Thank you, everyone. Good morning, everyone. Thank you for joining our fiscal 2024 third quarter earnings conference call. I'm here today with Bill Nash, our President and CEO; Enrique Mayor-Mora, our Executive Vice President and CFO; and Jon Daniels, our Senior Vice President, CarMax Auto Finance operations. Let me remind you our statements today that are not statements of historical fact, including statements regarding the Company's future business plans, prospects and financial performance are forward-looking statements we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our current knowledge, expectations and assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, we disclaim any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our Form 8-K filed with the SEC this morning and our annual report on Form 10-K for the fiscal year ended February 28, 2023, 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. Our third quarter results reflect the continuation of our strategy that has yielded sequential year-over-year improvements across key components of our business for four straight quarters. While the affordability of used cars remains a challenge for consumers, we're excited about the positive impact we are seeing from our omnichannel investments, which reinforces our strong belief that we are well positioned for the future. This quarter, we delivered strong retail and wholesale GPUs. We bought more vehicles from consumers and dealers, and we also sold more wholesale units than a year ago. We further reduced SG&A from the prior year. We continued to strengthen the credit mix within NCAP's receivables portfolio, which had a positive impact on our loan loss provision, and we resumed our share repurchase program. For the third quarter of FY '24, our diversified business model delivered total sales of $6.1 billion, down 5% compared to last year. This was driven by lower retail and wholesale prices and lower retail volume, partially offset by higher wholesale volume. In our retail business, total unit sales declined 2.9% and used unit comps were down 4.1%. Average selling price declined approximately $1,300 per unit or 5% year-over-year. Third quarter retail gross profit per used unit was $2,277, relatively consistent with $2,237 from last year. For the fourth quarter, our expectation is that our per unit margin will be lower than last year's fourth quarter record margin. We continue to expect that per unit margin for the full year will be similar to last year. As always, we will continue to actively manage this as we test price elasticity and monitor the competitive landscape. Wholesale unit sales were up 7.7% versus the third quarter last year. Average selling price declined approximately $600 per unit or 7% year-over-year. Third quarter wholesale gross profit per unit was $961, in line with $966 a year ago. Like our outlook on retail GPUs, we anticipate wholesale per unit margin for the full year will be similar to last year. As a reminder, last year's fourth quarter wholesale GPU was within $4 of our all-time record and benefited from appreciation and strong dealer demand, particularly at the end of the quarter. We expect this year's fourth quarter per unit margin will be more in line with our year-to-date performance and lower than last year. We bought approximately 250,000 vehicles from consumers and dealers during the quarter, up 5% from last year. Of these vehicles, we purchased approximately 228,000 from consumers, with slightly more than half of those buys coming through our online instant appraisal experience. As a result, our self-sufficiency remained above 70% for the quarter. With the support of our Edmond sales team, we sourced the remaining approximately 22,000 vehicles through dealers, up from approximately 14,000 last year. In regard to our third quarter online metrics, approximately 14% of retail unit sales were online, up from 12% last year. Approximately 55% of retail unit sales were omni sales this quarter, up from 52% in the prior year. All of our third quarter wholesale auctions and sales were virtual and are considered online transactions. This represents 19% of total revenue. Total revenue from online transactions was approximately 31%, up from 28% last year. CarMax Auto Finance or CAF delivered income of $149 million, down slightly from $152 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 third quarter financial performance.

Thanks, Bill, and good morning, everyone. As Bill noted, we drove another quarter of sequential improvement in year-over-year performance across our business and our P&L. Notable areas of improvement included used and wholesale unit sales and their respective margin dollars, total gross profit, CAF contribution, SG&A leverage and EPS. Third quarter net earnings per diluted share was $0.52 versus $0.24 a year ago. Total gross profit was $613 million, up 6% from last year's third quarter. Used retail margin declined by 1% to $398 million with lower volume, partially offset by a slightly higher per unit margin. Wholesale vehicle margin increased by 7% to $123 million, with an increase in volume and flat per unit margin compared to last year. Other gross profit was $92 million, up 55% from a year ago. This increase was driven by service, which delivered a $33 million improvement over last year, with this year's quarter reporting a $21 million loss. The efficiency and cost coverage measures that we put in place towards the end of FY '23 continued to drive improved year-over-year performance in FY '24. Extended protection plan or EPP revenues were relatively flat compared to last year's third quarter. We do not expect to receive profit-sharing revenues in the fourth quarter due to the inflationary pressures our partners have experienced. Third-party finance fees were down $2 million from a year ago, driven by lower volume in Tier 2 for which we receive a fee and higher volume in Tier 3 for which we pay a fee. On the SG&A front, expenses for the third quarter were $560 million, down 5% from the prior year's quarter as we continue to see benefits from our cost management efforts. SG&A as a percent of gross profit levered by 11 percentage points as compared to last year. The decrease in SG&A dollars over last year was mainly due to three factors. First, other overhead decreased by $19 million; this decrease was driven primarily by continued favorability in non-GAAP uncollectible receivables and, to a lesser degree, from reductions in spending for our technology platforms and from favorability in costs associated with lower staffing levels. Second, total compensation and benefits decreased by $20 million, excluding a $3 million increase in share-based compensation. This decrease was primarily driven by our continued focus on driving efficiency gains and aligning staffing levels in stores and CECs with sales. The decrease was also impacted by a lower corporate bonus accrual in the quarter. Third, advertising increased by $5 million. This reflects an increase in per unit spend as compared to last year's quarterly low level of per unit spend and was partially offset by lower units. As we have previously communicated, our expectation is for our full-year marketing spend on a per unit basis to be similar to last year. Accordingly, we expect that our per-unit spend in this year's fourth quarter will exceed last year's fourth quarter. Entering the fourth quarter, we have now passed the year mark since we initiated our significant cost management efforts. We are well on track to outperform the target we set out at the beginning of the year of requiring low single-digit gross profit growth to lever SG&A for the full year, even when excluding the benefits from this year's legal settlements. That being said, we remain disciplined with our spending and investment levels. Regarding capital structure, we resumed our share repurchase program in October, repurchasing approximately 649,000 shares for a total spend of $42 million in the quarter. This pace is in line with the guidance we provided last quarter. As of the end of the quarter, we had $2.41 billion of repurchase authorization remaining. In terms of other uses of capital, such as new store openings, we will open four stores in the fourth quarter, including two in the New York metro market and one in each of the Los Angeles and Chicago metro markets. We will also open our first stand-alone reconditioning center in the Atlanta metro market. Our extensive nationwide footprint and logistics network continue to be a competitive advantage for CarMax. Now I'd like to turn the call over to Jon.

Thanks, Enrique. Good morning, everyone. During the third quarter, CarMax Auto Finance originated approximately $2 billion, resulting in penetration of 44% net of three-day payoffs, which was up from Q2 and relatively in line with the 44.4% observed during the third quarter last year. The weighted average contract rate charged to new customers was 11.3%, an increase of 150 basis points from the same period last year and up 20 basis points from Q2. Tier 2 penetration in the quarter was sequentially in line with Q2 at 18%, but remains lower year-over-year as we have yet to fully comp over the partner tightening observed in the back half of calendar 2022. Tier 3 accounted for 6.9% of sales as compared to 6.1% last year, impacting each of these results as CAF's decreased percentage in Tier 3 as well as the increased test volume in Tier 2. CAF income for the quarter was $149 million, down $3.5 million from the same period last year but up $14 million sequentially. The provision for the quarter was $68.3 million as compared to $85.7 million in the prior year's Q3. The $17 million favorability was offset by a year-over-year reduction in total interest margin of $20 million, driven by additional interest expense of $81 million. Note fair market value adjustments from our hedging strategy accounted for $6 million in expense this year versus $5 million of income last year. The total interest margin of the portfolio decreased to 5.9% from the 6.1% seen last quarter. This slight reduction is primarily a result of increased funding costs, including the fair market value adjustments along with CAF's deliberate credit tightening that began last year, which inherently removes higher margin, higher loss assets from new originations. CAF continued to offset these headwinds by adjusting customer rates, but with a careful eye on three-day payoffs, sales and overall CarMax profitability. We are pleased with our ability to maintain a relatively stable net interest margin despite the volatile interest rate environment. The $68 million provision within the quarter resulted in a reserve balance of $512 million or 2.92% of receivables compared to 3.08% at the end of the second quarter. This 16 basis point reduction has occurred even with CAF's continued investment in the Tier 2 space and is evidence of the growing impact that our broader credit tightening is having on the overall portfolio. While CAF delinquency levels remain elevated versus historic norms, as has been the case industry-wide, we believe our reserve adjustment adequately reflects the anticipated future loss performance of our portfolio. The underwriting adjustments executed to date have been the right strategic moves to ensure we hit targeted loss levels, preserve our access to efficient funding yet still deliver strong future CAF earnings. We are well poised to recapture Tier 1 and Tier 3 volume as economic conditions improve, and our continued learning in the Tier 2 space should provide a future growth opportunity. Now I'll turn the call back over to Bill.

Great. Thank you, Jon and Enrique. As I mentioned at the beginning of the call, we're excited about the contributions we are seeing from our omnichannel investments. Our omnichannel capabilities offer our customers a uniquely personalized car buying experience that enables them to do as much or as little online and in-stores as they want. I'm proud of the progress that we've made on our journey to deliver the most customer-centric experience in the industry. As we have said before, we believe consumers in the used car industry will increasingly prefer to have the ability to progress digitally. We are seeing this in our data. At the end of fiscal year '20 when we completed our initial omnichannel rollout, approximately 40% of our customers leveraged some or all of our digital capabilities to complete their transactions. That has grown to approximately 70% this year. I recognize that the market volatility over the past few years has made it challenging to see the direct benefits omnichannel has delivered to our business, so I want to share some proof points that we are seeing. First, our data indicates that omnichannel is driving incremental retail customers to CarMax. Customers who fully complete an online transaction are 10% more likely to be new to CarMax compared with our omnichannel and in-store customers. We have also found that our online consumers skew younger, which creates the opportunity to participate in more of their lifetime purchase cycles. Additionally, since initially completing our omnichannel rollout, we have seen outsized market share growth in our oldest 15 markets where we have not opened new stores since calendar 2013. In calendar 2019, the market share annual growth rate for these markets doubled from the average annual growth rate for the previous five years. Moreover, from the beginning of calendar 2019 to the end of calendar '22, the market share average annual growth rate for these older markets continued to exceed their pre-omnichannel average growth rate. Second, instant offer, our online consumer-facing appraisal tool that is a core part of our omnichannel capabilities is significantly driving our vehicle purchases and wholesale sales. We doubled our bots from consumers of the year we launched instant offer. This enabled us to grow our self-sufficiency to over 70%, which we have maintained since we launched the tool. Online buyouts have also fueled our wholesale volume, which grew approximately 65% during the launch year and has remained well above the volume prior to instant offer. It's worth noting that our instant offer algorithms also support our dealer-facing Max offer vehicle sourcing application. Third, our omnichannel products are supporting double-digit web traffic growth. Finance-based shopping has been our number one lead source. This multi-lender prequalification product gives customers the ability to digitally receive quick credit decisions across our inventory with no impact to their credit score. Over 80% of our customers are using this online tool as they begin the credit process. Finally, omnichannel is on track to be a more efficient cost structure compared to our store-only model. Our omnichannel cost structure has more fixed costs than our historical store-only structure. We continue to show sequential year-over-year improvements in key cost efficiency metrics for our omnichannel overhead model. With a more fixed cost structure, we expect to leverage more strongly than in the previous model as demand picks up. We expect the impact of our omnichannel capabilities will continue to grow over time as consumers demand a more personalized experience that combines online and in-store progression. We believe that many of our competitors across the used car industry will not be able to deliver this experience in a simple and seamless manner. In closing, we're confident we have the right strategy in place. Our consistent approach to control what we can and deliver the most customer-centric experience in the industry is driving sequential quarterly improvements across our business. We are well positioned to emerge from this cycle as an even stronger company. With that, we'll be happy to take your questions.

Thank you. We'll go first with Daniel Imbro from Stephens. Your line is open. Please go ahead.

Jon, Enrique, maybe just want to circle back on the cash provision just given the impressive results here. I'm trying to understand the puts and takes. So, the allowance came down quite a bit, Jon, I think you talked about maybe just tighter underwriting there. But it looks like net charge-offs are at maybe the highest level we've seen in over a decade. So, I guess can you help us reconcile those two factors? And how should we think about provisions? Has the credit improvement meant that nominally this is the right level of provisions going forward? Or how would you think about those trends as we move through the end of the year and the tax refund season?

Thank you for the question, Dan. I was expecting it. Let's begin with the provision aspect. Our provision for the quarter consists of two parts: our revised outlook on anticipated losses from our existing business compared to what we projected at the end of Q2, and the necessary reserve for losses on new originations. Regarding the first part, our expectations at the start of Q2 and the actual performance we've seen in Q3 for our existing business haven't changed significantly. We regularly publish updates on our securitizations and their performance, which represent about 60% of our receivables. We have substantial assets that have not yet been securitized, and we have noted that conditions have tightened. The securitized data shows two distinct categories: the pre-COVID and early COVID assets, which are performing significantly worse than our targets, falling well below the 2% to 2.5% range. We anticipated a return to more normal levels, and we are observing that with the newer assets. We also believe there's a phenomenon where losses are coming in earlier. Looking at our recent securitizations, especially from 2021 and early 2022, there's a noticeable difference in the timing of the losses, which we believe are front-loaded. All of this was factored into our reserve estimates at the end of Q2. Therefore, the initial part of the provision did not require a significant adjustment, meaning that the main component of our provision is related to our new originations. As we've discussed, these new originations are much tighter, with very little volume from Tier 3, a minimal amount from Tier 2, and we have tightened conditions for Tier 1 as well. Consequently, with around $2 billion in new originations, we have a more secure book of business and a lower overall loss, leading to a modest required provision which constitutes the majority of our Q3 provision.

Our next question will come from Brian Nagel with Oppenheimer. Please go ahead.

You're asking a nice continued solid progression here.

Thank you.

My question is about the wholesale business, which showed significant improvement in the fiscal third quarter. Can you elaborate on what contributed to this increase in sales growth? Additionally, as you evaluate the wholesale business, are there insights to share regarding its relationship with your used car segment? Lastly, could you provide any updates on how the third quarter unfolded and what trends we might expect as we move into the early part of the fourth quarter?

Thank you for the questions, Brian. We are pleased with the growth in our wholesale segment, which I believe is attributed to several factors. One factor is the year-over-year dynamics from last year, where our sales were different due to various marketplace activities. We had reduced our offers, which may reflect in the year-over-year growth. Additionally, I'm optimistic about our product innovation, especially with the Max offer. This quarter, we completed the rollout of our instant offer feature, which simplifies the process for customers who no longer need to take pictures of vehicles to get a value. They still have the option to take pictures if they choose, which is an innovative change. Looking ahead, our performance may depend on market dynamics. It's clear that the industry is still facing challenges, and our business isn’t at the level we aspire to. However, there are encouraging signs. We've experienced sequential improvements and have dealt with significant depreciation this quarter. While this creates short-term headwinds in both wholesale and retail, it ultimately benefits the used car industry and us through reduced front-lit prices. Year-over-year, our sales prices are down about $1,300, while acquisition prices are down about $1,500, considering some mix adjustments. This depreciation trend is positive. If interest rates stabilize or decrease, that would be advantageous for our business. Another encouraging point is our market share, which showed improvement in October, marking the first month we compared it year-over-year. Additionally, we've analyzed customer behavior through a credit bureau, discovering that many customers who decide not to buy often stick to that decision. This could indicate some pent-up demand when the market improves. While the industry remains challenged, there are signs of optimism. Throughout this period, we’ve focused on cost control and improving efficiency and customer experiences. All of these factors bode well for our future, and I hope that provides clarity.

We'll turn now to Seth Basham with Wedbush Securities.

My question is also on CAF. Jon, could you give us some more color on those securitizations from late '21 through 2022 in terms of your expectations that the loss curves are going to flatten out because we haven't really seen that in the data yet.

Yes, I appreciate the question. The key point to note is that if you look at the published data from 2019 onward, and then consider the data from 2016 to 2018, you'll see a typical trend. We're observing that the data from the first and fourth quarters of 2021 seems to indicate a change. While everyone may interpret the data differently, we see the timing of losses fitting well within our expected range. We're closely monitoring the data from the first and second quarters of 2022, which also seems to be showing signs of change. However, the earlier quarters of 2022 have not shown this trend yet, but they hadn't at this stage in the prior years either. Overall, based on our analysis of sub-segments and their performance, we firmly believe the losses will fall within the 2% to 2.5% range, which is our target. Does that provide the insight you were looking for, Seth, or is there anything else you want to ask?

That's helpful. Of the securitizations you have outstanding, are you forecasting losses for any of them above that 2% to 2.5% range?

For the securitizations we have today, we have the ability to break that down by sub-segment, and currently, we do not expect anything above the 2.5% target. If something appears at 2.5% or 2.55%, we will make the necessary reservations. However, at this moment, we do not see that happening. Additionally, it's important to remember that this reflects what has been securitized to date. There's a lag of four to six months before it impacts our results due to the tightening that has occurred over the past year. I fully expect that as this data enters the market, you will clearly see the evidence of the tightening measures we've implemented over the last year.

As Jon had mentioned, a lot of the receivables that we don't see are in our warehouses, right? It's about, what, 60% roughly of what you'll see, are in the securitization data that's public, but there's a good chunk of receivables that are not necessarily public because they're in warehouses; there in alternative facilities. And that's really where you see a lot of that tightening. That's blending into the overall loss rate.

We'll go next to Craig Kennison with Baird. Please go ahead.

I had a question on AI. At your Analyst Day a few months ago, you highlighted several ways in which your tech team was driving innovation. I guess I'm wondering, very big picture, whether you see AI as a technology that is going to level the playing field for other used car retailers or rather might be a wedge technology that really does ultimately separate winners from losers.

Thank you for the question, Craig. First, I think we need to distinguish between AI and generative AI because AI has been in use for a long time across various areas of our business. When we discussed it recently, we were primarily focused on generative AI. I believe that people will eventually embrace generative AI, and early adopters will see the benefits sooner. As you mentioned, we are utilizing it in multiple areas, including our creative processes and coding. We are also developing generative AI assistance for our knowledge base that we believe will be very powerful for our customer engagement centers. Additionally, we are experimenting with conversational search, allowing consumers to interact without having to type keywords. Ultimately, I think having generative AI will be essential, and those who adopt it early will secure an advantage.

We'll turn now to Rajat Gupta with JPMorgan.

I had a follow-up question on CAF around net interest margin. Should we look at that 5.9% as a loan exposure and stable around that level going forward? I just wanted to clarify that and just have one quick follow-up on SG&A.

Sure. Yes. I appreciate the question, Rajat. Yes, I think that's a fair thought, right? I mean, we signaled a couple of quarters ago that we felt like that 6% range was about where we're going to level off. Remember, we're coming off of relatively historic high. So, we've been pleased that our ability to pass this rate along to the customer. Obviously, there was a shock in the interest rate market. So said it was coming, those higher interest rates were coming and it clearly has helped us to level off. So, we're pleased where we sit right now. And I think we would anticipate stabilizing at this level. Obviously, all bets are off with where the Fed heads; hopefully, rates aren't going up. If they remain stable, we think we're in a good spot. If they come down and turn down, as a reminder, typically rate increases lag when rates go up and rate decreases lag when rates come down. So hopefully, potentially, we could enjoy some added margin on the way down. But right now, I think we're in a stable spot.

Yes, Rajat, I just would add. Look, I think Jon has done a good job of saying, look, we expect to be in this range. We said we were 6, 1 in the last couple of quarters, give us a little wiggle room depending on what the cost of funds in here, it's down a little bit, but it's really reflected the cost of funds. So I think the way we think about it is it's really no change in story, as Jon said.

Understood. Regarding SG&A, it seems there are ongoing actions related to headcount. Could you clarify which specific areas these actions are occurring in? Is it in the customer experience centers, among sales personnel, or in Edmond? Additionally, does this reflect your perspective on the market conditions in the near to medium term? Also, could you provide details on the impact from the bonus accruals this quarter?

That was a complex question. If I miss any part, please remind me of what you asked regarding compensation reductions, which I believe was your first point. The reductions have been widespread. Compared to last year, we've seen nearly a 10% decrease in our headcount related to SG&A, affecting all areas, including our CECs, business office, stores, and field sales consultants. We're focusing on controlling overhead in compensation, improving sales metrics, and driving efficiency. We continue to demonstrate improvements in the efficiency of our omni model, as evidenced by two of the three metrics we track regarding omni's impact on total units, both used and wholesale. We're currently more efficient compared to when we launched the omni model, although we're still working to improve efficiency relative to the omni operating model on a per retail unit basis. Our objective is to enhance efficiency, and while we're not fully there yet, we are pleased with our progress. This commitment to efficiency puts us in a strong position for the inevitable sales rebound, which we anticipate will allow us to capitalize on those sales more effectively, which I believe was part of your question.

Rajat, this is Bill. I'll take the first part. Enrique, you take SG&A. As far as, look, if you look at our staffing, I think for this whole year, we've been fairly stable. Like Enrique said, we're down about 10%, but headcount total has been fairly consistent over the last few quarters. And I think we've really put ourselves in a position that we can be very nimble here. So depending on what happens with the business, if the business picks up. We feel really good about where we are from a staffing perspective; we can manage hours that kind of thing. If the business took a downturn for some reason, we also feel like we have some flexibility. So I think we've really kind of given ourselves a nimbleness that we feel good about going forward. And then I'll pass to you.

Yes, but the corporate bonus pace within compensation. So very specifically, that was about $5 million in the quarter in terms of favorability.

We will turn now to Scot Ciccarelli with Truist.

I have a follow-up regarding the affordability issues. Do you believe it's necessary to return to 2019 levels of affordability to achieve the same volume levels as in 2019 on a per-store basis? Additionally, could you provide any insights for the fourth quarter? Investors seem to be expecting positive comparisons in the fourth quarter due to easier comparisons, but some third-party data indicates that trends may still be negative. Thank you.

Yes. Sure, Scott. I think on the first part of your question, you're talking about affordability. And I assume you're talking about the price of cars where it was in 2019 versus where it is today? Am I interpreting the question, right?

Correct.

I believe we will eventually return to the sales levels of 2019. In 2019, the average sales price was around $20,000, whereas it has risen to slightly over $27,000 during this period. I hope we can get back to the low 20s or around 25, which would still be better than current levels. We are already seeing improvements year-over-year in our sales of cars priced under $20,000 and $25,000, which is encouraging. However, I don't foresee us reaching those 2019 price points entirely, as new cars are increasingly becoming more expensive. The key question will be what the future price gap looks like. Regarding demand, the market has been somewhat inconsistent. In the past three months, September was our strongest month, although still negative. October was our weakest month, and November was slightly better than October, but still similar. December is showing signs of improvement compared to November. We are continuing to monitor market elasticity and take necessary actions. I believe that as we witness some depreciation in pricing, it will positively impact the industry moving forward.

Bill, my question is about the affordability issue. How much improvement do you need in affordability to restore your per-store volume to what you experienced in 2019?

Yes. Look, it's a hard question to be able to exactly answer what that needs to be. I think, again, I think we can get back onto the comp growth without having to get back to 2019. And again, we've seen sequential improvements this year even though the prices haven't come down dramatically from the start of the year. So it's a hard question to answer, Scott. But look, our goal is to get back onto the comp growth. And the reality is if I look at the first 10 months of this calendar year, which we have market share data for versus the last six months of last year. We're doing better from a market share standpoint for the first 10 months than we were the last six months of last year, which I think is encouraging. We haven't comped total year-over-year yet because the first half of last year was so strong. But as I said earlier, I'm encouraged by the fact that October is the first month we have year-over-year market share growth.

We'll go now to John Healy with Northcoast Research.

Just wanted to ask, Bill, just your expectations kind of maybe on this year's tax season, it's just around the corner. And what you see as kind of maybe pluses or minuses. I don't know, I know we all fixate on kind of the monthly trends, but anything relating to tax season, how you guys are feeling like that might impact this year's business or any kind of other exogenous factors that might go into kind of maybe how we see February or March demand levels kind of materialize?

Sure, John, I'd appreciate a call afterwards to discuss this if you have any insights. At this moment, I don't anticipate any significant changes in tax season compared to last year. Typically, you expect to sell more cars during tax season, and I think it will be quite similar. What will be interesting is that last year, we saw a significant appreciation in vehicle prices at the start of the year. We're not relying on that kind of steep appreciation this time, so it will be intriguing to observe the year-over-year pricing dynamics. For now, we're planning for a tax season similar to last year since we don't see any indications of major differences.

We'll go now to Sharon Zackfia with William Blair.

I guess a follow-up on that. Have you changed the way you show inventory on the website? Because it does look like there's been a big inventory build so far in the last few months. And if you're not expecting kind of a sea change in the tax refund season, I'm just curious on why we're seeing that inventory build.

Yes, Sharon, that's a great question. What you're observing is that if you compare the average saleable inventory for the quarter year-over-year, it is quite similar to last year. At the end of the quarter, as you noted, it is higher. Overall, total inventory has increased slightly, with a rise in saleable inventory compared to non-saleable. The increase in saleable inventory is due to our planned production shutdowns. Last year, the holiday fell on the weekend, and we do not manufacture cars then. This year, both January and December 25th are on weekdays, and we want to provide our employees with time off to celebrate the holidays. Therefore, we conducted some early pre-building to account for the shop closures and ensure we provide time off for the holiday. That is primarily what you are seeing. There are some year-over-year dynamics, but that is the main factor.

Okay. And any thought process yet on kind of how you're viewing expansion from a unit standpoint for next year?

Yes, we'll provide that guidance in our Q4 call, and that's what we intend to do.

We'll go next to Chris Bottiglieri with BNP Paribas.

Could you elaborate on the comment regarding the lack of expected profit share in ESP? Do you anticipate F&I in Q4 will be similar to Q3? Is the historical seasonal difference mainly due to profit share? Additionally, will this have any spillover effect into the next fiscal year, especially concerning how you set the profit share for Q4?

Yes. Thanks for the question, Chris. The seasonal effect is really more related to sales, right, and as sales map, so ESP penetration in dollars. So the only thing we've seen in the past couple of years is really in the fourth quarter where we've seen that profit share from our partners materialized at the end of the quarter. And last year was pretty material. I think it was over $15 million. And so I wanted to make sure we called that out. Just given the inflationary pressures that our partners have seen over the past year, it's just made their profitability a little bit more pinched. And at the end of the day, when we look for profit share, there needs to be a certain amount that they're seeing for us to share in that. So, what we've anticipated so far for this year is that we will not see that profit share. But again, that's really due to inflationary pressures that our partners are seeing.

Got you. Okay. And then I was hoping you could kind of elaborate on the warehouse portfolio. It's roughly 2/3 the size of the kind of securitized stuff. Like could you just maybe tell us a little bit more about what's in there? What's the average age today versus the securities portfolio? If you were to look at these non-securitized, non-Tier 2, 3 test receivables, like how does the loss performance of those vintages compared to the like-for-like vintages that are in the securitized book? It sounds like you're signaling that it's better, but I was hoping you can just kind of elaborate on that a little bit more.

Certainly, I'll address that. Our warehouse lines serve as short-term financing until we can go to the ABS market or consider other options for longer-term funding. Currently, our conduit lines mainly hold the newest assets until they are market-ready. This quarter's assets and those from the previous quarter are temporarily in place, amounting to around $4 billion, with potential for some spillover. We've made significant tightening, particularly from Tier 3 and Tier 2. When focusing on Tier 1, we've also tightened those assets. We expect Tier 1 assets to perform better than what we see in the securitization. Overall, we believe all of it performs well, but specifically, the conduit assets are likely to incur lower losses compared to the recent securitized assets.

The receivables will tend to sit in our warehouses for between three to six, seven months, right, until the time they then go into the securitizations. And so, that's why you see a little bit of a timing delay, right, between the performance of those two buckets of receivables.

We'll go now to Michael Montani with Evercore ISI.

Yes. Wanted to ask, first off, on the provisioning front, we were thinking kind of $90 million plus seems to be a run rate trend and obviously, it came in better. So, is that the right way to think about this, maybe starting with a six handle in the near term given some of the tightening that you've done and all that we know? And then I just had an SG&A follow-up.

Sure. I’d like to revisit the provision. There are two main components to consider. The first is any change in our existing book of business compared to what we reserved in the previous quarter, and the second is the new originations. Let’s start with the new originations; we did $2 billion this year, which includes Tier 1, Tier 2, and a limited amount of Tier 3 business. We've indicated that Tier 3 is minimal and Tier 2 is in testing stages, while Tier 1 constitutes the majority. When we account for this, we sign an anticipated lifetime loss rate along with the costs associated with repossessions, which are relatively small but contribute to our overall expectation based on the $2 billion figure. This constitutes one part of the provision. The other part is determined by how effectively we reserved for it in the previous quarter. As we stated this quarter, we believe we have managed this well, and nothing in the quarterly performance suggests we are significantly off, resulting in the $68 million figure. Therefore, it’s important to separate these two components when determining your provision for each quarter.

Yes. So a couple of questions there. In terms of the mid-70% SG&A as a percent of gross profit, it's absolutely our next step that we've communicated. We've made material strides in driving efficiency in our business. And hitting that mid-70 is our next goal. But in addition to the cost management efforts that we've undertaken, we're also going to require the consumer to return with some strength. SG&A efficiency is also a function of gross profit. And so to hit that in 70%, we are going to need to see some decent gross profit growth as well, but that's absolutely our next step.

Yes. And generally, historically, Q3 to Q4, your SG&A does go up to the reasons you're pointing, which is more volume, and as Enrique said, volume-driven.

Our next question comes from John Murphy with Bank of America.

Just a question on inventory. I don't know if you can disclose this or if you have the information, but what do you think the average ASP is in your inventory that you'll sell out? I mean you've seen ASP come down about $2,000 from the peak, and we're still not getting the same-store sales comp lift that you might expect as that price is coming down. I'm just curious what's in inventory? And are you able to acquire inventory at lower prices going forward just to drive the comp?

Thank you for your question, John. Regarding our inventory, it's important to note that over 50% of what we sold during the quarter was purchased prior to this period. The inventory we currently have consists of items acquired during the quarter, and there has been significant depreciation during this time, which we expect to continue. This should lead to lower prices. However, it's worth mentioning that, generally, to maintain flat sales prices throughout the year, about $1,500 in depreciation is necessary, primarily because new cars tend to be more expensive. Therefore, we don't see much advantage until depreciation exceeds $1,500 annually. While we don't disclose our average price, the saleable inventory we have now is priced lower than what was sold during the quarter.

That's very helpful. And then just one follow-up on market share, I mean, obviously, it's influenced by what's happening in the market and competitive dynamics. How do you perceive the competitive landscape? For instance, a company like Automation had around 1.3 million used vehicles last year. Recently, they've increased their buying outside of their dealerships, doing about 100,000 units outside compared to what they were doing before. It seems like the franchise side, though this is just one example, is targeting some of the same vehicles you are even outside traditional channels. Are you noticing that as you are acquiring, or is this more of a one-off situation?

You mean as far as the acquisition of vehicles?

Well, I mean, the franchise dealers traditionally would take flow from the new vehicle, the trade-ins and other sources. But they've stepped outside of that traditional channel are going out to third parties or not in auctions, but direct-to-consumer as well. And that was an incremental source of 100,000 units for them on an LTM basis, and that's just new, right? That's just incremental and new activity. So I'm just curious if that's unique to them or you're seeing that sort of more in general?

Yes. You're aware of the significant volume in auctions, particularly for zero- to four-year-old vehicles. If people want that inventory, they need to be more resourceful, so it's not surprising that others are doing so. Our sales for zero to four-year-olds actually increased year-over-year a bit, which is one data point to consider. All dealers are trying to acquire vehicles from various sources, and I'm excited about innovations like Max offer. When discussing sales efficiency, it includes just the consumers; we don’t factor in what we're getting from other dealers, and this product is more focused on retail than wholesale. So, it's understandable that you have an instance of that. Those who can implement such strategies will likely do so, and remember, there are tens of thousands of competitors selling zero to 10-year-old cars, many of whom lack that capability.

We'll take our final question from David Whiston with Morningstar.

Just wanted to ask about advertising expense, which did go up year-over-year, whereas for the nine months, it's down. What was the catalyst to make you increase spending this quarter is what I'm curious about.

Yes, that's going to be very much a function just of our CapEx spend and the depreciation there. But then also, when it comes to our technology spend, a portion of our technology spend is going to be depreciated, right? And so, you'll see that impact in our D&A.

Yes. I believe regarding advertising, we're committed for the long term. We'll invest in brand awareness and customer acquisition. As we approach the new year, we plan to communicate our advertising strategy. Our advertising efforts are focused on driving sales, facilitating purchases, and promoting on Edmond. We've indicated that we would increase spending in the latter half of the year, but the overall annual spending will remain consistent. We are implementing this strategy, and it's crucial to understand that while we are investing in advertising, we are also monitoring the return on investment. Sometimes, if the ROI isn't translating to sales, we might adjust our focus towards purchases or Edmond. This will fluctuate each quarter, but typically, we'll spend a bit more in the fourth quarter due to the upcoming tax season, which tends to boost volume.

Yes, David, sorry, I apologize. I thought you were asking about depreciation.

You got an extra answer?

Yes. We aim to acquire all the vehicles, but we will do so in a thoughtful and profitable manner. While we could purchase many more cars, it wouldn't be sensible from a profitability perspective. The team has performed exceptionally well, especially in light of the significant depreciation we've experienced, and they've managed to handle it effectively despite being a short-term challenge.

And at this time, we have no additional questions standing by. I'd like to turn the call back over to Bill for closing remarks.

Great. Thank you, Jamie. Well, I want to thank all of you for joining the call today and for your questions and your continued support. As always, I want to thank our associates for everything they do to take care of each other and the customers and the communities. I want to wish all of them a happy holiday season as well as you all. And we will talk again next quarter. Thank you.

Once again, ladies and gentlemen, that does conclude today's program. Thank you for your participation. You may disconnect at this time.