CarMax 1Q18 Earnings Call Notes

Bill Nash – President and CEO

Tom Reedy

Not planning to take more risk in financing

“I don’t think we’re in a position to start talking about taking any more risks on CAF. As we talked about last quarter, we enacted some tightening. But pretty much, what flows to CAF, what flows to Tier 2 and Tier 3 is going to be based on what comes through the door. And as we’ve all talked about, look at Tier 3 business as incremental. Obviously, it’s more — it’s less profitable and more volatile. But on ongoing basis, it would do very little to what CAF is going to be, just maybe it will have an impact on the mix of penetration between the various players.”

We have the best channel for originating used car loans

“Absolutely, I think, we’ve talked about before that we believe we have the best channel for originating used car loans. I don’t think any of our partners would disagree with that. As far as performance in the quarter, we continue to be happy with how they’re performing. Tier 2 lenders, we look at collectively, because all of them see every customer and they’re able to make a competitive offer. As you saw, they’re up about half a point year-over-year in the quarter. So we’re happy with the conversion we’re seeing out of that group. Tier 3, as we mentioned, we saw some tightening in Q1 of last year, but relatively consistent performance. Since then and the way we measure performances, how many sales that we get out of the applications that they see. So, nothing except good things to report on that front.”

CarMax FY 4Q17 Earnings Call Notes

Bill Nash – CEO


“remember, what we’re talking about is SEO, search engine optimization versus search engine marketing. Search engine marketing is what you pay for the ads. Search engine optimization, the way you — it’s not necessary that you’re paying for ads. The way we do it is, through this year, we’ve done a couple different things. One, it started with the website. Since the new website, we’ve also redesigned how the search engines crawl our website and make it so it’s more efficient for them to crawl. We focus on keywords, again keywords that aren’t related to CarMax, and building up pages and so that when the search engines search your website, they see keywords and like, okay, CarMax must be an expert on that, so we’re going to bring them into the organic search. Content, that’s another way we’ve increased our SEO, building relevant content that again when the search engines look at your website, it’s relevant to the questions that people are asking. So those are the levers that we pulled in and we will continue to pull to get the SEO or the organic search going for our customers.”

Tom Reedy

There’s not that much precision around recovery estimates

Yeah, let me answer your second question first, and that is, there’s not nearly that much precision around recoveries. As I mentioned I think a couple questions ago, we originate loans based on the knowledge that in the future we won’t know what recoveries are and we have a range of recoveries that we’ve experienced over time. And so we go into the equation contemplating a range of recoveries and hopefully it falls within that range. So there is really not much to be specific on that front.

CarMax 2Q17 Earnings Call Notes

CarMax’s (KMX) CEO Bill Nash on Q2 2017 Results

Testing home delivery of cars

“Lastly, we have previously mentioned that we conducted a small test of home delivery. This allows the customers to shop for and buy a car at their convenience without coming into the store. We are now conducting another larger test in Charlotte, North Carolina. Through this test we hope to learn the best ways to further operationalize this offering and deliver our hallmark exceptional customer service experience outside the store. We believe no one is in a better position to deliver as much of the car buying experience online as the customer wants. ”

Haven’t seen a big increase in supply of late model cars yet

“Yes, I think on the supply side I think the expectations were that was going to be coming back more in full force at this point and continue on later into next year and in the year after. We really haven’t seen a big, huge increase in the supply of late model cars. I think there is some coming out there but we haven’t seen the big increase that I think was originally expected and we think it will come, our external partners in the auctions think they will come later this year into next year and even the year after.”

Not surprising to see credit migrating the other way a bit

“we have been in an environment of very favorable, not just we but the overall credit markets in general, have been in a very favorable loss environment for the last few years, the last couple of years at least. And it’s not hugely surprising to see things starting to migrate a little bit differently.”

Auto lending tends to be more regional rather than national

“I think, as you pointed out, we are always looking at testing other lenders, we have got a test running right now but it’s not big enough to talk about. The interesting thing about this space is there is very few national players, it’s like much more a regional space in the financing world. So we can test additional lenders.”

Have seen a reduction in applications from customers below 600 FICO

“what we have observed in the stores is a reduction in those applications, call it the below $600 FICO level and continued increases in the volume of applications on the high end. Now I can’t speak to what other people are experiencing but we have seen some communications from other retailers that this particular segment of customers is a bit challenged today. ”

Carmax FY 1Q17 Earnings Call Notes

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 ”

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.”

CarMax FY 3Q16 Earnings Call Notes

New cars eventually come back to market at some point as used cars

“I think this is probably short-lived. Obviously, it’s been driven by low gas prices. We have seen bigger increases in new car sales as it relates to SUVs and trucks compared to the used car market increases. But ultimately, these cars will all come back into the market at some point.”

The average new car dealer sells about 50 cars per month

“our average store sold 340 cars a month during the quarter. If you look at industry data, the average new car dealer sells about 50 cars a month. So it’s really hard to say that we are losing ground and a lot of that stuff that you read about for – from new competition are very small players in very limited markets.”

A couple of years from now there will be a lot of trucks and SUVs available on the wholesale market

“we are seeing, as you know highest SAAR we have ever seen and the bigger of the increase in the SAAR is related to trucks and SUVs. If I was thinking about that over a long period of time, that means a couple of years from now we will see lot of trucks and SUVs out in the wholesale market, which if there is demand, then we will be able to take advantage of that and buy and sell them.”

Spreads in the asset backed market should stabilize as the Fed has given guidance on interest rates

“Historically, as rates have come up, we have been a little bit as the market has slower to adjust upward, because that rates can be sticky and conversely when rates have been coming down, you are usually a little slow to adjust downward because the market is going to drive that as well and you see a little bit of a benefit. But as far as going forward, yes, the market will tell. I think now that the Fed has given some guidance, I think about where they are going with interest rates that stabilize things from the perspective of spreads in the asset-backed market.’

Traffic was slightly down, but it may have been more prepared to buy because conversions up

“we did get enough traffic to sell 340 cars a month per store. And it was only slightly down. And then conversion was slightly up. And we ended up where we ended up. But in terms of traffic through the door, I think there is a chance that customers are being more prepared and are more likely to buy when they show up. And for us if we could get traffic that’s more prepared and more likely to buy, that’s just as good for us as it is if we just got plain old extra traffic.”

At some point we knew the tide was going to turn in credit

“Charge-offs has to do with what’s in the portfolio and it’s been put in there over the last several years. And the way I characterize it is we have had a long stream of favorable experience and at some point, it was – the tide was going to turn in. Things were probably going to normalize. I would probably characterize it as giving back some of the favorable experience we have had over the last several quarters. It’s too early to tell what that means from a go-forward perspective.”

Carmax FY 2Q16 Earnings Call Notes

Customers want to do more and more of the transaction from home

“what we are trying to do is make sure our customers can do as much of the transaction as they want to do from home. We’ve definitely seen the sentiment shift where customers are looking to do more and more research, more and more pieces of the transaction from home, and in some cases the entire transaction from home”

High lease percentage means used cars coming to auction with more predictability and organization

“When it’s a very high lease percentage, it’s kind of more predictable, so if there’s a bunch of leases going out now, if it’s almost 30% of new cars sales, two years out, three years out we’re going to see a lot of leases coming back. They tend to be a lot more organized at the auction, maybe even a little bit easier for us to have access to.”

The volkswagen thing only relates to the diesel product

“the Volkswagen, which just came out so we’re really still just evaluating it. It only relates to diesel product. We have about– I mentioned earlier we have about 50,000 cars online. We have only a couple of hundred diesel products, Volkswagens or Audis, so very, very small.”

More demand for SUVs with lower gas prices

” what I’ve seen in that product is prices have gone up because there’s more demand, so I think the lowering of gas prices has caused some higher prices when you’re looking to buy those cars at auction, but not something that caused it to move meaningfully one way or the other in terms of our sales”

No change in aggressiveness of tier 3 lenders

“we’ve seen pretty consistent behavior from our Tier 3 lenders, and when I say consistent behavior, it doesn’t necessarily mean what percentage of sales are getting done by Tier 3 because they are impacted by what is actually flowing down through the channel and that they’re able to see, so if there is a change in credit mix or if our other Tier 2 lenders are becoming more aggressive, it changes the nature of what they are seeing. What we look at is their behavior on how many of the applications that they see, they approve, and if they convert, and on those bases we’ve seen pretty consistent behavior.”

The market is still extremely fragmented

” the market is extremely fragmented and the fact that all of those cars are online doesn’t change the fact that when the customer goes and actually goes through the process, they still have to go through a process in a way that makes them uncomfortable.”

KarMax FY 1Q16 Earnings Call Notes

4.9% unit comps

“We had a great first quarter, driven by strong performance in all our key businesses areas and with the continuation of our store opening plan. I’ll give you some of the highlights for the quarter. Used unit comps increased by 4.9% and total used units grew by 9.3%.”

Clearly shifting more consumer behavior to online

“If you look at consumer behavior over the last several years, it’s clearly shifting towards wanting to do more and more of whatever shopping process they’re involved in online. And we see that continuing to shift, and then within that, continuing to shift towards mobile.”

Seeing stable performance from subprime lenders

“I think we talked about this a little bit last quarter. We’ve seen pretty stable performance from our Tier 3 lenders. If you look at what they’re approving and the quality of their offers, it’s been pretty consistent for the last several quarters.”

Credit quality of applications is up y/y

“if you look at credit quality of applications this quarter, it’s up about two points year over year. That moves the mix a little bit. And I think we’ve done a lot of work to build a good stable of Tier 2 lenders that each brings something different from the table from a credit perspective, and that adds incremental sales. So like I said, I think we’re happy with the performance of our Tier 3 lenders. I think that we see consistent aggressiveness out of them in the last several quarters.”

Selling prices were down

“the first part, I think we were down – well, I’m getting the number here – I think we were down a couple of hundred bucks. And I’m with you, Sharon, I don’t generally expect ASPs to go down, so I don’t have a great explanation for it. I think lower prices are better for our customers. I don’t think it really is an indication of much of anything because the move was so modest.”

I wouldn’t read to much into that though

“We were roughly flat last quarter. I think we’re up $100. So I haven’t really read too much into it. It’s such a small change in price.”

Shifted back to more 0-4 year old vehicle sales

“For the quarter, it was 76%. And you mentioned 75% was in the fourth quarter, and that’s on top of 73% the year prior. So I think pre-recession, that number was 85%, and then coming out of the recession it was 70%. So yes, we’ve seen some shifting back towards. We’ve been expecting this with the shifting in supply, with the change in the SAAR. But from quarter to quarter, it was relatively flat from the fourth quarter to this quarter.”

Not a lot of operating costs to working out delinquencies in a strong environment

“if you think about what’s entailed in the finance business, there’s a lot of activity contacting customers. If you’re in an environment where people are less delinquent and there’s fewer losses that – and fewer people not paying, which we are today, that means you’re making less calls. It probably needs less resource to do that.”

Higher lease percentage probably helps ability to source cars

“Lease percentage right now, I think, in the new car industry is somewhere around 30%. And when you see that supply coming back is really two years and three years later after you see a high lease percentage. So I’m not sure that we’ve seen much of it yet, but it’s never been a problem for us to source cars. And when cars are at a high lease percentage, when you look out two years and three years later, generally, they’re more organized at the auction, so it’s a little easier for us actually to buy those cars when we see them come back to the marketplace.”

We’re actually disintermediating peer to peer

a customer who normally would have put their car online and be – or have put up in their yard and put a for-sale sign on it, now they’re bringing a lot of those customers. They’re bringing their cars directly to us and sell it to us. So it may not be exactly the way you’re thinking of it, but I think we’re getting plenty of customers who would have gone through the peer-to-peer channel and are deciding to sell their car directly to CarMax.”

CarMax 4Q14 Earnings Call Notes

Increased share of used vehicle market by 5%

“”Our data indicates, that for the calendar year 2014, we increased our share of the zero to 10 year old used vehicle market by approximately 5%.”

Refreshes don’t really change much operationally, but better experience for customers

“I think we completed three or four of these types of conversions, and they’re a little bit more expensive than the money that would have been spent. So we just thought we would call it out, and we plan to do another 17 this year. In terms of operational changes, it doesn’t change much operationally, but I think it provides a better experience for our customers, and a better working environment for our associates as well. So we have been pretty pleased with what we have done so far, and we will gauge the results going forward, and see how much more aggressively we want to spend.”

Advertising spending

“We are making a lot of changes, and we are evaluating how best to spend our money, but that will be an ongoing process for us. So continued strong effort on TV, we are pretty much out of print, and have been for a long time, and continuing to try to optimize our paid search, as well as trying to improve our SEO, our search engine optimization through organic search.”

Our lending partners have historically allocated more capacity to carmax because they like the transparency of value

“historically, we believe that our partners have opted to direct volume towards CarMax, at the expense of other places, because they like the origination channel, the clarity of information and the knowledge about what the asset is really worth, etcetera. So we have observed in tough times before, that we felt we were less impacted than other folks. Who knows what that means going forward, but that’s probably as much color as I can give you.’

Employ a lot of data

“we employ a lot of use of data, and the ability to deliver that data back to our employees. At the moment, they need it to make good decisions. We have lots of ability to track customers through the process and make future decisions based on that. So I think we have done a pretty good job of utilizing technology in our stores, so that our associates can deliver a great customer experience.”

Cars have always been sold p2p

“You know, we look at every part of competition, and in terms of peer-to-peer, one thing to remember is, that is a huge chunk of the market already and always has been. About a third of all cars sold in the U.S. are sold from consumer to consumer. Whether you sell a car by putting a sign in your yard or you list it online or you just put it in the newspaper or whatever you do. So that has always been a third.”

You don’t lose a sale when it’s cold it just gets deferred

“we never like to use weather as an excuse, but it was really cold, and we did have a lot of stores closed, particularly in the back half of February. As far as attributing sales loss, we generally think we get it back, because when we are closed, everybody else is closed. Its not like milk, if you didn’t sell it, you didn’t sell it, or a grocer. Its such an infrequent purchase, where if we are closed, generally all the competition is closed as well. So I can attributed a specific sales loss to it, but we probably would have done a little better, if it wasn’t so cold”

CarMax FY 2Q15 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Subprime auto lending has cooled off a little

“The Tier 3, as I said, it’s a combination of factors. We’re clearly seeing them continue to provide, I’ll say less attractive offers than they were a year ago, less compelling offers for the customer so therefore we’re seeing less conversion in that space. But as I mentioned, it’s a byproduct of their behavior plus what they’re seeing coming through the door, and we’ve seen some pickup in the behavior of our other partner lenders.”

Auto lenders changed their behavior in Q3

“we saw it happening at the very end of Q3. There was a notable shift in behavior. I think—you know, we have no reason to think behavior is changing from where it is today. We want those guys to run a profitable business that’s going to be sustainable and support our customers for the long run. They are going to test and make changes as appropriate for their portfolio, and we wish them all the best of luck in doing it.”

90% of customers have been getting financing

“90% of customers are getting approval from somebody in our kind of hemisphere of lending, and that number has been—you know, 90 has kind of been as high as it’s ever been for us, but it’s been stable there for a couple of years now.”

Average retail price of a car is 30k

“The only time we’ve ever seen significant drop-off in our average retail was during the recession, when we saw our average retail drop by over $2,000. Other than that, due to inflation and due to just continued increased costs of new cars, a new car now is over $30,000, it’s just not something that I think will go backwards.’

Carmax 1Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

90% of customers are getting approval for loans

” if you look at our applicant flow, we’re still at 90% of our applicants are getting approval of some kind.”

Subprime lenders had gotten a little over-extended, now have pulled back some

“We told you last year at this time that our subprime providers had got a little more aggressive. We told you in the third quarter that they had pulled back a little bit.”

Prices rose much more than usual

“if this was what we would say a normal year, we would see some appreciation in the spring and then kind of a steady decline throughout the rest of the year. And this year, we saw more appreciation in the spring than we are used to. And lots of people attributed to weather and pent-up demand for inventory. So we will go with that.”

Don’t like wholesale prices going up

“I never like prices going up. I rather have prices go down, although I don’t think they will. So it’s a first time we have been over $20,000 average retail, since we started the business. But our margins per car were flat. So it was clearly a reflection of what the market was doing. And we talked about wholesale pricing being up during the quarter and it was simply that. And really, the only benefit from higher ASP is we get a little more on the spread when we do a CAF loan but other than that I rather see us provide lower prices to customers.”

People want to test drive cars before purchasing them online

“We don’t fully transact online. There isn’t really a preclusion. If we wanted to really press down that path, we could. We found that customers want to test drive cars. They want to — particularly, our average cars is almost four years old, with almost 40,000 miles on it.”

Do a lot of stuff online, just not consummate the deal

“we now allow our customers to put cars on hold and make appointments online without speaking to anybody. We still have the capability in the number of stores for customers to transfer cars, even a pay transfer by giving their credit card online without speaking to anybody and having that car delivered. They can actually start their paper work online, making appointment for the sales consultant and show up a lot of the work already done. But in terms of fully consummating the deal online, we’re not doing that yet.'”

Sometimes conversions drive comps, sometimes it’s traffic

“What happened over the last several years is we’ve had few quarters where all of our sales increase was driven by conversion and we’ve had sometimes where all of it has been driven by traffic. There were times when it was about a 50-50 split and I think over a long period of time, that’s kind of what we expect. It’s just so happened this quarter that our conversion was relatively flat and our comps were driven by traffic.”

It’s an infrequent purchase, so not as affected by weather

“We’ve never really made a big deal out of weather. I think because we are an in infrequent purchase that we don’t view that we lose. We’re not like a grocery business where if you don’t sell milk, then you never get to sell that milk. We sell a car. People buy it once every five years and what we’ve seen in our history is, if we miss some sales then we kind of get them back overtime. But it’s really hard to measure.”