Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter Fiscal Year 2023 CarMax Earnings Release Conference Call. At this time, all participants are in 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. I would now like to hand the conference over to your speaker today, David Lowenstein, AVP Investor Relations. Please go ahead.

Thank you, Corless. Good morning. Thank you for joining our fiscal 2023 fourth 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 that 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 28, 2022, 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?

Great. Thank you, David. Good morning, everyone, and thanks for joining us. The current challenges in the used auto industry are well documented, with affordability pressured by broad inflation, climbing interest rates, tightening lending standards, and prolonged low consumer confidence. We are continuing to leverage our strongest assets, our associates, our experience, and our culture to build momentum and manage through this cycle. While there are many macro factors that we cannot control, we have taken deliberate steps to support our business both in the near-term and the long run. This quarter, we reduced SG&A further. We delivered strong retail GPU through our vehicle acquisition, reconditioning, and margin management strategies while continuing to test price elasticity. We adjusted offers to deliver strong wholesale GPU while increasing unit sales quarter-over-quarter. We aligned used saleable inventory units with market conditions while driving down total inventory dollars more than 25% year-over-year. And finally, we raised CAF's consumer rates to help offset rising cost of funds while still growing CAF’s penetration. We are prioritizing initiatives to drive efficiency and improve experiences for our associates and customers. We believe these steps will enable us to come out of this cycle leaner and more effective while also positioning us for future growth. Reflecting on fiscal ‘23, we achieved a number of key milestones in each area of our diversified business model. We enabled online self-progression for all of our retail customers, enhanced our wholesale shopping experience, and completed the nationwide rollout of our finance-based shopping prequalification product. All of these accomplishments further position our business for growth as the most customer-centric experience in the industry. I'll talk more about these later in the call. Now into our results for the fourth quarter of FY ‘23. Our diversified business model delivered total sales of $5.7 billion, down 26% compared to last year, driven by lower retail and wholesale volume and prices. In our retail business, total unit sales declined 12.6% and used unit comps were down 14.1%. Average selling prices declined approximately $2,700 per unit or 9% year-over-year. In addition to the macro factors I mentioned previously, we believe our performance continued to be impacted by transitory competitive responses to the current environment. Our market share data indicated that our nationwide share of zero to 10-year-old vehicles remained at 4% for calendar year 2022. External title data shows that the market share gains we achieved during the first half of the year were offset by share losses during the second half of the year as we prioritized profitability over near-term market share. For context, we have lost market share during prior down cycles. In those cases, we recovered the market share and then continued to grow up to new heights as economic conditions improved. We remain focused on achieving profitable market share gains that can be sustained for the long-term and plan to continue running extensive price elasticity tests. The results from our most recent test confirmed that holding margins during the quarter was the right profitability play. Despite the decrease in average selling price, fourth quarter retail gross profit per used unit was $2,277, up $82 per unit year-over-year, demonstrating our ability to appropriately value vehicles and effectively manage margin in inventory. Wholesale unit sales were down 19.3% versus the fourth quarter last year but improved from the 36.7% decline during this year's third quarter as our total boughts from consumers and dealers improved sequentially. Wholesale average selling price declined approximately $3,200 per unit or 28% year-over-year, but we saw some appreciation beginning in January. Wholesale gross profit per unit was $11.87, which is consistent with last year's fourth quarter. Margin benefited from the recent price appreciation I just mentioned and from strong dealer demand, particularly at the end of the quarter. We bought approximately 262,000 vehicles from consumers and dealers during the quarter, down 22% from last year's record, but a sequential improvement from the 40% decline during this year's third quarter. Our self-sufficiency remained above 70% during the quarter. We purchased approximately 247,000 cars from consumers in the quarter, with a little more than half of those buyers coming through our online instant appraisal experience. We sourced approximately 15,000 vehicles through dealers, up 4% from last year. Regarding our fourth quarter online metrics, approximately 14% of retail unit sales were online, up from 11% in the prior year. Approximately 52% of retail unit sales were omni sales this quarter, down from 55% in the prior year. Nearly all of our fourth quarter wholesale auctions in sales, which represents 18% of total revenue, remain virtual and are considered online transactions. We began a small wholesale auction simulcast test during the quarter to gauge dealer interest in resuming in-person attendance and will continue to test options for live attendance during FY ‘24. Total revenue resulting from online transactions was approximately 30%, down slightly from last year. CarMax Auto Finance, or CAF, delivered income of $124 million, down from $194 million during the same period last year. Jon will provide more detail on customer financing, the loan loss provision, and CAF contribution in a few moments. At this point, I'd like to turn the call over to Enrique, who will provide more information on our fourth quarter financial performance. Enrique?

Thanks, Bill, and good morning, everyone. Our continued focus on managing what is in our control drove a sequential improvement from the third quarter across key financial metrics, including EPS, gross profit, and SG&A. Fourth quarter net earnings per diluted share was $0.44, down from $0.98 a year ago. Total gross profit was $611 million, down 14% from last year's fourth quarter. Used retail margin of $387 million and wholesale vehicle margin of $143 million declined 9% and 20% respectively. The year-over-year decreases were driven by lower volume across used and wholesale. This was partially offset by strong margin per unit performance. Used unit margins increased from last year's fourth quarter and wholesale margins per unit were flat year-over-year. Other gross profit was $81 million, down 24% from last year's fourth quarter. This decrease was driven primarily by a decline in extended protection plan or EPP revenues. In addition to the impact of lower retail unit sales, profit sharing revenues from our partners decreased from $33 million in last year's fourth quarter to $16 million in this year's quarter. This was partially offset by stronger margins and a favorable year-over-year return reserve adjustment. Penetration was flat year-over-year at approximately 60%. Third-party finance fees were relatively flat over last year's fourth quarter, with lower volume and fee-generating Tier 2 offset by lower Tier 3 volume for which we pay a fee. Service was also relatively flat over last year's fourth quarter, reflecting sequential improvement in year-over-year performance. We have maintained our technician staffing levels and have put in place key efficiency and cost coverage goals for our teams. This supports our expectation of improved performance in FY ‘24 compared to the full FY ‘23 year. The extent of this improvement will also be governed by sales performance given the leverage, deleverage nature of service. On the SG&A front, expenses for the fourth quarter were $573 million, down 8% from the prior year's quarter and down 3% sequentially from this year's third quarter. SG&A as a percent of gross profit was higher than the fourth quarter last year, due primarily to the 14% decrease in total gross profit dollars compared to last year's quarter. The change in SG&A dollars over last year was mainly due to the following factors: first, we reduced advertising by $34 million. Second, total compensation and benefits decreased $17 million, which included an $18 million increase in share-based compensation. Excluding the latter, compensation and benefits were down $35 million, of which $18 million was due to a lower corporate bonus accrual in the quarter. Third, other overhead increased by $6 million. The year-over-year increase in investments in our technology platforms and strategic growth initiatives was primarily the result of decisions made in prior quarters. This was partially offset by a favorable year-over-year comparison due to costs incurred in last year's fourth quarter associated with a significant ramp in staffing and favorability in a variety of other smaller costs this year. During the quarter, we continued to take steps to better align our expenses to our sales. This included further reducing staffing through attrition in our stores and CECs, limiting hiring and contractor utilization in our corporate offices, and continuing to align our marketing spend to sales. While our advertising expense on the dollar and per unit basis was lower year-over-year on the quarter, our investment for the quarter and full-year on a per unit basis remains aligned with last year's full-year spend level. For fiscal ‘24, in total, we anticipate maintaining per unit spend at a similar level to FY ‘23 with per unit spend varying from quarter-to-quarter. We believe that at this point, we largely have the resources in place to meet our near-term omnichannel and other digital investment needs. Accordingly, our expectation is that we will bend the expense growth curve on our omnichannel investments and our overall SG&A. In FY ‘24, we expect to require low single-digit gross profit growth to lever SG&A, well below the levels we've guided to during the investment-heavy phases of our omni transformation. As a result, we expect to deliver stronger flow-through of gross profit growth to profitability. While we expect that the front half of the year will benefit from the cost management actions we took in the back half of FY ‘23, the magnitude of the year-over-year benefit relative to the 8% decrease we experienced in Q4 may be muted, particularly in Q1. This dynamic stems from rolling over a more comparable period for advertising and a corporate bonus accrual in Q1 than the fourth quarter declines that I noted earlier. While not providing specific guidance beyond FY ‘24, we expect that this bending of the SG&A growth curve will carry over beyond this year. This will support our pathway back to a lower SG&A leverage ratio with the initial goal of returning to the mid-70% range over time. Hitting this range will also require healthier consumer demand. Regarding capital structure, our first priority remains to fund the business. Given the recent performance and ongoing market uncertainty, we continue to take a conservative approach to our capital structure. While our adjusted net debt to capital ratio was slightly below our 35% to 45% targeted range, we are managing our net leverage to maintain the flexibility that allows us to efficiently access the capital markets for both CAF and CarMax as a whole. In keeping with the school of maintaining flexibility, we continue to pause our share buybacks. Our $2.45 billion authorization remains in place as does our commitment to return capital to shareholders over time. For capital expenditures, we anticipate approximately $450 million in FY ‘24, similar to our FY ‘23 level. This spend is primarily being driven by investments in land and the build-out of facilities related to long-term growth capacity for production and options. New store development is also contributing to CapEx, albeit at a lower level as we have slowed the pace of openings in FY ‘24. In FY ‘24, we plan to open five new locations including two more stores in the New York City metro market as well as our first off-site production location in the Atlanta metro market. Our extensive nationwide footprint and logistics network continue to be a competitive advantage for CarMax. Our liquidity remains strong and we ended the quarter with approximately $350 million in cash on the balance sheet and no draw on our $2 billion revolver. Now, I'd like to turn the call over to Jon.

Thanks, Enrique, and good morning, everyone. During the fourth quarter, CarMax Auto Finance originated $1.9 billion, resulting in penetration of 44.7% net of three-day payoffs, up from the 41% seen in the same quarter last year and in line with Q3. The weighted average contract rate charged to new customers at 10.9% was up 110 basis points from Q3 and 270 basis points from the same period last year. We were pleased with our ability to increase consumer rates within the quarter while maintaining a consistent share of finance contracts sequentially and growing our share of finance contracts substantially on a year-over-year basis. Tier 2 penetration in the quarter was 19.4%, lower than typical seasonal levels. Tier 3 penetration was flat to last year at 6.9%, while our long-term lending partners continued to complement each other in providing strong credit offers to our customers. We did observe year-over-year tightening as both rising interest rates and delinquencies likely led to these adjustments. Of note, CAF has also adjusted its underwriting standards in reaction to the current environment, including towards the end of Q4 reducing its targeted percentage of Tier 3 volume from 10% to 5%. CAF income for the quarter was $124 million, down from $194 million in the same period last year. The $70 million year-over-year decrease is primarily driven by a $44 million increase in loan loss provision as well as a $61 million increase in interest expense, partially offset by growth in interest and fee income. Within the quarter, total interest margin decreased to $262 million, down $22 million from the same quarter last year. The corresponding margin to receivables rate of 6.3% is down approximately 100 basis points year-over-year and 125 basis points from the near 10-year peak seen in this year's first quarter, driven mostly by the significant interest rate jumps absorbed during the past year. In response, we have made numerous pricing moves over the last 12 months, including in the fourth quarter that should cause the reduction in margin to slow and allow this portfolio rate to level off in fiscal year 2024. The loan loss provision in Q4 of $98 million results in an ending reserve balance of $507 million or 3.02% of ending receivables. This is compared to a reserve of $491 million last quarter, which was 2.95% of receivables. This sequential 7 basis point adjustment in the reserved to receivable ratio reflects unfavorable performance within the portfolio as well as the uncertain macro environment along with the continued increase in cash Tier 2 and Tier 3 volume. We continue to target and operate within the 2% to 2.5% cumulative net credit loss range for our core Tier 1 portfolio and we believe we are appropriately reserved for future losses. Regarding further advancements in our credit technology, we continue to stabilize and improve upon our nationally available best-in-class pre-qualification product, finance-based shopping or FBS. During the fourth quarter, we fully deployed yet another of our large lending partners within the FBS platform, now bringing the total to five well-established lenders that are providing decisions on the full vehicle inventory for an applicant and co-applicant, leveraging a soft credit pull. Note what truly makes this product distinct in the used auto industry is our ability to calculate over 6 million unique credit decisions every minute from multiple finance sources, each leveraging their own distinct credit models, and then to make these offers digitally available to customers wherever they are shopping in the store or at home. During this upcoming first quarter, we hope to add additional finance partners to the platform as work is already well underway. Now, I'll turn the call back over to Bill.

Thank you, Jon and Enrique. As I mentioned at the start of the call, even as we navigated the challenges of fiscal ‘23, we achieved a number of key milestones during the year by focusing on making our omnichannel experience faster, simpler, and more seamless for our associates and customers. I'm proud of the progress we made on our journey to deliver the most customer-centric experience in the industry. Some highlights from this year that will have a lasting impact across our diversified business model are for retail, we enabled online self-progression capabilities for all of our customers. As we evolve our omnichannel experience, we're also updating our operating models to drive efficiency gains in our stores. During the year, we launched self-checking capabilities for appraisal customers and also enhanced e-sign functionality to better enable self-progression. Our e-commerce engine combined with our unparalleled nationwide physical footprint is a competitive advantage. Our ability to deliver integration across digital and physical transactions is a key differentiator in both the experience we provide and the total addressable market available to us. For wholesale, we rolled out a modernized mobile-friendly vehicle details page that displays the most relevant information from dealers they need to preview our wholesale inventory, creating a shopping experience for dealers that is similar to how consumers shop our retail inventory. We also expanded MaxOffer, our digital appraisal product for dealers to approximately 50 markets, which enables us to build on our leading position as a buyer of cars. We utilize our admin sales team to sign up new dealers for the service, providing profitable incremental wholesale volume. For credit in CAF, we completed the nationwide rollout of finance-based shopping, our multi-lender prequalification product. As Jon mentioned, this gives customers the flexibility to digitally receive quick credit decisions from a majority of our lenders across the entire vehicle inventory. Over 80% of our customers have used this online tool as they begin the credit process. In addition, CAF is equally focused on coming out of this cycle leaner and more effective. The team is already leveraging the new loan receivable system that we deployed a little over a year ago to deliver on savings opportunities with many more expected in the upcoming years. Looking ahead to fiscal ‘24, we will build on last year's initiatives and prioritize projects that unlock operating efficiencies and create better experiences for our associates and customers. We are confident that the actions we will take position us better to capture the upside when the market improves. Some examples include: for retail, we are leveraging data science, automation, and AI to make it even easier for customers to complete key transaction steps on their own and to go back and forth between assisted help and self-progression. We are also building digital tools that will support customers across key transaction steps in their journey and give them better insight into their remaining steps. These tools will drive online sales and make it easier for customers to opt into express pickup. This delivery option offers customers the ability to complete their transaction at one of our stores in as little as 30 minutes and represents a win-win opportunity. Our research shows that customers love this experience when utilized and it will enable us to lower costs over time. For wholesale, we will leverage our modernized vehicle detail page to offer new services. Examples include AI-enhanced conditional reports and proxy bidding capabilities. We will also improve MaxOffer by rolling out our instant offer experience to all participating dealers. These tools will enable us to drive incremental operational efficiencies as we continue to scale our wholesale volume, all while providing a better experience. For CAF, we're working to integrate our finance-based shopping product into our stores and customer experience centers more seamlessly so that all consumers can enjoy the full experience. As Jon mentioned, we will also continue to pursue opportunities to add additional lenders to the platform, which will expand the breadth and depth of offers available to our customers. While these are a few good examples, our entire organization, from Edmonds to Logistics, is focused on improving efficiencies and experiences. We are confident in the future of our diversified business. We will continue to evaluate our performance relative to our long-term financial targets annually. As we start fiscal ‘24, we affirm the targets that we updated in April ‘22, selling between 2 million and 2.4 million vehicles through our combined retail and wholesale channels by fiscal ‘26, generating between $33 billion and $45 billion in revenue by fiscal ’26, and growing our nationwide market share of zero to 10-year-old vehicles to more than 5% by the end of calendar ‘25. I want to thank and congratulate all of our associates for the work they do. They are our strongest differentiator and the key to our success. Last week, Fortune Magazine named CarMax one of its 100 Best Companies to Work for for the 19th year in a row. I am incredibly proud of this recognition, particularly as we faced a challenging year. It's due to our associates' commitments in supporting each other, our customers, and our communities every day. Over our nearly 30-year history, we've navigated many challenging environments and have emerged stronger each time. This environment is no different and I'm confident that the actions we are taking will enable us to drive robust growth as the market improves. With that, we’ll be happy to take your questions. Corless?

Absolutely. At this time, we will open the floor for questions. Your first question comes from the line of John Healy with Northcoast Research.

I wanted to start by discussing the CAF business. Enrique, could you share your thoughts on where some of the key metrics may look in the next quarter, particularly in terms of losses and recoveries? Additionally, can you update us on the cost of funds and any changes there, as well as the coupon rate for consumers? Is there a lag or catch-up period we should consider? We'd like to understand how to think about these dynamics as we approach fiscal '24.

Yes. Thanks for the question, John. I'll address the cost of funds and kind of how to think about that. Then I'll turn it over to Jon to talk about the business. So from a cost of funds perspective, what I'd tell you is that the securitization market, which we're largely dependent on, is currently open, and the market is constructive. What we've seen, you signed in our first deal where the cost of funds came down relative to the deal that ended in 2022, right? And so we do believe that the benchmarks continue to come down, spreads continue to be healthy, and we would expect that to carry forward. For timing, you would expect us to be in the market here in the near-term. But we would expect to be able to execute our deal. And again, I think relative to a couple of deals ago where the market was really compressed, and the cost of funds was one of the highest we had seen in many years, it's come down from there. Still higher than what we'd like them to be, but certainly better than where they had trended a couple of deals ago.

Sure. I'll address the other metrics. To elaborate on the cost of funds, another important aspect is the APR involved in the deals. Previously, our rate was 9.09%, and we recently reported 10.9% in our originations this quarter. We've successfully increased rates throughout the year, which should positively affect future deals as well. If spreads stabilize and our APRs remain higher, it will be advantageous for us. Regarding losses and delinquencies, as stated in our earlier remarks, we've increased our reserve to $507 million, which is 3.02% of receivables. This increase is partly due to unfavorable conditions in our portfolio and the broader economic environment. The entire industry is experiencing a rise in delinquency rates among consumers in our existing business. Our newer originations have a higher average selling price, resulting in larger payments, which means consumers are facing higher auto payments than usual. We are closely monitoring these factors and have adjusted our reserves accordingly. While we've seen an uptick in delinquencies, we have managed it effectively, and it hasn't fully translated into losses. We believe we can continue to serve consumers effectively. Additionally, as mentioned in our earlier comments, we have tightened our lending criteria, as have many lenders both within and outside our industry. We've implemented these measures regularly, including during previous economic downturns and the start of the pandemic. Our approach is more conservative to watch consumer behavior closely. Even with our tighter criteria, we believe our partners will be willing to take on that volume, as they have in the past. Looking ahead, it's difficult to predict the future of losses and delinquencies, but we expect to remain in the 2% to 2.5% range, as we always have, and feel we are well-reserved while keeping a close eye on consumer trends.

Great. Thank you.

And the next question comes from Michael Montani with Evercore ISI. Your line is open.

Great. Thanks for taking the question. Just wanted to ask on retail and wholesale GPUs. Those were both, I think, stronger than we were anticipating. If you could just provide some update on the pricing volatility that we're seeing, pretty unprecedented, I think both at retail as well as at wholesale. And then competitively what you're seeing in the market, how sustainable is this, kind of, strong discipline in GPU, I guess, for those two segments?

Sure. Good morning, Michael. Yes, on the retail and wholesale GPU, obviously, they did come in stronger. I think the wholesale benefited a little bit we saw some appreciation in the latter part of the quarter, which when that generally happens, we usually trail whether it goes up or comes down. So I think that added a little bit of favorability there. I think as you go forward thinking about wholesale, I would land probably more in the line of where we've been historically $900 to $1,000. On the retail side again, we did extensive price elasticity testing and determined that we could have sold a few more cars, but we actually would have made less money. So we held the retail GPUs, they're pretty similar to the third quarter. They were up year-over-year and that's more of a function of the fact that we continue to have a higher mix of older vehicles, which carry a little bit more margin. I think just in the retail pricing environment in totality, we did see some depreciation at the beginning of the quarter, we saw a little bit of appreciation in the latter part. If you go back a year ago, not this year, they just completed the year before, prices appreciated about $7,500 and that's in the zero to five-year-old cars this year. By the end of the calendar year, they had come back about $5,000, I would expect, even though we've seen some recent appreciation, I would expect to probably start to see a little bit more depreciation as we go forward. So that should continue to give a little bit of relief on the overall retail sales price.

Thank you.

And the next question comes from the line of Craig Kennison with Baird. Your line is open.

Hey, good morning and thank you for taking my question. We're hearing that some banks are pulling back on floor plan credit for some of your competitors. I'm wondering since you self-fund your inventory, would you expect an advantage sourcing inventory in this environment?

Yes, I think it's hard to say. What I would tell you is because our self-sufficiency is so high, we just really haven't had an issue in the sourcing environment. It's not like we're going out and competing in the auction lanes as much as we used to. I think it remains to be seen what the impact is on competitors and where they get their funding. I guess theoretically, it could cause prices to go down if they are not able to source financing to keep inventory on the lot. But that remains to be seen.

Thank you.

The next question comes from the line of Rajat Gupta with JPMorgan. Your line is open.

Great. Thanks for taking the question. Just had a question on SG&A and one within that. Maybe just on the store occupancy cost, it was lower quarter-over-quarter by roughly 10%, despite five new stores opened. Is there something we're missing there? We would have expected it to be up sequentially given the new openings, but I just want to make sure, are we not missing any one-timers there? And then I have a quick follow-up.

Great. Yes, thanks, Rajat. Yes, I don't think we’re missing anything. I think a couple of points here. One is that there was some timing of spend from quarter-to-quarter that will vary. So we had some timing favorability this quarter over the previous quarter. In addition, given the volumes and where they're at, we had a bit of a pullback in our rent as volumes flex. We will move up in terms of our off-lot short-term capacity to accommodate volumes. Given where volumes are at, we did have a pullback in our off-site capacity. So you'll see that reflected in occupancy through a lower rent. So those are the two bigger items I'd tell you within the quarter.

Understood. That's helpful. And in terms of just budgeting purposes for SG&A for the year. What kind of view are you taking on the used car market this year? Do you expect the industry, especially the zero to 10-year-old space to grow this year and do you expect to grow share with the level of ad spend that you're guiding to? Just curious what kind of shape of recovery are you assuming in your budgeting plan?

Yes, Rajat, thanks for the question. Look, we're certainly not economists, but I think there's some publications and I think like COGS for example has the used market overall being down a little bit this year. I think you also have it softer in the front part, I mean, softer in the front part a little bit better in the back half. I think that's kind of the way we think about it as well, but that remains to be seen. And as always on the market share, our goal is whether the market is a good market or a bad market. We want to gain profitable market share and I spoke to just the transitory pressures that we continue to see in this quarter as it relates to market share. But given previous experiences, we would expect that to turn and then we'd get back into gaining market share.

Understood. Thank you.

Sure.

Our next question comes from the line of Brian Nagel with Oppenheimer. Your line is open.

Hi, good morning.

Good morning.

I have a question regarding your indication of a lower leverage point for this year. It seems you're planning to manage expenses with lower growth rates. I want to confirm my understanding of this. Additionally, what changes have you made to enable this? Lastly, as the business recovers from this cyclical trough, should we expect that leverage point to remain more skewed than it has been in the past?

Yes, everyone. Thanks for the question. I'll give you my thoughts first and I'm sure Enrique will have some thoughts as well. But you're exactly right, we are sending the message that we expect this to be at a lower rate going forward. And if you think about the past few years, every year we update and say, okay, this is what it's going to take to lever and we're running that five day in this past year. The prior year we said, hey, it's going require more than that, because of the investments we knew we were making plus some of the carryover investments. We hadn't been giving longer term guidance, because, quite honestly, while many companies have gone from a pure brick-and-mortar model to more of an omnichannel approach, there really hasn't been any other example of companies doing that with, what I call, considered purchases where there's a lot of back and forth between physical and digital properties. And so I almost equate this to renovating an old house, which unfortunately I haven't experienced with that too. You don't know what you don't know until you get into it. And every time you pull down a wall in an old house, there's some new surprise there. With this, every time we would turnover a rock as it related to the omnichannel experience, there were two other rocks underneath it. And I think what we've gotten to the point of is that we've built out our product organization. We feel really good about the resources there. We've got the base of the capabilities. Now it's about enhancing, and then as we enhance and finish some things, we'll shift people to work on different things. So we feel good about the resources that we have at this point. And I'll let Enrique add any other…

Yes, just to build on that a little bit. Like I said in my prepared remarks, we are past the investment-heavy phase for omni transformation. We believe, largely speaking, that we have the resources in place, we're appropriately staffed and now it's really a matter of executing on our plans to really focus around enhancing efficiencies, enhancing and strengthening experiences for our customers and our associates, right? But we believe we passed that point. So we do think that now and for the guidance that we've given, low-single-digit gross profit growth is what we're going to need to lever. And I would think about that as well as carrying beyond FY ‘24 and into, while not giving specific guidance, I would think about that as kind of where we are in our maturity curve as a company and that's kind of how I think about it for the next period of time.

Alright guys. I appreciate the color. Thank you.

Our next question comes from the line of Sharon Zackfia with William Blair. Your line is open.

Hi, good morning. A few things around SG&A. Just want to make sure I understand the context around leverage. So are you referring to SG&A leverage as a percent of sales or SG&A to gross profit? So just want to make sure, well, level set on what metric you're using. I also want to clarify the cadence in the first quarter; are you referring to sequential moderation in the decline or year-over-year moderation? I think that's, kind of, important to quantify as well? And then lastly, and I'm sorry it's a multipronged question. It's just on the ad spend; so it’s a little surprising to hear, and I think I heard correctly, that ad spend per car would remain consistent year-over-year. And I just wondered the thought process behind that, given the environment we're in, which it sounds as if a lot of people are just priced out of cars' period. So I wonder about keeping that ad spend, kind of, at the same level versus retracting maybe more towards the $300 level that you had historically?

Thank you, Sharon, for your questions. To clarify your first point, we have defined leverage as SG&A to gross profit, not based on retail units or sales. As we have evolved, our focus has shifted to a more comprehensive view that includes a stronger wholesale and CAF business. Therefore, our leverage point is specifically on gross profit. Regarding your second point, in the first quarter of FY '24, while we acknowledge that SG&A was down 8% year-over-year in the fourth quarter, we anticipate that the decrease in the first quarter may not be as pronounced. This is due to more comparables related to corporate bonus accruals, which significantly impacted the fourth quarter. Additionally, our marketing expenses were much higher in last fourth quarter, which provided some relief that may not be replicated in the upcoming quarter, presenting a greater challenge for FY '24 compared to FY '23. Lastly, concerning marketing spend, we made a decision a few years ago to increase our marketing budget per unit, which we plan to maintain. We have a strong understanding of our return on investment and effective properties and investments. Our marketing team effectively tracks what generates ROI and what does not, and we currently believe that a spend of approximately $350 per unit is suitable for our situation.

And Sharon, I would add that, as Enrique mentioned, our performance can fluctuate each quarter. Some quarters may show growth while others may see a decline, depending on the return on investment we're observing. We will always allocate some budget for brand spending because it is crucial for our long-term strategy. Additionally, when considering advertising, it’s not solely focused on acquiring customers; we also consider vehicle acquisition. At times, we might increase spending to purchase cars from consumers. We will keep a close watch on this.

Okay. Thank you.

Thank you.

Your next question comes from the line of Scot Ciccarelli with Truist Securities. Your line is open.

Hey, everyone. Scot Ciccarelli here. Retail prices are still significantly high. Average rates have increased, leading to notable monthly payment hikes. This seems to be causing a decline in comparable sales by double digits. I'm curious about how this is specifically affecting your conversion rate. When we analyze the sales drop, is it more attributable to reduced customer traffic or is it related to initial customer interest? Or do you find that people are getting close to making a purchase but then decide they can't afford it? Are these factors equally impactful, or does one have more influence than the other?

Yes, great question, Scot, and welcome back to the call. We see the traffic top of funnel is not the issue. The real problem occurs at the conversion point. When potential buyers find a car they like and start to proceed, they often realize that the monthly payment is beyond their budget, causing them to drop out of the process. This highlights why we've emphasized vehicle affordability as a major factor affecting our sales. The focus is on conversion, rather than on the initial traffic.

Yes. I'll add to that, Scot. One thing we mentioned about the FBS platform is how excited we are that many people are looking for that monthly payment online right from the start, rather than in the store. If they choose a specific vehicle and find that the payment is higher than expected, we provide the ability to view payment options for all vehicles with multiple lenders, allowing them to adjust quickly. We believe that once the initial shock of higher average selling prices eases over time, having this tool available to adjust pricing and payments as necessary will greatly benefit us and help us move forward.

Okay. So total demand is still there. It's just the affordability or the ability to close is really the main challenge if you will?

Yes, the interest is definitely there. And I think some of the web traffic continued strength in the web traffic is also because of the finance-based shopping product that Jon just talked to people just trying to figure out what can I afford? Maybe they're not ready to buy a car, but maybe they're just looking to see what they can afford.

Great. Thank you very much.

Thank you.

Your next question comes from Daniel Imbro with Stephens Inc. Your line is open.

Yes. Good morning, everybody. Thanks for taking my questions.

Good morning.

Good morning.

Enrique, I would like to inquire about SG&A in a slightly different way. You have mentioned attrition for several quarters and it appears that you are making good progress in reducing that compensation line. Can you provide insights on the current staffing levels in the stores or CECs compared to a year ago or prior to this attrition? Are we seeing a 15% reduction or a 20% decrease in headcount? Additionally, as growth improves, what are your expectations for staffing levels? On one hand, Bill just mentioned the intention to remain lean moving forward, but I recall you stating in your prepared remarks that you are aiming for a mid-70s SG&A to gross ratio over time. I am trying to piece this together, so if you could elaborate on our current staffing situation, future expectations, and their implications for long-term SG&A margins, that would be helpful.

Yes. I'm going to tell you is that we believe we're largely speaking appropriately staffed. There are still some pockets where there's probably some overstaffing that we're working through, right? And we do it in a healthy way, which is just through attrition. And that's the approach we've taken for the past period here. But largely speaking, we think we're appropriately staffed, kind of, across the board. Compared to last year, right? We were down when it comes to like what flows through SG&A, because we do have a large service department and service associates that flows to our COGS. But just through SG&A, we’re down about 10% year-over-year, right? And that's really, kind of, staffing in our CECs as we've rightsized in our stores as we've rightsized as well and that's where you'll see it offset a little bit by our corporate overhead staffing, but net-net we're down about 10%. So that's kind of where we are. When it comes to like the mid-70% leverage rate target, yes, we're actually striving to get there. Our goal is to get back to a leverage rate that's more reflective of a stronger flow-through and a business model that we're striving to get to. Now to get to that number, we're also going to need some help in sales, right, as well to support that. And we expect to get there over time. I think to get there in FY ‘24, I would tell you it would be a strong stretch, just given where we ended FY ‘23 and kind of where volumes are at. And just the environment that we're operating in. But we are controlling what is in our control, and I think we've done a pretty effective job here of taking our SG&A down and thinking about our business model and the maturity curve in terms of where we are with our omni transformation. Now it's really a matter of reallocating resources internally to work on the most accretive projects that we have.

Yes. I would like to add that as the business recovers, we are concentrating on improving efficiencies. The store's business model has evolved with omni-channel integration. Therefore, we are seeking greater efficiencies in Customer Engagement Centers, so as we see more volume, these centers don't need to expand as quickly. We have already downsized the sales force due to the effectiveness of the Customer Engagement Centers, as customers are making more progress on their own. This shift is also why we are emphasizing self-progression, allowing our floor sales consultants to support more customers. As we consider the future model, we aim to enhance efficiencies not only at the corporate level, where we feel confident in our teams, but also in our field operations.

And if I could squeeze a clarifier, not another question. I guess you guys used to be in the mid to high-60s, it sounds like you reduced headcount 10%. The CEC is making more efficient. I guess why wouldn't that or something better than that be the target you're working towards? Enrique, rather than the mid-70s. I guess have there been incremental expenses from the omni and admins that have just have raised that long-term SG&A margin?

Yes. And what I said is that our first step, right, so our initial goal is to the mid-70s and then longer-term, we do have as part of our aspirations to get back to roughly where we were. I don't know if we'll get back fully to where we were in the medium term here, but certainly our first step is to get to the mid-70s.

Yes. And I think, Daniel, on that, keep in mind part of the omni transformation is we've gone from an organization that worked with all legacy systems that really didn't cost us anything to a combination of systems that we built in-house, but also software-as-a-service. And software-as-a-service is an expense that we used to not have. So things like software-as-a-service, the product organization that we built out, we've got 60 product teams that really enable having this omni-channel experience both to have the store and the digital. So that expense isn't going away. We didn't use to have that expense. Theoretically, the CECs will be offset with the sale. So that should watch, but there are the things like cybersecurity that because we have so much of a digital presence now, you had to step up your spend there. So there are some things, which is why, to Enrique’s point, our first goal is, hey, let's get back to the 70s because we know we've got some headwinds on things that we didn't use to have, and then we'll continue to work on taking it below there.

Great. Appreciate all the color and best of luck.

Thank you.

Your next question comes from Seth Basham with Wedbush Securities. Your line is open.

Thanks a lot and good morning. My question is on retail GPU, pretty good performance this quarter. Curious to know whether or not you think the market dynamics helped you on that metric? And then looking forward, should we be thinking about that flat year-over-year for 2024 fiscal or should there be a movement one way or the other based on the price elasticity expectations and other factors?

Yes. Good morning, Seth. Yes, I think the market dynamics did help, because again, we were doing pricing elasticity tests, and as I said earlier, we could have sold some more cars, but overall profitability would have been down. So I think that, that did help. Now as far as going forward, I think I'd probably get more in the range of where we historically. I think, you know, part of it will depend on what the macro factors, because we'll continue to test elasticity. But if you think about we've been, kind of, in the $2,100 to roughly $2,150, $2,200 in that range. I would think somewhere in that range is probably a good target to think about for the upcoming year. But again, it's going to be dependent on what we see from the market factors.

Okay. And just as a follow-up thinking about the trade-off between unit sales and GPU market share is clearly an important goal of yours. Is there a point in time where you'll be more aggressive on price to regain market share to meet your long-term targets? You truly believe this is transitory? Is there any reason why it may not be?

Yes, no, it's a great question. And again, we've always said this idea of proper market share and that hasn't changed. You know, if I look at the market share for 2022, it was relatively flat. You can argue it was slightly up, but we call it relatively flat. For the first half of the year, we saw good market share gains. In fact, several of the months were double-digit gains. We hit August, August, I would call it was fairly flat, and then we saw declining gains really from September through December. And we've seen this before, if I go back to ’08, ’09, if I go back to COVID, although they're very different circumstances, we've seen where we've lost market share for a period of time, then it flattens out. We start from a month-over-month, we start to grow it back. We get back to where we were before we started and then we continue to increase. I would expect this to not be any different. I'm encouraged as I look at the data that we have so far; if you look at August through or really September through December, it was decreasing market shares month-over-month. I think December, January, my hope is we've kind of bottomed out there. We don't have the February data yet, but I'm hoping that we bottomed out, which means that, okay, market share should from month-over-month will still be probably below year-over-year, but we should start to climb back out.

Thank you.

Sure.

Your next question comes from Chris Bottiglieri with BNP Paribas. Your line is open.

Hey, everyone. It's Chris Bottiglieri. I wanted to ask about CapEx. Can you provide more details? It seems like the omnichannel growth is slowing, and you're only planning to open five stores. I'm trying to understand why CapEx is increasing. Are you looking to ramp up store growth in FY ’25, which would involve some initial capital expenditures? Also, you mentioned on the call that you’re launching off-site recognition centers and auction centers. Are these going to require more capital than your regular stores? I’d like to understand the strategies behind these investments and what they aim to achieve. Any additional details would be really helpful.

Yes, Chris, thank you for your question. For fiscal year 2024, we expect our capital expenditures to be about the same as last year, but the components of that spending are changing. The main focus for our CapEx this year will be on developing our off-site production and auction capabilities, which are essential for meeting our long-term goals. We are confident in our short-term sales and auction targets, but we also need to plan for the future. This includes acquiring land across the country and this year, we are set to open our first off-site production auction site in the Atlanta metro area. The size of this facility will be comparable to our largest existing production locations, typically more than 20 acres. The capital expenditures for these off-site production sites will be similar to what we've previously spent on our current production locations, and this will constitute the largest part of our CapEx for the year. We anticipate that our store growth will continue into fiscal year 2025, although we have adjusted our targets for fiscal year 2024 to five new stores. We will assess our performance and the broader market conditions as we move forward, but some planning for growth is already underway because opening a new store requires considerable time and preparation.

Yes. And Chris, I would just add to that the planned spend for the capacity, it's no different than what we've done in the past. We used to build production stores as we're going into new markets. Well, what we've been doing here lately, because we haven't opened up a bunch of production stores, we've been leveraging the existing production. So we had planned to add capacity. So it's really no different than what we've done in the past. It just happens to be okay now it's time that we start to do some additional production builds. And the really only difference is that some of them will not be attached to stores, but still in close proximity to stores, because that's a big competitive advantage.

That's really helpful. And then just related, I think you mentioned something effective opening up simulcast to get on wholesale. Can you maybe just elaborate there? It seems you're getting really strong wholesale volumes in GPUs to understand like the motivation there and what that means for revenue and cost? Just any thoughts would be helpful.

Yes, that's a great question. We aim to enhance the experience for our dealers while also maximizing the sale price of our cars. We're conducting small tests to determine if combining a physical sale with a virtual broadcast attracts new dealers or generates additional bids. In our pursuit of efficiency, we want to explore every possibility. I don't view this as a significant increase in SG&A spending because much of our testing resembles a postcard sale, where cars are showcased while keeping the auction lane accessible for bidding. These tests are ongoing as we seek to learn more. We are confident about our margins on vehicle sales, but we are always looking for opportunities to improve.

That’s okay. Thank you for the time. Appreciate it.

Thank you.

Your next question comes from the line of John Murphy with Bank of America. Your line is open.

Good morning, everyone. I have a couple of quick follow-up questions. In the press release, you mentioned that the total interest margin would stabilize in 2024. Looking back over the past three years, in 2020 and 2021, you had about 7% collateral spreads in those pools, while in the last four quarters, you've had 4% collateral spreads. Is there something in the forward market or in your upcoming launches that suggests those spreads will widen significantly? It’s hard to see how spreads could stabilize without some compression. My second question is regarding market share gains. Is there potential to grow in the six to ten-year-old segment? Considering the 4% in the zero to ten-year-old market, do you believe there is significant potential in the older vehicles where you may see higher profits over time?

Sure. Yes. If you just look at those previous deals, you look at the ‘23 one deal, again, an APR of 9.09%, we just referenced that we're at 10.9% this quarter and I could tell you that's not where we ended the quarter, so you're going to see in subsequent deals APRs higher if funding costs are more reasonable. I think we're absolutely going to be better matched funding costs for rate out there, that's exactly what I'm referring to.

And John, on the market share, the six to 10, remember, we always measure market share in zero to 10. I do think six to 10 is an opportunity. I mean, if you look at our recent sales, like even this quarter, vehicles over six years over 60,000 miles. If I look at where we were year-over-year, we're probably 10 points higher. We're probably in the high 30s as a percent of sale. The real question will be is prices come down. Do consumers start to go back to newer model vehicles? So we'll see, I think we're in a great position. We obviously have shown that we can acquire those vehicles and recondition them. So it's a great lever as we go forward.

Okay. When you just think of that as a structural opportunity, right? I mean, if those consumers go back to the younger, cheaper vehicles, you still have those 10-year-old vehicles that you can sell. Wouldn't that just augment your, sort of, long-term structural growth? I mean, I'm just curious. I mean, it just seems like a huge opportunity.

Yes, I think so. But again, some of it will be just on consumer demand. If the folks that are coming into our stores are looking for later model vehicles, lower mileage, we're certainly going to put more of those on our lot, so we'll manage to whatever the consumer is looking for.

Okay. Thank you.

Yes. Thank you.

Thank you. We don't have any further questions at this time. I'll hand the call back to Bill for any closing remarks.

Great. Thank you. I want to thank everybody for joining the call and your questions and support. I do want to congratulate all the associates again on being named a great place to work for 19 years in a row. And like I said earlier, we believe we're well positioned to navigate this environment and emerge even stronger. We look forward to talking with everyone next quarter. Take care.

Thank you, ladies and gentlemen. That concludes the fourth quarter fiscal year 2023 CarMax earnings release conference call. You may now disconnect.