Carmax Inc Q3 FY2020 Earnings Call

Good morning. My name is Carol, and I will be your conference operator today. At this time, I would like to welcome everyone to the CarMax Fiscal 2020 Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Stacy Frole, Vice President, Investor Relations.

Thank you, Carol. Good morning. Thank you for joining our fiscal 2020 third quarter earnings conference call. I am here today with Bill Nash, our President and CEO; and Tom Reedy, our Executive Vice President of Finance; and Enrique Mayor-Mora, our Senior Vice President and CFO. Let me remind you, our statements today 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 management’s current knowledge and assumptions about future events that involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the Company disclaims any intent or obligation to update them. For additional information or on important factors that could affect these expectations, please see the Company’s annual report on Form 10-K for the fiscal year ended February 28, 2019 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?

Thank you, Stacy, and good morning, everyone. Before we get started, I want to take a moment to personally congratulate Enrique on his recent promotion to CFO. Enrique and I have worked together for many years, and he has made a lot of great contributions during this time. I also want to thank Tom for serving as our CFO for the past nine years. I look forward to continuing to work with him as he shifts his focus to our strategic initiatives, in addition to continuing to oversee all the finance. For today, I will start with our third quarter highlights before turning the call over to Enrique, who will discuss our financials in more detail. Tom will then provide additional color around customer financing. And I will wrap up with an update on our omni-channel experience before opening it up for your questions. As you read in the earnings release, we delivered a strong sales performance this quarter with revenues up 11.5% on a 7.5% increase in used unit comps and an 11% increase in total used units sold. Net income and EPS for the quarter were down 9% and 4.6%, respectively. This is largely the result of significantly higher stock-based compensation due to an increasing share price during the quarter, combined with a planned increase in third quarter expense due to the timing of advertising. As a reminder, volatility in stock-based compensation expense is driven by restricted stock units that are awarded broadly to our non-executive associates. Enrique will provide additional details on these items shortly. Keep in mind, despite these third quarter cost headwinds, year-to-date comps were up 6.7%, EPS is up 10.1%, earnings are up 3.6%. And while we have deleveraged SG&A by $37 per unit, this includes $42 per unit of stock-based compensation. We attribute our sales growth to a variety of factors including solid execution in operations, finance, customer progression and marketing, in addition to an overall favorable used car sales environment. Web traffic increased 15% year-over-year as we continue to benefit from our various marketing efforts. During the third quarter, our markets offering an omni-channel experience had slightly stronger comp sales than our non-omni markets. The strong performance in both was supported by many of our omni-related digital initiatives that have been rolled out nationally. This includes improved customer lead management tools, finance self-service tools and digital merchandising. We believe all stores benefited from our national marketing campaign launched in October, which reinforces the strength of our brand. For the quarter, gross profit per used unit was $2,145, up slightly when compared with the prior year. Our teams have done an exceptional job of continuing to drive efficiencies, allowing us to maintain margins while offering competitive prices. Wholesale unit sales were also higher this quarter with volume up 3.3% year-over-year. The increase in wholesale volume was slightly offset by a small decrease in gross profit per wholesale unit due to heavier depreciation at auctions since the beginning of the third quarter. As a percentage of sales, zero to four-year-old vehicles was 77%, similar to last year. Total SUVs and trucks accounted for about 49% of sales, up from 45% last year. At this point, I’ll turn the call over to Enrique to provide more information on the third quarter financial performance.

Thanks, Bill, and good morning, everyone. For the quarter, other gross profit decreased slightly. EPP profits grew by $11 million with 13.3% due to the combined effects of strong used volume growth and increased margin. Like the prior year, we did not recognize any additional EPP profit sharing revenue. This increase was offset by an $11 million decline in service department profits for the quarter versus a year ago. The decrease in service profits was largely due to three factors. First, we increased our post-sale warranty period from 30 to 90 days back in May. We view this as an investment in providing a better customer experience. Second, we experienced near-term inefficiencies due to a sharp ramp in technician hiring support for future sales growth. Finally, a portion of stock-based compensation runs through the service department. On the SG&A front, expenses for the quarter increased $75 million to $485 million. SG&A deleveraged by $157 per unit. A material component of this growth and the resulting deleverage was driven by stock-based compensation. $11 million or 25% of the overall year-over-year growth in SG&A on the quarter was due to the 17% increase in our share price for the quarter versus a 15% decrease in the prior year period. This resulted in a $94 per unit deleverage to SG&A and represents $0.09 of EPS. We also had a planned increase of $14 million or 39% in advertising costs for the new ad campaign and the rollout of our omni-channel experience that Bill mentioned earlier. This spend on the quarter brings our year-to-date advertising expense per unit to $225. On a year-to-date basis, this is slightly higher than last year and consistent with our earlier communications that our intention is to spend slightly more per unit for the full year. Other notable expense drivers included the opening of 19 stores since the beginning of the third quarter last year, which represents a 10% growth in our store base, higher variable costs associated with our strong sales growth and continued spending to advance our technology platforms, digital initiatives and our omni-channel rollout. During this period of investment, we continue to believe comps in the range of 5% to 8% will be needed to leverage SG&A on an annual basis. As part of our expansion strategy, we opened four stores in the third quarter, two in new markets, Palm Springs, California and Gulfport, Mississippi, and two in existing markets, Dallas and Atlanta. Over the next 12 months, we anticipate opening 11 more stores. Earlier this month, we also opened our Phoenix Customer Experience Center or CEC. We continue to enhance shareholder returns through our repurchase program. During the quarter, we repurchased approximately 1.3 million shares for $115 million. This program has contributed to our 10% year-to-date EPS growth that Bill mentioned earlier. We have $1.67 billion remaining in our current authorizations.

Thank you, Enrique, and good morning, everybody. CarMax Auto Finance and our partner lenders continued to deliver solid results with CAF income growth and strong conversion in Tier 2 and Tier 3. During the quarter, we saw modest growth in application volume and strong performance across all credit tiers. Tier 2 accounted for 20.4% of used unit sales compared with 18.3% last year. Tier 3 was up slightly to 9.5% compared with 9.3% a year ago, and CAF penetration net of three-day payoffs was 43.3% versus 44.1% in last year's third quarter. Year-over-year, CAF's net loans originated grew by 13% to $1.7 billion as the increase in used cars sold and the average amount financed was somewhat offset by the decrease in CAF’s net penetration rate. For loans originated during the quarter, the weighted average contract rate charged to customers was 8.1%, down from 8.5% a year ago and 8.6% in the second quarter. Portfolio interest margin increased to 5.7% versus 5.6% in Q3 last year. CAF income was up 3.9% to $114 million, primarily driven by the 7.5% growth in average managed receivables and a small increase in interest margin, offset by an increase in the loss provision as a percent of average receivables. The provision for loan losses was $49 million in Q3 versus $40.8 million in the prior year period. The increase arises from portfolio growth and a modestly higher allowance based on loss experience we began to see earlier this year. At $153.6 million, the allowance represents 1.15% of ending managed receivables, up slightly from 1.12% a year ago and comparable to the second quarter. This remains well within our range of expectations, given our origination strategy and portfolio mix. Before I turn the call over, I will touch on the impending Current Expected Credit Loss accounting standard, which is commonly referred to as CECL. CECL will be effective for us at the start of our fiscal 2021 and a number of you have inquired about it. This is a non-cash accounting change and won’t impact our previously disclosed cumulative net loss expectations. The most significant element of the new standard is that it requires companies to reserve for the expected lifetime losses, whereas currently we reserve for the following 12 months. As a result of the adoption, we will increase our allowance for loan losses by $200 million to $250 million. This is based on information as of November 30, 2019, and the adjustment will flow through retained earnings. Post-adoption, CECL could also create more volatility in the quarterly provision for loan losses as any true-ups will be projected over the life of the portfolio versus the 12 months we're currently estimating. Now, I’ll turn the call back over to Bill.

Thanks Tom and Enrique. Now, I'll provide an update on the rollout of our omni-channel experience, and how we are continuing to innovate and improve the business for the future. First, the numbers. We now have four CECs that we continue to staff, Raleigh, Atlanta, Kansas City, and our newest in Phoenix, which opened earlier this month. Approximately 40% of our customer base currently has access to our omni-channel experience, and we are on track to reach the majority of our customers by the end of this fiscal year in February. We plan to complete the rollout in the next fiscal year. ESP penetration in our omni-markets is slightly lower than our overall penetration, which is a little above 60%. We have not seen a material change in finance penetration or mix with the rollout of omni. We are pleased to achieve 7.5% comps while at the same time, implementing the largest transformation in the Company’s history. While we continue to run some inefficiencies in both our CECs and stores, we are confident we will be able to improve productivity as we roll out and mature the new experience. We also still believe our unique omni-channel experience will be more cost-efficient than our current model. We've already begun to drive cost efficiencies in our Atlanta CEC quarter-over-quarter. We are also excited about the opportunities ahead as we continue to improve our customer offerings. Two key areas where we see opportunity are our Customer Relationship Management or CRM platform and our new delivery options. Our CRM platform enhances the experience for both our customers and our associates. It provides associates with valuable insights and data about our customers that allow us to better personalize their experience. It provides customers with access to our customer hub. This hub makes it easier for customers and our sales associates to have full visibility to the status of their journey and to continue to progress further, whether online or in the store. We also see tremendous opportunity with our express pickup and home delivery offerings. Our conversion rate on these sales is very high, and the customer experience with these delivery options is extremely well received. While combined, they still represent less than 10% of sales in eligible markets, these offerings steadily increased throughout the quarter. Going forward, we expect more customers will take advantage of these delivery options as we expand our omni-channel experience into new markets and increase customer awareness through various marketing channels. Our associates are doing an amazing job and structuring and delivering a systematic yet aggressive rollout of the new omni experience, an experience that personalizes each customer’s journey whether in person, online, by phone or a seamless combination of channels. Our ability to leverage the infrastructure, analytics, and processes we have built over the last 26 years and continue to improve with state-of-the-art technologies and new digital capabilities is a significant competitive advantage, one that, when combined with our ongoing store expansion, positions us well to continue to lead the industry, profitably grow sales and gain market share. I'm extremely proud of our associates and all of their accomplishments, and we're all excited about the future. With that, we'll be glad to take your questions.

At this time, we will be conducting our question-and-answer session. Our first question today comes from Scot Ciccarelli from RBC Capital Markets. Please go ahead.

Good morning, guys, and happy holidays to you.

Good morning, Scot.

Can you guys talk about the change that you had in your service policy, specifically what caused you to make that change, the 30 to 90 days? And was there any financial catch-up in the quarter or is this more of a reset that will continue for the next few quarters?

Sure, Scot. For a long time, we had a 30-day limited warranty program. As Enrique mentioned, we switched to a 90-day warranty in May because we believe it enhances the customer experience. Now that this change has been implemented across the board since May, it has resulted in a slight additional cost of a few dollars per unit, which is a bit of extra pressure on expenses.

And so, we should expect, let's call it, a similar effect to that service department revenue for the next three quarters, let's call it?

Well, keep in mind, when Enrique was talking about the service profits, there are really three different buckets that are going in there. Part of it was the shift from 30 days to 90 days, and of that, I would say that's about a third of the overall change. Another third was stock-based compensation, and the other third was the staffing inefficiencies that we see because we're ramping up our technicians. As we ramp up technicians, until we get a critical mass, it's hard to turn on new shifts. So, each one of them makes up about a third. And on the 30 to 90-day warranty, of that third, about half of it is a little step up on a per unit basis of the expense. We also had in that third a mix shift, where we did more 90-day warranty work in retail service work.

Got it. And just for clarification, does the 90 days align with most CPO programs that are available?

I'm not sure about the CPO program, Scot. I would have to go and look at that. I think that we feel like 90 days is certainly best-in-class for used cars.

Got it. All right. Thanks, guys.

Thank you.

That's a program that will anniversary itself in the first quarter of fiscal year 2021, as we rolled it out in May of this past year.

Our next question comes from Brian Nagel from Oppenheimer. Please go ahead.

So first off, Enrique and Tom, congratulations on your new roles.

Thank you.

Thanks.

I have a broader question from a strategic perspective. The business has clearly improved recently, with used car unit comparisons for this quarter showing an increase of over 7%. Bill, as we examine this positive trend in used car unit comparisons, how should we interpret the balance between internal initiatives and external factors? The data indicates an overall improvement in the market, potentially aided by used car pricing and other influences. However, CarMax is also implementing several initiatives, particularly related to the omni-channel. How much of the rise in used car unit comparisons is driven by our own efforts versus external conditions? From the internal perspective, what are the major factors contributing to this progress?

Yes, that's a great question, Brian. As I mentioned earlier, it is a result of strong execution combined with a favorable environment. When I consider the favorable conditions, we have better access to credit, and while new car prices remain high overall, we have noticed a slight narrowing of the gap between new and used car prices. Low unemployment and strong consumer confidence, along with an increase in incoming inventory, also contribute to this favorable environment. Additionally, I want to commend our internal efforts, particularly in execution. Our teams have been effective in sourcing the right cars at the right prices during a period when we typically observe depreciation. Our operations teams are continuously finding efficiencies that allow us to pass savings on to our customers. We've seen significant progress in guiding customers through their journeys, both in-store and online, with the help of new tools we're rolling out for our associates. Our financing team performed well, supporting sales and maintaining margins while providing attractive customer offers, and we have launched a new marketing campaign. Overall, I believe the growth we are seeing is due to a combination of both internal and external factors, rather than any single one being the primary driver.

Got it. It's very helpful. My follow-up question relates to the marketing expense mentioned for Q3, which impacted earnings. How should we view the new marketing campaign in relation to the changes made to marketing over the past few quarters?

Yes. I think, periodically we rework our marketing. This was a big change. We have a new outside agency; between the outside agency and our internal team, I think they've done a great job really bringing it to life, not only our brand, but also the omni-channel experience in those markets. So, as you've seen in the past, when we go with the new marketing campaign, if you look at the last one with Andy Daly, we run that for a while, we build off of that. I would think that this marketing campaign, the same type of thing will continue to build off the strength of this. And as we go forward, you will just continue to see this new campaign versus running ads on all campaigns. In the third quarter, I've talked about this on previous calls; in the first and second quarters, we knew that we were going to be heavy on the backside of the year. We ran light on advertising. In fact, through the second quarter year-to-date on a per unit basis, we were spending less than what we spent last year on an annual basis. And I've said all along, we're going to spend a little bit more to also help market our omni-channel experience. I think, as you look at where we are now year-to-date, Enrique cited earlier, we're about $225 per unit, slightly above last year. I think that's a good proxy. We will be slightly above where we finished the year last year. We still expect that's where we will come in on a per unit basis.

Our next question comes from Sharon Zackfia from William Blair. Please go ahead.

Hi. Good morning. Question on SG&A. There's obviously a lot of moving parts in there this quarter. And, I appreciate the commentary on the 5% to 8% to leverage comps, I guess, going forward. Can you talk about whether that 5% to 8% would be applicable for the fourth quarter? And then, as we go into fiscal 2021, I know there is still continued investments in omni-channel, but does that start to abate somewhat in terms of the incremental spending and inefficiencies that you're seeing?

Yes. On a quarterly basis, there can be so much variability that when we refer to the 5% to 8%, it's on a longer annual basis. If you take a look at this quarter between stock-based comp and between the advertising timing, that alone caused us to deleverage. So, within any particular quarter, it's difficult to say. But certainly on an annual basis, that is our expectation.

Yes. And Sharon, on the second part of your question about what you should expect to see in the New Year. I've said earlier in previous calls, last year was a step-up year. We expected this year to be another step-up year. Next year, we expect it to be a continued step-up year but less to a degree than what you've seen from a growth percent, less so than what you saw this year or last year. Of course, we'll provide some more direction in our fourth quarter call when we're back here then.

Our next question comes from John Murphy from Bank of America. Please go ahead.

Good morning, guys. I just wanted to follow up on one of the comments you made on the call. The development of the CRM system and making it more advanced, so there's more data available to your sales team. I'm just curious, is there an intention to maybe go more proactively and market sales directly to individual consumers to drive same-store sales, as you're developing that CRM system, or is this more just as people come in and inquire about vehicles, you just have more information to help out the process? It just seems like there may be an opportunity here to get more directed advertising going.

Yes. I believe that the CRM serves primarily as a tool to assist our associates, whether they are in the customer experience center or in the store. The advantage of the CRM lies in its ability to collect and analyze data. We can implement what we call smart routing to ensure that we manage those leads effectively and determine who will handle them. We are becoming increasingly skilled in this area, which is one of the aspects I am enthusiastic about as we move forward and continue to improve efficiencies. Regarding our capacity to directly target more customers, we have already begun that transition. If you consider our overall advertising expenditure, likely half of it is now allocated to digital advertising, which is far more targeted than traditional advertising methods like broadcast TV and radio. I believe that the data we gather from the CRM will aid us in better targeting potential customers, although I tend to think of them in separate categories.

Okay. And then just one follow-up on the express pickup and in-home delivery. You said a little bit less than 10% in the eligible market. So, it sounds like it’s somewhere between 5% to 10%. I mean, would you call those folks that are doing the express pickup and in-home delivery incremental consumers or buyers in your stores, or is there some kind of cannibalization? Just trying to understand what's incremental and what's cannibalized?

Yes. At this point, I would say it's probably both. Currently, we are seeing more express pickups than home deliveries. It's interesting because sometimes customers think they want home delivery, but as they engage in the process, they realize they prefer to come in and test drive a few cars, which leads them to switch to in-store. The express pickup allows customers to handle everything online and then come to the store to pick up their keys. If they want to take the car for a test drive or learn about options, they can do that in less than 30 minutes. I expect both of these options to continue growing as we enhance the experience and promote it in our marketing efforts.

Our next question comes from Armintas Sinkevicius from Morgan Stanley. Please go ahead.

Great. Thank you for taking the question. 7.5% same-store sales growth year-over-year, that's quite a strong number. How do we think about how much of that comes from a favorable used car sales environment versus how much of that comes from the omni-channel rollout? Any way you can help us contextualize that would be very much helpful.

Yes. As I said earlier, there are a lot of different factors. I don't think any one of those factors is the majority. So, I don't think necessarily the favorable environment is a majority when you add all those things I talked about earlier. I think, a lot of these execution things that we've highlighted, especially the digital initiatives improvements that we've made as part of omni and rolled that out to the other locations that don't have omni, I don’t believe any one of them lines up and has the majority of that lift. It's really a combination of all of them.

Okay. And when you talk about lift, does that mean versus the comp a year ago or just the 7.5% number itself?

When I consider that 7.5% figure and what drives that performance, I don't think any single factor is primarily responsible for that 7.5%.

Our next question comes from Craig Kennison from Robert W. Baird. Please go ahead.

Hey. Good morning. Thanks for taking my question. I guess, first, I want to tell you that my daughter contributed to your comp this quarter. We had a great experience. So, thank you for that.

That's great. Thank you, Craig.

Yes. It was a good experience. We didn't get to do the internet omni-channel experience yet, but I'm sure that will come. The question I had was on your recon business or your recon work. You always seem to drive cost out of the reconditioning process. Has that trend continued? And as a follow-up, is it still your policy mostly to return that to the consumer rather than trap some of that in the gross profit line?

Yes. Craig, to answer your question on giving it back to the customer, yes, at this point, we like passing that along to the customer. It helps make the prices as competitive as possible. The reconditioning, we continue to look for efficiencies there. I would say the area that we're seeing a little bit more improvement on is more of the procurement. So, think about parts, that kind of thing. We've equipped our associates in the field with certain tools that allow them to buy the right part at the right time, at the right expense. I would also tell you picking up some efficiencies in our transportation, as we move more vehicles with our internal and dedicated fleets. That helps as well. And then, of course, I always put an emphasis on our buying, because when you think about price competitiveness, it really starts with where you purchase the cars. I think the buyers have helped to make sure that we are buying them at the right price and the right time. The other thing I would just say is that, not only does it help us be competitive on prices, but all those savings help us manage our margin and keep that stable as well.

Our next question comes from Rick Nelson from Stephens. Please go ahead.

So, the New York Fed this week pointed to a higher rejection rate for auto loans. I'm curious if you see any need for tightening of CAF? I did notice a shift toward the Tier 2 and Tier 3 finance providers away from CAF?

Rick, could you just repeat the first part of your question, please?

So, the New York Fed this week had a report out that pointed to a higher rejection rate on auto loans. I'm curious if you need to tighten CAF?

No. I think, as I mentioned, we've seen real strong performance from both our partner lenders who are originating in our system, which is as Bill mentioned, providing a little bit of a lift year-over-year. In CAF, we saw losses tick up a little bit earlier in the year, and our increased provision this quarter kind of reflects that we're just going at that run rate that we've been experiencing all year versus a little bit more favorable environment last year. But, we've seen no need to adjust our credit appetite. We're still generating a portfolio that we're very comfortable with and happy with the business.

Also, on the GPU front, another solid quarter. You mentioned gaining leverage from the omni-channel. Bill, is your intent to pass that leverage on to the customer to drive more volume or does that spend...

Yes. Currently, the leverage I mentioned during the call refers to one of our oldest customer experiences in Atlanta, where we are starting to see some cost leverage. This will mainly be reflected in SG&A savings rather than through GPU or in customer pricing. You'll see that benefit appear in SG&A savings.

Our next question comes from Derek Glynn from Consumer Edge Research. Please go ahead.

Good morning. Thanks for taking our question. We had a follow-up on the home delivery attach rate at a little less than 10% of sales in omni-channel markets. Where do you think that steady state number is? What percent of your overall sales do you think home delivery can be in the long run?

Well, just for clarification, Derek. The 10% that I mentioned includes both home delivery and express pickup, with express pickup being a subset of home delivery. So, it’s a higher percentage than home delivery alone. However, both services, when considered individually, still represent a small portion of our overall sales. As for where I think it could go, to be honest, I’m not sure. But it doesn’t really matter to us because our priority is to support the customer and provide them with the experience they desire. If more customers prefer home delivery, that's great; we'll be able to meet that demand. If they choose to come into the store, we can accommodate that as well. So, I can't predict the future, but we did notice an increase in the usage of both express pickup and home delivery over the quarter. However, I’m uncertain about the ultimate potential for these services.

And then, just as a follow-up, as we think about your SUV and truck mix, I would think that follows a pattern unfolding in the new market with the mix of those vehicles is much higher. To what extent do you view that as a tailwind to your ASPs? And is there any opportunity or appetite to take more price drive higher GPUs?

When we examine GPUs, it's important to note that they are not influenced by the cost of the vehicle. We don't necessarily earn more from more expensive vehicles. Looking ahead, the truck mix seems to be increasing slightly, which better reflects what is entering the market, whether through our appraisal lane or external auctions. I expect this trend to continue in the coming quarters.

Our next question comes from David Whiston from Morningstar. Please go ahead.

Thanks, good morning. My question is about new vehicle leasing as an alternative to buying a used car from CarMax. I believe leasing has reached its peak for this cycle, but in the past, there have been some very appealing offers for consumers. So, do you view new vehicle leasing as less of a competitive threat now compared to 12 months ago, or is it pretty much the same?

I believe the industry data suggests that this year will see a peak in off-lease vehicles compared to last year. As for the direction of leases next year, it’s difficult to predict. I don't claim to be a leasing expert, but regardless of whether leases continue at their current rate or decline slightly in the next quarter, we expect to maintain good inventory availability. Once the peak of off-lease vehicles decreases, something else will fill that gap. We've witnessed this cycle repeat several times throughout our history in business.

Our next question comes from Chris Bottiglieri from Wolfe Research. Please go ahead.

The first question is about the increase in advertising. Was most of this additional spending focused nationally, or was it more directed towards areas where you have omni-channel markets? And then, two, sorry.

I'm sorry. Go ahead. Finish your question.

Yes. I was wondering, as you shift more towards online, have you reconsidered what the appropriate advertising budget should be? Perhaps increasing advertising makes more sense. I'm curious about your thoughts on this.

Yes. The majority of the spend on the quarter was actually the national spend, not the omni-market spend.

I understand. That's helpful. I wanted to discuss the wholesale business further. You've mentioned that web traffic looks strong and that unit growth has been impressive, but also noted a decrease in appraisal traffic at wholesale. First, can you share your thoughts on what might be causing that? Is the competitive environment becoming more challenging due to the current cycle of competitive threats? Second, regarding the supply of 8 to 10-year-old vehicles, which was expected to increase, has that played out as you anticipated earlier in the cycle?

Yes. So, Chris, I mean, there has been robust competition for what we would consider A lane vehicles. A lot of different dealers are focused on trying to buy more outside of the auction. But, that's nothing new. The comments I made earlier about wholesale were more around GPU. And with that, the GPU went down a little bit, but that's more of a function of what we saw in the marketplace from a depreciation standpoint as the vehicles depreciate and we put less on the offer, which also has an impact on buyer rate and volume. So, we had a little bit of pressure on buyer rates, still up around 30%, a little over 30%. So, we're still pleased with that. But anytime you have a depreciating market, it puts a little headwind on your offers which then puts a little headwind on your volume.

Yes, it certainly makes sense. Did the number of wholesale locations change this quarter? It looks like you closed a couple, but I might just get the way on reading the schedule.

No, we did not close any auctions.

Our next question comes from Seth Basham from Wedbush Securities. Please go ahead.

Stock-based comp was a big headwind this quarter. You mentioned some additional stock compensation to service line associates, which is captured in SG&A, but are you also giving more stock-based comp to associates that would be captured in that SG&A?

Yes. Stock-based compensation, the majority is going to be in SG&A, but there are also components in service profits as we mentioned related to service associates. It’s also a component related to CAF as well. But, by far the largest component is within SG&A. I think, it's also important to emphasize again, this is our broad-based equity program, targeted at non-executive management, settled in cash and runs through the P&L.

Yes. And Seth, just to also clarify, we didn't increase that program. It's not like there were more shares or anything out there. It's just the market volatility changed from quarter-over-quarter.

Got it. Thank you for that clarification. And then, secondly, as it relates to the performance of your comparable store sales overall relative to your omni-channel markets, you mentioned omni-channel is slightly better. That sounds a little bit different than what you're describing. The omni-channel outperformance in prior quarters, is that A, correct; and B, is that surprising; and C, is it still a good investment, if you're not getting a big lift on those omni-channel sales?

There are many questions in that one question, Seth, but I will do my best to address all of them. Is it surprising where we are? Absolutely not. If you compare it to what we've seen in the Atlanta market, it's different. But I've always stated that every market is going to be a bit unique, and we'll be pulling different levers. I feel very positive about our progress with the omni rollout and its contribution to our sales. Currently, we are facing some challenges in our omni markets regarding our customer experience centers. When a market transitions to the omni experience, we deactivate the e-offices in the stores. While the e-offices have been staffed by experienced associates who know how to assist customers, these associates are now focused on the customer experience centers. Our customer experience centers have our most experienced associates, but they have only been in this role for about six months. As we continue to expand and open new customer experience centers, such as the ones in Kansas City and Phoenix, there are fewer experienced associates handling customer progression. I see this as a significant opportunity for us, especially when considering future efficiencies and productivity improvements. Overall, I feel confident about our position, even though our omni markets are currently facing challenges.

Understood. Thank you very much. Happy holidays, guys.

You too.

This concludes our question-and-answer session. I’ll now turn the call back over to Bill Nash for closing remarks.

Great. Thank you, Carol. I want to thank all of you for your interest in CarMax and for joining us today. As always, our success is because of our associates and the culture that they have created. I want to thank them for what they do every day, for driving what's possible for each other, for our customers and for our communities. I want to wish all of them and all of you a happy holiday. And we will talk again next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.