CarMax, Inc. (NYSE:KMX) Q3 2024 Earnings Call Transcript

CarMax, Inc. (NYSE:KMX) Q3 2024 Earnings Call Transcript December 21, 2023

CarMax, Inc. beats earnings expectations. Reported EPS is $0.52, expectations were $0.43. KMX isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Q3 Fiscal Year 2024 CarMax Earnings Release Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, David Lowenstein, AVP, Investor Relations. Please go ahead.

David Lowenstein: Thank you, Jamie. Good morning, everyone. Thank you for joining our fiscal 2024 third quarter earnings conference call. I’m here today with Bill Nash, our President and CEO; Enrique Mayor-Mora, our Executive Vice President and CFO; and Jon Daniels, our Senior Vice President, CarMax Auto Finance operations. Let me remind you our statements today that are not statements of historical fact, including statements 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 our current knowledge, expectations and assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially from our expectations.

In providing projections and other forward-looking statements, we disclaim any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our Form 8-K filed with the SEC this morning and our annual report on Form 10-K for the fiscal year ended February 28, 2023, previously 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?

Bill Nash: Great. Thank you, David. Good morning, everyone, and thanks for joining us. Our third quarter results reflect the continuation of our strategy that has yielded sequential year-over-year improvements across key components of our business for four straight quarters. While affordability of used car remains a challenge for consumers, we’re excited about the positive impact we are seeing from our omnichannel investments, which reinforces our strong belief that we are well positioned for the future. This quarter, we delivered strong retail and wholesale GPUs. We bought more vehicles from consumers and dealers, and we also sold more wholesale units than a year ago. We further reduced SG&A from the prior year. We continued to strengthen the credit mix within NCAP’s receivables portfolio, which had a positive impact on our loan loss provision, and we resumed our share repurchase program.

For the third quarter of FY ’24, our diversified business model delivered total sales of $6.1 billion, down 5% compared to last year. This was driven by lower retail and wholesale prices and lower retail volume partially offset by higher wholesale volume. In our retail business, total unit sales declined 2.9% and used unit comps were down 4.1%. Average selling price declined approximately $1,300 per unit or 5% year-over-year. Third quarter retail gross profit per used unit was $2,277, relatively consistent with $2,237 from last year. For the fourth quarter, our expectation is that our margin — our per unit margin will be lower than last year’s fourth quarter record margin. We continue to expect that per unit margin for the full year will be similar to last year.

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Q&A Session

As always, we will continue to actively manage this as we test price elasticity and monitor the competitive landscape. Wholesale unit sales were up 7.7% versus the third quarter last year. Average selling price declined approximately $600 per unit or 7% year-over-year. Third quarter wholesale gross profit per unit was $961 in line with $966 a year ago. Like our outlook on retail GPU, we anticipate wholesale per unit margin for the full year will be similar to last year. As a reminder, last year’s fourth quarter wholesale GPU was within $4 of our all-time record and benefited from appreciation and strong dealer demand, particularly at the end of the quarter. We expect this year’s fourth quarter per unit margin will be more in line with our year-to-date performance and lower than last year.

We bought approximately 250,000 vehicles from consumers and dealers during the quarter, up 5% from last year. Of these vehicles, we purchased approximately $228,000 from consumers with slightly more than half of those buys coming through our online instant appraisal experience. As a result, our self-sufficiency remained above 70% for the quarter. With the support of our Edmond sales team, we sourced the remaining approximately 22,000 vehicles through dealers, up from approximately 14,000 last year. In regard to our third quarter online metrics, approximately 14% of retail unit sales were online, up from 12% last year. Approximately 55% of retail unit sales were omni sales this quarter up from 52% in the prior year. All of our third quarter wholesale auctions and sales were virtual and are considered online transactions.

This represents 19% of total revenue. Total revenue from online transactions was approximately 31%, up from 28% last year. CarMax Auto Finance or CAF delivered income of $149 million down slightly from $152 million during the same period last year. Jon will provide more detail on customer financing, the loan loss provision and CAF contribution in a few moments. At this point, I’d like to turn the call over to Enrique, who will provide more information on our third quarter financial performance. Enrique?

Enrique Mayor-Mora: Thanks, Bill, and good morning, everyone. As Bill noted, we drove another quarter of sequential improvement in year-over-year performance across our business and our P&L. Notable areas of improvement included used in wholesale unit sales and their respective margin dollars, total gross profit, CAF contribution, SG&A leverage and EPS. Third quarter net earnings per diluted share was $0.52 versus $0.24 a year ago. Total gross profit was $613 million, up 6% from last year’s third quarter. Used retail margin declined by 1% to $398 million with lower volume, partially offset by a slightly higher per unit margin. Wholesale vehicle margin increased by 7% to $123 million, with an increase in volume and flat per unit margin compared to last year.

Other gross profit was $92 million, up 55% from a year ago. This increase was driven by service, which delivered a $33 million improvement over last year with this year’s quarter reporting a $21 million loss. The efficiency and cost coverage measures that we put in place towards the end of FY ’23 continued to drive improved year-over-year performance in FY ’24. Extended protection plan or EPP revenues were relatively flat compared to last year’s third quarter. We do not expect to receive profit-sharing revenues in the fourth quarter due to the inflationary pressures our partners have experienced. Third-party finance fees were down $2 million from a year ago, driven by lower volume in Tier 2 for which we receive a fee and higher volume in Tier 3 for which we pay a fee.

On the SG&A front, expenses for the third quarter were $560 million, down 5% from the prior year’s quarter as we continue to see benefits from our cost management efforts. SG&A as a percent of gross profit levered by 11 percentage points as compared to last year. The decrease in SG&A dollars over last year was mainly due to three factors. First, other overhead decreased by $19 million, this decrease was driven primarily by continued favorability in non-GAAP uncollectible receivables and, to a lesser degree, from reductions in spend for our technology platforms and from favorability in costs associated with lower staffing levels. Second, total compensation and benefits decreased by $20 million, excluding a $3 million increase in share-based compensation.

This decrease was primarily driven by our continued focus on driving efficiency gains and aligning staffing levels in stores and CECs with sales. The decrease was also impacted by a lower corporate bonus accrual in the quarter. Third, advertising increased by $5 million. This reflects an increase in per unit spend as compared to last year’s quarterly low level of per unit spend and was partially offset by lower units. As we have previously communicated, our expectation is for our full year marketing spend on a per unit basis to be similar to last year. Accordingly, we expect that our per unit spend in this year’s fourth quarter will exceed last year’s fourth quarter. Entering the fourth quarter, we have now passed the year mark since we initiated our significant cost management efforts.

We are well on track to outperform the target we set out at the beginning of the year of requiring low single-digit gross profit growth to lever SG&A for the full year, even when excluding the benefits from this year’s legal settlements. That being said, we remain disciplined with our spend and investment levels. Regarding capital structure, we resumed our share repurchase program in October. Repurchasing approximately 649,000 shares for a total spend of $42 million in the quarter. This pace is in line with the guidance we provided last quarter. As of the end of the quarter, we had $2.41 billion of repurchase authorization remaining. In terms of other uses of capital, such as new store openings, we will open four stores in the fourth quarter including two in the New York metro market and one in each of the Los Angeles and Chicago metro markets.

We will also open our first stand-alone reconditioning center in the Atlanta metro market. Our extensive nationwide footprint and logistics network continue to be a competitive advantage for CarMax. Now I’d like to turn the call over to Jon.