車美仕 (KMX) 2022 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter Fiscal Year 2022 CarMax Earnings Release Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, David Lowenstein, AVP, Investor Relations. Please go ahead.

Thank you, Jerome. Good morning. Thank you for joining our fiscal 2022 third quarter earnings conference call. I'm here today with Bill Nash, our President and CEO; Enrique Mayor-Mora, our Senior Vice President and CFO; and Jon Daniels, our Senior Vice President, CAF operations. Let me remind you, our statements today regarding the company's future business plans, prospects and financial performance are forward-looking statements we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements are based on 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 Form 8-K issued this morning and its annual report on Form 10-K for the fiscal year ended February 28, 2021, filed with the SEC.

Should you have any follow-up questions after the call, please feel free to contact our Investor Relations department at (804) 747-0422, extension 7865. Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow-ups. Bill?

Great. Thank you, David. Good morning, everyone, and thanks for joining us. We're very pleased with this quarter. We delivered record levels of used and wholesale sales as well as EPS for the third quarter. We also delivered all-time high margins in both used and wholesale.

For the third quarter of FY '22, our diversified business model delivered total sales of $8.5 billion, up 64% compared with the third quarter of FY '21, driven by both higher average selling prices and volume gains. Net earnings per diluted share was $1.63, up 15% from a year ago. Across our retail and wholesale channels, we sold approximately 415,000 cars in total, up 29% versus third quarter last year. For the first 9 months of FY '22, we sold approximately 1.3 million retail and wholesale cars combined as we set new records in each month.

We continue to be the largest buyer of vehicles from consumers. We bought approximately 383,000 cars from consumers in the third quarter, which is up 91% versus last year and, again, we achieved self-sufficiency above 70%.

Our customer-centric omnichannel strategy, solid execution and macro factors are driving performance across our company. In our retail business, total unit sales in the third quarter were up 16.9%, and used unit comps were up 15.8% versus the third quarter last year. We experienced robust demand as we ramped staffing levels and built inventory. CAF and our credit partners also supported our sales by continuing to deliver strong credit offers even as our average sales price grew by over 30% year-over-year.

We achieved sequential growth in saleable inventory each month within the quarter. While inventory and staffing remained below our targets, we are pleased with our momentum and are confident that we have access to the resources we need to build inventory ahead of tax season though retail demand will determine the pace. In addition to strong unit sales, we reported record retail gross profit per used unit of $2,235, up $84 per unit versus the third quarter last year. With used car prices at all-time highs, we chose to pass along the majority of our self-sufficiency-driven acquisition cost savings to consumers via lower prices. We believe we struck the right balance between increasing our margins and supporting our customers in a time of elevated industry prices.

Wholesale units were up 48.5% from the third quarter last year, and gross profit per unit achieved an all-time record of $1,131 compared with $906 a year ago. The strength in wholesale units was primarily driven by the ongoing success of our instant online appraisal offering. We also benefited from still elevated valuations of used autos in the broader market.

CarMax Auto Finance, or CAF, delivered income of $166 million, down from $176 million during the same period last year. CAF margins remained strong. Year-over-year financial results were impacted by a $68 million headwind in reserve adjustments. As a reminder, last year's quarter benefited from a reduced provision coming out of the pandemic, and this year's quarter reflects a more normalized provision.

CAF and our partner lenders delivered strong offers in all credit tiers. In a few moments, Jon will provide more detail on customer financing and CAF contributions as well as on the impact of the auto loan receivable systems conversion.

Right now, I'd like to turn it over to Enrique, who will provide more information on our third quarter financial performance. Enrique?

Thanks, Bill, and good morning, everyone. Total gross profit was $837 million, up 32% from last year's record third quarter. This was driven by wholesale vehicle margin of $212 million, which was up 85%, and used vehicle margin of $508 million, which was up 21% from last year's third quarter.

Other gross profit was $116 million, up 18% from last year's third quarter. Favorability in the quarter included $20 million of margin contribution from Edmunds. Other gross profit also benefited from a $12 million improvement in third-party finance fees with income of $1.6 million compared to a $10.6 million cost last year. This was driven by renegotiated third-party finance fees and lower Tier 3 volume compared with last year. Also positively impacting other gross profit, EPP was up $5 million or 4.8%. While penetration was stable at approximately 60%, this year's third quarter reflects a $6 million unfavorable return reserve adjustment compared to a $3 million favorable return reserve adjustment during the prior year's quarter.

Partially offsetting gross profit favorability, service was down $21 million from the prior year's quarter. This was driven by pressure primarily related to our efforts to grow technician staffing as well as a shift in some retail service capacity to instead support used car reconditioning. Service gross profit versus the prior year period improved in each month during the quarter, and we anticipate that results will continue to improve into the fourth quarter.

On the SG&A front, expenses for the third quarter increased to $576 million, up 34% from the prior year's quarter due to costs related to unit volume growth and continued investment in our strategic initiatives. SG&A as a percent of gross profit was roughly flat at 68.8% compared to 68.2% during the third quarter last year. The increase in SG&A dollars over last year was primarily driven by 3 main factors. First, a $100 million increase in total compensation and benefits, driven by a strong ramp in staffing, a $23 million increase in stock-based compensation, unit volume-related commissions and the inclusion of Edmunds' payroll this quarter versus a year ago.

Second, a $22 million increase in other overhead, which includes our receipt of a $23 million settlement from a class action lawsuit. The remainder of the change primarily reflects investments to advance our technology platforms and strategic initiatives and the impact of COVID-related cost savings in the prior year quarter. And third, a $17 million increase in advertising expense, as previously communicated, to drive customer acquisition and to amplify the CarMax brand by continuing to build awareness of our omnichannel offerings.

For the first 9 months of fiscal year '22, SG&A as a percent of gross profit was 66.1%, leveraging approximately 3 points over last year's 9-month percentage of 68.9%. We remain committed to ensuring that we are efficient and effective in our spend, and we expect that our targeted areas of focus will continue to deliver results over time. During the third quarter, from an efficiency and effectiveness perspective, we saw solid improvements in the service levels of our CECs and their conversion of web leads. This was despite the record level of volume that our CECs handled in the third quarter. This improvement was due to a combination of successful staffing ramps and ongoing utilization of our AI and machine learning processes that drive the right work to the right associates.

We also continue to see efficiency gains in our buying organization. The combination of our instant offer program, along with the investments we've made in data science, automation and AI, continue to materially drive down our costs per buy. From a capital structure perspective, we ended the quarter with an adjusted debt to capital ratio in the middle of our targeted range of 35% to 45%. During the quarter, we entered into a $700 million term loan agreement primarily to support the growth of our total inventory dollars. In regard to our share repurchase program, we remain committed to returning excess capital to shareholders and repurchased approximately 850,000 shares in the quarter for approximately $115 million.

Now I'd like to turn the call over to Jon.

Thanks, Enrique, and good morning, everyone. Once again, our finance business has delivered solid results. For the third quarter, CAF's penetration, net of 3-day payoffs, was 42.2% compared with 45.7% observed last year. Tier 2 increased to 22.2% of used unit sales compared with 19.5% last year. Tier 3 accounted for 6.5% of sales compared with 9.7% a year ago. The year-over-year change in CAF penetration was driven by a larger percentage of customers leveraging cash or outside financing for the purchase of their vehicle as well as CAF comping over a historically high penetration in Q3 of FY '21.

We continued to observe strong credit offers from our Tier 2 partners as they compete for additional volume within the CarMax channel. These offers, along with a decrease in application volume and the lower portion of the credit spectrum, contributed to the swap in volume between Tiers 2 and 3. CarMax continues to provide outstanding access to financing for our customers across the credit spectrum. Our approval rates this quarter remained over 95% despite financing amounts that are approximately 25% above the same period in 2020. This ability to maintain such a strong credit offering speaks to the value of our multi-lender credit platform supported by CAF and our long-term finance partners.

During this year's third quarter, on the strength of record used unit sales, CAF's net loans originated was nearly $2.4 billion. The weighted average contract rate charged to new customers was 8.3%, down from 8.6% a year ago and 8.5% in the second quarter. The difference in APR is primarily a result of the change in the credit mix of customers, along with rate testing that CAF executed within the quarter. CAF income for the quarter was $166 million, down $10 million from the same period last year. This included a more normalized loan loss provision of $76 million as compared to the significantly reduced provision of only $8 million in the same quarter last year that was driven by the continued reduction of the reserve that was established at the start of the COVID pandemic.

Almost fully offsetting the provision headwind was a year-over-year increase in total interest margin of $65 million or 7.2% of managed receivables. This year-over-year margin increase highlights the strength of our ABS program, the favorable state of the capital markets and our continued growth in receivables. The current quarter's provision of $76 million results in an ending reserve balance of $427 million or 2.75% of managed receivables. This is up from 2.66% at the end of the second quarter and includes a 6 basis point adjustment for the added Tier 2 and Tier 3 volume CAF is now originating. The adjustment was primarily driven by the implementation of our Tier 2 origination test. Remember, contribution from CAF originations is recognized over the life of the receivables, while the loss reserve is recognized at the time of origination. Note also that the core portion of the reserve allocated to Tier 1 loan losses remains well within our historical range of 2% to 2.5%.

During the third quarter, we transitioned from CAF's legacy auto loan receivable servicing systems to brand new systems. The new platform went live in October and included a period of planned downtime in a number of operational areas, including collections and customer service. This required pause in our business resulted in an increase in delinquencies and losses that we expect to normalize over the coming months as both our systems and processes stabilize. This had an immaterial impact to the loan loss provision on the quarter. Additionally, CAF absorbed roughly $5 million in deployment expense in the third quarter related to items such as temporary contractor support, proactive customer communication regarding the systems change and added staffing to handle the elevated call volume once back online.

We are extremely excited about this new platform that will not only provide CAF, a modernized foundation for growth and efficiency, but will also allow us to enhance our customer experience and self-service capabilities. I would like to take this opportunity to thank the CAF organization, along with the corresponding project teams who have worked so tirelessly to build them and implement such a transformative solution for both our associates and our customers.

Now I'll turn the call back over to Bill.

Thank you, Jon. Thank you, Enrique. This quarter continues this year's strong top line performance trend. We're benefiting from our investments and are excited about the opportunities that lie ahead. We provide the ability for customers to buy a car 100% in-store or 100% online, and our omnichannel capabilities allow our customers to personalize their experience with a mix of digital and physical interactions to meet their needs.

As our omnichannel and online sales continue to grow, we have observed that the vast majority of our customers who buy digitally still elect to take delivery in our stores. This is another proof point that our ability to offer seamless integration across digital and physical transaction is providing value to our customers and is a key differentiator for us.

In the third quarter, a little more than 9% of retail unit sales were online, up from the prior year's quarter of 5%. Our wholesale auctions remain virtual, so 100% of wholesale sales, which represents 23% of total revenue, are considered online transactions. Total revenue resulting from online transactions was approximately 30%. This is up from 20% in last year's third quarter. Approximately 57% of retail unit sales were omni sales this quarter, up from 49% in the prior year's quarters.

We've been focused on completing the rollout of our 100% self-service experience where customers, if they choose to, can independently complete the entire car buying process online. Currently, more than 2/3 of our customers have access to complete end-to-end unaided online experience, an increase from a little over 50% from our last call. This expansion reflects customers' ability to incorporate trade-ins without liens to their online orders. The remaining 2 use cases that we will be working through during the fourth quarter are paid transfers and trade-ins with liens.

In the third quarter, we bought approximately 194,000 vehicles from customers through our online instant appraisal, which represents about half of our total buys from customers. That's a new record, a 4% increase from our second quarter number and a 19% increase compared to the first quarter. This growth supports our belief that we remain the largest online buyer of used autos from consumers in the U.S.

We are continuously enhancing our e-commerce offerings to exceed customer expectations and to seamlessly integrate with our best-in-class store experience. In the third quarter, we continued to make progress on our online finance experience by expanding our finance-based shopping, or FBS, capability. FBS enables our customers to see personalized finance terms from multiple lenders across the full inventory of vehicles on our website, which is a key differentiator in the retail marketplace. Roughly 75% of our customers are able to enjoy this experience today. And going forward, we are working towards adding the remaining customers and integrating additional lenders to this experience. Additionally, during the fourth quarter, we will be launching a more sophisticated version of the tool and increasing the speed of digital decisions.

Again, we're proud of our strong results for this quarter and year-to-date. By delivering the most customer-centric experience in the industry, we will enable sustainable growth and create meaningful long-term shareholder value.

And with that, we'll be happy to take your questions. Jerome?

(Operator Instructions) Your first question comes from the line of Sharon Zackfia with William Blair.

Happy holidays. I guess a question on SG&A per car. I mean, it's been up kind of at a double-digit percentage rate over the last few quarters, and I know that's comparing against a year ago capacity restrictions and lesser investments in the business. But I'm curious what your line of sight is into kind of SG&A per car turning into more of a low single-digit percentage increase or even starting to leverage that in the future.

Sharon, happy holidays to you as well. And 3 quarters ago in our Analyst Day, we communicated kind of the new way that we were looking at SG&A that -- which is SG&A as a percent of gross margin or gross profit dollars as we believe that's much more reflective of how we actually run the business and more reflective of our efficiency because we are investing not only in our used car business, but we're investing in technology and platforms and resources to grow our wholesale business, which certainly we'd seen so far this year and certainly this quarter as well as our CAF business. So we're investing across the board. So if you take a look at SG&A as a percent of gross profit, that's kind of how we manage the business. And year-to-date, we've leveraged that by 300 basis points. And our intent is that we will leverage this year when it comes to SG&A, and our plan is to leverage that into the fourth quarter as well.

Okay. Great. And then a follow-up question on used car pricing. I mean there's a lot of debate amongst investors on how much companies such as yourself are benefiting from used car prices. So is there any way to disaggregate what you think the benefit is, particularly maybe in wholesale GPU from prices as opposed to the initiatives that you've done that have increased the appraisal volume in general from the online arena?

Yes, Sharon. When I think about used car prices, it's -- on one side, it's a bit of a headwind, on another side, it's a bit of a tailwind. I think you've hit the area where I think it's more of a tailwind, which is wholesale. So any time used price valuation goes up, that's a good thing for organizations that are buying cars and certainly is a good thing for us. As I think about the wholesale growth or just our growth in self-sufficiency in totality, I would still go back to that we believe that the majority of that growth is really a result of some of the innovations, things like instant appraisal or the instant offer that we have on -- for appraisals. I think that's driving the majority of the growth because even if I go back to the first quarter where we didn't see -- it was prior to kind of this continued ramp-up in valuations, we saw a huge increase in wholesale and just overall buys. So while it is hard, to your point, to disaggregate the 2, I think we believe that the majority of the increase is driven by things that we're doing internally.

Your next question comes from Rick Nelson with Stephens.

Nice quarter. I'd like to follow up on the online penetration. It was 9%, up from 5% a year ago, but yet that stayed stable sequentially. Any thoughts on why we didn't see that grow sequentially?

Yes, it was up a little bit. But you're right, it was fairly a small increase from the last quarter. And as I think about it, one of the reasons that we got our self-progression up to about 2/3 was because we added some functionality to the trades that don't have liens. And we added that more to the latter part of the quarter last year. And I think the -- what we're really seeing is we're giving customers options to do different things.

So while they may think, okay, I'm going to do an online sale, as I said in my opening remarks, some people are still -- they're coming in and wanting to deliver in the store. They want to do a couple of things in the store. So I think a big driver is just options. We give consumers options. And so they may think they're going to do one thing and they actually take a different path, which -- that's what we're all about. We don't care which way a consumer wants to buy or how they want it delivered. We just want to make sure that we're giving them the most personalized experience. I'd expect to see this percent continue to go up. But again, it's going to be more driven by the customers' behaviors than us forcing anybody to go one way or the other.

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

Happy holidays. My question has to do with affordability. With your ASPs up over $6,000 to more than $28,000, are you seeing the high prices crowd out any segment of your customer base, especially among your less affluent consumers?

Yes. So Craig, I think it goes back to a little bit of Sharon's question where I said we've got some headwinds, and we've got some tailwinds. When you think about ASPs, the tailwind is more on the wholesale. The headwind -- I think there is a little bit of a headwind on the retail side. While you're benefiting from less new cars that are out there, so you're probably getting some new car customers that are looking for a higher selection, the fact that the price is up, I think that does pinch some consumers out, especially at the lower end of the credit spectrum. It could make it more difficult for them. This is also the reason why we stay very focused on trying to make sure we can continue to pass along efficiencies to customers just to make sure that we can give them as good a deal as possible, which again is why we took a lot of our self-sufficiency gains and put it through in prices.

Yes, Craig, and I'll just accentuate that comment I made in my prepared remarks. I think this makes us feel all the more better given the ASPs on our 95%-plus approval rate on those that did come through the door and our lending platform and our lenders down in that space still able to provide strong quality offers. So certainly recognize it as it can be a challenge down there, but we feel like we have the credit to provide those customers.

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

This is Aileen Smith on for John. I wanted to ask a question and circle back to one of the targets that you provided at your Analyst Day back in May, which was to sell 2 million vehicles per year by 2026 across the retail and wholesale channels. At the time, your volume levels were closer to the 1.2 range, but based on where 4Q lands, you're probably going to be close to 1.6, 1.7 for this year, which is impressive. So first question, relative to when you provided that outlook 6 months ago, what segment of the business has been performing perhaps better than expectations, retail or wholesale? And second, what factors would you attribute to this more so increasing inventory through sourcing efforts or making progress with your customers on omnichannel or other offerings?

Yes. So I mean, the way I think about it is, we've been pleasantly surprised by some of our innovations. We expected to increase sales, both wholesale and retail and -- which is why we set the goal out there. Obviously, wholesale has been very strong, but so is retail. Top line retail has been strong as well. So we're very pleased, and I think it's a little too early. We just put those targets out there not that long ago, but we'll be reviewing those targets probably later on in the year after the year-end and potentially updating. But I think it's a little early at this point.

Yes, I would agree with that. And I think we've said on our previous calls, we have -- our performance in our instant offer has really exceeded our expectations. We put that product out really in the first quarter, and it just -- it has taken off. It's resonated with our consumers. It's resonated with the marketplace, and that has really driven a good part of our business through self-sufficiency but also driving wholesale business as well. So that has exceeded our expectations. And it's gotten -- our instant offer program has gotten stronger every single quarter. So second quarter was stronger than the first. Third quarter was stronger than the second. So that seems to be building momentum out there in the marketplace.

Your next question comes from the line of Rajat Gupta with JPMorgan.

I just wanted to follow up just with the labor and capacity situation today. How comfortable are you with the pace of hiring and the level of staffing that you have at your stores just to serve the demand that is to come in the near to medium term? And I have a follow-up.

Yes. We feel -- like I said in my prepared remarks, we feel great about the momentum, both in inventory and staffing. If I look at staffing, just for the quarter, we hired more than 2,000 associates and, obviously, the majority of those are in the field and the customer experience centers. So we're on a good trend there. We're a little light of where we'd like to be. And also this is the time of the year where we start to ramp up for the traditional tax season. But we feel great about that. We also feel great about our ability to produce cars. As I said earlier, we're sequentially building every single month, and we've continued that trend early into this fourth quarter. We're very confident that we can get both to where we need, that we've got the resources and the wherewithal to take care of both.

Got it. That's helpful. And just kind of a follow-up on CAF. You've increased your Tier 2, Tier 3 mix within that -- within CAF over the last few quarters. And if I compare to 2 years ago, it looks like your third-party Tier 2 mix is also higher, whereas you've also increased the Tier 2 mix within CAF. So just curious as to what's changing in your overall customer base in general? Is there a more permanent shift taking towards even the Tier 2, Tier 3 mix? Or is this just more a onetime thing? I'm just curious how that's going to change and how that impacts the business?

Yes, I appreciate the question. Yes. So within the Tier 2 percentage, obviously, you saw that, that went up within the quarter. A couple of things going on there, penetration or the amount of sales that a tier or a lender will take is certainly a function of those that are applying for credit. We did mention that there was less volume down in the lower kind of subprime space. So that will take volume from Tier 3. But I think also very important of note is the credit offers from our Tier 2 lenders has been spectacular, and they're probably pulling some volume up out of Tier 3, which is positive, obviously, from a participation standpoint. So that's strong. Obviously, you did recognize that CAF is in the Tier 2 space as well. So we're taking some volume there. But I think the combination of the credit quality that are applying and then the Tier 2 strength of offers is what's changing in the Tier 2 and Tier 3 space.

And your next question comes from the line of Brian Nagel with Oppenheimer.

Nice quarter. Congratulations. So the question I want to ask, probably a bit of a follow-up to some of the prior questions. But look, there was definitely a nice acceleration in the used car business from fiscal Q2 to fiscal Q3. Bill, you talked in your prepared comments about -- in some of the response to the questions about the inventory, maybe the inventory constraints lighting up. But I guess, my question is, how should we really think about this acceleration? I mean what are -- what were the key factors behind it? And was it more supply, more demand driven? And then I recognize that you don't give guidance. How should we consider maybe the sustainability of what we're seeing in the business, at least as of the end of Q3?

Yes. So Brian, thank you for the question. First of all, I've got to give a shout out to the team because they've done just a phenomenal job from an execution standpoint, taking advantage of the opportunities. Like I did say, I think the fact that we have been light in inventory, especially in the second quarter and how we've continued to work through that, I think that's a big factor.

I think the staffing is another big factor because we're understaffed in the stores and our customer experience centers. We continue to make enhancements on our omnichannel experience. If I think about just year-over-year, online and omnichannel, this year was roughly, let's call it, 66% of sales. A year ago, it was 53% of the sales. I think passing along efficiencies in pricing, last quarter was really the first quarter that we had seen self-sufficiency above 70%, and we saw that continue through this quarter and being able to pass those savings along, I think, were also a good thing.

So I think there's a lot that's playing into it, and it's really hard to say, okay, well, this piece of it or that piece. We felt great about the quarter. It was strong every month in the quarter. And you're right, we don't give guidance, but I'll tell you, we're pleased with the start of the fourth quarter.

Perfect. Then so if I could follow up to that. As we think about the business, what constraints are still in place? Is it inventory, labor or other things? I mean -- and then how should we think about those constraints abating, again, just over the next, say, few months or whatever?

Yes. I think labor -- I think labor is one that we'll continue to focus on. While we've made great progress, we want to hire some more folks there, and that's pretty much across the whole organization. So I think that's another one that we're continuing to focus on and making great progress as well as inventory. We'll continue to build out inventory. But like I said earlier, I think we have the resources, and we're on the right path to make sure that we'll be able to get our inventory to where it needs to be in time for any type of tax time sales. And I'll tell you, the other thing is if I look over the next year, we're also -- as part of our planned growth, we have roughly, let's call it, 10 new production centers opening up. Some of them are part of geo, some of them are part of expansion plans that we'd already started. So we've got the resources we need, and we're on a good trajectory, but those are our, I think, shorter-term focuses for us, certainly.

Brian, what I would add to that is between the improvements in staffing and certainly the physical capacity that we have today and moving forward, what I'd tell you is that we have a strong belief that we are operationally strong and ready for growth. So we are well positioned.

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

My first question is regarding the self-sufficiency ratio, which was again up over 70% this quarter, second time in a row. But this quarter, we saw your retail unit comps really accelerate and your GPU be much stronger year-over-year than last quarter. Can you help us understand the dynamics that are driving those big changes from one quarter to the next?

Yes. So I think I spoke a little bit about the comps and all the factors that kind of drove that in there. I mean, obviously, self-sufficiency is at a high for a second -- the entire second quarter. We were able to pass those efficiencies along. And like I said in my prepared remarks, what we're trying to do is walk a fine balance here. We know prices are up 30% for us. We know that puts pressure for some customers. So we're really trying to make the vehicles as affordable as possible. We'll continue this quarter -- just like we did last quarter, we'll continue to look at inventory levels, test elasticity, check competitors' inventory. So there's a lot of things that go into this. But I do think we struck the right balance, both from a margin standpoint kind of coming in historically high. If you look at recent margin ranges for the last few years, I think we came in high on that. But still we're able to pass along some great efficiencies to the consumers.

Right. Just to follow up. Last quarter, we didn't see as much improvement in GPU or comp. Is the delta between last quarter and this quarter, therefore, due to market forces, such as the difference between market retail and wholesale prices? Or is there something else?

Well, I think this is -- last quarter was the first time we had really achieved self-sufficiency over 70%. And what we did realize last quarter, we pretty much were passing along. What I would tell you is if you look at the market, and we don't talk about market share until the end of the year because there's definitely a lag and you have to look at it on a calendar year basis due to that lag. But some of the external sources that are out there that will tell you the used car just overall market is either flat or maybe even negative in the last few months. And we think that bodes well for the gains that we're starting to see.

So I think what you're really seeing here is you're just seeing a combination of a whole bunch of things that are really kind of came to fruition like I talked about all the different things for comp. I think what you're starting see is there's just a lot of factors that really played in on the third quarter results.

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

Congrats on the quarter. Just wanted to clarify one thing and then I had a question on provisioning. But from a clarification standpoint, into the fourth quarter, Enrique, I just wanted to make sure I heard you correctly that you all would look to potentially lever the SG&A to gross ratio in the fourth quarter. Just wanted to clarify that first of all, and then I had a follow-up.

Yes. No, that's what I said. Our intent is to lever into the fourth quarter.

Okay. Great. And then the follow-up I had was just from a provisioning standpoint. Just wanted to understand, moving forward, how you all are thinking about basically that line item within CAF because, obviously, you've got potential for further improvements in unemployment rate and stubbornly high kind of used car prices, which theoretically should help you out. But then there's obviously more Tier 2 that you're doing and so forth. So now that the reserve has been kind of built up again a little bit, should we think $75 million a quarter more or less? Or any color you can provide there would help a lot?

Yes. Great question, Michael. Yes, if we think about the combination of the reserve and the provision, exactly as you stated, our reserve right now metrically uses the 2.75% reserve to receivables. Remember in there is, as you stated, Tier 1, but also Tier 2, Tier 3 volume and then some expense for recovery there. If you back out that Tier 1, as I mentioned, we feel like we're hitting our normal range of 2% to 2.5% for that Tier 1 business. Also, if you look at what we originated in the quarter, $2.4 billion, again, recognizing that there's Tier 1, a higher loss of Tier 2 and Tier 3 in that originations as well as the recovery expense. But $76 million feels very much close to normal for that size of origination.

So I think you're right on the mark here. It's something -- we feel like we're at a normal percentage from a loss rate perspective, but I would think about that going forward. And one thing I'll point out as a reminder, again, the provision was substantial at the height of the pandemic. $122 million done back in quarter 1 of FY '21. And as we saw performance improve, really fantastic performance from our consumers, we were able to reduce that provision over time. So the fact that we comped over last year's quarter 3 is fantastic. So I realize we've still got that comping to do. But yes, agree, we're in a normal environment right now.

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

Happy holidays. So I would love to know how online looks on GPU versus the $2,235. Is it higher or lower than that? And as a follow-up, you mentioned the vast majority of your customers still prefer pick up in store within the omni -- sorry, within the online label. I'm curious if you can tell us how many or what portion of the 9% did opt for home delivery?

Okay. So on your first question, online GPU, it's the same as in the in-store. It doesn't matter if you bought online or in store. The GPU is relatively the same. As far as the 9% online sales, the way we think about it is we speak to it more alternative delivery, which is -- includes home delivery as well as express pickup. And when I think about that, that percent of just total sales, obviously, is less than 10%, with the bulk of it being more express pickups, where the customers come into the store, they've already filled out everything and maybe 1 or 2 little things to do, but we get them in and out and about very quickly. So that's the bigger share versus the home delivery.

Yes. I just didn't know if you want to specify that. You did say vast majority, I just didn't know if it was 90% of the 9% or 70% of the 9%. Just...

You mean for the GPU and home delivery?

For home delivery.

It's a much smaller percent of that.

Your next question comes from the line of Chris Bottiglieri with BNP Paribas.

Just had a quick follow-up on the credit and then I have another credit question. So the first one, it sounds like in response to Mike's question -- Mike Montani's question earlier, there was no impact -- I mean the systems impact -- you seemed to imply there is some kind of impact on gross losses recovery, but then said like it wasn't having any provision. I'm just trying to triangulate those 2. Like was there any impact on gross losses recovery this quarter? Or is it more like just on the overhead expense?

Yes. Fair question, Chris. Yes, as I stated in my prepared remarks, big systems change a lot of -- a fair amount of disruption that we are fully expecting and plan for. But as we've come online and caught up with the volumes, we've seen those delinquencies trend down to more normal levels. But absolutely no impact or we believe it's immaterial on the full lifetime loss of the portfolio. And so that's, obviously, nothing in there in the provision and the corresponding reserve. So...

Yes. Just to add on that, Chris. We did -- it was immaterial last quarter in anticipation of it, and it was immaterial again this quarter.

Got you. That's helpful. Okay. And then just bigger picture question. Can you elaborate more on the lower rates on new loans this quarter compared to last quarter? And you mentioned kind of rate testing. Your peer made a -- a large online peer made a similar comment last quarter. Just timing feels a little bit unusual to be experimented with cutting rates when we're actually seeing the inverse happening where the market is raising rates now in terms of the tier rates. So I guess first question is, with that backdrop, have you found customers historically become more rate sensitive when rates rise? And is that the motivation for testing? And then just using some kind of historical precedent, how should we think about the impact on rates to customers in periods where funding costs go up? Like how big of a lag is there between passing those rate increases through?

Yes. Great questions, Chris. Yes, as I mentioned in the prepared remarks, yes, we did execute some rate testing this quarter. It's what we do. We're always trying to keep an eye on what the market is doing. We can look at a number of metrics internally, again, our capture rate or our booking rate, which results in our penetration, 3-day payoffs, a number of metrics we can keep an eye on. But most importantly for CAF is, as the sole Tier 1 lender, we want to be highly competitive for our customers, provide the best possible offer as we can. So it made sense. We just wanted to get the pulse of the market. We did some rate testing, and we're watching that very carefully. As you mentioned, certainly, the Fed did come out and signal that there's going to be rate increases in the future. Again, we will manage that as we always do. We'll look at what the peers do, how the market reacts often in a rising rate environment.

To your point, you will see a lag there. It won't get passed along to the customer right away. We're not looking to get out in front of that. We'll, one, again, remain highly competitive in our rates, and we will test. We will test as we always do, accordingly. We will watch how the market is moving, what those take rates are. And then if it makes sense to pass along to the customers, we will. But if it impacts sales to cars or the experience or our CAF's capture rate, then we may not. So the testing will drive what we do.

Yes. And I think the great thing about CAF, Chris, is that they're not just focused on maximizing their own profit. The beauty is they're working on profit, but they're also working to help maximize sales. So our decisions may sometimes vary from other players that are just purely in the finance arena.

Your next question comes from the line of David Bellinger with Wolfe Research.

I want to ask on the nearly 200,000 vehicles sourced from consumers through the instant appraisal. Can we get a sense of just how many offers you're making each quarter? Is the conversion rate improving sequentially? And given all the data you're now armed with in deploying more effectively, are you seeing better engagement or even repeat activity from past customers?

Yes. So David, on the online offers, as you can imagine, we make a lot of online offers. Some of the customers are just really shopping for their value, and they're not really interested in selling or even buying a car. So we're making a couple of million offers a year. As I think about the conversion of those, really, the way we've talked about it in the past is if the customers show up at our store, they are to get their vehicle appraised, whether they haven't had it appraised online or whether they have had it appraised online. We look at the buy rate from that standpoint. So if I look at the traditional appraisal lane, where a customer hasn't had it appraised online, we're really seeing mid-30 buy rate, which is great.

On the online side, as you can imagine, they've already had their vehicle valued online and they're showing up at the store, then that certainly is going to be a higher buy rate. So it pulls the overall buy rate up. But I think it's -- I don't think we should look at it necessarily as of the ones that have offers, how many of them actually sold. We do see some good improvement there, but that's not really how we think about the business.

Got it. And is there anything on the repeat activity? Or do you see more engagement from past customers in terms of the instant appraisal?

You know what, David, I'd have to go back and look and see how many of them are customers that have had them appraised prior. I don't have that number off the top of my head.

(Operator Instructions) Your next question comes from the line of David Whiston with Morningstar.

I'm curious if you don't mind looking forward ahead into the future a bit. I'm just curious what your thoughts are on as the chip shortage improves, a new vehicle inventory over, say, the next 18 months, will that cause used pricing to crash kind of hard and abruptly? Or do you see a soft landing? And if you see a harder landing, are you worried about your customers perhaps having too much negative equity that they may stay out of the store or stay out of the market in '23?

Yes. It's a tough question to really gauge when I think the chip shortage will kind of correct itself. I mean whatever I tell you is probably going to be wrong. What I believe will be -- we'll start to see some relief maybe latter part of next year. I think it's not going to be like a faucet that just automatically turns on overnight. So as more chips are available and more new cars are available, you'll start to see the impact on used vehicle prices. I think any time sales prices are up 30% year-over-year, I think there is a risk that down the road, there could be some more negative equity out there. But I can tell you, we've been in this business a long time. We've been through a lot of cycles up and down, and we've proven that we can work through any such factors, whether it be negative equity, whether it be depreciation in the marketplace. And I would actually tell you, I think we are able to handle that and do a much better job than anybody else just given our experience. So stay tuned. It's hard to know when we'll get some relief on just overall used car prices.

And just one other thing on the previous David's question, one on the IO, the team here informed me I misspoke. It's actually -- I think what I said was a couple of million [dollars] (sic) [offers] a year. It's actually a couple of million per quarter. I misspoke. I meant to say quarter versus year. So I just wanted to clarify that for him as well.

Okay. And you talked about mitigating negative equity. Is it possible that CAF can be more aggressive in a negative equity situation?

Yes. I mean I don't think that we're going to necessarily adjust our underwriting given a particular situation of where ASPs are and negative equity and all that. Again, all in all, being the captive lender, a great environment to always think about sales and capture that in our decisions. But again, we want to underwrite a strong credit customer. If we're going to the ABS market, we need a solid book of business. So I just think we are very focused on delivering sales and credit quality.

Yes. And we deal with negative equity customers all the time and the CAF team does a phenomenal job there, just like our third-party lenders do.

And we don't have any further questions at this time. I'll hand the call back to Bill for any closing remarks.

Great. Thank you. Well, thank you all for joining the call today and your questions and your support. As I said earlier, we're really excited about the opportunities in front of us. And as I always do, I want to thank all of our associates for everything that they do, how they take care of each other and our customers. They are really the reason for our success and why we remain such a positive disruptive force in the used car industry. So I wish all of our associates and all of you a happy holiday season, and we'll talk again next quarter. Thank you for your time.

Thank you. Ladies and gentlemen, that concludes Third Quarter Fiscal Year 2022 CarMax Earnings Release Conference Call. You may now disconnect.