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.”