Craig Kennison: Thank you.
Bill Nash: Thank you.
Operator: And we’ll take our next question from Michael Montani with Evercore ISI. Your line is open. You may ask your question.
Michael Montani: Hey guys, good morning. Thanks for taking the question. Just wanted to ask to start off. If you think about this year, is there any reason that this wouldn’t be another year for CarMax to take market share? And then is there a need at all to either sacrifice gross profit per unit or potentially loosen credit standards to take share?
Bill Nash: Yes. I mean, look, you could — if you lowered your prices, you could absolutely sell some more cars. But I’ll go back to what I said earlier. I mean we’re focused on profitable market share. And look, you can see it with the publicly traded auto retailers, they’re swapping it off, sometimes units for GPU. And when you look at total comp GPU, it just — it hasn’t been necessarily a good decision. So we’ll continue to test the elasticity. Our goal, obviously, every year is to gain market share. I am hopeful just looking at kind of depreciation trends, I’m hoping that this year will be a more normal depreciation and depreciation cycles, but we’ll see. And I think that’s going to be a factor. And again, I always couch it with we’ll always test the elasticity to see if it makes sense to lower margins in order to get more units and more total gross profit.
Enrique Mayor-Mora: And as far as the CAF lending standards, I mean, I think that’s one of the things that we’re optimistic about. We’ve tightened. We’ve tightened for a very for very purposeful reason. Obviously, we have partners down the line. But as Bill mentioned, yes, you do lose sales when CAF tightens. But we believe that the cycle will turn. The consumer will get healthier. And we’re excited to go after more market share up and down the credit spectrum. So I think it absolutely is an opportunity on the other side of this.
Bill Nash: Yes. I’m optimistic with CAF. And I know the Fed is — there’s a decision on when they’re going to cut rates. I mean it stabilizes and doesn’t sound like it’s going to go up. I’m going to knock on wood right now. But as that comes down, that’s a tailwind for us for sure on a couple of different fronts from a CAF standpoint, margin standpoint but also from a sales standpoint.
Michael Montani: Just how to think about the mid-70s SG&A ratio target as well. Is that feasible for this year? Or how should we think about that?
Enrique Mayor-Mora: Yes. I think the mid-70s SG&A as we’ve talked about, that is absolutely our next step in our progress. I think in terms of this coming year, we’re going to need strong consumer demand also return. There’s, obviously two variables in that equation, right? You have SG&A, which I feel we’ve made a lot of strides this past year, and we’ll continue to focus on. But we really need that gross profit number to accelerate in order to hit that mid-70%. I think you hit it in FY ’25 would really be a tough putt, just given the level — the volumes of our unit sales over the past couple of years here.
Bill Nash: Well — and I think also just given that they think that the market is overall going to be fairly flat.
Enrique Mayor-Mora: Yes. Exactly.
Michael Montani: Got it. Thank you.
Bill Nash: Thank you.
Operator: We’ll take our next question from John Healy with Northcoast Research. Your line is open. You may now ask your question.
John Healy: Thank you. Just wanted to ask a bit about the wholesale business. It’s a nice position where we kind of ended the year in terms of GPUs on wholesale. I was kind of curious kind of how you see that business from a GPU performing in ‘25, just given the expected, kind of, the sending of the used car market in terms of values with improving supply. Do you think we can hold at this kind of $1,000 level for a while? And can you talk a little bit about what you’re doing with the auction side of the business? I think in your prepared remarks, you mentioned that you’re going to build a standalone auction facility, which I believe would be the first one for the company, maybe where you’re going with that business and does that decoupling of auctions from the retail location potentially market new business line that you’re getting into, not only from a self-sufficiency standpoint but maybe from a revenue standpoint?
Bill Nash: Yes. Thank you for the questions. On the wholesale margin, yes, I was especially pleased with the wholesale margin. Just given some of the year-over-year dynamics, the team did a phenomenal job. And I think it speaks to just some of the improvements we made in our overall auction process with technology, that kind of thing. I think you’re thinking about it the right way. If you look at it on a yearly basis, I think a good target, give or take a little bit, is similar to what we ran for the year this year on wholesale margins. So I think you’re thinking about that the right way. And I think it speaks to a lot of the improvements that we’ve made in the business. As far as the standalone auction facility, it is — it’s interesting because we actually have a couple of standalone auction facilities that we’ve built over time, just that are generally located right close to one of the stores from a extra capacity.
But this — you’re right, this will be the first time that we’ve gone out and really kind of built the facility with the intention of it having to be an auction facility. I think going forward, you’re going to see some of the standalone auction/production. The one that we’re talking about for next year is just an auction facility. We may run some logistics hub out there. But right now, it’s an auction facility. And it’s really going to help us in a couple of different ways. The facility will be close to existing stores. And we’ll be able to take wholesale vehicles out of existing stores, allow them to leverage the lots more from a service standpoint, more from a sales standpoint. We’re ending up moving a lot of cars anyway from satellite and XF stores.
And now taking them to this location will just help us continue to make benefits or improvements at standalone facilities, and I think they’ll pan out well for us going forward. So our intention as we go forward is to build more of these things, get more of some of the wholesale sales out of the stores to free up space, free up capacity that we think will have other benefits to the business, whether it’s, hey, you can do a little bit more MaxCare retail service. There’s a lot of benefits to that, plus just the standardization of having these bigger locations in closed proximity to stores will also help us to innovate even quicker than what we’ve been able to do.
John Healy: Thank you guys.
Bill Nash: Thanks John.
Operator: We’ll take our next question from Scot Ciccarelli with Truist Securities. Your line is open. You may ask your question.
Scot Ciccarelli: Good morning guys. Another market share follow-up, I guess. Bill, why do you think you lose share in disruptive periods? I mean historically, industry leaders in various retail verticals actually accelerate share gains during disruptive periods. What is different about the CarMax model why that may not follow a similar pattern?
Bill Nash: Well, when you say disruptive periods, I mean, the three periods, and I think Great Recession, if I think about COVID, I think what we’re doing — what’s going on a little bit different. I mean here more recently, it’s this vehicle volatility that I talked about earlier. And when there are shocks to the system of large depreciation over a short amount of time, you know how we run the model. We’re like, okay, should we lower our prices? And is it overall better from a profitability standpoint? And what we’ve seen is it just doesn’t pan out that way, which is why we hold the margins steady. Now there’s lots of competitors don’t do that. And they do what’s right for their business. They’ve got different demands. They’ve got credit lines, things like that.
So they have to do what’s right for their business, and we have to do what’s right for our business. So you will see — we’ve seen this year when we hold the prices and others are liquidating inventory for various reasons. We — trying to give up market share.
Scot Ciccarelli: So just philosophically, like is that the right decision over time? Like I understand like you can capture more profit. But if you want to be a growth vehicle and you have been for 20-plus years, I think you said 38, right? Is that the right decision to kind of hold the line on price and protect profit? Or should you be seeking market share? I’m just wondering philosophically how you guys are thinking about that? Thanks.
Bill Nash: Yes. No, I mean, it’s a good question. And obviously, we think philosophically, look, the buying cycle is every five years. And who — if you had asked me at the beginning of this year, do you think there might be a price correction? I would say maybe, yes, probably another price correction coming out of last year. I didn’t expect there to be two price corrections. I don’t see this type of environment being able to replicate itself year after year. I think these are very unusual circumstances. So I do think that here in the short term, it is the right thing to do. It’s not like this is going to be continuing to repeat. If it was, then we would look at the business model. But I think we believe that this is the right move.
Scot Ciccarelli: Got it. Thank you very much.
Bill Nash: Thanks, Scott.
Operator: And we’ll take our next question from Christopher Bottiglieri from BNP Paribas Exane. Your line is open. You may ask your question.
Ian Davis: Hey, everyone. This is Ian Davis on for Chris. Thanks for the question. It seems you’ve been a bit more reliant on warehouse facilities than ABS in recent years ex the Tier 2 and Tier 3 pilot. So wondering if you could elaborate a little bit on how average FICO expected losses of loans in these warehouse facilities compares to maybe what you see in the — similarly loans and ABS facilities?
Jon Daniels: Sure. Yes, I can take that one, Ian. Yes, I mean, I think you said excluding Tier 2 and Tier 3, so we’re talking focused on the Tier 1 business. Yes, I mean, our focus is generally to bring in all the volume from Tier 1 into our warehouse facilities, and our goal would be to get it all into the ABS market. Now fundamentally, there are things that you need to pare back. There are certain criteria they need to meet. You need to have a title, they need to have made the first payment, et cetera. So you’re going to have some higher risk stuff fall out. It’s always going to happen. But our goal is to move all that volume from originations through the warehouse into ABS. Inherently because of those exclusions, you’re going to have probably a little bit higher FICO in the ABS deals.
If you look at deal over deal over deal, that change in FICO is coming from us changing what we’re originating and that ultimately flowing through. Remember, it’s going to take six, seven months to get into an ABS deal for when we originate it. But that movement over time in ABS is really what we’re underwriting, probably less so what we’re holding out into in a warehouse line.
Enrique Mayor-Mora: And from a total capacity standpoint, where we certainly leverage the ABS market is the most efficient way to fund the business. We also — as you’ve noted, we’ve also grown our kind of non-ABS funding with our banking partners. We have tremendous banking partners, and we’ve built out some facilities, additional facilities there. And we talked about that several years ago about just bridging out and having alternative finance options as we continue to grow the business. And that’s what we’ve done.
Ian Davis: Got it. That’s helpful. And if I could just slip another question in. We had read that CarMax may be removing the 30-day return policy. Is there any truth for this? And if there is, could you contextualize maybe how material abandoning the policy would be to earnings? And perhaps any other context in terms of customers valuing it or maybe using it, any context there would be helpful.
Bill Nash: Yes. So what you’re referring to is the 30-day money back guarantee. And we’re modifying it to 10 days money back, which is still industry-leading. And that’s really due to really some experiential headwind, both for customers and associates, which also add increased expenses when you’re talking about most of our customers — a lot of our customers take advantage of it well before the 30-days. You get past the 10, some people are just working the system. Others, what we run into is some headwinds with DMVs and municipalities getting title work squared away, checks back, taxes back, that kind of thing. So I think that’s what you’re referring to.
Ian Davis: Yes, that’s right. Yes, that’s helpful. Thank you.
Bill Nash: Yes.
Operator: And we’ll take our next question from Chris Pierce with Needham. Your line is open. You may ask your question.
Chris Pierce: Hey, good morning. I just wanted to ask, are we set up for another period of excessive depreciation in the wholesale market because as we get the tax refund season, which we’re sort of already through in the wholesale market, there’s going to be normal depreciation. But like are we set for further excessive depreciation and what would limit excessive depreciation? Because as far as I can tell, dealers are already carrying lower inventories versus normal. So how — is there anything that the industry can do to combat that? Or is it just we need to see that excessive depreciation because we need to get back to a $22,000 average used car?
Bill Nash: Yes. Chris, I’m not necessarily seeing what you’re calling excessive depreciation. I’m really seeing more depreciation that’s more in line with kind of what you would see between 2015 and 2019. It’s actually, if look at it, appreciate a little bit more. But again, your average sales price is up higher. Just recently have we started to see some depreciation. So I haven’t seen what you’re referring to as far as excessive depreciation. And I think we may see more of a historical type of appreciation, depreciation throughout the year, but we’ll see.
Chris Pierce: And is that because of lower dealer volumes or inventories? Or is that what gives you confidence that you think you’ll see that — you won’t see abnormal depreciation this year like you saw last year?
Bill Nash: Well, I’m just going off of what I’ve seen so far kind of calendar year-to-date and comparing it to historical averages. The last 2, 3 years, it’s kind of been all over the board from an appreciation standpoint and a depreciation standpoint. If you kind of take those years out and look more historical like 2015 to 2019, what does the depreciation curve look like? What does the NAAA data look like? I would say this year, calendar year-to-date is falling more in line with kind of what those cycles look like. So that’s what I’m referring to.
