Ladies and gentlemen, thank you for standing by, welcome to the Q4 Fiscal Year 2024 CarMax Earnings Release Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Lowenstein, AVP, Investor Relations. Please go ahead.

Thank you, Shelby. Good morning, everyone. Thank you for joining our fiscal 2024 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 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. We're encouraged by the performance of our business during the fourth quarter. We're continuing to leverage our strongest assets, our associates, capabilities, experience and culture to build momentum as we manage through the cycle. While affordability of used cars remains the challenge for consumers, pricing improved during the quarter. We continue to achieve efficiency improvements in our core operations and believe we are well positioned to drive growth as the market turns. In the fourth quarter, we posted our fifth consecutive quarter of sequential year-over-year retail used unit improvement and reported growth in total used unit sales and comps. We delivered strong retail and wholesale GPUs. We increased used saleable inventory units more than 10%, while holding used total inventory units flat year-over-year. We continue to actively manage our SG&A and we grew CAF income significantly as we delivered a substantial reduction in the provision for loan losses year-over-year, while maintaining stable net interest margins sequentially. For the fourth quarter of FY '24, our diversified business model delivered total sales of $5.6 billion, down 2%, compared to last year. This was driven by lower retail and wholesale prices and lower wholesale volume, partially offset by higher retail volume. In our retail business, total unit sales increased 1.3% and used unit comps were up 0.1%. Average selling price declined approximately $600 per unit or 2% year-over-year. Our market share data indicates that our nationwide share of zero to 10-year-old used vehicles declined from 4% in calendar '22 to 3.7% in 2023 as we prioritized profitability over near-term market share growth. As always, we continue to test price elasticity to validate our decisions. External title data shows that our market share initially accelerated relative to our performance across the second half of 2022, but then came under pressure during multiple periods of steep depreciation. We remain confident in our ability to accelerate market share growth as used vehicle affordability continues to improve and as the volatility of vehicle value stabilizes. Fourth quarter retail gross profit per used unit was $2,251, relatively consistent with last year's fourth quarter record of $2,277. Wholesale unit sales were down 4% versus the fourth quarter last year. Average selling prices declined approximately $250 per unit, or 3% year-over-year. Fourth quarter wholesale gross profit per unit was $1,120, slightly down from $1,187 a year ago. 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 last year's quarter. This prior year appreciation dynamic impacted our year-over-year performance and buys as well. We bought approximately 234,000 vehicles during the quarter, down 11% from last year. Of these vehicles, we purchased approximately 213,000 from consumers, with slightly more than half of those buys coming through our online instant appraisal experience. With the support of our Edmunds sales team, we sourced the remaining approximately 21,000 vehicles through dealers, up 45% from last year. For our fourth quarter online metrics, approximately 14% of retail unit sales were online, consistent with last year. Approximately 55% of retail unit sales were omni sales this quarter, up from 52% in the prior year. All of our fourth quarter wholesale auctions and sales were virtual and are considered online transactions. This represents 17% of total revenue. Total revenue from online transactions was approximately 30%, in line with last year. CarMax Auto Finance or CAF delivered income of $147 million, up 19% from $124 million during the same period last year. Jon will provide more detail on consumer financing, the loan loss provision, and CAF contribution in a few minutes. But 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. As Bill noted, we drove another quarter of sequential improvement in our used unit sales with strong per unit margins for both used and wholesale and strong CAF contribution growth, while staying focused on managing SG&A. Quarter net earnings per diluted share were $0.32 versus $0.44 a year ago; last year's quarter benefited from an $0.08 tailwind due to the receipt of Extended Protection Plan, or EPP, profit sharing revenues, as well as $0.04 from a lower tax rate, compared to a more normalized tax rate this quarter. Total gross profit was $586 million, down 4% from last year's fourth quarter. Used retail margin of $387 million was flat, with higher volume partially offset by a slightly lower per-unit margin. Wholesale vehicle margin decreased by 9% to $129 million, with a decrease in volume and per-unit margin, compared to last year. Other gross profit was $69 million, down 15% from a year ago. This decrease was driven primarily by last year's receipt of $16 million in profit sharing revenues from our EPP partners. As noted on our third quarter call, we did not expect to receive profit sharing revenues this year as our partners experienced inflationary pressures and consumers returned to more normalized driving patterns. Partially offsetting this dynamic was the positive impact from price elasticity testing on our extended service product. During the quarter, we tested raising MaxCare margins per contract sold, which resulted in a slight decrease in product penetration, while driving overall profitability. We are encouraged by these results, and we have rolled out the margin increase nationally. Our expectation is that this action will drive approximately $20 per retail unit of incremental EPP margin in FY '25. Service decreased by $4 million, as compared to last year's fourth quarter. This decrease was primarily driven by wage pressures and planned lower production in the quarter as we pre-built inventory in the third quarter, due to holiday timing. For the full year, service improved by $75 million year-over-year. Our expectation is that we will continue to see significant year-over-year favorability in FY '25. The extent of this improvement will be governed by sales performance given the leveraged, deleveraged nature of service. Third-party finance fees were down $3 million from a year ago, driven by higher volume in Tier 3 for which we pay a fee and lower volume in Tier 2 for which we receive a fee. On the SG&A front, expenses for the fourth quarter were $581 million, up 1% from the prior year's quarter. Our continued discipline in spend and investment levels allowed us to come in flat year-over-year when excluding share-based compensation. As a reminder, in the fourth quarter, we passed the year mark since initiating our significant cost management efforts. SG&A dollars for the fourth quarter versus last year were mainly impacted by three factors. First, other overhead decreased by $16 million. This decrease was driven primarily from reductions in spend for our technology platforms and from the continued favorability in non-CAF uncollectible receivables. Second, total compensation and benefits increased by $7 million, excluding an $8 million increase in share-based compensation. This increase was mostly driven by a higher corporate bonus accrual in the quarter. Third, advertising increased by $5 million. This reflects an increase as communicated last quarter due primarily to the timing of per unit spend. For full-year FY '24, we strongly outperformed the target we set out at the beginning of the year of requiring low-single-digit gross profit growth to lever SG&A, even when excluding the benefits from this year's legal settlements. Our ability to materially drive SG&A costs down year-over-year was led by favorability in non-CAF uncollectible receivables that reflects improved execution at our stores, at our corporate offices and by external partners. Our focus on driving efficiency gains in our stores and CECs, the planned reduction of technology spend and by aligning staffing levels and marketing spend to sales. In FY '25, we expect to require low-single-digit gross profit growth to lever SG&A, when excluding FY '24's favorable legal settlements. This reinforces our pathway back to a lower SG&A leverage ratio with our initial goal of returning to the mid-70% range over time once we see healthier consumer demand. We anticipate that SG&A will be pressured in the first quarter. As a reminder, we received $59 million in legal settlements during the first quarter of FY '24. Additionally, in this year's first quarter, we expect an approximately $25 million impact due to share-based compensation for certain retirement-eligible executives and a lapping of favorable reserve adjustments related to non-CAF uncollectible receivables during last year's first quarter. With regard to marketing going forward, we plan to speak to our spend on a per total unit basis, inclusive of total retail and wholesale units. We believe this more holistically reflects the impact of our marketing initiatives, which support both vehicle sales and buys. In FY '25, we expect full-year marketing spend on a total unit basis to be similar to FY '24 at approximately $200. Regarding capital structure, during the quarter we repurchased approximately 686,000 shares for a total spend of $49 million. Starting in the first quarter, we intend to modestly accelerate the pace of our share repurchases above the pace that we implemented in our third quarter of fiscal year '24. As of the end of the quarter, we had $2.36 billion of repurchase authorization remaining. For capital expenditures, we anticipate an investment level between $500 million to $550 million, up from the $465 million in FY '24. The year-over-year increase in planned spending is primarily related to the timing of spend for new stores. Like in FY '24, the largest portion of our CapEx investment remains related to the land and the buildout of facilities for long-term growth capacity and offsite reconditioning and auctions. In FY '25, we plan to open five new store locations. Consistent with our strategy, these new locations will be smaller cross-functional stores that complement our omni-channel strategy and leverage our scale. We also plan to open our second standalone reconditioning facility, which will be located in Richmond, Mississippi, as well as one offsite auction location in the Los Angeles metro market. We currently expect to open multiple offsite reconditioning and auction locations in FY '26. 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 and good morning everyone. During the fourth quarter CarMax Auto Finance originated approximately $1.8 billion, resulting in sales penetration of 42.3% net of three-day payoffs, which was down 240 basis points from the same period last year. The weighted average contract rate charged to new customers grew to 11.5%, an increase of 60 basis points from last year's fourth quarter and 20 basis points sequentially. Tier 2 penetration in the quarter was 18.2%, down from 19.4% observed during last year's fourth quarter. Tier 3 accounted for 8.2% of sales, up 130 basis points from last year, as a partner began to ease previously implemented tightening. Also impacting each of these year-over-year results is CAF's continued decreased percentage in Tier 3, as well as the increased test volume in Tier 2. CAF income for the quarter was $147 million, up $23 million from the same period last year. This improvement was primarily driven by a $26 million year-over-year reduction in the provision for loan losses, slightly offset by a $3 million reduction in total interest margin. Note fair market value adjustments from our hedging strategy accounted for $4 million in expense this quarter versus $1 million of income in last year's fourth quarter. The $72 million provision within the quarter resulted in a reserve balance of $483 million or 2.78% of receivables, compared to 2.92% at the end of the third quarter. This highlights the significant impact that originations under our tightened credit policy are having on the reserve as they continue to become a larger percentage of the full portfolio. In addition, observed performance within the portfolio aligned closely to our reserve expectations at the end of the third quarter and contributed to the reduction in the reserve. The margin to receivable rate of the portfolio remained steady at 5.9% for the quarter. We remain pleased with our ability to maintain a stable interest margin despite keeping our credit tightening in place. As I noted earlier, CAF continues to test across varying parts of the credit spectrum. Ultimately, CAF is building the capability to scale its participation across all credit tiers, which will help to capture finance economics, drive sales, and fully complement our valued lending partnerships that are a key foundation of CarMax's best-in-class credit platform. Now I'll turn the call back over to Bill.

Thank you, Jon and Enrique. Fiscal 2024 was a challenging year across the used car industry as vehicle affordability and widespread macro factors continue to pressure sales. In response, we focused on what we could control and took deliberate steps to support our business both the near-term and long run. In addition to achieving the efficiencies across our entire organization that Enrique talked about, I am proud of the progress we've made in further enhancing our omni-channel capabilities as we prioritize projects designed to optimize experiences for our associates and customers and drive operating efficiencies. Some examples include, for retail, we leverage data science, automation, and AI to make it even easier for customers to complete key transaction steps like vehicle transfers on their own. We also enhanced digital checkout functionality for appraisal customers, enabling them to submit their documents remotely and unlocking their ability to participate in our 30-minute express drop-off experience. Additionally, we expanded capabilities for Sky, our 24/7 virtual assistant, to include managing finance applications, vehicle transfers, appointment reservations, and appraisal offers. Customer adoption of Sky has been strong, and this has not only created efficiencies, but also widened bandwidth for our associates. For wholesale and vehicle acquisition, we modernized our auction platform to offer new services, including single sign-on across all of our systems, AI-enhanced condition reports, early bidding capabilities, and automated bills of sale. Additionally, we streamlined Max offer by rolling out our instant offer experience to all participating dealers. In the credit space, we have now incorporated all of our lenders into our finance-based shopping platform, expanding the breadth and depth of offers available to our customers. We continue to see great adoption with more than 80% of the consumers utilizing the best-in-class pre-qualification product as they begin the credit process. Finally, Edmunds launched a number of research and buy tools in support of its goal to be the leader in EV research. These include range tests, charging efficiencies, VIN-level battery health assessments, and EV tax credit incentive guides. Looking ahead to fiscal 2025, we will build on our progress from last year to further expand our competitive mode. We are confident that the actions we are taking will enable us to grow sales, profitable market share, and buys while also driving additional operational efficiencies as the market turns. Some examples include, for retail we plan to launch an evolved hub within our customers' online shopping accounts that will make it even easier to seamlessly go back and forth between assisted help and self-progression. Customers will be able to see the steps they have taken on their shopping journey, whether on their own or with help from a CEC or store associate. The hub will also guide next steps and promote MaxCare, our extended service plan offering. Additionally, we will continue to digitize work in support of our focus to build a leaner and high-value assistance model for our CECs. This will enable existing resources to support higher transaction volume as we grow traffic and drive stronger conversion. As part of this effort, we will further integrate Sky into key communication channels and prove its ability to serve as the initial point of contact across many points in the customer's shopping journey. Sky will manage next steps on its own or seamlessly transition customers to a CEC associate via the customer's channel of choice. For vehicle acquisition, we'll focus to bring even more vehicles into our ecosystem. A key component of this will be our continued partnership with Edmunds to acquire vehicles from dealers. In the credit space, we plan to further optimize our prequalification product by integrating the customer's instant offer into the application process. As Jon mentioned, we will also continue to test CAF's participation across varying parts of the credit spectrum. As always, we will continue to pursue opportunities that enable us to provide outstanding offers for consumers, while driving sales and economics for the business. In regard to our long-term financial targets, we're maintaining our goal to sell more than 2 million combined retail and wholesale units annually. However, we are extending the timeframe for this goal between fiscal 2026 and fiscal 2030, due to the uncertainty in the timing of the market recovery and as we continue to focus on profitable market share growth. We will adjust the timeframe as we gain greater visibility into the industry's pace of recovery. Given higher average selling prices, we expect to achieve the $33 billion annual revenue target sooner than units. And similarly, we also expect to achieve more than 5% nationwide market share of zero to 10-year-old used vehicles sooner than units. Given the recent volatility in vehicle values, we will provide an updated timeframe for our expected achievement at the end of fiscal year 2025. Before turning to Q&A, I want to recognize two significant milestones. First, CarMax celebrated its 30th anniversary during fiscal 2024. I want to thank and congratulate all of our associates for the work that they do. They are the differentiator and the key to our success. Second, Fortune magazine recently named CarMax as one of the 100 best companies to work for, for the 20th year in a row. I'm incredibly proud of this recognition, particularly as we face a challenging year. It's due to our associates' commitment to supporting each other, our customers, and our communities every day. In closing, I'm proud of the progress we've made on our journey to deliver the most customer-centric experience in the industry. I'm encouraged by the sequential quarterly improvements we're driving across our business, and I'm excited about our focuses for fiscal 2025. Our core operations are strong and we are well positioned to drive growth as macro conditions improve. With that, we'll be happy to take your questions. So Shelby?

And your first question comes from Seth Basham with Wedbush Securities. Your line is open; you may now ask your question.

Thanks a lot. I have one quarterly specific question and one big picture question. On the quarter, it seems like service gross profit was weaker than we anticipated. Can you help us understand how much of that pressure was transitory and how much improvement we should see in the service line in 2025?

Yes. Thanks, that’s a great question. We do believe it was transitory. We did have a couple things from a year-over-year standpoint. The planned lower production that we had communicated. So we did expect some headwinds there in the fourth quarter. We also had some wage pressures. Now that being said, we have undertaken in the fourth quarter, which will carry forward into next year, even more efficiency initiatives, particularly for labor. We've invested in RFID tracking of inventory. We're going to leverage our tech and engineering investments to enhance reporting in our stores. We're focused on driving more MaxCare work to our shops and at the same time we've also taken labor and parts rates up to help offset inflationary pressures. So we do expect to see improvement, significant improvement year-over-year just like we delivered this year the significant improvement for the year as a whole and we expect that same next year. Now it is also certainly related to sales performance as well given the leveraged, deleveraged nature of service.

Understood, thank you for that color. And then secondly Bill, in regards to market share, you indicated on your last call that you started to see an improvement in market share towards the end of the fiscal third quarter. Seems like things slipped a little bit in the fourth quarter. Help us understand why and when should we expect to see market share increases going forward as the cycle turns?

Yes, great question, Seth, and you're right. Last quarter I talked about October from a year-over-year standpoint actually inflecting positive, but also during the third quarter, I talked about the steep depreciation. It was going to be interesting to see how competitors reacted. When I step back and think about market share at the highest level, the two things that have been impacting us this year, and really some of it was last year as well, are affordability and then, more relevant to this year, the steep depreciation periods that we've seen. So from the affordability standpoint, we've talked about that throughout the year as far as consumers may be trading down, trading into older vehicles, into zero to 10-year-old cars that maybe we don't sell, or just basically standing on the sidelines, because we see that there's demand out there yet people aren't actually pulling the trigger. The other thing that we saw during the year, we saw two very steep depreciation cycles. If I look at last year's calendar year and I talked about it in my prepared remarks, we were growing market share coming out of last year. And then we ran into a period, let's call it four or five months, of steep depreciation starting in about April, and it was about $3,000. Then it stabilized for a little bit, and then we finished out the year with, again, another steep depreciation, probably the steepest we've seen in the shortest period of time, about another $3,000. And as we've talked about before, when we see the steep depreciation, that's really when we're testing our pricing elasticity, because we know that competitors, for their own reasons and for their business models, may end up taking down prices to move inventory, that kind of thing. And what we've said is we're going to continue to move forward on profitable market share growth. So I think what we saw in the fourth quarter, dealers were trying to figure that out in October, because a year ago, if you remember, we saw steep depreciation. There was a big influx of where we saw dealers letting inventory go. And then what happened in the beginning of the first quarter, they ended up buying a bunch of cars because they had sold through too much and that drove up appreciation. So I think this year, dealers were a little bit delayed, which is why you saw a little bit of an inflection in October. But then we saw a sell-off in November and December. The good news is that the January data we have, we can actually see where we're improving our market share in January. February, we don't have the actual data yet, but we feel good about February. So I think from a market share standpoint, this value volatility can be challenging and we'll continue to work and that's one of the reasons why we want to see how this pans out over this year before we update that target. So hopefully that color is helpful.

And we'll take our next question from Sharon Zackfia with William Blair. Your line is open. Please ask your question.

Hi, good morning. I guess two questions and hopefully you guys will forgive me. But on the improved affordability, can you give us some metrics around that? I mean, it's clear that new car prices are coming down and hopefully rates are top-ish. So what was kind of an average loan payment that you originated this quarter versus maybe the third quarter or some historical benchmark just to give us an idea of how that's improving for the customer? And then secondarily, just on that market share dynamic, is there any region or any particular cohort of demographics that you've been more susceptible to this market share loss as some competitors may have been less rational? Thanks.

Sure, Sharon. It's Jon here. I'll take the first one on the loan payment. So historically, our average used car was $20,000 forever. So that translated typically, depending on the interest rate, to a $400 monthly payment. I think that's a good round number to think about. With the appreciation, you saw really a peak probably hit in later calendar '22 of about $570, $580. That was primarily driven by that financed amount. Rates were on their way up, but that financed amount really was driving that. So that increase we kind of attributed to maybe an 85-15 split on the financed amount versus the interest rate going up. Now as we've cited, clearly, the vehicle prices are coming down. The financed amount is coming down to some degree and rates are going in the other direction. So we probably say this quarter we probably saw roughly a $525 to $530 payment. Still two-thirds of that driven by that vehicle price being still higher. Now the rates are a bigger contributor, but hopefully that gives you some perspective on how affordability has improved to some degree. Still a bit of a shock to a consumer that's used to a $400 monthly payment coming in at a $530 monthly payment. They're going to have to figure out how they work that into their budget going forward, but that hopefully gives you some context on how affordability has shifted.

And, Sharon, on the second part of your question, not necessarily a difference geographically. We talked about before, your Tier 3 customer, obviously, we have a lot less Tier 3 sales than we've had in the past. Our consumers that make less than $3,000 per month in a household have basically been cut in half. So certainly that lower finance customer, lower income customers, has been impacted. But we also see, and I talked about this in the third quarter just from working with one of the credit bureaus, of the folks that don't end up buying that apply for a loan at CarMax, it's not like we're seeing this big degradation where they're going to somebody else. They're just sitting on the sidelines. And I think part of that speaks to what Jon just spoke about. The other thing I would just remind everybody on the market share is historically we have always grown market share. It's just when there's been unusual events. If you go back to the great financial crisis, if you go to COVID. And I would say now in this period, we've got these very, very steep depreciations. I mean, we saw two this year, we saw one last year, we've just never seen these before. And so I think working through these, we'll get through them and then like always, we'll continue to grow market share.

And we'll take our next question from Rajat Gupta with JP Morgan. Your line is open. You may ask your question.

Got it. Great. Thanks for taking the question. I wanted to just quickly ask on how the first quarter was trending. Given you exited or you had positive comps in the fourth quarter, should we expect that trend to continue here? You know, because seasonality would imply like comp should move lower or negative again in the first quarter, but curious what you're seeing and any updates you can give us there? And then just a broader question on the long-term target. It's almost like a four-year range, 2026 to 2030. Could you explain the thought process behind such a wide range? And where is the uncertainty really coming from? Is it on the demand side or is it on supply side? Any more color there would be helpful. Thanks.

Yes, so thanks for the question, Rajat. On the first question, kind of comp cadence, for the quarter, December, January negative comps, February was a positive comp resulting in a positive for the quarter. Since the quarter ended, it's been a little choppy. We've seen some weakness and right now, quarter to date, albeit early, and again choppy, we're seeing about a mid-single-digit negative comp right now, but again, it's early on and it's been choppy the last month and a half. On the second question, the long-range targets — keep in mind on the market share, we'll come back at the end of this year and update that. On the units one, yes, you're right, it is a wide range. We're going to come back and provide more visibility into that once we just get a better idea of the market recovery. Keep in mind, I think industry estimates had this year finishing up about 35.5 million used vehicles, where traditionally we're at 40 million. And so I think their expectation is going to be fairly flat, maybe up a little bit in total used units in the zero to 10-year-old category, it might be flat to even up a little bit. So I think you're expecting when it comes to total used units, there's probably more growth in the over 10-year-old vehicles in the zero to 10. And so that's something — we want to get some visibility into that, especially when it comes to the units. The volatility also plays into it, though, because it also impacts your buy rate, which ultimately can impact your wholesale. So as we get more visibility into this market recovery, we'll come back and narrow that time frame for you.

Yes, the expectation is not to hit the wide end of that range. Really is we're going to provide visibility once there's just a bit more stability in the market.

Just to clarify on the zero to 10-year-old comment. I mean if you look at what's happened with new car sales the last few years and just users originated on them, is there a chance that the zero to 10-year-old market takes another step down in calendar '25 before turning positive? Because that should be fairly visible, right, given what we know that's happened over the last three, four years?

Yes. I think the zero to 10, what the estimates are out there is it's going to be flat to up a little bit. So we'll see where that actually pans out. Keep in mind, there is a new car dynamic here where less cars were sold a couple of years ago. But again, I would also look back to — we saw bigger declines back in the great financial crisis. So we'll see estimates are that it's going to be flat to up a little bit.

Great. Thanks for all the color.

We'll take our next question from Brian Nagel with Oppenheimer. Your line is open. You may ask your question.

Hey guys, good morning.

Good morning, Brian.

Okay. Just my first question with regard to used sales, and maybe a bit bigger picture. But I guess it's much in the business. Look, you got the positive comp, albeit slightly. You got positive used car unit comp here in Q4. And then in response to the prior question, you talked about maybe some incremental weakness here in early Q1? But the question I have is as you're looking at this business, recognizing that you don't give guidance, there's a lot of moving parts out there. What has to happen? Because it seems like a lot of the key factors are starting to turn more favorable for CarMax, whether it be used car pricing moderating, rate stabilization, we're seeing the data, a better tax refund season. So I guess as you look, what's the kind of the equation, if you will, to get back to that normalized used car unit comp?

Yes. I think we've hit on a couple of the major issues. Affordability has to continue to move down. I was encouraged, I mean this quarter was the first time we've been under a $26,000 average selling price in like two years. So that's a step in the right direction. I think there's a lot of positives out there you referred to like interest — hopefully interest rates at least stable. And once they start coming down, I think that's certainly a good guide as well. I think building on some of the stuff that we've been working on, the efficiencies that we're working on that we've talked about is the fact that we've got sequential improvement. Jon talked about CAF becoming more of a full credit spectrum lender. There's opportunity there. I think there's opportunity in omni. I mean we've got a lot of good things that are positive, but we do need a little help on the affordability. And I think we also — just that volatility, don't underestimate. I mean, when you have a year where you see depreciation of $6,000, keep in mind, we saw some appreciation at the beginning so it offset some of that. But $6,000 really in two different time periods. We just haven't seen that. And we had another of those last year, I would call them price corrections. And I think having some visibility into that and stabilizing that. If you get a — we've shown like continued market share growth over the years, whether it's been appreciation, whether it's been normal depreciation, keep in mind, normally in the end of the year, there is depreciation. It's probably $1,500 to $1,600 a year. We've been able to take market share in all those environments. So I think those are the two big factors for us.

I think a couple of other just demand signals that we've seen. Web traffic was up again this quarter, year-over-year. Finance applications were up again this quarter. So there's demand signals that we're seeing out there, it just boils down to the affordability question.

That's very helpful. If I could ask just one follow-up. You've talked now — forget about tightening lending standard. We're seeing — we're clearly seeing the benefits of that in the CAF data and particularly, I guess, the loan loss provision. I guess the question I have is to what extent is your tighter lending now impacting demand for used cars at CarMax?

Yes, appreciate the question. I mean, certainly, I think that's the benefit of our platform, right? CAF is able to tighten, and it's able to slow down to partners that are willing to — maybe they're going to ask for a little more money down, it's going to be a little bit higher rate. But they are going to have the option to buy, and we see people get picked up down the line. We're very careful when we test rates and we do any underwriting adjustments. We watch it very carefully. We test it. We know what's going to get picked up, and we're very thoughtful about the sales impact and any decision we make, whether it'd be pricing or underwriting. So certainly, there's going to be a few people that might not choose that higher rate or more down payment from our lenders down the line. But we believe, generally, they are very excited, Tier 2 partners are, when CAF passes on stuff, and they can go pick it up.

Yes. But Brian, it's definitely a headwind. I mean we're tightening. We've got great partners picking up some of that, but they don't pick it all up. And then it goes down to Tier 3, and you've seen where our Tier 3 volume just is in general. So there's no doubt that the tightening in general of the industry is having an impact.

Got it. I appreciate it, thank you.

And we'll take our next question from Craig Kennison with Baird. Your line is open. You may ask your question.

Hey, good morning. Thanks for taking my question. I wanted to ask about sourcing, Bill. You bought 11% fewer cars. I know depreciation is a headwind, but you also have these innovative new tools like instant offer and Max offer that I thought might provide a secular lift. So I'm wondering on instant offer, can you shed any light on just overall appraisal activity and buy rates to give us a feel for the kind of traction you have with that tool? And then on Max offer, how much of that 45% growth, albeit from a small base, is attributable to adding new dealers versus momentum with the existing dealers?

Yes. Thanks for the question, Craig. On the consumer buys, again, I think it's more of a year-over-year dynamic. Buy rate this year was down a little bit versus last year. But keep in mind, last year, in the fourth quarter, we saw about $2,000 of appreciation. We didn't see that this quarter. It was much, much less by the end of the quarter. That has an impact because consumers always think their cars are worth more money. When you can put more on it, that helps buy. On the Max offer, the increase there is really we've increased the overall number of dealers. The way we think about it is how many active dealers you have. And of the dealers we have, we saw about a 50% increase in active dealers actually using the tools. So we're encouraged by that. We haven't expanded to other areas. We think there's a lot of opportunity to continue to move this along, which is what I said earlier in my prepared remarks. It's going to be a focus for us.

Thank you.

And we'll take our next question from Michael Montani with Evercore ISI. Your line is open. You may ask your question.

Hey guys, good morning. Thanks for taking the question. Just wanted to ask to start off. If you think about this year, is there any reason that this wouldn't be another year for CarMax to take market share? And then is there a need at all to either sacrifice gross profit per unit or potentially loosen credit standards to take share?

Yes. I mean, look, you could — if you lowered your prices, you could absolutely sell some more cars. But I'll go back to what I said earlier. We're focused on profitable market share. And look, you can see it with the publicly traded auto retailers, they're swapping it off, sometimes units for GPU. And when you look at total comp GPU, it just hasn't necessarily been a good decision. So we'll continue to test the elasticity. Our goal, obviously, every year is to gain market share. I am hopeful just looking at kind of depreciation trends, I'm hoping that this year will be a more normal depreciation and depreciation cycles, but we'll see. And I think that's going to be a factor. And again, I always couch it with we'll always test the elasticity to see if it makes sense to lower margins in order to get more units and more total gross profit.

And as far as the CAF lending standards, I mean, I think that's one of the things that we're optimistic about. We've tightened for very purposeful reasons. Obviously, we have partners down the line. But as Bill mentioned, yes, you do lose sales when CAF tightens. But we believe that the cycle will turn. The consumer will get healthier. And we're excited to go after more market share up and down the credit spectrum. So I think it absolutely is an opportunity on the other side of this.

Yes. I'm optimistic with CAF. And I know the Fed is — there's a decision on when they're going to cut rates. If it stabilizes and doesn't sound like it's going to go up, as rates come down, that's a tailwind for us for sure on a couple of different fronts from a CAF standpoint, margin standpoint but also from a sales standpoint.

Just how to think about the mid-70s SG&A ratio target as well. Is that feasible for this year? Or how should we think about that?

I think the mid-70s SG&A as we've talked about, that is absolutely our next step in our progress. I think in terms of this coming year, we're going to need strong consumer demand also return. There are obviously two variables in that equation, right? You have SG&A, which I feel we've made a lot of strides this past year, and we'll continue to focus on. But we really need that gross profit number to accelerate in order to hit that mid-70%. Hitting it in FY '25 would really be a tough putt, just given the volumes of our unit sales over the past couple of years here.

And I think also just given that the market is overall going to be fairly flat.

Got it. Thank you.

We'll take our next question from John Healy with Northcoast Research. Your line is open. You may now ask your question.

Thank you. Just wanted to ask a bit about the wholesale business. It's a nice position where we kind of ended the year in terms of GPUs on wholesale. I was kind of curious how you see that business from GPU performing in '25, just given the expected sending of the used car market in terms of values with improving supply. Do you think we can hold at this kind of $1,000 level for a while? And can you talk a little bit about what you're doing with the auction side of the business? I think in your prepared remarks, you mentioned that you're going to build a standalone auction facility, which I believe would be the first one for the company. Maybe where you're going with that business and does that decoupling of auctions from the retail location potentially mark a new business line you're getting into, not only from a self-sufficiency standpoint but maybe from a revenue standpoint?

Yes. Thank you for the questions. On the wholesale margin, yes, I was especially pleased with the wholesale margin. Just given some of the year-over-year dynamics, the team did a phenomenal job. And I think it speaks to just some of the improvements we made in our overall auction process with technology, that kind of thing. I think you're thinking about it the right way. If you look at it on a yearly basis, I think a good target, give or take a little bit, is similar to what we ran for the year this year on wholesale margins. So I think you're thinking about that the right way. And I think it speaks to a lot of the improvements that we've made in the business. As far as the standalone auction facility, it is interesting because we actually have a couple of standalone auction facilities that we've built over time, just that are generally located right close to one of the stores for extra capacity. But this will be the first time that we've gone out and really built the facility with the intention of it having to be an auction facility. I think going forward, you're going to see some of the standalone auction/production facilities. The one that we're talking about for next year is just an auction facility. We may run some logistics hub out there. But right now, it's an auction facility. And it's really going to help us in a couple of different ways. The facility will be close to existing stores. And we'll be able to take wholesale vehicles out of existing stores, allow them to leverage the lots more from a service standpoint and from a sales standpoint. We're ending up moving a lot of cars anyway from satellite and XF stores. And now taking them to this location will just help us continue to make improvements at standalone facilities, and I think they'll pan out well for us going forward. So our intention as we go forward is to build more of these things, get more of some of the wholesale sales out of the stores to free up space, free up capacity that we think will have other benefits to the business, whether it's, hey, you can do a little bit more MaxCare retail service. There's a lot of benefits to that, plus just the standardization of having these bigger locations in close proximity to stores will also help us to innovate even quicker than what we've been able to do.

Thank you guys.

We'll take our next question from Scot Ciccarelli with Truist Securities. Your line is open. You may ask your question.

Good morning guys. Another market share follow-up, I guess. Bill, why do you think you lose share in disruptive periods? I mean historically, industry leaders in various retail verticals actually accelerate share gains during disruptive periods. What is different about the CarMax model why that may not follow a similar pattern?

Well, when you say disruptive periods, I mean the three periods, and I think Great Recession, COVID, I think what's going on a little bit different here recently. I mean here more recently, it's this vehicle volatility that I talked about earlier. And when there are shocks to the system of large depreciation over a short amount of time, you know how we run the model. We're like, okay, should we lower our prices? And is it overall better from a profitability standpoint? And what we've seen is it just doesn't pan out that way, which is why we hold the margins steady. Now there's lots of competitors who don't do that. And they do what's right for their business. They've got different demands. They've got credit lines, things like that. So they have to do what's right for their business, and we have to do what's right for our business. So you will see — we've seen this year when we hold the prices and others are liquidating inventory for various reasons, we end up giving up market share.

So just philosophically, is that the right decision over time? Like I understand you can capture more profit. But if you want to be a growth vehicle and you have been for 20-plus years, is that the right decision to hold the line on price and protect profit? Or should you be seeking market share? I'm just wondering philosophically how you guys are thinking about that. Thanks.

Yes. No, I mean, it's a good question. And obviously, we think philosophically, look, the buying cycle is every five years. If you had asked me at the beginning of this year, do you think there might be a price correction? I would say maybe, yes, probably another price correction coming out of last year. I didn't expect there to be two price corrections. I don't see this type of environment being able to replicate itself year after year. I think these are very unusual circumstances. So I do think that here in the short term, it is the right thing to do. It's not like this is going to be continuing to repeat. If it was, then we would look at the business model. But I think we believe that this is the right move.

Got it. Thank you very much.

And we'll take our next question from Christopher Bottiglieri from BNP Paribas Exane. Your line is open. You may ask your question.

Hey, everyone. This is Ian Davis on for Chris. Thanks for the question. It seems you've been a bit more reliant on warehouse facilities than ABS in recent years ex the Tier 2 and Tier 3 pilot. So wondering if you could elaborate a little bit on how average FICO expected losses of loans in these warehouse facilities compares to maybe what you see in similarly rated loans in ABS facilities?

Sure. Yes, I can take that one, Ian. Yes, I mean, I think you said excluding Tier 2 and Tier 3, so we're talking focused on the Tier 1 business. Yes, I mean, our focus is generally to bring in all the volume from Tier 1 into our warehouse facilities, and our goal would be to get it all into the ABS market. Now fundamentally because of those exclusions, there are certain criteria they need to meet. You need to have a title, they need to have made the first payment, et cetera. So you're going to have some higher-risk stuff fall out. It's always going to happen. But our goal is to move all that volume from originations through the warehouse into ABS. Inherently because of those exclusions, you're going to have probably a little bit higher FICO in the ABS deals. If you look at deal over deal over deal, that change in FICO is coming from us changing what we're originating and that ultimately flowing through. Remember, it's going to take six, seven months to get into an ABS deal for when we originate it. But that movement over time in ABS is really what we're underwriting, probably less so what we're holding out into in a warehouse line.

And from a total capacity standpoint, where we certainly leverage the ABS market is the most efficient way to fund the business. We also — as you've noted, we've also grown our non-ABS funding with our banking partners. We have tremendous banking partners, and we've built out some facilities, additional facilities there. And we talked about that several years ago about just bridging out and having alternative finance options as we continue to grow the business. And that's what we've done.

Got it. That's helpful. And if I could just slip another question in. We had read that CarMax may be removing the 30-day return policy. Is there any truth to this? And if there is, could you contextualize maybe how material abandoning the policy would be to earnings? And perhaps any other context in terms of customers valuing it or maybe using it, any context there would be helpful.

Yes. So what you're referring to is the 30-day money-back guarantee. We're modifying it to a 10-day money-back guarantee, which is still industry-leading. That's really due to some experiential headwinds, both for customers and associates, which also add increased expenses. Many of our customers take advantage of it well before 30 days; when you get past 10 days, some people are working the system. Others, what we run into is headwinds with DMVs and municipalities getting title work squared away, checks back, taxes back, that kind of thing. So that's what you're referring to.

Yes, that's right. Yes, that's helpful. Thank you.

And we'll take our next question from Chris Pierce with Needham. Your line is open. You may ask your question.

Hey, good morning. I just wanted to ask, are we set up for another period of excessive depreciation in the wholesale market because as we get the tax refund season, which we're sort of already through in the wholesale market, there's going to be normal depreciation. But are we set for further excessive depreciation and what would limit excessive depreciation? Because as far as I can tell, dealers are already carrying lower inventories versus normal. So how is that going to limit further depreciation? Or is it just we need to see that excessive depreciation because we need to get back to a $22,000 average used car?

Yes. Chris, I'm not necessarily seeing what you're calling excessive depreciation. I'm really seeing more depreciation that's more in line with kind of what you would see between 2015 and 2019. It's actually, if you look at it, perhaps a little more normal. Recently have we started to see some depreciation. So I haven't seen what you're referring to as excessive depreciation. And I think we may see more of a historical type of appreciation and depreciation throughout the year, but we'll see.

And is that because of lower dealer volumes or inventories? Or is that what gives you confidence that you think you'll see that you won't see abnormal depreciation this year like you saw last year?

Well, I'm just going off of what I've seen so far calendar year-to-date and comparing it to historical averages. The last 2 to 3 years have been all over the board from an appreciation and depreciation standpoint. If you take those years out and look more historical, like 2015 to 2019, what does the depreciation curve look like? What does the industry data look like? I would say this year, calendar year-to-date is falling more in line with kind of what those cycles look like. So that's what I'm referring to.

Okay. Appreciate it. Thank you.

Thank you, Chris.

And we'll take our next question from John Murphy with Bank of America. Your line is open. You may ask your question.

Good morning, guys. I just wanted to see if you could talk about sort of the split of the zero to six and the seven to 10-year-old vehicle sold in the quarter and maybe on a year-over-year basis. And as we think about this, unless there's some massive economic boom that is not really expected, seems like through '24 and '25, the zero to six year old car population will continue to shrink, which is a supply issue for you guys, unless you shift a little bit more to the seven to 10-year-old bucket but also would help you out a lot on affordability. So it just seems like it could be a small strategy shift here that could alleviate some of the issues that we're facing. Just curious if you could comment on that as well. So mix and then potentially pushing a little bit more to sevens to 10s.

So I think looking at the quarter, if I look at zero to four versus, let's call it five plus, we were similar to last year. We were a little bit older than the third quarter. So I think our mix is — it's interesting. It's almost 50-50 when you look at zero to four and the five plus. When I look at zero to six maybe versus the seven plus, it's for last year it's very similar. Let's call it a 70-30 split: zero to six-year-old 70%, seven-plus 30% for us. Last quarter was a little bit — I made the remark last quarter that we had a little bit shift in some newer cars. So last quarter was a little bit more in the zero to six than this quarter. And I think, as we move forward, and I mentioned this earlier, you're right, as far as new cars, a year or two ago, fewer new cars were sold. But again, I would just point to you're still in the ballpark of a 15-plus million SAAR run rate, which is much higher than what we saw coming out of the great financial crisis. And the other thing I would point to is that our self-sufficiency now for a couple of years on a yearly basis continues to be over 70%, which we didn't have prior, and we think that's a great tailwind. So for us, the supply hasn't really been the issue; it's the price.

Got it. And then just one follow-up on the sourcing side that you just talked about. You said dealer sourcing was up 21,000 units, about 45% on a year-over-year basis in the quarter. Is that something you think could increase? I mean, I think there's some concern that vehicles, late-model vehicles get caught further up funnel as open lanes and others help with their virtual auctions to keep vehicles further up funnel. But it sounds like you actually kind of refute that with the increase in dealer sourcing. How much of an opportunity do you think dealer sourcing could be over time or maybe a risk as they hold on to more vehicles?

Look, I'm pleased with the Max offer. We're continuing to buy more vehicles to that. We think it's a great product that's really resonating with dealers. And when you look at the mix of vehicles we're buying, it's actually skewed more retail than wholesale, which is a huge benefit. I think it's a very competitive product. And like I said, we've got a lot of dealers that are actively using it, and we plan to continue to push that. And when we talked about we've historically talked about self-sufficiency. We've always talked about it from the standpoint of just the consumers. Well, it really should start adding in this dealer-sourced bucket as well, which, again, just helps keep our self-sufficiency very high.

Great. Thank you very much.

Thank you, John.

We'll take our next question from David Bellinger with Mizuho. Your line is open. You may ask your question.

Hey, thanks for the questions. Maybe just a follow-up on that last one and acquiring cars directly from consumers. Can you talk through just the quality of those vehicles? Are there any material differences versus those at the auction? And just overall, is there enough inventory out there from consumers in that $20,000 to $25,000 range right now? Or is that more of a limited opportunity?

Yes. Actually, from a mix standpoint, this quarter, if you look, our sales of vehicles less than $20,000 were similar year-over-year and better than the third quarter. So we had more sub-$20,000 cars. Buying vehicles from consumers is a huge benefit. You're buying vehicles that people in that area generally like. The reason why it's important is to self-sufficiency because those are more profitable than having to go off-site. If you're having to go and secure all your vehicles off-site, that's an expensive channel to go through. And we have the luxury of having such a high self-sufficiency that we have to really kind of go out and obtain vehicles off-site on a limited basis.

Got it. And if I could just follow up one more on your quarter-to-date comment down mid-single digit. Is there anything that's really changed to explain that shift from positive comps in February, maybe some of the tax refund flows that might have impacted, but also, is there potentially just some pause on the part of the consumer with steeper price depreciation lately? And if that's the case, how long could that last?

I think it just speaks to the consumer. The tax season this year has been a little softer, although refunds are higher, the actual number of refunds is behind where it was last year. While prices have gone down, interest rates are higher than a year ago. I think you still have the pressure of the consumers on everything else they are buying — food and housing — and inflationary pressure there. So I think it speaks more to the consumer mindset at this point. It's been choppy; we've had some weather things going on. There's been a lot going on. So we'll continue to monitor and make adjustments as we can as we go through.

Got it, thanks Bill.

Okay, thank you, David.

And we'll take our last question from David Whiston with Morningstar. Your line is open. You may ask your question.

Thanks. Good morning. Just a two-part question on affordability. You mentioned ASPs are continuing to fall, which is good. But are consumers even noticing the lower ASPs at this point? Are they entirely focused on unfavorable monthly payment due to interest rates? And also on that trading trade-offs scenario for affordability, is the consumer moving into cars away from light trucks? Or is it more just shifting into older than five-year-old vehicles?

Well, I think it's always been about the monthly payment for the consumers. And the prices are coming down. As Jon said, the actual monthly payment is coming down, but it's still over $100 more than what it used to be. So when a consumer is thinking about buying a car, let's say they're in a car right now and they're ready to swap out, they see they'd have to pay another $100, and that's where we're seeing that friction. There are lots of data points to say consumers are just waiting on the sidelines right now, either for the monthly payments to come down or to figure out a way to work it into their budget with all the other expenses. Regarding class mix, if you look at the numbers for the quarter, from a class standpoint, we actually sold more larger SUVs and more expensive types of vehicles. Now the average age of our wholesale and retail vehicles is up a bit, but it's not like they're choosing to go compact versus larger SUVs, at least not for the quarter.

Okay. Are you worried about the off-lease shortage ramping up with the anniversary of the start of the chip shortage?

Leased vehicles have never been a big piece of our inventory strategy, and we've been through cycles before where there have been leased cars and where there haven't. I think we've been in a cycle where there really haven't been leased cars because many manufacturers have required lease customers to return vehicles to the franchise dealer. We have customers wanting to sell leased vehicles, and we can't buy them because of those restrictions. It's been a nice benefit for the franchise dealers, because they're able to get these cars at a good rate from leases that were done a while ago. That will play out and not be such a benefit as we go into the future, but it just hasn't been a big source of inventory for us historically.

Okay, 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. Well, listen, I want to thank everybody for joining the call today. Obviously, we've got lots going on. And we appreciate your questions and your support. Before I close, again, I just want to congratulate all of our associates for being named as a Great Place to Work for the 20th year in a row. We're all very proud of that and it really speaks to our folks and the culture that they've built here at CarMax. So thanks for your time today, and we'll talk again next quarter.

Thank you. Ladies and gentlemen, that concludes the Q4 fiscal year 2024 CarMax earnings release conference call. You may now disconnect.