CarMax, Inc. (NYSE:KMX) Q4 2024 Earnings Call Transcript

CarMax, Inc. (NYSE:KMX) Q4 2024 Earnings Call Transcript April 11, 2024

CarMax, Inc. misses on earnings expectations. Reported EPS is $0.32 EPS, expectations were $0.49. CarMax, Inc. 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, welcome to the Q4 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, Shelby. Good morning, everyone. Thank you for joining our fiscal 2024 fourth 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. We’re encouraged by the performance of our business during the fourth quarter. We’re continuing to leverage our strongest assets, our associates, capabilities, experience and culture to build momentum as we manage through the cycle. While affordability of used cars remains the challenge for consumers, pricing improved during the quarter. We continue to achieve efficiency improvements in our core operations and believe we are well positioned to drive growth as the market turns. In the fourth quarter, we posted our fifth consecutive quarter of sequential year-over-year retail used unit improvement and reported growth in total used unit sales and comps.

We delivered strong retail and wholesale GPUs. We increased used saleable inventory units more than 10%, while holding used total inventory units flat year-over-year. We continue to actively manage our SG&A and we grew CAF income significantly as we delivered a substantial reduction in the provision for loan losses year-over-year, while maintaining stable net interest margins sequentially. For the fourth quarter of FY ‘24, our diversified business model delivered total sales of $5.6 billion, down 2%, compared to last year. This was driven by lower retail and wholesale prices and lower wholesale volume, partially offset by higher retail volume. In our retail business, total unit sales increased 1.3% and used unit comps were up 0.1%. Average selling price declined approximately $600 per unit or 2% year-over-year.

Our market share data indicates that our nationwide share of zero to 10-year-old used vehicles declined from 4% in calendar ‘22 to 3.7% in 2023 as we prioritized profitability over near-term market share growth. As always, we continue to test price elasticity to validate our decisions. External title data shows that our market share initially accelerated relative to our performance across the second-half of 2022, but then came under pressure during multiple periods of steep depreciation. We remain confident in our ability to accelerate market share growth as used vehicle affordability continues to improve and as the volatility of vehicle value stabilizes. Fourth quarter retail gross profit per used unit was $2,251, relatively consistent with last year’s fourth quarter record of $2,277.

Wholesale unit sales were down 4% versus the fourth quarter last year. Average selling prices declined approximately $250 per unit, or 3% year-over-year. Fourth quarter wholesale gross profit per unit was $11.20, slightly down from $1,187 a year ago. 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 last year’s quarter. This prior year appreciation dynamic impacted our year-over-year performance and buys as well. We bought approximately 234,000 vehicles during the quarter, down 11% from last year. Of these vehicles, we purchased approximately 213,000 from consumers, with slightly more than half of those buys coming through our online instant appraisal experience.

With the support of our Edmond sales team, we sourced the remaining approximately 21,000 vehicles through dealers up 45% from last year. For our fourth quarter online metrics, approximately 14% of retail unit sales were online consistent with last year. Approximately 55% of retail unit sales were omni sales this quarter, up from 52% in the prior year. All of our fourth quarter wholesale auctions and sales were virtual and are considered online transactions. This represents 17% of total revenue. Total revenue from online transactions was approximately 30% in line with last year. CarMax Auto Finance or CAF delivered income of $147 million, up 19% from $124 million during the same period last year. John will provide more detail on consumer financing, the loan loss provision, and CAF contribution in a few minutes.

But at this point, I’d like to turn the call over to Enrique, who will provide more information on our fourth quarter financial performance. Enrique?

Enrique Mayor-Mora: Thanks, Bill, and good morning, everyone. As Bill noted, we drove another quarter of sequential improvement in our used unit sales with strong per unit margins for both used and wholesale and strong CAF contribution growth, while staying focused on managing SG&A. With quarter net earnings per diluted share was $0.32 versus $0.44 a year ago, last year’s quarter benefited from an $0.08 tailwind due to the receipt of Extended Protection Plan, or EPP, profit sharing revenues, as well as $0.04 from a lower tax rate, compared to a more normalized tax rate this quarter. Total gross profit was $586 million, down 4% from last year’s fourth quarter. Used retail margin of $387 million was flat, with higher volume partially offset by a slightly lower per-unit margin.

Wholesale vehicle margin decreased by 9% to $129 million, with a decrease in volume and per unit margin, compared to last year. Other gross profit was $69 million, down 15% from a year ago. This decrease was driven primarily by last year’s receipt of $16 million in profit sharing revenues from our EPP partners. As noted on our third quarter call, we did not expect to receive profit sharing revenues this year as our partners experienced inflationary pressures and consumers returned to more normalized driving patterns. Partially offsetting this dynamic was the positive impact from price elasticity testing on our extended service product. During the quarter, we tested raising MaxCare margins per contract sold, which resulted in a slight decrease in product penetration, while driving overall profitability.

We are encouraged by these results, and we have rolled out the margin increase nationally. Our expectation is that this action will drive approximately $20 per retail unit of incremental EPP margin in FY ‘25. Service decreased by $4 million, as compared to last year’s fourth quarter. This decrease was primarily driven by wage pressures and planned lower production in the quarter as we pre-built inventory in the third quarter, due to holiday timing. For the full-year service improved by $75 million year-over-year. Our expectation is that we will continue to see significant year-over-year favorability in FY ‘25. The extent of this improvement will be governed by sales performance given the leverage, de-leverage nature of service. Third-party finance fees were down $3 million from a year ago, driven by higher volume in Tier 3 for which we pay a fee and lower volume in Tier 2 for which we receive a fee.

On the SG&A front, expenses for the fourth quarter were $581 million, up 1% from the prior year’s quarter. Our continued discipline in spend and investment levels allowed us to come in flat year-over-year when excluding share-based compensation. As a reminder, in the fourth quarter, we passed the year mark since initiating our significant cost management efforts. SG&A dollars for the fourth quarter versus last year were mainly impacted by three factors. First, other overhead decreased by $16 million. This decrease was driven primarily from reductions in spend for our technology platforms and from the continued favorability in non-CAF uncollectible receivables. Second, total compensation and benefits increased by $7 million, excluding an $8 million increase in share-based compensation.

This increase was mostly driven by a higher corporate bonus accrual in the quarter. Third, advertising increased by $5 million. This reflects an increase as communicated last quarter due primarily to the timing of per unit spend. For full-year FY ‘24, we strongly outperformed the target we set out at the beginning of the year of requiring low-single-digit gross profit growth to lever SG&A, even when excluding the benefits from this year’s legal settlements. Our ability to materially drive SG&A costs down year-over-year was led by favorability and non-CAF uncollectible receivables that reflects improved execution at our stores, at our corporate offices and by external partners. Our focus on driving efficiency gains in our stores and CECs, the planned reduction of technology spend and by aligning staffing levels and marketing spend to sales.

In FY ‘25, we expect to require low-single-digit gross profit growth to lever SG&A, when excluding FY ‘24’s favorable legal settlements. This reinforces our pathway back to a lower SG&A leverage ratio with our initial goal of returning to the mid-70% range over time once we see healthier consumer demand. We anticipate that SG&A will be pressured in the first quarter. As a reminder, we received $59 million in illegal settlement during the first quarter of FY ‘24. Additionally, in this year’s first quarter, we expect an approximately $25 million impact due to share-based compensation for certain retirement eligible executives and a lapping of favorable reserve adjustments related to non-CAF uncollectible receivables during last year’s first quarter.

With regard to marketing going forward, we plan to speak to our spend on a per total unit basis, inclusive of total retail and wholesale units. We believe this more holistically reflects the impact of our marketing initiatives, which support both vehicle sales and buys. In FY ‘25, we expect full-year marketing spend on a total unit basis to be similar to FY ‘24 at approximately $200. Regarding capital structure, during the quarter we repurchased approximately 686,000 shares for a total spend of $49 million. Starting in the first quarter, we intend to modestly accelerate the pace of our share repurchases above the pace that we implemented in our third quarter of fiscal year ‘24. As of the end of the quarter, we had $2.36 billion of repurchase authorization remaining.

For capital expenditures, we anticipate an investment level between $500 million to $550 million, up from the $465 million in FY ‘24. The year-over-year increase in plan spending is primarily related to the timing of spend for new stores. Like in FY ‘24, the largest portion of our CapEx investment remains related to the land and the buildout of facilities for long-term growth capacity and offsite reconditioning and auctions. In FY ‘25, we plan to open five new store locations. Consistent with our strategy, these new locations will be smaller cross-functional stores that complement our omni-channel strategy and leverage our scale. We also plan to open our second standalone reconditioning facility, which will be located in Richmond, Mississippi, as well as one offsite auction location in the Los Angeles metro market.

We currently expect to open multiple offsite reconditioning and auction locations in FY ‘26. 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.

Jon Daniels: Thanks Enrique and good morning everyone. During the fourth quarter CarMax Auto Finance originated approximately $1.8 billion, resulting in sales penetration of 42.3% net of three-day payoffs, which was down 240 basis points from the same period last year. The weighted average contract rate charged to new customers grew to 11.5%, an increase of 60 basis points from the last year’s fourth quarter and 20 basis points sequentially. Tier 2 penetration in the quarter was 18.2%, down from 19.4% observed during last year’s fourth quarter. Tier 3 accounted for 8.2% of sales, up 130 basis points from last year, as a partner began to ease previously implemented tightening. Also impacting each of these year-over-year results is CAF’s continued decreased percentage in Tier 3, as well as the increased test volume in Tier 2.

CAF income for the quarter was $147 million, up $23 million from the same period last year. This improvement was primarily driven by a $26 million year-over-year reduction in the provision for loan losses, slightly offset by a $3 million reduction in total interest margin. Note fair market value adjustments from our hedging strategy accounted for $4 million in expense this quarter versus $1 million of income in last year’s fourth quarter. The $72 million provision within the quarter resulted in a reserve balance of $483 million or 2.78% of receivables, compared to 2.92% at the end of the third quarter. This highlights the significant impact that originations under our tightened credit policy are having on the Reserve as they continue to become a larger percentage of the full portfolio.

In addition, observed performance within the portfolio aligned closely to our reserve expectations at the end of the third quarter and contributed to the reduction in the reserve. The margin to receivable rate of the portfolio remained steady at 5.9% for the quarter. We remain pleased with our ability to maintain a stable interest margin despite keeping our credit tightening in place. As I noted earlier, CAF continues to test across varying parts of the credit spectrum. Ultimately, CAF is building the capability to scale its participation across all credit Tiers, which will help to capture finance economics, drive sales, and fully complement our valued lending partnerships that are a key foundation of CarMax’s best-in-class credit platform.

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

Bill Nash: Thank you, Jon and Enrique. Fiscal 2024 was a challenging year across the used car industry as vehicle affordability and widespread macro factors continue to pressure sales. In response, we focused on what we could control and took deliberate steps to support our business both the near-term and long run. In addition to achieving the efficiencies across our entire organization that Enrique talked about, I am proud of the progress we’ve made in further enhancing our omni-channel capabilities as we prioritize projects designed to optimize experiences for our associates and customers and drive operating efficiencies. Some examples include, for retail, we leverage data science, automation, and AI to make it even easier for customers to complete key transaction steps like vehicle transfers on their own.

We also enhance digital checkout functionality for appraisal customers, enabling them to submit their documents remotely and unlocking their ability to participate in our 30-minute express drop-off experience. Additionally, we expanded capabilities for Sky, our 24/7 virtual assistant, to include managing finance applications, vehicle transfers, appointment reservations, and appraisal offers. Customer adoption of Sky has been strong, and this has not only created efficiencies, but also widened bandwidth for our associates. For wholesale and vehicle acquisition, we modernized our auction platform to offer new services, including single sign-on across all of our systems, AI enhanced condition reports, early bidding capabilities, and automated bills of sale.

Additionally, we streamline Max offer by rolling out our instant offer experience to all participating dealers. In the credit space, we have now incorporated all of our lenders into our finance-based shopping platform, expanding the breadth and depth of offers available to our customers. We continue to see great adoption with more than 80% of the consumers utilizing the best-in-class pre-qualification product as they begin the credit process. Finally, Edmunds launched a number of research and buy tools in support of its goal to be the leader in [Technical Difficulty] research. These include range tests, charging efficiencies, VIN-level battery health assessments, and EV tax credit incentive guides. Looking ahead to fiscal 2025, we will build on our progress from last year to further expand our competitive mode.

We are confident that the actions we are taking will enable us to grow sales, profitable market share, and buys while also driving additional operational efficiencies as the market turns. Some examples include, for retail we plan to launch an evolved hub within our customers’ online shopping accounts that will make it even easier to seamlessly go back and forth between assisted help and self-progression. Customers will be able to see the steps they have taken on their shopping journey, whether on their own or with help from a CEC or store associate. The hub will also guide next steps and promote MaxCare, our extended service plan offering. Additionally, we will continue to digitize work in support of our focus to build a leaner and high value assistance model for our CECs. This will enable existing resources to support higher transaction volume as we grow traffic and drive stronger conversion.

As part of this effort, we will further integrate Sky into key communication channels and prove its ability to serve as the initial point of contact across many points in the customer’s shopping journey. Sky will manage next steps on its own or seamlessly transition customers to a CEC associate via the customer’s channel of choice. For vehicle acquisition. we’ll focus to bring even more vehicles into our ecosystem. A key component of this will be our continued partnership with Edmunds to acquire vehicles from dealers. In the credit space, we plan to further optimize our prequalification product by integrating the customer’s instant offer into the application process. As Jon mentioned, we will also continue to test CAFs participation across varying parts of the credit spectrum.

As always, we will continue to pursue opportunities that enable us to provide outstanding offers for consumers, while driving sales and economics for the business. In regard to our long-term financial targets, we’re maintaining our goal to sell more than 2 million combined retail and wholesale units annually. However, we are extending the timeframe for this goal between fiscal 2026 and fiscal 2030, due to the uncertainty in the timing of the market recovery and as we continue to focus on profitable market share growth. We will adjust the timeframe as we gain greater visibility into the industry’s pace of recovery. Given higher average selling prices, we expect to achieve the $33 billion annual revenue target sooner than units. And similarly, we also expect to achieve more than 5% nationwide market share of zero to 10-year-old used vehicles sooner than units.

Given the recent volatility in vehicle values, we will provide an updated timeframe for our expected achievement at the end of fiscal year 2025. Before turning to Q&A, I want to recognize two significant milestones. First, CarMax celebrated its 30th anniversary during fiscal 2024. I want to thank and congratulate all of our associates for the work that they do. They are the differentiator and the key to our success. Second, Fortune magazine recently named CarMax as one of the 100 best companies to work for, for the 20th year in a row. I’m incredibly proud of this recognition, particularly as we face a challenging year. It’s due to our associates’ commitment to supporting each other, our customers, and our communities every day. In closing, I’m proud of the progress we’ve made on our journey to deliver the most customer-centric experience in the industry.

I’m encouraged by the sequentially quarterly improvements. We’re driving across our business, and I’m excited about our focuses for fiscal 2025. Our core operations are strong and we are well positioned to drive growth as macro conditions improve. With that, we’ll be happy to take your questions. So Shelby?

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Q&A Session

Operator: [Operator Instructions] And your first question comes from the line as Seth Basham with Wedbush Securities. Your line is open. You may now ask your question.

Seth Basham: Thanks a lot. I have one quarterly specific question and one big picture question. On the quarter, it seems like service gross profit was weaker than we anticipated. Can you help us understand how much of that pressure was transitory and how much improvement we should see in the service line in 2025?

Enrique Mayor-Mora: Yes. Thanks, that’s a great question. We do believe it was transitory. We did have a couple things from a year-over-year standpoint. The planned lower production that we had communicated. So we did expect some headwinds there in the fourth quarter. We also had some wage pressures. Now that being said, we have undertaken in the fourth quarter, which will carry forward into next year, is even more efficiency initiatives, things and for labor specifically. We’ve invested in RFID tracking of inventory. We’re going to leverage our tech and engineering investments to enhance reporting in our stores. We’re focused on driving more MaxCare work to our shops and at the same time we’ve also taken labor and parts rates up to help offset inflationary pressures.

So we do expect to see improvement, significant improvement year-over-year just like we deliver this year the significant improvement for the year as a whole and we expect that same next year. Now it is also certainly related to sales performance as well given the leverage, deleverage nature of service.

Seth Basham: Understood, thank you for that color(. And then secondly Bill, in regards to market share, you indicated on your last call that you started to see an improvement in market share towards the end of the fiscal third quarter. Seems like things slipped a little bit in the fourth quarter. Help us understand why and when should we expect to see market share increases going forward as the cycle turns?

Bill Nash: Yes, great question, Seth, and you’re right. Last quarter I talked about October from a year-over-year standpoint actually inflecting positive, but also during the quarter — third quarter, I talked about the steep depreciation. It was going to be interesting to see how competitors reacted. When I step back and think about market share kind of at the highest level, the two things that have been impacting us this year, and really some of it was last year as well, are affordability and then more relevant to this year is the steep depreciation periods that we’ve seen. So from the affordability standpoint, we’ve talked about that throughout the year as far as consumers may be trading down, trading into older vehicles, into zero to 10-year-old cars that maybe we don’t sell, or just basically standing on the sidelines, because we see that there’s demand out there yet people aren’t actually pulling the trigger.

The other thing that we saw during the year, we saw two very steep depreciation cycles. If I look at last year’s calendar year and I talked about it in my prepared remarks, we were growing market share coming out of — we were improving our market share coming out of last year. And then we ran into a period, let’s call it four or five months, of steep depreciation starting in about April, and it was about $3,000. Then it stabilized for a little bit, and then we finished out the year with, again, another steep depreciation, probably the steepest we’ve seen in the shortest period of time, about another $3,000. And as we’ve talked about before, when we see the steep depreciation, that’s really when we’re testing our pricing elasticity, because we know that competitors, for their own reasons and for their business models, may end up taking down prices to move inventory, that kind of thing.

And what we’ve said is we’re going to continue to move forward on profitable market share growth. So I think what we saw in the fourth quarter, dealers were trying to figure that out in October, because a year ago, if you remember, we saw steep depreciation. There was a big influx of where we saw dealers letting inventory go. And then what happened in the beginning of the first quarter, they ended up buying a bunch of cars because they had sold through too much and that drove up appreciation. So I think this year, dealers were a little bit delayed, which is why you saw a little bit of an inflection in October. But then we saw a sell-off in November and December. The good news is that the January data we have, we can actually see where we’re improving our market share in January.

February, we don’t have the actual data yet, but we feel good about February. So I think from a market share standpoint, this value volatility can be challenging and we’ll continue to work and that’s one of the reasons why we want to see how this kind of pans out over this year before we update that target. So hopefully that color is helpful.

Operator: And we’ll take our next question from Sharon Zackfia with William Blair. Your line is open. Please ask your question.

Sharon Zackfia: Hi, good morning. I guess two questions and hopefully you guys will forgive me. But on the improved affordability, can you give us some metrics around that? I mean, it’s clear that new car prices are coming down and hopefully rates are toppish. So what was kind of an average loan payment that you originated this quarter versus maybe the third quarter or some historical benchmark just to give us an idea of how that’s improving for the customer? And then secondarily, just on that market share dynamic, is there any region or any particular cohort of demographics that you’ve been more susceptible to this market share loss as some competitors may have been less rational? Thanks.

Jon Daniels: Sure, Sharon. It’s Jon here. I’ll take the first one on the loan payment. So historically, our average used car was $20,000 forever. So that translated typically, depending on the interest rate, $400 monthly payment. I think that’s a good round number to think about. With the appreciation, you saw really a peak probably hit in kind of later, at calendar ‘22 of about $570, $580. That was — I think we cited that was primarily driven by that financed amount. I mean, rates were on their way up, but that financed amount really was driving that. So that increase we kind of attributed to maybe an 85-15 split on the financed amount versus the interest rate going up. Now as we’ve cited, clearly, the vehicle prices are coming down.

The financed amount is coming down to some degree and rates are going in the other direction. So we probably say this quarter we probably saw roughly a $525, $530 payment. Still two-thirds of that driven by that vehicle price still higher. Now the rates are a bigger contributor, but hopefully that gives you some perspective on how affordability has improved to some degree. Still a bit of a shock to a consumer that’s used to a $400 monthly payment coming in at a $530 monthly payment. They’re going to have to figure out how they work that into their budget going forward, but that hopefully gives you some context.

Bill Nash: And, Sharon, on the second part of your question, not necessarily a difference geographically. We talked about before, your Tier 3 customer, obviously, we have a lot less Tier 3 sales than we’ve had in the past. Our consumers that make less than $3,000 per month in a household, they’ve basically been cut in half. So certainly that lower finance customer, lower income coming in customers has been impacted. But we also see, and I talked about this in the third quarter just from working with one of the credit bureaus of the folks that don’t end up buying, that apply for a loan at CarMax, it’s not like we’re seeing this big degradation where they’re going to somebody else. They’re just sitting on the sidelines. And I think part of that speaks to what Jon just spoke about.

The other thing I would just remind everybody on the market share is, historically we have always grown market share. It’s just when there’s been unusual events. If you go back to the great financial crisis, if you go to COVID. And I would say, now in this period, we’ve got these very, very steep depreciations. I mean, we saw two this year, we saw one last year, we’ve just never seen these before. And so I think working through these, we’ll get through them and then like always, we’ll continue to grow market share.

Operator: And we’ll take our next question from Rajat Gupta with JP Morgan. Your line is open. You may ask your question.

Rajat Gupta: Got it. Great. Thanks for taking the question. I wanted to just quickly ask on — how the first quarter was trending. Given you exited or you had positive comps in the fourth quarter, should we expect that trend to continue here? You know, because seasonality would imply like comp should move lower or negative again in the first quarter, but curious like what you’re seeing and any updates you can give us there? And then just a broader question on the long-term target. It’s almost like a four-year range, 2026 to 2030. Could you explain the thought process behind such a wide range? And where is the uncertainty really coming from? Is it on the demand side or is it on supply side? Any more color there would be helpful. Thanks.

Bill Nash: Yes, so thanks for the question, Rajat. On the first question, kind of comp cadence, for the quarter, December, January negative comps, February was a positive comp resulting in a positive for the quarter. Since the quarter ended, it’s been a little choppy. We’ve seen some weakness and right now, quarter to date, albeit early, and again choppy. We’re seeing about a mid-single-digit negative comp right now, but again, it’s early on and it’s been choppy the last month and a half. On the second question, the market — oh, the long-range targets — well, keep in mind on the market share, we’ll come back at the end of this year and update that. On the units one, yes, you’re right, it is a wide range. We’re going to come back and provide more visibility into that once we just get a better idea of the market recovery.

Keep in mind, I think COGS latest numbers had this year finishing up about 35.5 million units, where traditionally we’re at 40 million. And so I think their expectation to ours going to be fairly flat, maybe up a little bit in total used units in the zero to 10, it might be flat to even up a little bit less. So I think you’re expecting when it comes to total used units, there’s probably more growth in the over 10-year-old vehicles in the zero to 10. And so that’s something of — we want to get some visibility into that, especially when it comes to the units. The volatility also plays into it, though, because it also impacts — vehicle volatility plays into it because it impacts your buy rate, which ultimately can impact your wholesale. So as we get more visibility into this market recovery, we’ll come back and narrow that time frame for you.

Enrique Mayor-Mora: Yes, the expectation is not to hit the wide end of that range. Really is we’re going to provide visibility once there’s just a bit more stability in the market like building.

Rajat Gupta: Just to clarify on the zero to 10-year-old comment. I mean if you look at what’s happened with like new car sales the last few years and just users originated on them, is there a chance that the zero to 10-year-old market takes another step down in calendar ‘25 before turning positive? Because that should be fairly visible, right, given what we know that’s happened over the last three, four years?

Bill Nash: Yes. I think the zero — again, I think the zero to 10, what the estimates are out there is it’s going to be flat to up a little bit. So we’ll see where that actually pans out. I mean the — keep in mind, there is a new car dynamic here where less cars were sold a couple of years ago. But again, I would also look back to — we saw bigger declines back in the great financial crisis. So we’ll see estimates are that it’s going to be flat to up a little bit.

Rajat Gupta: Great. Thanks for all the cover.

Bill Nash: Thank you.

Operator: We’ll take our next question from Brian Nagel with Oppenheimer. Your line is open. You may ask your question.

Brian Nagel: Hey guys, good morning.

Bill Nash: Good morning, Brian.

Enrique Mayor-Mora: Good morning.

Brian Nagel: Okay. Just my first question with regard to used sales, and maybe a bit bigger picture. But I guess it’s much in the business. Look, you got the positive comp, albeit slightly. You got positive used car unit comp here in Q4. And then in response to the prior question, you talked about maybe some incremental weakness here in early Q1? But the question I have is as you’re looking at this business, recognizing that you don’t give guidance, there’s a lot of moving parts out there. What has to happen? Because it seems like a lot of the key factors are starting to turn more favorable for CarMax, whether it be used car pricing moderating, rate stabilization, we’re seeing the data, a better tax refund season. So I guess as you look, what’s the kind of the equation, if you will, to get back to that normalized used car unit comp?

Bill Nash: Yes. I think we’ve hit on a couple of the major issues. The affordability has to continue to move down. I was encouraged, I mean this quarter was the first time we’ve been under a $26,000 average selling price in like two years. So that’s a step in the right direction. I think there’s a lot of positives out there you referred to like interest — hopefully interest rates at least stable. And once they start coming down, I think that’s certainly a good guide as well. I think building on some of the stuff that we’ve been working on, the efficiencies that we’re working on that we’ve talked about is the fact that we’ve got sequential improvement. Jon talked about CAF becoming more of a full credit spectrum lender. There’s opportunity there.

I think there’s opportunity in omni. I mean we’ve got a lot of good things that are positive, but we do need a little help on the affordability. And I think we also — just that volatility, don’t underestimate. I mean, when you have a year where you see depreciation of $6,000, keep in mind, we saw some appreciation at the beginning so it offset some of that. But $6,000 really in two different time periods. We just haven’t seen that. And we had another of those last year, I would call them, their price corrections. And I think having some visibility into that and stabilizing that. If you get a — we’ve shown like continued market share growth over the years, whether it’s been appreciation, whether it’s been normal depreciation, keep in mind, normally in the end of the year, there is depreciation.

It’s probably $1,500, $1,600 a year. We’ve been able to take market share in all those environments. So I think those are the two big factors for us.

Enrique Mayor-Mora: I think a couple of other just demand signals that we’ve seen. Web traffic was up again this quarter, year-over-year. Finance applications were up again this quarter. So there’s demand signals that we’re seeing out there just boils down to like we’ve been talking about really to the affordability question.

Brian Nagel: That’s very helpful. If I could ask just one follow-up. You’ve talked now — forget about tightening lending standard. We’re seeing — we’re clearly seeing the benefits of that in the CAF data and particularly, I guess, the loan loss provision. I guess the question I have is to what extent is — are your — what potential is that, your tighter lending now impacting demand for used cars at CarMax?

Jon Daniels: Yes, appreciate the question. I mean, certainly, I think that’s the benefit of our platform, right? CAF is able to tighten, and it’s able to slow down to partners that are willing to — maybe they’re going to ask for a little more money down, it’s going to be a little bit higher rate. But they are going to have the option to buy, and we see people get picked up down the line. We’re very careful when we test rates. And we do any underwriting adjustments. We watch it very carefully. We test it. We know what’s going to get picked up, and we’re very thoughtful about the sales impact and any decision we make, whether it’d be pricing or underwriting. So certainly, there’s going to be a few people that might not choose that higher rate that more down payment from our lenders down the line. But we believe, generally, they are very excited, Tier 2 partners are, when CAF passes on stuff, and they can go pick it up.

Bill Nash: Yes. But Brian, it’s definitely a headwind. I mean we’re tightening. We’ve got great partners and picking up some of that, but they don’t pick it all up. And then it goes down to Tier 3, and you’ve seen where our Tier 3 volume just is in general. So there’s no doubt that the tightening in general of the industry is having an impact.

Brian Nagel: Got it. I appreciate it, thank you.

Bill Nash: Thank you, Brian.

Operator: And we’ll take our next question from Craig Kennison with Baird. Your line is open. You may ask your question.

Craig Kennison: Hey, good morning. Thanks for taking my question. I wanted to ask about sourcing, Bill. You bought 11% fewer cars. I know depreciation is a headwind, but you also have these innovative new tools like instant offer and Max offer that I thought might provide like a secular lift. So I’m wondering on instant offer, can you shed any light on just overall appraisal activity and buy rates to give us a feel for the kind of traction you have with that tool? And then on Max offer, how much of that 45% growth, albeit from a small base, is attributable to adding new dealers versus momentum with the existing dealers?

Bill Nash: Yes. Thanks for the question, Craig. On the — from consumers, again, I think it’s more — I think when you’re talking about the decline, it’s more of a year-over-year dynamic. Buy rate this year was down a little bit versus last year. But keep in mind, last year, I think in the fourth quarter, we saw about $2,000 of appreciation. We didn’t see that this quarter. It was much, much less than that by the end of the quarter. That has an impact because consumers always think their cars are worth more money. When you can put more on it, that helps buy. On the Max offer, the increase there is really — well, we’ve increased the overall number of deals. The way we think about it, how many active dealers do you have. And of the deals we have, we saw about a 50% increase in active dealers actually using the tools.

So we’re encouraged by that. We haven’t expanded to other areas. We think there’s a lot of opportunity to continue to move this along, which is what I said earlier in my prepared remarks. It’s going to be a focus for us.