Edible Garden Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
June 21, 2024

There are 14 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Q1 Quarter Fiscal Year 2025 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.

Operator

And I would now like to hand the conference over to your speaker today, David Lowenstein, VP, Investor Relations. Please go ahead.

Speaker 1

Thank you, Savannah. Good morning, everyone. Thank you for joining our fiscal 2025 Q1 earnings conference call. I'm here today with Bill Nash, our President and CEO Enrique Mayer Mora, our Executive Vice President and CFO and John 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.

Speaker 1

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 ks filed with the SEC this morning and our annual report on Form 10 ks for the fiscal year ended February 29, 2024, 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 7,865. Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow ups.

Speaker 2

Bill? Great. Thank you, David. Good morning, everyone, and thanks for joining us. During the quarter, we saw continued positive trends, including year over year price declines, improvement in vehicle value stability and ongoing growth in upper funnel demand.

Speaker 2

We're encouraged by what we are seeing and are continuing to strengthen our business by delivering associate and customer wins that are differentiated and durable. In the Q1, we delivered strong retail and wholesale GPUs and grew EPP margins. We sourced approximately 35,000 vehicles from dealers, an all time record. We increased used salable inventory units 5% year over year while decreasing used total inventory units 4%. We grew cap income 7% year over year under Titan Lending Standards and post quarter end we launched our first non prime securitization deal.

Speaker 2

We continue to actively manage our SG and A and we repurchased over $100,000,000 in shares. For the Q1 of FY 2025, our diversified business model delivered total sales of $7,100,000,000 down 7 percent compared to last year, reflecting lower retail and wholesale volume and prices. In our retail business, total unit sales declined 3.1% and average selling price declined approximately $700 per unit or 3% year over year. Used unit comps were down 3.8% and we saw comp performance strengthen in the back half of the first quarter. 1st quarter retail gross profit per used unit was $2,347 in line with last year's $2,361.

Speaker 2

Wholesale unit sales were down 8.3% versus the Q1 last year as the industry experienced lower seasonal appreciation year over year. Average selling price declined approximately $900 per unit or 10%. Wholesale gross profit per unit was a 1st quarter record of $10.64 up from $10.42 a year ago. We bought approximately 314,000 vehicles during the quarter, down 9% from last year. The appreciation dynamics that I just mentioned impacted our overall buys as well.

Speaker 2

We purchased approximately 279,000 vehicles from consumers with slightly more than half of those buys coming through our online instant appraisal experience. With the support of our Edmund sales team, we source the remaining approximately 35,000 vehicles through dealers, up 70% from last year. For our Q1 online metrics, approximately 14% of retail unit sales were online consistent with last year. We continue to see ongoing adoption of our omnichannel retail experience. Approximately 57% of retail unit sales were omnisales this quarter, up from 54% in the prior year.

Speaker 2

Total revenue from online transactions was approximately 30% in line with last year. All of our Q1 wholesale auctions and sales were virtual and are considered online transactions, which represent 18% of total revenue for the quarter. CarMax Auto Finance or CAF delivered income of $147,000,000 up 7% from the same period last year. In a few minutes, John will provide more detail on customer financing, the loan loss provision, CAF contribution and our progress in becoming a full credit spectrum lender, which enables incremental growth in financing income. At this point, I'd like to turn the call over to Enrique, who will provide more information on our Q1 financial performance.

Speaker 2

Enrique?

Speaker 3

Thanks, Bill, and good morning, everyone. As Bill noted, we drove strong per unit margins this quarter for both used and wholesale. We also delivered growth in other gross profit margins and cash contribution, while staying focused on managing SG and A. First quarter net earnings per diluted share was $0.97 versus $1.44 a year ago. As a reminder, last year's quarter had a benefit of $59,000,000 which translates to a $0.28 per share from a legal settlement.

Speaker 3

Total gross profit was $792,000,000 down 3% from last year's Q1. Used retail margin of $495,000,000 declined by 4% with lower volume and relatively flat per unit margins. Wholesale vehicle margin of $157,000,000 declined by 6% with lower volumes partially offset by higher per unit margins. Other gross profit was $139,000,000 up 3% from a year ago. This was driven by an $8,000,000 increase in EPP.

Speaker 3

As a reminder, in the Q4 of FY 2024, we tested raising MaxCare margins per contract, which drove overall product profitability despite a lower product penetration rate. With that, we rolled out the margin increases in late Q4 FY 2024. Service delivered $3,000,000 in margin, flat with last year's Q1. Performance was primarily supported by efficiency and cost coverage measures, offset by deleverage due to lower year over year sales in the quarter as well as by timing. We expect year over year improvement for the balance of the year as governed by sales performance given the leverage deleverage nature of service.

Speaker 3

On the SG and A front, expenses for the Q1 were $639,000,000 up 3% or $19,000,000 from the prior year's quarter when excluding the benefit from the $59,000,000 legal settlement received during the Q1 of FY 2024. Also pressuring SG and A this quarter was approximately $22,000,000 of expense from share based compensation for certain retirement eligible executives and the lapping of favorable reserve adjustments related to non CAF uncollectible receivables during last year's Q1. Excluding these items, which we noted in our FY 'twenty four year end call, SG and A total dollars were down year over year in the Q1 due to our continued discipline in spend levels. SG and A dollars for the Q1 were mainly impacted by 2 additional factors. First, other overhead increased by $6,000,000 when excluding last year's favorable legal settlement.

Speaker 3

Continued year over year favorability in non cap uncollectible receivables was more than offset by lapping over last year's Q1 favorable reserve adjustment. 2nd, total compensation and benefits excluding share based compensation expense decreased by $3,000,000 mostly driven by our ongoing focus on efficiency in stores and CECs. Regarding capital allocation, during the quarter, we repurchased approximately 1,400,000 shares for a total spend of $104,000,000 which was an acceleration in the pace from the repurchase levels in the second half of fiscal year twenty twenty four. As of the end of the quarter, we had approximately $2,300,000,000 of repurchase authorization remaining. In the Q1, we also paid off our $300,000,000 floating rate term loan, which was scheduled to mature in early June.

Speaker 3

Now I'd like to turn the call over to John. Thanks, Enrique, and good morning, everyone. During the Q1, CarMax Auto Finance originated approximately $2,300,000,000 resulting in sales penetration of 43.3 percent net of 3 day payoffs, which was up 60 basis points from last year's Q1. The weighted average contract rate charged to new customers was 11.4%, an increase of 30 basis points from a year ago. Partner Tier 2 penetration in the quarter was 18.7%, down from 20.4% observed last year.

Speaker 3

Partner Tier 3 volume accounted for 7.5 percent of sales, up from 6.7% compared to last year as our partners improved offers were in place for entirety of the Q1. Both tiers saw less application volume year over year as lower credit customers remain challenged with affordability. Also impacting each of these year over year results, but to a lesser degree, is CAF's continued decreased volume in Tier 3 as well as the increased test volume in Tier 2. GAAP income for the quarter was $147,000,000 up $10,000,000 from the same period last year, primarily driven by an increase in total interest margin. Note, fair market value adjustments from our hedging strategy accounted for $3,000,000 in expense this quarter versus $9,000,000 in expense during last year's Q1.

Speaker 3

The net interest margin percentage for the quarter was 6.2%, up from last quarter, but in line with our expected level of near 6%. The provision for loan losses was flat to last year at $81,000,000 and resulted in a reserve balance of $493,000,000 or 2.79 percent of receivables compared to 2.78% at the end of last quarter. CAF's continued investment in the Tier 2 space offset by the previously implemented tightening in Tier 1 contributed to a consistent reserve to receivable ratio. As was highlighted last quarter, CAF has been building the capability and infrastructure to scale its participation across all credit tiers. First, CAF has leveraged its learning in Tier 2 along with its experience operating in both Tiers 1 and 3 to develop a new full spectrum underwriting model, which we will begin to test in the Q2.

Speaker 3

From a funding perspective, we plan to expand our current asset backed securitization program from a single platform to one that more broadly incorporates cash receivables across distinct prime and non prime segments. We believe this will allow us to better align our offering with each investor base and ultimately generate added funding capacity. To that end, our first non prime ABS transaction is currently in the market with $625,000,000 of offered notes. Having the ability to both successfully decision and efficiently fund the entirety of the credit spectrum at scale puts CAF in a strategic position to further complement our full roster of lending partners while also driving additional finance income for the business. Now I'll turn the call back over to Bill.

Speaker 2

Great. Thank you. As I mentioned earlier, we're encouraged by the positive trends we're seeing in pricing and vehicle value stability. I'm proud of the durable actions we have been taking to support our business and further differentiate our offering, which are setting us up for continued improvements in our performance and future growth. Some examples include, we've expanded our vehicle sourcing capabilities by attracting more dealers to MAX offer through product enhancements that make it even easier to use.

Speaker 2

We achieved record sourcing volume each month of the quarter and are excited about launching this capability in New York during the Q2. We've increased used sale of inventory units while lowering total used inventory units through WIP reductions from new title management capabilities and focused inventory management in non production stores. We have enhanced CAF's ability to become a full spectrum lender, which positions us to further grow CAF income over time. We've raised our EPP margins and improved service gross profit. We have achieved efficiency gains in our stores and CECs that will scale very well as we buy and sell more cars.

Speaker 2

We have launched a number of EV research tools through Edmunds to help educate and build trust with consumers. We've also established test stores in California to evaluate new capabilities that support our operational readiness for increased EV sales and also enhance the customer experience. Finally, we have continued to further enhance our omni channel capabilities. We are rolling out our new order processing system to our stores and plan for it to be available nationwide later this year. The system helps associates guide customers through each step of the buying journey and provides a more seamless experience for consumers who prefer to blend self progression with assistance from associates.

Speaker 2

In addition to these actions, we are focused on driving down cost of goods sold by pursuing incremental efficiency opportunities that we've identified across our logistics network and reconditioning operations. For logistics, we're testing a transportation management system that dispatches moves through a centralized team. The system automates communication between drivers and stores and provides new planning and execution capabilities. For reconditioning, we've identified opportunities to reduce costs such as parts acquisition, bringing elements of sublet work in house and optimizing production workflow. In addition, we believe that balancing production capacity across our stores and standalone reconditioning centers will drive further efficiencies and potentially enable us to take on more MaxCare work over time.

Speaker 2

All of these actions continue to make us stronger, better positioned to support consumers and fuel our excitement about our future growth in sales and profitability. With that, we'll be happy to take your questions. Savannah?

Operator

Thank And our first question will come from John Healy with Northcoast Research. Please go ahead.

Speaker 4

Thank you. Bill, I'd love to just kind

Speaker 5

of start with the top of the funnel for you guys just on same store sales. I think you mentioned that comp trends improved as we move through Q1 and would just love to get your thoughts on maybe how those improved and maybe what you're seeing now. And just as a follow-up to that, how do you answer the share question? Because I think that's the biggest one investors bring up is we see these numbers for CarMax, but how do you feel you guys are performing in the market versus peers? And if there is a delta, how do you explain that delta?

Speaker 5

Thanks.

Speaker 2

Thank you, John. On your first question, I think what you're asking is basically kind of comp cadence. So again, if you go back to the Q4, we the last call we did halfway through the quarter, we were running mid single digit negative comps. Obviously, the back half of the quarter was better than the first half of the quarter, which we were encouraged by. And then if you look at June month to date for the new quarter, we also continued we continue to see some improved performance and we're actually running slightly positive comp June month to date.

Speaker 2

So we're encouraged to see this continued improvement there. As far as market share data, if we look at the 1st 3 calendar months of the year, which we have the title data for, were higher in the 1st calendar quarter of 2024 than we were in Q4 of calendar 2023. We're also similar to where we were last year in the Q1 calendar quarter. And just to remind you, the last 2 4th quarters, we've seen big price corrections. And so that's this one was similar.

Speaker 2

We kind of bottomed out December. We're coming back up. It looks like we're coming up about the same rate as we did last year. So year over year market shares is fairly similar. On the market share, look, there's a lot of volatility there on short periods.

Speaker 2

And barring any other big price correction, my plan is not necessarily talk about the market share again until the end of the year, because already we're seeing we've got some markets that are up, some markets that are down. I think looking over the longer period of time is the way to really look at it. So again, I'll update this again at the end of the year unless we see some big macro factor that's having an outsized impact on it. But we feel good about the trends.

Speaker 4

Thank you, guys.

Speaker 6

Thanks, John.

Operator

Our next question will come from Seth Basham with Wedbush Securities. Please go ahead.

Speaker 7

Thanks a lot and good morning. My multipart question is on CAF. First, looking at the loss trends and your reserves, continuing to see losses increase in your securitized portfolio. Your reserves look a little bit light. Do you think that you're going to have to reserve more aggressively if the loss trends continue?

Speaker 7

And then secondly, how quickly can you ramp Tier 2 and Tier 3 lending as you now have a non prime securitization program?

Speaker 3

Yes. Appreciate the question, Seth. So with regard to losses and delinquencies within the quarter, I'd say largely we were very much in line with what we expected for the quarter. And I think that's reflected in the provision year over year is basically flat. If you look at our reserve to receivable ratio, flat sequentially.

Speaker 3

Certainly, we published data on a quarterly basis. Remember that's roughly 60% of our portfolio. But again, the trends there as expected. And bear in mind in the quarter, this quarter is typically a high volume quarter. So your actual provision will typically be higher because you've originated more and it's typically a lower credit quality quarter because of tax time as well.

Speaker 3

So I'll add that. But for the most part, a non event for us from a delinquency in losses as it was right in line with our expectations. To your second question, how quickly can we ramp the Tier 2 and Tier 3 volume? I think the easier way to answer that is kind of let's anchor to what we originate today. So 43% of sales give or take in any given point is largely what we're doing today.

Speaker 3

The vast majority clearly is in Tier 1. In Tier 3, we've been historically larger, but we're at a small piece because really investing in Tier 2 and trying to understand that it's in the higher portion of Tier 2. We are really excited about our non prime securitization program. We think that's truly going to enable growth both in the lower end of the credit spectrum for us to take a larger percentage of sales, but also to expand what we do in the higher end in what we call our higher prime segment. So we're looking forward to that.

Speaker 3

Now as far as ramping and timing of the ramp, I would say in the near term, maybe for the balance of the year, we're going to continue to just learn about the Tier 2 space. We're going to roll out our new models or sorry, test our new models in the quarter. We're going to begin to learn about the entirety of the Tier 2 spectrum. And that will take some time. And as we grow that, we will certainly let folks know.

Speaker 3

But beyond that, we do think there's room for us to grow beyond 43%. It will be 45%, 47%, 50% remains to be seen the timing of how much and when, but we do believe it's substantial, but probably not doing much more than what we're doing today for the balance of the year. I do think long term as well when you assess, when you think about funding capacity, I do think that's entering into this market, which we're really excited about, is probably another $2,000,000,000 to $3,000,000,000 worth of funding capacity that we're going to give ourselves when you think about how deep we can eventually go over time. So this is a really exciting program and we expect to drive our financing income incrementally moving forward.

Speaker 7

Absolutely. Thank you.

Operator

Our next question comes from the line of David Ballinger with Mizuho.

Speaker 8

Hey, great. Thanks for taking the question. It's on the expense side. So if you look at the ad spend per total unit, I think that was up about 5% year over year compares to your guidance for flattish. Maybe just walk us through any changes you're seeing there on the ad spend line?

Speaker 8

And just overall, how we should think about SG and A dollars in Q2 and over the balance of the year?

Speaker 3

Thanks for the question. I would tell you that's pretty benign, right? I think quarter to quarter, it's going to be a plus here, a little bit negative here on a total unit basis, which is again how we manage our total advertising spend. So I wouldn't look at that as anything other than just kind of quarter to quarter fluctuations. But we are committed to managing to that roughly $200 per total unit for the balance of the year for the entire year, I should say.

Speaker 2

SG and A on the rest of the year?

Speaker 3

For the rest of the year? Sorry, can you repeat the question again?

Speaker 8

Yes. And just the second part, just overall SG and A expense dollars. Just how should we think about that level through the balance of the year?

Speaker 3

Yes. I think for the entire year, we're really focused. In the Q1, we're really proud of the fact that once you back out some of the noise that I spoke to, we were actually down SG and A year over year. I would expect that for the balance of the year that that's going to be a little bit more challenging from a total dollar standpoint. But what I'll reemphasize here is what we're focused on.

Speaker 3

And what we're focused on is putting ourselves in a position through active cost management to be able to lever on low single digit gross profit growth. And that's really what we're focused on. And so when you look at what we've been for the past several years in our heavy investment phase, that's a different story, right? And it really speaks to us migrating more to a little bit more of a fixed cost structure and an ability to lever when sales roll around, which they will. And so that's how we think about our ability to leverage moving forward.

Speaker 8

Got it. Thank you.

Operator

Our next question comes from Brian Nagel with Oppenheimer.

Speaker 6

Hi, good morning.

Speaker 2

Good morning, Brian.

Speaker 6

A couple of questions. I'll lump them together. I mean, the first, just with regard to this first non prime securitization, I think it's a follow-up to Seth's question before. But as we think about this development, I mean, how what are the ramifications longer term for CarMax? Is this going to be a potential vehicle to drive better share, better profitability both?

Speaker 6

I mean, again, how should we think about the model collection now with this capability? And then my second question, unrelated, you keep calling out the sourcing vehicles from dealers. I guess the question is the sustainability of that and just also the potential positives for margins or other sourcing? Thank you.

Speaker 3

Yes, Brian. Appreciate the question. I'll take the first one with regard to the non prime securitization. Yes, I'm going to continue to anchor us to this kind of 43% of sales. As mentioned, we think there is some substantive volume that we can take above that.

Speaker 3

And the best way to kind of give orders of magnitude of the value, the long term value here is we see it under the current financial situation, the current economics, for every one point of sales that we can grab, we think that can drive $10,000,000 to $12,000,000 worth of value to CarMax. Now bear in mind that doesn't start day 1 when you begin to add that volume. Initially you originate additional volume, you need to provision for loan losses, but eventually becomes accretive. And once you get to steady state, that's where I'm referring to the $10,000,000 to $12,000,000 So as you can imagine, as you tack on additional points, you tack on additional value for CarMax. And in the long run, we think it's very substantial and something we're looking forward to going after.

Speaker 2

Yes. And as far as the second part of your question, Brian, on dealer sourcing, look, we're all about sourcing vehicles wherever we can find them. And traditionally for us, we've been sourcing through consumers and then what we don't get from consumers we've been buying at off-site auctions. This is just another step to diversify. We buy from consumers, we can buy directly from dealers.

Speaker 2

And the ones that we're buying for dealers, the bulk of it's a little different than we buy for consumers. The majority of those are there's a higher percentage of retail cars that we're buying from dealers. So while they're not as profitable as the ones we buy from consumers, they're certainly more profitable than when we have to go off-site for. So we're encouraged by it. We think it's this is an area that we can continue to grow.

Speaker 2

We're getting great responses from the dealers. We've made some improvements to the platform, which I think is part of why you're seeing this continued demand. And if I look at a year ago versus now, we've the dealers that are actively using it have bumped up, let's call it, roughly 50% in the last year and we really haven't added I mean, we added a few more markets, but really haven't added that many more markets. So we're encouraged by

Speaker 6

Thanks guys. Appreciate all the color.

Speaker 2

Sure.

Operator

Our next question comes from Sharon Zackfia with William Blair.

Speaker 9

Hey, good morning. Thanks for taking the question. I guess, it's kind of on the improvement in sales you've been seeing. I mean, do you think that's broader industry dynamics? Do you think there's something operationally you're doing?

Speaker 9

I know obviously at the top of the funnel is increasing, conversions have been down a little bit. Is that starting to improve for you? And if so, kind of where and why? Thanks.

Speaker 2

Yes. Thank you for the question, Sharon. Look, I think it's a combination of things. I think it reflects on just some of the continued work that we're doing internally. But it's also look, vehicle prices, even though they were up quarter over quarter, they're always up from the 4th to the first.

Speaker 2

They were down $700 year over year. So we're seeing vehicle values be a little bit more stable. If you look at depreciation trends, for example, if you look at the last 2 years, they're all over the board from appreciation to depreciation and they're steep both ways. This year is a little bit more what I would call normal, although there is a difference in the Q1 last year. Just to expand on some of my comments earlier, last year we saw appreciation kind of in this first time period of the year of about $2,500 and then we saw about $1100 depreciation this year.

Speaker 2

We only went up about $1,000 and then it's kind of flat by the end of the quarter. So you have a little bit of year over year dynamics. But again, just the value stability, that's nice. I mean, we've always worked in an environment where there's been appreciation and depreciation. What's more impacted is the last year and a half, 2 years is these big price corrections.

Speaker 2

So I think it's a combination of factors.

Operator

And we will take our next question from Rajat Gupta with JPMorgan. Please go ahead.

Speaker 10

Great. Thanks for taking the question. Bill, I just had a question on strategy and operations. I think like we can all see like the factual data on the unit comps, the market share. It's not where CarMax used to be historically.

Speaker 10

And if you look at your margins and like the EBITDA per unit, I mean, you can easily exclude the onetime items this quarter, they have not changed or improved. So I'm curious if you think that the current strategy that you have around sourcing, the impact omni channel has had on your in store culture, Is all of that still the right approach? Or do you think something needs to change? Or are we just waiting for the industry backdrop to improve for CarMax to do better on all these metrics, especially when some of the public peers are doing better? Thanks.

Speaker 2

Yes, Rajat. Look, I feel great about the strategy. I feel great about all the things that you talked about. I think what's really been the story for us particularly is really what you've seen over the last year and a half and it's been more about these big price corrections and what's going on in the market. The fact that we sell a late model high quality car from an affordability standpoint.

Speaker 2

So if you look at the data, you're seeing more 10 plus year old cars being sold here in the last 2 years. I think that's even the same case for the 1st calendar quarter. So I think the impact on the business had been more macro related, but we certainly have not been sitting here waiting for them to get better. We've been making ourselves stronger. And I think those dividends will continue to come back.

Speaker 2

They'll pay dividends as we go forward as sales come back. I mean, keep in mind, last year, I think the total used cars exchange was $35,500,000 It's typically north of $40,000,000 And the most impacted share of that group is the less than 6 year old. And again, it goes back to the affordability. So we feel great about our strategy. We feel great about the durable actions I told you that we've taken, which will continue to give us benefits as we go forward.

Speaker 3

And I do think it's important to point out as well, and Bill talked about it in his prepared remarks, going after aggressively going after reconditioning costs, going after logistics costs and bringing those down. Those are material items moving forward that we anticipate that can support sales, that can support margin, both of those items. So we're excited about those. So Rajat, it's a matter of aggressive also going after what we can control and we can control that.

Speaker 2

The only other thing I would add to that Rajat is when you go through experiences like this, you want to be a better, stronger company. So if this was to happen again in the future, what might you do different? And some of the things we've already talked about, the expanding our sourcing, Enrique just talked about really focusing on the cost of goods sold. John's talked about the financing. I actually think the financing, not only are they going to allow us to grow cap income, I think there's an opportunity to actually grow units because I think there's little pockets that maybe our partners aren't picking up that we think are actually good little pockets that we can now do.

Speaker 2

I think the work that we've done on the variable costs, for example, a lot of those factors, the EPP, the increase in that, all those factors also enter into the equation on elasticity when it comes to measuring like should we lower prices, should we keep the prices the same. So again, I think we've learned a lot, we've made a lot of improvements. So if the situation is to happen together, we have more tools in our tool chest.

Speaker 10

Maybe just like on the June commentary, I mean, is it fair to expect that the positive trends you're seeing should only get better through the course of the quarter? Or is there some monthly seasonality or comps to keep in mind there? Thanks.

Speaker 2

Yes. Look, we're encouraged by the really the trend since the second half of the first quarter. Like I said, it's even continued into June. So we're encouraged by that and we're going to keep getting after it. So I don't have a crystal ball to tell you exactly what's going to happen this year, but we feel good about the trajectory.

Speaker 2

Great. Thank you. Thank you.

Operator

Our next question will come from Craig Kennison with Baird. Please go ahead.

Speaker 11

Hey, good morning. Thanks for taking my question. Bill, you mentioned some cost of goods sold initiatives related to logistics and reconditioning. Do you expect those savings to flow through to the bottom line or to drive lower prices? And then is there any way for you to quantify the per unit impact of those initiatives?

Speaker 2

Yes, great questions, Craig. And yes, we're from a quantification standpoint, look, I think we have a couple of $100 per unit, per retail unit that we're going after over the next year or 2 between reconditioning and logistics. So as you know, that's not insignificant at all. And we're excited about it. It's not going to hit day 1 tomorrow.

Speaker 2

But across the 2, we feel like there is kind of that amount of opportunity there. And then the other part of your question.

Speaker 11

Do you expect that to hit the bottom line or is that Yes.

Speaker 2

So what I would tell you is, I mean, obviously, you have a decision to make when you start to pull that in. As I sit here right now, I'd say, look, we probably flow that through in the form of pricing, but certainly you have decisions to make as you realize some of those efficiencies.

Speaker 11

I guess just to follow-up, why not take if your prices are competitive today, why not take those efficiencies to the bottom line?

Speaker 2

Well, again, you have decisions to make. And again, we'll be looking at the affordability. We'll be looking at elasticity. There's lots of it's hard for me to say what the situation is going to look like once we get there because there's a lot of factors that play into that. We may take some of it, we may take in the past, I mean, you've followed us long enough.

Speaker 2

At one point, we picked up some reconditioning savings. We took them to the bottom line. But a lot of the year since then, we've been passing along and it helps us just manage overall margins, it helps manage the price. So I just think there's a lot that goes into the equation and we'll have to look at that point in time.

Speaker 11

Yes. Yes, makes sense, Bill. Thank you.

Speaker 4

Yes.

Operator

Our next question comes from Chris Bottiglieri with BNP Paribas. Please go ahead.

Speaker 12

Hey, thanks for taking the question. So first, I just wanted to follow-up that last question actually. Can you elaborate more on the parts acquisition? That sounds pretty material. Are you going direct to vendor and just sourcing yourself?

Speaker 12

Are you asking your retail partners to reduce pricing? And then I have a question on credit. I know I'm breaking David's rule. I apologize. I hope I'm doing it intentionally, so sorry.

Speaker 12

But the prospectus on new non prime securitization would suggest there's $5,000,000,000 of this type of receivable. How does that $5,000,000,000 legacy portfolio that's behind that securitization, how does that differ between Tier 2? Like is Tier 2 just like a higher C and L than the legacy 5? Can you just elaborate like how this is different and where you see the ceiling? Thank you.

Speaker 2

Sure, Chris. First of all, breaking David's rule, you're the only one that apologize and everybody's broken it up to this point, so we forgive you. The first part of the question I'll answer and I'll toss it over to John on the non prop. So look, we've got unbelievable parts partners. Parts partners have been around for a long time.

Speaker 2

So we have national relationships with. So that's been great. We just see that there's some parts optimization internally that we can do better on and which parts we're getting from which source and which parts are being applied and not being applied. So that's just one of many things that we're working on. But I don't want you to come away, think we have this we don't have good partners or whatever because we do.

Speaker 2

We have great national relationships and we're pleased with those partners. We just think we can do a better job optimizing the parts. So John?

Speaker 3

Yes. Appreciate the question, Chris. So if we think about the legacy $5,000,000,000 you referred to, if I look at kind of our overall portfolio or what we originate across our 43%, again, we've historically operated our current program. The vast majority of that has been Tier 1 that we're putting into the current ABS program. If we think about that, those receivables, we're going to basically split that and we're going to create a higher prime program, which is going to target again, we think a different investor base, really give us scale across what we would consider the higher portion of those historically securitized receivables.

Speaker 3

And then we drop down the residual there including and then add to that the Tier 2 and the Tier 3 volume that we have not historically securitized will be able to be lumped together into this non prime program. So that's how you think about what we originate today. If you think about what we might go after in the future, there are small pockets of Tier 1 that we've tightened on today that we would be able to capture back and we're always looking to do that. But then if you look at the entirety of Tier 2 and Tier 3, call that today, it's 27% of sales. That's a wide spectrum in all honesty across that 27%.

Speaker 3

And so we think that there's volume being captured across all of that and we will figure out what the right spot to be in is. So but again, this will enable us to grow down there. Now last thing I'd want to make a point on is our partners have enjoyed that volume and we love that they enjoy that volume. We anticipate selling a lot of cars in the future and we want our partners right there with us along for the ride. So we will go after some of that volume in the 20 in that Tier 2 and that Tier 3 space.

Speaker 3

We don't want it all, but we do think there is opportunity to grow there. So hopefully that broad answer answers your question. I would just add one thing. Sure. I said one thing, Chris.

Speaker 3

I think a general way to think about that split in the program between high prime and non prime from a FICO perspective is think of the non prime as less than 650 and then the high prime is greater than 650, just a general way to think about the 2 pools.

Speaker 12

Got you. Okay. Thank you for all the help. Appreciate it.

Operator

Our next question comes from Scot Ciccarelli with Truist. Please go ahead.

Speaker 13

Good morning, guys. Good morning. Bill, I know you've had a couple of different questions on market share, but I'm going to try to swing at it a little bit differently here. From the outside, I guess, we can see growth rates of Carvana and the public dealers. Given your commentary earlier on mix, do you think it's your mix of late model product that's kind of the key driver to the relative growth rates that we're seeing?

Speaker 13

Or could there be other factors at play, whether it's credit approvals or something else?

Speaker 2

No, Scott. I mean, I think the biggest factor is really coming off that big price correction at the end of the calendar year last year. Remember, we hold our margins. Obviously, it's a highly fragmented market. There's lots of folks that don't hold their margins.

Speaker 2

They're getting rid of the inventory. So I think that's been a big factor most recently in the drop in the Q4 and now as we're starting to climb back out. But certainly, I think beyond that, look, I said earlier, I think there's more cars that are being sold that, for example, that are 10 years and older. And that's just not a space that we really do anything. And I think the other thing is our bread and butter has always been kind of 0 to 4.

Speaker 2

That's probably 70% of historically what our sales are and been an expensive ticket for folks. And so there we've seen people migrate down. We've seen like throughout the last couple of years, when you look at credit apps, people are looking for a little bit cheaper card and that's across all the credit spectrum. So I think there's a combination of things that are going on. And the other thing is we're just not going to we've spent 30 years making sure that we have a high quality product and we want to maintain that high quality product.

Speaker 2

And so we understand that there's going to be some consumers that have traded down. So I think it's a combination of things.

Speaker 4

Okay. Can I ask a follow-up?

Speaker 13

Where is when you look across your markets, I know historically, the older management team used to refer to kind of 10% market share in certain markets. Like what is your highest market share in a specific market just so we can kind of compare the 4% average to it?

Speaker 2

Yes. So our highest markets are over 10% still. And when we and I've talked about this in the past, when we rolled out Omni originally in 2020, we looked at those 15 oldest markets and we actually saw a nice little acceleration in market share. Obviously, they grow a lot slower than the younger stores. But I don't know where the top end of that is, but it is the older ones they're over double digit, over 10%.

Speaker 4

Got it. Thanks guys.

Speaker 2

Thank you, Scott.

Operator

Our next question will come from Chris Pierce with Needham. Please go ahead.

Speaker 4

Hey, good morning. Can you talk about supply? I know we're seeing commercial vehicles at auction kind of grow year over year with more growth ahead. But is that the supply of cars that you need to come back that will help the overall share of newer cars in the market gain share versus older share older cars and that helps you sort of gain share? Like what are you seeing from a supply perspective?

Speaker 2

Yes. I know a lot has been written and folks saying that we have a supply problem. And the reality is we're not having a problem sourcing the cards. If there's any impact on supply or from supply, it's just that it goes into the overall affordability question, but we can get the supply. Now having said that, I think it's great that the SAAR continues to go up.

Speaker 2

I think the most recent number I saw was like 15.7 percent eventually and we've already started to see it to your point. More cars that come into the market, again help bring the price down of the used cars and more specifically 0 to 4. So I think it's more inventory in there. And I think that's good for the industry. I think it's good for us.

Speaker 4

Okay. So just to you're not having problems getting supply, but you're choosing not to source older vehicles and that's what's sort of hurting the share. But I just want to make sure I'm kind of understanding where supply is going and the supply decisions you're making.

Speaker 2

Yes. So, no, I appreciate the clarification because when you asked the question you're talking about the supply of about later model cars. If there's any supply issue, it's just if you're looking for an older vehicle, for us, we buy lots of older vehicles, but there's only so many of them that you can bring up to the quality standards. So if we have any supply issue at all, it would be more in the older vehicles that meet the CarMax standards. But again, I mean, we've had roughly a third of our cars are, let's call it, more than 6 years old.

Speaker 2

That's quite up it's up a lot from where it was before. But if there's any supply issue, it would probably be more in that bucket versus the late model bucket. So just is the supply

Speaker 4

of vehicles that meet the CarMax standard growing or has it been flat and not changing if what's the right way to think about the supply of vehicles that you're willing to retail?

Speaker 2

Yes, I think as we look forward, you look holistically, whether it's an older CarMax vehicle that meets our parameters or younger one, I think the supply is improving just because of what the dynamic that you talked about earlier because the SAR is continuing to go up, eventually those cars come in. So and the impact has on us as well prices just start to come down. And I think that's good for the industry and it's good for us.

Speaker 4

Okay. Thank you for that. Appreciate it. Thank you, Chris.

Operator

And we will take

Speaker 8

our next question from David Ballinger with Mizuho. Please go ahead. Hey, thanks guys. Just another one. Regarding the CDK and the dealer software issues that are pretty widespread right now, does CarMax have any exposure there?

Speaker 8

And are you seeing any changes in volumes or consumer activity? Just any clarity you can provide on just some of the near term implications from this widespread issue?

Speaker 2

Yes. It's unfortunate for those dealers because I know there are a lot of them. We do not use CDK as our DMS. It has a small impact on us and the way it has an impact on us is we obviously work with a lot of other dealers from a part standpoint and if their systems are down, it can slow down parts, has low impact on title work as well. But I would say it's just minor in the scheme of things as far as the impact on us.

Speaker 8

Got it. Thank you.

Speaker 12

Sure.

Operator

I'll hand the call back to Bill for any closing remarks.

Speaker 2

Okay. Great. Well, I want to thank as always, Joe, I want to thank all of our associates for everything they do. I also want to thank you all for joining the call today. And just to let you know, we just recently published the 2024 responsibility report, and I would encourage all of you read it.

Speaker 2

It provides great updates on several of our key initiatives from climate related to the tangible impact we're making on our local communities. I think we're proud. I think it demonstrates our values and how we live and it also positions us well to drive long term sustainable value for all of our shareholders. So again, we appreciate your time today and we'll talk again next quarter.

Operator

And this will conclude today's conference. Thank you for your participation and you may now disconnect.

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Earnings Conference Call
Edible Garden Q1 2025
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