Carmax FY 1Q17 Earnings Call Notes

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Tom Folliard

CHallenging quarter

“First quarter fiscal 2017 was a challenging one for us. Total revenues increased by 2.8%. Used unit comps were slightly positive and total used units grew 4%. Comp units were driven by an improvement in conversion, which offset a modest decrease in traffic. We do believe that the decline in traffic is both predominantly and disproportionately a result of the decrease in Tier 3 sales given the fact that Tier 3 conversion has historically been significantly lower than our non-Tier 3 conversion.”

Customers better informed when walk in doors

“it’s broadly known that consumers are being much more informed before they come into the store. So they are doing a lot of the research upfront. In our case, we know nine out of ten of our consumers that end up purchasing from us do some homework ahead of time from – on carmax.com. ”

Santander did pull out of subprime lending

“I have always said our goal is to have sustainable partners that are there for our customers and can provide a wide range of financing. In the quarter though we did see one line in particular a pullback and it was Santander I mean you have seen them out in the public domain, talking about how they are pulling back in sub-prime auto, letting other business to other folks.”

Lenders are getting stricter on lending terms

“let me be a little more clear, it’s not approval rate, we – if you look at the percent of customers that are up in approval of some kind in the stores that’s well above 90%, what we are seeing is the decline – a degradation in I guess both quality of the offers, meaning they might be asking for a little bit more money down or they are asking for stipulations and particularly we have seen a step-up in that with one of the lenders there is an increase in asking for proof of income, asking for proof of residence, asking for proof of phone number, things like that. So it’s not really a change in the number of approvals, but the quality of approvals and therefore, the ability the customer to accept or the willingness for the customer to accept it. ”

Lower recovery rates drove charge offs

“I think this quarter we feel like it was driven by the recovery – it’s a combination of both, but the recovery rates probably had a little more weight this quarter. And as far as any specifics around customers, we really don’t have anything.”

Lower recovery rates a by product of softness in overall wholesale market

“No, I think it’s just – it’s a by-product of overall pricing in the wholesale market. As you probably know, when we repo cars, we typically sell them off at our auctions and we realize whatever the auction market is delivering at that point in time.”

Testing to figure out what they can do full online

“So, the home delivery, we have referenced that in the last call. We did do a test. We have since pulled back on the test. We are looking at how to better operationalize that and we will be coming out with another test later this fall on the home delivery. As far as the full transaction online, that’s something that we will continue to explore. Like I said earlier today, we started looking online financing as a component of that. And again, part of that will also be driven by the consumer demand and need for doing the whole transaction online as well as making sure that we stay within the state restrictions of what can be done online and what can’t be done online.”

Tom Reedy

Increase in applications from higher credit customers, decrease from lower end

Thanks, Tom. Good morning, everybody. This quarter, consistent with last two quarters, we continue to experience a year-over-year increase in credit applications from customers at the higher end of the credit spectrum and a decline in applications across the lower end.”

Loss reserves increasing for a couple of reasons

“I think it’s a combination of things, Scot. In general, if you step back and look at it, last year’s experience was very favorable. So I don’t think we would have expected to have a repeat of that, so that’s kind of the first point. We have also seen pretty significant growth in the portfolio, which means losses are going to step-up. And then also in the last 2 years, we have expanded on the credit front a bit. If you remember back in 2013, we got much more aggressive with customers at the very high end of credit, offering very low rates to the highest credit quality customers. That had an impact of kind of bringing down our expected losses on the portfolio. Over the last 2 years though we have been expanding at the lower end of what CAF has done”

” we did have some unfavorable experience in the quarter as I mentioned due to – partially due to that expansion and partially due to the wholesale recovery rate.”