Title

Presentation

CarMax, Inc. beats earnings expectations. Reported EPS is $0.97, expectations were $0.949.

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

David Lowenstein : Thank you, Savannah. Good morning, everyone. Thank you for joining our Fiscal 2025 First Quarter Earnings Conference Call. I’m here today with Bill Nash, our President and CEO; Enrique Mayor-Mora, our Executive Vice President and CFO; and Jon 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. 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-K filed with the SEC this morning and our Annual Report on Form 10-K 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 7865. Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow-ups. Bill?

Bill Nash: 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. 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 first quarter, 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-saleable inventory units 5% year-over-year, while decreasing used total inventory units 4%. We grew CAF income 7% year-over-year under tightened lending standards and post-quarter end we launched our first non-prime securitization deal.

We continued to actively manage our SG&A, and we repurchased over $100 million in shares. For the first quarter of FY ’25, our diversified business model delivered total sales of $7.1 billion, down 7% 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. First quarter retail gross profit per used unit was $2,347 in-line with last year’s $2,361. Wholesale units sales were down 8.3% versus the first quarter last year as the industry experienced lower seasonal appreciation year-over-year.

Average selling price defined approximately $900 per unit or 10%. Wholesale gross profit per unit was a first quarter record of $1,064 up from $1,042 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. 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 sourced the remaining approximately 35,000 vehicles through dealers, up 70% from last year. For our first quarter 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 Omni sales this quarter, up from 54% in the prior year.

Total revenue from online transactions was approximately 30% in-line with last year. All of our first quarter 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 million 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 spectrum, 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 first quarter financial performance. Enrique?

Enrique Mayor-Mora : 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 and other gross profit margins and CAF contributions, while staying focused on managing SG&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 million, which translates to a $0.28 per share from a legal settlements. Total gross profit was $792 million, down 3% from last year’s first quarter. Used retail margin of $495 million declined by 4% with lower volume and relatively flat per unit margins. Wholesale vehicle margin of $157 million declined by 6% with lower volumes partially offset by higher per unit margins.

Other gross profit was $139 million, up 3% from a year ago. This was driven by an $8 million increase in EPP. As a reminder, in the fourth quarter of FY’24, 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’24. [CAF] (ph) delivered $3 million in margin, flat with last year’s first quarter. 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.

On the SG&A front, expenses for the first quarter were $639 million up 3% or $19 million. From the prior year’s quarter, when excluding the benefit from the $59 million legal settlement received during the first quarter of FY ’24. Also pressuring SG&A this quarter was approximately $22 million 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 first quarter. Excluding these items, which we noted in our FY ’24 year-end call, SG&A total dollars were down year-over-year in the first quarter due to our continued discipline in spend levels. SG&A dollars for the first quarter were mainly impacted by two additional factors.

First, other overhead increased by $6 million when excluding last year’s favorable legal settlement. Continued year-over-year favorability in non-CAF uncollectible receivables was more than offset by lapping over last year’s first quarter favorable reserve adjustment. Second, total compensation and benefits, excluding share-based compensation expense, decreased by $3 million, mostly driven by our ongoing focus on efficiency in stores and CECs. Regarding capital allocation. During the quarter, we repurchased approximately 1.4 million shares for a total spend of $104 million, which was an acceleration in the pace from the repurchase levels in the second half of fiscal year ’24. As of the end of the quarter, we had approximately $2.3 billion of repurchase authorization remaining.

In the first quarter, we also paid off our $300 million floating rate term loan, which was scheduled to mature in early June. Now I’d like to turn the call over to Jon.

Jon Daniels: Thanks, Enrique, and good morning, everyone. During the first quarter CarMax Auto Finance originated approximately $2.3 billion, resulting in sales penetration of 43.3% net of three-day payoffs, which was up 60 basis points from last year’s first quarter. 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. Partner Tier 3 volume accounted for 7.5% of sales, up from 6.7% compared to last year, as our partners improved offers were in place for the entirety of the first quarter. 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. CAF income for the quarter was $147 million, up $10 million 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 million in expense this quarter versus $9 million in expense during last year’s first quarter. 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 $81 million and resulted in a reserve balance of $493 million or 2.79% 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 second quarter. From a funding perspective, we plan to expand our current asset-backed securitization program from a single platform to one that more broadly incorporates CAF’s 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 million 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 will turn the call back over to Bill.

Bill Nash: Great. Thank you. As I mentioned earlier, we are encouraged by the positive trends we are seeing in pricing and vehicle value stability. I am 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 MaxOffer through product enhancements that make it even easier to use. We achieved record sourcing volume each month of the quarter and are excited about launching this capability in New York during the second quarter. We’ve increased used saleable inventory units while lowering total used inventory units through [with production] (ph) 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. 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. 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 are 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 stand-alone reconditioning centers, will drive further efficiencies and potentially enable us to take on more MaxCare work over time. All of these actions continue to make a stronger, better position 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. Savanna?

Operator: Thank you. [Operator Instructions] Our first question will come from John Healy with Northcoast Research. Please go ahead.

John Healy: Thank you. Bill, I’d love to just kind 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? Thanks.

Bill Nash: 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 fourth quarter, 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 continue — we continue to see some improved performance, and we’re actually running slightly positive comp June month to date. So we’re encouraged to see this continued improvement there. As far as market share data, if we look at the first three calendar months of the year, which we had the title data four, we are higher in the first calendar quarter of ’24 than we were in the fourth quarter of calendar 2023.

We were also similar to where we were last year in the first quarter — calendar quarter. And just to remind you, the last two fourth quarters, we’ve seen big price corrections. And so that’s — this one was similar. We kind of bottomed out December, we’re coming back up. It looks like we are coming up about the same rate as we did last year. So year-over-year market share is fairly similar. On the market share, look there is a lot of volatility there on short periods. 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 are seeing — we 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.

John Healy: Thank you guys.

Bill Nash: Thanks John.

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

Seth Basham: Hi, thanks a lot. And good morning. My multipart questions on cash. First, looking at the loss trends and your reserves, we continue to see losses increase in your securitized portfolio, your reserves looked a little bit light. Do you think that you’re going to have to reserve more aggressively if the loss trends continue? And then secondly, how quickly can you ramp Tier 2 and Tier 3 lending, as you now have a non-prime securitization program?

Jon Daniels: Yes, I appreciate the question, Seth. So with regard to losses and delinquencies within the quarter, I would 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 reserved receivable ratio flat sequentially. Certainly we published data on a quarterly basis. Remember, that’s roughly 60% of our portfolio. But again, the trends there are 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, so I’ll add that.

But for the most part, a non-event for us from a delinquency and 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 us anchor to what we originate today. So 43% of sales, give or take in any given point is largely what we are doing today. The vast majority clearly is in Tier 1. In Tier 3, we’ve been historically larger, but we are at a small piece because we are really investing in Tier 2 and trying to understand that. It is 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 are looking forward to that. Now as far as ramping and the timing of the ramp, I would say in the near-term, maybe for the balance of the year, we are going to continue to just learn about the Tier 2 space. We are going to roll out our new models — sorry, test our new models in the quarter. We are 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. But beyond that, we do think there is room for us to grow beyond 43%. Will it be 45%, 47%, 50%, remains to be seen the timing of how much and when, but we do believe it is substantial, but probably not doing much more than what we’re doing today for the balance of the year.

Enrique Mayor-Mora: I do think longer term as well, when you assess when you think about funding capacity, do you think us entering into this market, which we are really excited about, it is probably another $2 billion to $3 billion worth of funding capacity that we are 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.

Seth Basham: Absolutely. Thank you.

Operator: Our next question comes from the line of David Bellinger with Mizuho.

David Bellinger: Hi, great. Thanks for taking my 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 are seeing there on the ad spend line. And just overall, how we should think about SG&A dollars in Q2 and over the balance of the year?

Enrique Mayor-Mora: Thanks for the question. I would tell you that’s pretty benign, right? I think quarter-to-quarter, it’s going to be plus here, a little bit negative here on the 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 add roughly $200 per total unit for the balance of the year — for the entire year, I should say.

Bill Nash: SG&A on the rest of the year.

Enrique Mayor-Mora: For the rest of the year — sorry, can you repeat the question again?

David Bellinger: Yes. And just the second part is overall SG&A expense dollars. Just how should we think about that level through the balance of the year?

Enrique Mayor-Mora: Yes. I think for the entire year, we are really focused in the first quarter, we are really proud of the fact that once you back out some of the noise that I spoke to, we were actually down SG&A year-over-year. I’d expect that for the balance of the year, that is going to be a little bit more challenging from a total dollar standpoint, but what I’ll reemphasize here is what we are focused on. 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 where we’ve been for the past several years in our heavy investment phase, that is 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.

David Bellinger: Got it. Thank you.

Operator: Our next question comes from Brian Nagel with Oppenheimer.

Brian Nagel: Hi, good morning.

Bill Nash: Good morning.

Brian Nagel: A couple of questions. I’ll lump them together. The first, just with regard to the — 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. I mean again, how should we think about the model [question] (ph) 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. Thanks.

Jon Daniels: Thank you, Brian. I 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. 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 million to $12 million worth of value to CarMax. Now bear in mind, that doesn’t start day one when you begin to add that volume. Initially, you originate additional volume, you need to provision for loan losses, but eventually it becomes accretive.

And once you get to steady state, that’s where I’m referring to the $10 million to $12 million. So as you can imagine, as you tackle on additional points, you tackle on additional value for CarMax. And in the long run, we think it is very substantial and something we are looking forward to going after.

Bill Nash: 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 them through consumers. And then what we don’t get from consumers we’ve been buying it off-site auctions. This is just another step to diversify. We buy consumers. We can buy directly from dealers. And the ones that we’re buying for dealers, the bulk of the — it’s a little different that we bought to consumers. The majority of those are — there’s a higher percentage of retail cars that we’re buying from dealers. So while they are not as profitable as the ones we bought from consumers, they’re certainly more profitable than one we have to go off-site for.

So we are encouraged by it. We think it’s — this is an area that we can continue to grow. We’re getting great responses from the dealers. We’ve made some improvements to the platform, which I think is part of why you are 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 it.

Brian Nagel : Thanks guys. Appreciate the color.

Operator: Our next question comes from Sharon Zackfia with William Blair.

Sharon Zackfia: Hi, 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 broader industry dynamics, do you think there’s something operationally you are doing I know obviously, at the top of the funnel is increasing conversion has been down a little bit. Is that starting to improve for you? And if so, kind of where and why? Thanks.

Bill Nash: Yes. Thank you for the question, Sharon. Look, I think it is a combination of things. I think it reflects on just some of the continued work that we are doing internally, but it’s also look vehicle prices, even though they were up quarter-over-quarter, they’re always up from the fourth to the first, they were down $700 year-over-year. So we are seeing vehicle values be a little bit more stable. If you look at depreciation trends, for example, — if you look at the last two years, they’re all over the board from appreciation to depreciation and they are steep both ways. This year is a little bit more what I’d call normal, although there is a difference in the first quarter 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 $1,100 depreciation this year. We only went up about $1,000 and then 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 is been appreciation, depreciation, what’s more impacted us the last 1.5 years, 2 years is these big price corrections. So I think it is a combination of factors.

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

Rajat Gupta: Great. Thanks for taking the question. Bill, I just had a question on strategy and operations. I think like you can all see like the factual data on the unit comps, in the market share. It’s not where CarMax used to be historically. And if you look at your margins and like the EBITDA per unit, as you exclude the one-time items this quarter, they have not changed or improved. So I’m curious if you think 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.

Bill Nash: 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 1.5 years, 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. So if you look at the data, you are seeing more 10-plus year old cars being sold here in the last two years. I think that’s even the same case for the first calendar quarter. So I think the impact on the business have 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. 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 $35.5 million. It is typically north of $40 million. And the most impacted share of that group is the less than six 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.

Enrique Mayor-Mora: Yeah. 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 is a matter of aggressive also going after what we can control, and we can control that.

Bill Nash: 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. Jon has talked about the financing. I actually think the financing, not only is it going to allow us to grow CAF income, I think there is 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. I think the work that we’ve done on the variable cost for example.

A lot of those factors, the EPP, the increase net, 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 has to happen together, we have more tools in our tool chest.

Rajat Gupta: 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.

Bill Nash: No, look, we are encouraged by the — really the trend since the second half of the first quarter. Like I said, it is even continued into June. So we are encouraged by that, and we are 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.

Rajat Gupta: Great. Thank you.

Bill Nash: Thank you.

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

Craig Kennison: Hi, 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?

Bill Nash: Yes. Great questions, Craig. And yes, we are — from a quantification standpoint, look I think we have a couple of hundred bucks per unit per retail unit that we are going after over the next year or two between reconditioning and logistics. So as you know, that’s not insignificant at all. And we are excited about it. It is not going to hit day one tomorrow. But across the two, we feel like there is kind of that amount of opportunity there. And then the other part of your question.

Craig Kennison: Do you expect that to hit the bottom-line? Or is that something –.

Bill Nash: Yes. 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’d probably flow that through in the form of pricing. But certainly you have decisions to make as you realize some of those efficiencies.

Craig Kennison: Why — I guess just a follow up, why not take if your prices are competitive today, why not take those efficiencies to the bottom-line.

Bill Nash: Well, again, you have decisions to make. And again we will be looking at the affordability. We’ll be looking at elasticity. There’s lots of – it is hard for me to say what the situation is going to look like once we get there because there is 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, at one point when we picked up some reconditioning savings, we took them to the bottom-line. But a lot of the years since then, we’ve been passing along and it helps us just manage overall margin that helps manage the price. So I just think there is a lot that goes into the equation that we’ll have to look at that point in time.

Craig Kennison: Yeah, make sense Bill. Thank you.

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

Chris Bottiglieri: 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 is sourcing yourself? Or 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 not doing intentionally, sorry. But the prospectus on new non-prime securitization would suggest there is $5 billion of this type of receivable. How does that $5 billion legacy portfolio that’s behind that securization, how does that differ between Tier 2? Like is Tier 2 just like a higher CNL than the legacy 5? Can you just elaborate like how this is different and [where is this going] (ph)? Thanks.

Bill Nash: Sure, Chris. Well, first of all, breaking Davi’s Rule, you’re the only one that apologize and everybody has broken it up to this point. So we forgive you. The first part of the question I’ll answer, and I’ll pass it over to Jon on the [non-prime] (ph). So look, we’ve got unbelievable part partners. Parts partners have been around for a long time. So where 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 are 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. I think we had this we don’t have good partners or whatever because we do, 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. Jon?

Jon Daniels: Yes. I appreciate the question, Chris. So if we think about the legacy $5 billion 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 are putting into the current ABS program. If we think about that — those receivables, we are going to basically split that and we are 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. And then we dropped 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 in today that we would be able to capture back, and we are always looking to do that. But then if you look at the entirety of Tier 2 and Tier 3, call that today, it is 27% of sales. That is a wide spectrum in all honesty, across that 27%. And so we think that there is 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 the 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 — in that Tier 2 and that Tier 3 space. We don’t want it all, but we do think there is opportunity to grow there. So hopefully, that broad answers your question.

Enrique Mayor-Mora: I would just add said one thing, Chris. I think a general way to think about that split in the program between high prime and non-prime from a FICO perspective, I think of the non-prime is less than [$650 million] (ph) and then the high prime is greater than [$650 million] (ph), just a general way to think about the two pools.

Chris Bottiglieri: Gotcha. Okay. Thank you for all the help. Appreciate it.

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

Scot Ciccarelli: Good morning guys. Bill, I know you’ve had a couple of different questions on market share, but I’m going to try to swing out 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 is your mix of late-model product, that’s kind of the key driver to the relative growth rates that we are seeing? Or could there be other factors at play, whether it is credit approvals or something else?

Bill Nash: No, Scott. 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 is a highly fragmented market. There is lots of folks that don’t hold their margins. They are getting rid of the inventory. So I think that’s been a big factor most recently in the drop in the fourth quarter and now as we are starting to climb back out. But certainly, I think beyond that — look as I said earlier, I think there’s more cars that are being sold, for example that are 10 years and older, and that is 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. That’s probably 70% of historically what our sales are.

And that’s 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 car, and that’s across all the credit spectrum. So I think, there is a combination of things that are going on. And the other thing is we are 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. And so we understand that there is going to be some consumers that have traded down. So I think it is a combination of things.

Scot Ciccarelli: Okay. Can I ask a follow-up. 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?

Bill Nash: Yes. So we’re — our highest markets are over 10% still. And when we — and I’ve talked about this in the past, when we rolled out on the originally in ’20. 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 digits, over 10%.

Scot Ciccarelli: Got it. Thanks guys.

Bill Nash : Thank you Scott.

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

Chris Pierce: Can you talk about supply? I know we are 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?

Bill Nash: Yes — and a lot has been written and folks saying that we have a supply problem. And the reality is we are not having a problem sourcing the cars. If there is any impact on supply or from supply, it’s just that it goes into the overall affordability question, but we can get to supply. Now having said that, I think it’s great that the SAAR continues to go up. I think the most recent number I saw was like [15.7%] (ph) 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 is more inventory owners. And I think that is good for the industry. I think it is good for us.

Chris Pierce: Okay. So just — 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 are making?

Bill Nash: Yes. So no, I appreciate the clarification because when you asked the question, you were talking more about the supply of I thought later-model cars. If there is any supply issue, it’s just if you’re looking for an older vehicle, for us we buy lots of older vehicles, but there is 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 one-third of our cars are, let’s call it, more than six years old. That is quite up — it’s up a lot from where it was before. But if there’s any supply, you’d probably be more in that bucket versus the late model bucket.

Chris Pierce: So just — is the supply of vehicles that meet the CarMax standard growing? Or has it been flat not changing — what’s the right way to think about the supply vehicle that you’re going to retail?

Bill Nash: Yes, I think as we look forward, you look holistically, whether it is an older CarMax vehicle that meets our parameters or younger one, I think the supply is improving just because of with the dynamic that you talked about earlier because the SAAR 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.

Chris Pierce: Okay, thank you for that. I appreciate.

Bill Nash: Thank you Chris.

Operator: [Operator Instructions] We will take our next question from David Bellinger with Mizuho. Please go ahead.

David Bellinger: Hi 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? 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?

Bill Nash: 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 parts standpoint. And if their systems are down, it can slow down parts, there is a little 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.

David Bellinger : Got it. Thank you.

Operator: I’ll hand the call back to Bill for any closing remarks.

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