

The growth in our store base was offset by lower appraisal traffic.

As we discussed in previous quarters, we continue to see a supply -- a lower supply of older 7- to 9-year-old vehicles that correlate to the years of decline in the industry new vehicle sales during the recession.

Gross profit per wholesale unit increased to $1,012 compared to $995 in the last year's first quarter.

We believe this increase was supported by the delay in tax refunds.

A few other topics and then I'll turn the call over to Tom.

As a percentage of our sales mix, 0- to 4-year-old vehicles increased to over 78% versus more than 76% in last year's first quarter.

As a percent of sales, large and medium SUVs and trucks rose to 27% in this first quarter, similar to the fourth quarter but about 3 percentage points higher than last year.

On SG&A, expenses for the first quarter increased 6% to $404 million.

This was primarily due to several factors: the 11% or 18-store increase in our base since the beginning of the first quarter of last year, higher variable costs due to increased sales and spending related to our strategic initiatives.

These were partially offset by an $11.5 million decrease in share-based compensation expense.

While we reported $157 per unit in SG&A leverage, approximately $80 came from share-based compensation expense.

In addition, we saw some timing favorability from planned initiative and marketing spend.

Taking into consideration these timing items, we still leveraged SG&A modestly, reflecting the continued investment in strategic initiatives that we previously discussed.

During the first quarter, we opened 3 stores, including our first 2 in Seattle and 1 in Pensacola, Florida.

During the second quarter, we will open 3 stores: 1 in Hartford, which we opened earlier this month; another in San Francisco; and 1 in Salisbury, Maryland.

Now I'll turn the call over to Tom.

Thanks, Bill.

Good morning, everybody.

Last year, we talked about seeing an increase in credit applications from the higher end of the credit spectrum and a decrease in applications from the lower end, which was consistent throughout the year.

In the first quarter, we began seeing application growth all across the credit spectrum.

CAF net penetration was 42% compared to 44% in last year's first quarter.

CAF penetration levels in FY '17, remember, were at historically high levels.

We continued to see solid performance by our partners.

Tier 2 penetration grew to 19% versus 18.5% in last year's first quarter.

Third-party Tier 3 sales mix was 10% of used unit sales compared to 11.2% for the same period last year.

As we talked about in the press release, the Tier 3 headwind was less than we've experienced in recent quarters as the tightening we observed last year occurred in the middle of Q1.

In addition, we again saw growth in sales where customers paid cash or brought their own financing.

Going back to CAF.

Net loans originated in the quarter rose 7% year-over-year to $1.5 billion.

This was due to CarMax' sales growth, but partially offset by the lower penetration and a drop in average amount financed.

CAF income increased 8.5% to $109.4 million as the 11% growth in average managed receivables was partially offset by a slight compression in the portfolio interest margin.

Total portfolio interest margin was 5.8% of average managed receivables.

This compared to 5.9% in the first quarter of last year and 5.7% in the fourth -- in the most recent quarter.

For loans originated during the quarter, the weighted average contract rate charged to customers was 7.8% compared to 7.5% a year ago and 7.4% in the fourth quarter.

The ending allowance for loan losses at about $130 million was 1.18% of ending managed receivables, up from 1.05% in the first quarter of last year, but similar to our 1.16% we saw in the fourth quarter.

This quarter's loss experience was in line with our expectations at the end of Q4.

Turning over to capital structure.

During the first quarter, we repurchased over 3 million shares for $182 million.

Now I'll turn the call back to Bill.

Thanks, Tom.

Now I'm going to take a moment to provide updates on a few of our strategic initiatives.

A number of you have already had the opportunity to visit CarMax' digital and technology innovation center in downtown Richmond.

When you were there, you learned that we are focused on leveraging lean product development best practices for our consumer innovations.

This quarter, we unified our product teams into a new product department in order to further align the work of these teams and to continue to leverage rapid product innovation as a key competitive advantage.

One example of our product innovation is the progress we're making in digital merchandising, which is how we showcase our vehicles on carmax.com.

We have already achieved significant success through the use of indoor photo studios.

These studios allow us to eliminate the impact of weather and guarantee we secure a consistent, top-quality photo of all our vehicles.

To date, we've opened 16 indoor studios across the country and plan to open another 18 this fiscal year.

Regarding online financing, which has been available in all of our stores for 2 full quarters, we continue to be pleased with the results.

Customers are engaging well with this offering, and it continues to contribute to increased leads, which we believe ultimately generate incremental sales.

Now we're focused on improving the experience and proactively marketing our online financing capability nationwide.

Last quarter, I mentioned a test we were conducting in Charlotte of our new online appraisal offering.

This is a tool that allows our customers to receive an appraisal value for their vehicle by submitting information online.

We're receiving great feedback from both our customers and sales team and are planning to expand the test to 2 more stores in Charlotte next quarter.

Lastly, we continue to focus on learning how we can deliver CarMax' hallmark exceptional experience to customers wherever and whenever they want to shop.

We continue our home delivery test, and one key learning we have found is that human intervention at the right time is important to giving our customers the personalized experience they expect.

Our goal with this test is to build the functionality needed to fully integrate our online and in-store experiences so that we can offer as much or as little of the car-buying process online as each customer wants.

As you can tell, it's an exciting time here.

We've got a lot going on.

We remain confident that all of our initiatives, both online and in-store, will ensure CarMax continues to lead the industry and deliver an exceptional car-buying experience.

Now I'll open up the call for questions.

Victoria?

(Operator Instructions) Your first question comes from the line of Scot Ciccarelli with RBC Capital Markets.

So it looks like loss rates in CAF were better than expected after a couple quarters of, let's call it, underperformance.

Can you provide any more color on what you're seeing on that front, especially following the catch-up we had in the fourth quarter, number one?

And then number two, what you're seeing in recovery rates given the ongoing decline we're seeing in used vehicle values?

Yes, Scot.

I would, I guess, not agree that losses were better than expected.

As I mentioned in my remarks, losses for the quarter came in pretty much in line with where we had put them at the end of Q4.

So last year was a period of continuing underperformance from a loss perspective, and we were making adjustments based on missed versus what we had booked and making adjustments to the allowance based on what we're learning.

This quarter is pretty much a straightforward quarter for CAF at this point.

We saw growth in the receivables, a little bit less growth in net income margin because of the compression we've seen and not a lot to talk about from a loss perspective.

So you'd expect us to grow income a little bit.

With regard to recovery rates, we've seen that trend down a little bit year-over-year about I think 2 -- a couple percentage points, but not materially different.

Your next question comes from the line of Matt Fassler with Goldman Sachs.

My first question relates to SG&A, specifically, compensation.

Even when you back out stock comp in both years, your compensation per vehicle retailed, which is the way we tend to look at it, was down, I think, 4%.

I guess that's consistent with where it was for the past few quarters, certainly better than we had thought.

Is this a function of simply leveraging fixed costs?

And what kind of comp do you need, do you think, to leverage that number, particularly as the compares on that line item are getting a bit stiffer?

Matt, this is Tom.

I think what you're seeing is we had a pretty significant comp quarter.

I mean, compensation is both variable from selling more cars, but there's also a fixed element that we would expect to leverage as we sell more cars.

And I think that's probably what you're seeing in this quarter.

As far as where we expect to leverage, as Bill mentioned in his remarks, still kind of the higher end of that middle single-digit range is where we'd expect, given all the investment we're making in both technology systems and in improving our customer experience.

I will ask the follow-up, I'll take you up on that, which relates to the comment that Tom made about seeing application growth across the credit spectrum.

Clearly, that should be good for sales.

What does that say about the risk profile of the incremental loans that CAF will be extended?

Does the loan simply go where they would go?

In other words, if people come in on the lower end, they'll go more to Tier 3 or to Tier 2 and CAF will do what it's always done?

Or does this -- to satisfy that demand, do you want me to any more risk on the credit side for CAF in particular?

No.

I don't think we're in a position to start talking about taking any more risk on CAF.

As we talked about last quarter, we enacted some tightening.

But pretty much, what flows to CAF, what flows to Tier 2 and Tier 3 is going to be based on what comes through the door.

And as we've all talked about, we look at that Tier 3 business as incremental.

Obviously, it's more -- it's less profitable and more volitable.

But on an ongoing basis, it would do very little to what CAF is going to be.

Just maybe it will have an impact on the mix of penetration between the various players.

And are your partners, Tier 2 and Tier 3, receptive to this traffic?

Absolutely.

I think we've talked about before that we believe we have the best channel for originating used car loans.

I don't think any of our partners would disagree with that.

As far as performance in the quarter, we continue to be happy with how they're performing.

Q2 -- I mean, sorry, Tier 2 lenders, we look at collectively because all of them see every customer and they're able to make a competitive offer.

As you saw, they're up about 0.5 point year-over-year in the quarter.

So we're happy with the conversion we're seeing out of that group.

Tier 3, as we mentioned, we saw some tightening in Q1 of last year, but relatively consistent performance since then.

And the way we measure performance is how many sales do we get out of the applications that they see.

So nothing except good things to report on that front.

Your next question comes from the line of Sharon Zackfia with William Blair.

I have 2, I think, easy questions.

I'm going to bend Katharine's rule, if that's okay.

I guess the first one was on wholesale profit per car.

It's the first time it's been up in a while.

I just -- and I read the press release and it sounds like it might be an anomaly, and it will be a little bit more normal going forward.

I just wanted to clarify that.

And then secondarily on subprime, as you lap the tightening, I guess, I'm just wondering, going forward, should we expect kind of stable year-over-year subprime?

Is that a benefit to same-store sales going forward as it seemed to be somewhat of a hindrance over the past year?

If you could give us some color on your thoughts on that?

Sure, Sharon.

On the first question, on the wholesale profit per unit, you're right, it had -- it did buck the trends this quarter.

As we cited earlier, as I talked about in my statements earlier, I think there was some benefit from the delay in refunds, which we actually talked about a little bit in the fourth quarter that we thought that there was going to be a little bit of that.

So as far as where does it go from here, I mean, we'll have to wait and see.

But again, I think the real reason is that we had some folks that had tax refund monies that rolled into this quarter.

As far as the subprime and lapping and where that's going, it's really hard to tell where that's going to normalize.

And so being able to project [4] to some percent of where we're going to be, I think, would be a little dangerous at this point.

Yes.

I think a little [clarity].

Last year, as we talked about, we were seeing a headwind from both credit policy at the partners and a reduction in volume of customer applications, both.

As I mentioned, we've seen pretty consistent behavior from the partners.

On a go-forward basis, we have no way of knowing what could change on that front.

But assuming nothing would change, it's going to be dependent on the volume of customers coming through the door.

And we'll see how that plays out over the course of the year.

But we're still really pleased with the first quarter.

As far as when you look at the comps, our non-Tier 3 customers was about 10%.

And keep in mind that those are the most profitable customers we have.

So we are pleased with that.

Your next question comes from the line of Craig Kennison with Baird.

The topic is sourcing.

There's a huge influx of off-lease cars coming, as you know, and these should be ideal CarMax cars.

But since they're often grounded at franchise dealers, they could be tougher for you to access.

So my question is, what are you doing on the sourcing front to ensure you get your hands on these cars, especially knowing that it's more profitable if you don't have to rely entirely on auctions to source those cars?

Yes, Craig.

So first of all, I'll tell you, you're right.

We've already seen some of the influx of off-lease vehicles coming.

As far as it being tougher, there are so many cars that I think have come in and will continue to come into the market that I don't see that as a challenge.

And as more of them come in, the prices will continue to drop.

And so when we combine them off-site, they're that much more affordable for our customers.

So we don't see the sourcing as an issue of being able to get those vehicles.

We think we'll be able to get them.

And then we also think that they'll continue to go down in price, which will help on pricing.

So as a follow-up, is your mix of, call it, self-sourcing for off-lease cars any different than your mix of other types of cars?

Yes.

So the self-sufficiency is what you're talking about and which is how we view the appraisal lane.

We typically are in a range of 40% to 50%.

This quarter, we are slightly under that.

I think it's more of a factor of the 14% increase in total sales, though.

Your next question comes from the line of James Albertine with Consumer Edge.

I wanted to ask on extended protection plans.

It just seemed like the attachment rate may have improved here relative to prior quarters.

And given your comments on the 0- to 4-year-old vehicle penetration increasing year-over-year, wondering if that's having a positive impact that we may see carry through the balance of the year?

Sure, this is Thomas.

I'll start with the extended protection plans, as you asked.

As we -- as you saw, it was up about $16 million year-over-year.

There's 2 things going on there.

One is we did have a favorable adjustment -- a modest favorable adjustment on the return reserve, which is always going to be something that's in the mix.

Penetration was actually pretty consistent with last year, but we did see some improvement in pricing with some actions we took during the last fiscal year.

So that supported it a little bit as well, but penetration was relatively consistent.

Very consistent, actually.

Yes.

And I wouldn't see the 0 to 4 change or anything.

I wouldn't see that necessarily changing it.

We don't believe that will necessarily change that penetration in the near term.

So there's nothing in the data that suggests that you're more likely to sell an EPP on a 1-year-old to 2-year-old vehicle versus a 6- or 7-year-old vehicle?

Yes.

We don't have that information -- I mean, that would be a reasonable thing to assume, but we'd have to dig in.

We don't have it in front of us.

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

This is Aileen Smith on for John.

Just a follow-up question to the vehicle sourcing you discussed earlier.

Can you talk about the mix of vehicles that you're procuring for inventory now versus a year or 2 ago?

I think in the past, you had faced some issues with procuring truck and SUV inventory at attractive price points.

Has that headwind abated?

Or is there still some further room for improvement in the coming years, especially as the mix of vehicles coming off lease and churning in the used vehicle market better matches the new vehicle market in recent years?

Sure.

As I talked about earlier, our percent of sales of large and medium SUVs and trucks did rise to 27%, which was similar to the fourth quarter, but it was about 3 percentage points higher than last year.

And I would tell you, like we talked about last year, we're going to sell what customers are interested in buying.

So even last year, when we were a little bit lower on large SUVs and trucks, we were still putting out there what folks wanted to buy and were also a good deal for them.

So what I would tell you is I think, certainly, the supply has increased on these vehicles and has driven price down somewhat.

But again, we're going to buy what the consumers want.

Okay, great.

And can you -- just as a follow-up, what is the mix of crossovers in that as well?

Crossover vehicles?

Yes.

Yes.

I don't think -- the crossovers are not in that number.

We don't keep those in that number.

Your next question comes from the line of Mike Montani with Evercore ISI.

Wanted to flesh out a little bit the online appraisal initiative that you all have working.

I think in the past, you had mentioned like a high 90% kind of success rate with that.

And really, just tie that back into sourcing because my understanding is that it's much more profitable for you all to sell a unit that you've sourced through the appraisal lane versus the auction.

Can you just provide some figures around that latter comment?

And how, if online appraisal works, that might influence the mix of sourcing going forward?

Yes.

I'm not sure the comment about the 90%.

As far as the online test -- like I said, we've got it in 1 market.

This is where we will actually give the customer a value for their vehicle versus a range.

We'll give them a value.

We see this as an extension of our overall customer experience.

There may be some customers that are interested in getting that value before coming into the store and we want to be sure that we can accommodate it.

To your question about internal sourcing through our appraisal lane versus sourcing off-site, you're right.

We have talked about that in the past.

If we can buy it through our appraisal lane, it is a more profitable unit than buying it off-site.

So we're always trying to drive as much as possible through the appraisal lane.

But I will also tell you, even given this quarter, where we were allowed a little bit more on off-site purchases because of the volume that we moved, we were still able to maintain GPU.

Okay, great.

And the follow-up I had was on another digital initiative, which was home delivery.

Just wondering if you can share any learnings there, both from a standpoint of customer satisfaction with that initiative; and then secondly, profitability there, what you're seeing for long-term viability.

Yes.

I think it's a little too early to talk about the profitability piece of it.

Keep in mind, as I talked about in our remarks, we're really trying to make sure that we have a suite of e-commerce applications that enhance the customers' experience so that we can meet the customer wherever they want to be met.

As I talked about earlier, one thing that we're -- we continue to be seeing, and this has been reinforced, is that, in a lot of cases, customers do want some human interaction.

Now it may mean that they want to come into the store.

It may mean that they want to talk to somebody on the phone.

But regardless, because of the complexity of the transaction, consumers -- the majority of consumers, to enhance their experience, we -- generally, you have to have some type of consumer -- customer interaction with them.

So we'll continue to develop this product offering.

But again, it's really a series of a bunch of different things, whether it's online financing, whether it's online appraisals, whether it's delivering the cars to the house kind of coming all together and giving the customer the best experience possible.

Your next question comes from the line of Michael Levin with Deutsche Bank.

Wanted to see if you could dig into the ASPs and the mix a little bit more?

I mean, you're talking about a higher portion of trucks and SUVs and more 0- to 4-year-old vehicles, and we've kind of seen that play out.

And price indices at Manheim and ADESA and Edmunds kind of showing higher ASPs year-over-year.

But you guys are still kind of down a little bit.

I wonder if you could just kind of talk about some of what might be happening there?

Yes.

So I think you've highlighted a lot of the points there, Mike.

Given the shift in mix on trucks and large SUVs, you'd expect our ASP to go up a little bit.

Given the tick-up in 0 to 4s, that would be another factor that would cause ASPs to go up.

But I'll tell you, they're being offset by the acquisition prices that we're paying.

And what I would tell you is I think this speaks to the execution that the stores are doing and the great job that our buyers do, making sure that we're getting the best-priced vehicles.

And really, at the end of the day, that's really where it starts.

You got to buy the vehicles at the right price.

So lower acquisition price is more than offsetting the increase that you normally would see from the mix shift.

Got it, great.

So it's just an execution point there.

Just on a follow-up.

Can you kind of update on where you are in terms of online financing, where you are in that process and how you might be kind of progressing towards somebody having the ability to complete the entire transaction online in a very fast manner?

Yes.

So on the online financing, like I talked about earlier, it's been in place for 2 full quarters.

We're excited about the response from the customers.

They are engaging with it.

It's -- like I said, it's generating incremental leads.

I think our task at this point is to continue to make that product and that experience, continue to optimize that and make sure that we're tailoring it specifically for different customers.

So we'll continue to do that.

We'll continue to look at advertising it more nationally.

Right now, you hit it if you go to our website.

And like I talked about with the home delivery earlier, this is one component of home delivery.

And we do think -- I personally believe that consumers want to do more of the transaction online.

And to the point that we can make that as easy as possible, speed up the transaction when they come into the store, it's a that much quicker transaction, then that's a good thing for the customer.

As far as being able to do it all online, that's our home delivery test.

We've got that in a market right now.

We'll continue to improve that experience.

Are you expecting to bring that functionality to the wider online financing capability?

Well, the online financing capability is already a part of the home delivery.

As far as are we planning on expanding home delivery, that -- we're evaluating different options right now.

Your next question comes from the line of Seth Basham with Wedbush Securities.

My question is around traffic.

You talked about flat in-store traffic, but you saw a nice acceleration in website traffic, up 9% in the quarter.

That's a big improvement.

Can you talk about what's driving that, whether it's sustainable?

And as a related question, can you quantify the increase in leads that you're seeing?

Yes.

So on the traffic piece -- remember, I've talked about this in previous calls.

I think from a traffic standpoint, we have to get away from thinking about just store traffic, and we need to be thinking about store traffic and web traffic and web leads.

It's a more holistic view because what we're going after here are comps.

And whether we get the comps because people are coming through the door initially or if they're starting with us online, I think both are equally important.

But if store traffic is flat but we're getting more qualified folks in the door, that converts to more sales.

So as far as the uptick in the traffic, we're starting to cycle the new website.

So we can actually have apples-to-apples comparison, where you're comparing against the same website a year ago, which, prior to that, the water's a little bit muddy.

So we're pleased with the 9%.

But I would tell you, we're equally pleased with the growth that we have in leads.

And that's been a big focus for us because leads are something that we can execute on.

So that's been growing rapidly as well.

So that's -- we're equally pleased with that.

And then what was the other question you had?

It was just that, in terms of leads, can you qualify that increase in leads you're seeing?

Even just a range.

How much higher than the increased website traffic?

Yes.

So on the leads, we're seeing double-digit increases, and we've seen that for a period of time now.

Your next question comes from the line of Rick Nelson with Stephens.

(inaudible) CAF originations, that was kind of 7.8% this quarter, 7.4% last quarter, 7.5% a year ago.

Is this due to the originations shifting down in the credit spectrum?

Or are you, in fact, getting improved pricing on loans of similar quality?

Rick, as we mentioned last quarter, I think -- I don't know if it was in the prepared remarks or in a question, but we talked about pretty much raising rates 50 basis points across the board last quarter, and so you're going to -- it's a result of that.

And it's a result of the mix of this coming through the door.

But we're definitely -- we've definitely increased our rates.

And we'll continue to watch the market.

We'll continue to watch funding costs.

We look at it every week.

And we'll continue to test as we see changes in that to try and preserve the margin.

And we'll do whatever the market will allow us to do, as I've said many times before.

Your next question comes from the line of Bill Armstrong with CL King & Associates.

Just as a follow-up to that.

So your declines in your net interest margin have been slowing down, and it looks like it actually increased slightly on a sequential basis.

Is that mostly a result of these higher rates that you're now charging to consumers?

Or how should we think about that going forward?

Is that net interest margin something that may be starting to stabilize now?

I think what you'll need to do is you take a look at our public securitizations and you can see what's actually happening in those deals on a go-forward basis.

And then I'd let you to draw your own conclusions about what will happen going forward.

As far as the impact of recent changes, the net interest margin on the portfolio is on the entire portfolio, and so the newer originations are only a subset of that.

It's a result of a lot of different things.

There's things paying down.

There's the new stuff going in, and there's losses and expenses as well.

But I think you're right in observing that it's been relatively consistent for the past few quarters.

Your next question comes from the line of David Whiston with Morningstar.

Just a question on your relationship with the new vehicle market.

And given your really nice comps this quarter, is it fair to say that excessive discounting on the new side from franchise dealers is not hurting your traffic?

I think when you think about the new vehicles and the SAAR rate, I think there's a lot of -- there's times when we're going to track either up or down.

But I think it's more in regards to the extreme.

So if you see a big decrease in SAAR, a rapid decrease in SAAR or a rapid increase in the new car sales rate, you'll see, directionally, how that may impact us.

By think if you see a more stable SAAR, some -- or even a slightly declining SAAR, I think we've proven over time through performance that we've been able to successfully navigate those waters and have had some very good quarters in the past.

So as far as specifically with what we're seeing in leases, I mean, obviously, last quarter, 8% comp; this quarter, 8% comp; total sales, more than 14%, it doesn't seem like leasing is having a big impact -- or the incentives.

Your next question comes from the line of Adam Jonas with Morgan Stanley.

Just one question and one follow-up.

First, for your sales that involve used car trade-ins, can you tell us what percentage of these trade-ins might be upside down on their loans and kind of how that looks versus history in your trend?

Yes.

I think it's pretty similar.

We haven't seen a big -- really haven't seen any real increase in negative equity for CAF, what we've been financing.

So it's been pretty much -- it's been very stable in the loan-to-value.

In our portfolio and what we're financing, which is what we...

Okay.

But you don't disclose the percent -- percentage?

It's in the Q.

It's -- I believe it's in the Q. It's in the Q.

Okay.

All right, a follow-up then.

Many auto companies and suppliers are arguing that the car is undergoing unprecedented technological change in terms of -- especially in terms of safety.

And I understand, historically, there's no discernible link between tech and used prices historically.

But I was wondering, the management team's position, Bill and Tom, do you think that this time could be different given the pace of the change and to prepare for that?

Yes.

I think there have been a lot of technology improvements.

I think that they've been feathered in over a period of time.

And you're right, we're seeing more technology changes more rapidly.

But I mean, if you think about things like lane departure and parking assist, these things are all being feathered in.

I can't see where all of a sudden there's going to be a whole bunch of new things dropped on at one time that would cause the existing used car market to dramatically decline.

I just -- I don't see that happening.

I think it'll be a continued feathered in as technology continues to improve.

Your next question comes from the line of Chris Bottiglieri with Wolfe Research.

Just had a quick one.

You had pulled out some kind of impact from the tax refund delay on used and wholesale.

I realize this is air math, but is there any way you can maybe somewhat qualify for us the impact on both those segments?

Yes.

I think you called it air math.

I think that's pretty good.

No, we can't quantify specifically.

But what I'll tell you, and I talked about this in the earlier remarks, there's a lot of factors, I think, that are causing our performance.

And I think that's just one factor.

I don't think any one of all the factors, whether it be execution, improvements on the customer experience, whether it be delays in the tax refunds, I don't think -- I don't believe any one of them is the majority of the reason.

And I think that it's just one that we cited, but I'd also tell you there's lots of other good things that are going on here.

And there's also other things like pricing and sales inventory availability as well.

And again, I would just -- if you think about fourth quarter, over 8% comps.

This quarter, over 8% comps.

So I -- we're pleased with both quarters regardless of where the tax refunds fell.

Makes sense.

Do you think it's more than 2%?

Or is it kind of like somewhere in that ballpark, if you were to guess?

I just got -- I can't really do that air math.

Okay, that's fair.

And then just one follow-up related.

Does this affect wholesale gross profit per unit?

You kind of -- maybe explain to us what are the drivers of the wholesale GPU per unit?

Are there -- is that a true merged profit per unit?

Or there are some kind of fixed costs within that?

Yes.

The reason I cited it as wholesale GPU is because as refunds coming to folks' pockets, especially in the business at the wholesale, where it's the cheaper car, older car, more mileage-y car.

Those customers, when they get those refunds, they come out in the market.

When they come out in the market, it drives the prices up.

So that's why we cited it as a factor because it was a little bit of a reversal of trends that we've seen lately, especially citing the -- we still have the dynamic of 7- to 9 year-old vehicles -- the lack of 7- to 9-year-old vehicles, and that's a headwind, both from a unit standpoint and a margin standpoint.

But I think having some tax refunds that weren't received until the first quarter, it has an impact because it puts those folks in the market, which drives up demand, which drives up prices somewhat.

Got you.

So that wholesale GPU is just pure -- it's pure demand and supply?

There's no, like, leveraging the back lot, like it's embedded in that gross profit per unit?

Or anything like that, it's not volume related?

No.

I mean, you could -- we could absolutely drive gross -- wholesale gross profit per unit, we could drive it up.

But what that would mean is you'd have to offer less for the vehicles that were being traded in.

And one, we want to make sure we provide great customer experience.

We want to make sure we're putting our best foot forward, giving the customer the most amount of money that we can for their trades because we also know that trades are linked into sales.

So could we drive GPU higher?

Absolutely, but it would be at the cost of 5%.

You do have a follow-up question from the line of Scot Ciccarelli with RBC Capital Markets.

So another question, actually, on your web traffic increases.

Can you give us a better idea of how much of that web traffic is from people going directly to the CarMax site and then how much is coming from search leads?

And then secondarily, is there a way for you guys to kind of tell how much is coming through paid search and how much is coming through natural search?

Because I think you guys have been working on trying to drive both, if I'm not mistaken.

Yes.

So first of all, Scot, thank you for following the rules and getting back in line for asking the second question.

No, you're right.

We have been focusing.

Our big focus has been on search engine optimization and specifically nonbrand.

So keep in mind, search engine optimization is the one that we're not paying for.

It's organically grown.

And nonbrand would be anything that's non-CarMax.

So the customer types in Honda Accord versus CarMax Honda.

We've been actively working on that SEO nonbrand.

It started back last, I guess, last May with the new website.

That was an important first step.

We've been adding content the consumers want and expect.

This helps the search engines see, okay, that we've got content that's important.

Most recently, we have continued to optimize these pages.

We've continued to work on our website so that search engines like Google can find our pages.

We've put strategic little links that enable Google to find things that customers want to see on our website.

And then we've also redesigned the pages so that Google could see all the content, which we think is really important.

And we continue to add new pages of relevant data, new pages.

So for example, we've had Ford 150.

Google can see that we have a Ford 150 page.

We've continued to add more pages -- more specific pages.

So let's say Ford 150 Raptor.

So we will continue this work.

We're very pleased with the SEO.

I think if you go back, we kind of used June as the baseline.

If you use June as the baseline, our SEO traffic on a daily basis has tripled since June.

So we're very pleased with that.

And then the direct traffic, which is like CarMax -- if somebody types in something CarMax or carmax.com, that -- we've also seen increases in that as well.

But we've historically done well with that already.

You do have a follow-up question from the line of Mike Levin with Deutsche Bank.

Just wanted to clarify one earlier comment first.

It's -- kind of attributed part of the SG&A increase to higher variable spending to drive comp growth.

Just wanted to make sure that that's just the normal kind of incremental spend and not that variable cost of driving incremental comp growth is getting more expensive.

No, no, no.

That's just the normal.

As the units go up, obviously, the sales consultants, they're paid a flat fee the more units you have.

So that's just the normal variable spend increase that we would see.

It's not like we changed that dollar amount or anything on a per unit basis.

Got it.

And then with regard to the home delivery test, I know you'd sort of structured it originally as you were basically completing the transaction at the customers' home and not fully purchasing it online, which introduced some problems with certain state regulations.

Are you looking to try and shift that as the customer fully purchasing it online before it's delivered as opposed to finishing at the customer's home?

No.

I mean, we're still finishing at the customer's home for those customers that are interested in it.

Again, we think that's a -- being able to take the vehicle to their home and having the customer be able to test drive it before they actually purchase it, we think, is the right thing to do.

If we are going to continue to deliver it to home.

And at this point, there is this small subset of customers that are interested in that.

But I go back to what I said earlier.

It's more -- the home delivery test is more than just delivering it to a customer's home.

It's the overall experience and it's all the functionality that goes with that.

I think that's really what customers are interested in.

Being able to do that online and then the seamless integration when they come into the store is really important.

And so when I think about home delivery, I think about all of that.

So it's not just about delivering it to the customer's home.

And I don't see us, at this point, making them do everything online and then bringing them the car already bought.

I think for the time being, we're going to continue to take it to them, let them just take it for test drive.

And if they decide not to buy it, then we take it back to the store.

Aren't there -- doesn't that kind of prevent you from putting it into wide distribution because of certain state regulations, though?

Yes.

There's absolutely some state concerns, different states' approach, both out-of-store vehicle sales and online sales differently.

And I think you have to be aware of what those regulations are.

And as it's written in some states, you can't legally do that.

So we're focused on that and make sure that we're going to play by the rules as appropriate.

There are currently no further questions in queue.

I will turn the call back over to the presenter for any closing remarks.

Thank you, Victoria.

Well, look, in closing, I want to thank you all for joining the call today.

I want to thank you for your continued support.

I also just want to highlight that our success is absolutely due to our associates, and I want to thank them.

They are the true differentiator of CarMax.

And they're driving what's possible every day for each other, for our customers and for our communities.

I want to thank all 24,000-plus associates for what they do, and I look forward to talking to everyone next quarter.

Thank you.

Again, thank you for your participation.

This concludes today's call.

You may now disconnect.