Carmax Inc Q1 FY2025 Earnings Call

Thank you, Savannah. Good morning, everyone. Thank you for joining our Fiscal 2025 First Quarter Earnings Conference Call. I'm here today with Bill Nash, our President and CEO; Enrique Mayor-Mora, our Executive Vice President and CFO; and Jon Daniels, our Senior Vice President, CarMax Auto Finance operations. Let me remind you, our statements today that are not statements of historical fact, including statements regarding the company's future business plans, prospects, and financial performance are forward-looking statements we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our current knowledge, expectations, and assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, we disclaim any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our Form 8-K filed with the SEC this morning and our Annual Report on Form 10-K for the fiscal year ended February 29, 2024, previously filed with the SEC. Should you have any follow-up questions after the call, please feel free to contact our Investor Relations Department at 804-747-0422, extension 7865. Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow-ups. Bill?

Great. Thank you, David. Good morning, everyone, and thanks for joining us. During the quarter, we saw continued positive trends, including year-over-year price declines, improvement in vehicle value stability, and ongoing growth in upper funnel demand. We're encouraged by what we are seeing and are continuing to strengthen our business by delivering associate and customer wins that are differentiated and durable. In the first quarter, we delivered strong retail and wholesale GPUs and grew EPP margins. We sourced approximately 35,000 vehicles from dealers, an all-time record. We increased used-saleable inventory units 5% year-over-year, while decreasing used total inventory units 4%. We grew CAF income 7% year-over-year under tightened lending standards, and post-quarter end, we launched our first non-prime securitization deal. We continued to actively manage our SG&A, and we repurchased over $100 million in shares. For the first quarter of FY ’25, our diversified business model delivered total sales of $7.1 billion, down 7% compared to last year, reflecting lower retail and wholesale volume and prices. In our retail business, total unit sales declined 3.1%, and average selling price declined approximately $700 per unit or 3% year-over-year. Used unit comps were down 3.8%, and we saw comp performance strengthen in the back half of the first quarter. First quarter retail gross profit per used unit was $2,347 in line with last year's $2,361. Wholesale units sales were down 8.3% versus the first quarter last year as the industry experienced lower seasonal appreciation year-over-year. Average selling price declined approximately $900 per unit or 10%. Wholesale gross profit per unit was a first quarter record of $1,064, up from $1,042 a year ago. We bought approximately 314,000 vehicles during the quarter, down 9% from last year. The appreciation dynamics that I just mentioned impacted our overall buys as well. We purchased approximately 279,000 vehicles from consumers, with slightly more than half of those buys coming through our online instant appraisal experience. With the support of our Edmund sales team, we sourced the remaining approximately 35,000 vehicles through dealers, up 70% from last year. For our first quarter online metrics, approximately 14% of retail unit sales were online, consistent with last year. We continue to see ongoing adoption of our omnichannel retail experience; approximately 57% of retail unit sales were omni sales this quarter, up from 54% in the prior year. Total revenue from online transactions was approximately 30%, in line with last year. All of our first quarter wholesale auctions and sales were virtual and are considered online transactions, which represent 18% of total revenue for the quarter. CarMax Auto Finance or CAF delivered income of $147 million, up 7% from the same period last year. In a few minutes, Jon will provide more detail on customer financing, the loan loss provision, CAF contribution, and our progress in becoming a full-spectrum lender, which enables incremental growth in financing income. At this point, I'd like to turn the call over to Enrique, who will provide more information on our first quarter financial performance.

Thanks, Bill, and good morning, everyone. As Bill noted, we drove strong per-unit margins this quarter for both used and wholesale. We also delivered growth in other gross profit margins and CAF contributions while staying focused on managing SG&A. First quarter net earnings per diluted share was $0.97 versus $1.44 a year ago. As a reminder, last year's quarter had a benefit of $59 million, which translates to a $0.28 per share from legal settlements. Total gross profit was $792 million, down 3% from last year's first quarter. Used retail margin of $495 million declined by 4% with lower volume and relatively flat per-unit margins. Wholesale vehicle margin of $157 million declined by 6% with lower volumes partially offset by higher per-unit margins. Other gross profit was $139 million, up 3% from a year ago. This was driven by an $8 million increase in EPP. As a reminder, in the fourth quarter of FY’24, we tested raising MaxCare margins per contract, which drove overall product profitability despite a lower product penetration rate. With that, we rolled out the margin increases in late Q4 FY’24. CAF delivered $3 million in margin, flat with last year's first quarter. Performance was primarily supported by efficiency and cost coverage measures, offset by deleverage due to lower year-over-year sales in the quarter, as well as by timing. We expect year-over-year improvement for the balance of the year as governed by sales performance given the leverage, deleverage nature of service. On the SG&A front, expenses for the first quarter were $639 million, up 3% or $19 million from the prior year's quarter, when excluding the benefit from the $59 million legal settlement received during the first quarter of FY '24. Also pressuring SG&A this quarter was approximately $22 million of expense from share-based compensation for certain retirement-eligible executives and the lapping of favorable reserve adjustments related to non-CAF uncollectible receivables during last year's first quarter. Excluding these items, which we noted in our FY '24 year-end call, SG&A total dollars were down year-over-year in the first quarter due to our continued discipline in spend levels. SG&A dollars for the first quarter were mainly impacted by two additional factors. First, other overhead increased by $6 million when excluding last year's favorable legal settlement. Continued year-over-year favorability in non-CAF uncollectible receivables was more than offset by lapping over last year's first quarter favorable reserve adjustment. Second, total compensation and benefits, excluding share-based compensation expense, decreased by $3 million, mostly driven by our ongoing focus on efficiency in stores and CECs. Regarding capital allocation during the quarter, we repurchased approximately 1.4 million shares for a total spend of $104 million, which was an acceleration in the pace from the repurchase levels in the second half of fiscal year '24. As of the end of the quarter, we had approximately $2.3 billion of repurchase authorization remaining. In the first quarter, we also paid off our $300 million floating rate term loan, which was scheduled to mature in early June. Now I'd like to turn the call over to Jon.

Thanks, Enrique, and good morning, everyone. During the first quarter, CarMax Auto Finance originated approximately $2.3 billion, resulting in sales penetration of 43.3% net of three-day payoffs, which was up 60 basis points from last year's first quarter. The weighted average contract rate charged to new customers was 11.4%, an increase of 30 basis points from a year ago. Partner Tier 2 penetration in the quarter was 18.7%, down from 20.4% observed last year. Partner Tier 3 volume accounted for 7.5% of sales, up from 6.7% compared to last year, as our partners improved offers were in place for the entirety of the first quarter. Both tiers saw less application volume year-over-year as lower credit customers remain challenged with affordability. Also impacting each of these year-over-year results, but to a lesser degree, is CAF's continued decreased volume in Tier 3, as well as the increased test volume in Tier 2. CAF income for the quarter was $147 million, up $10 million from the same period last year, primarily driven by an increase in total interest margin. Note, fair market value adjustments from our hedging strategy accounted for $3 million in expense this quarter versus $9 million in expense during last year's first quarter. The net interest margin percentage for the quarter was 6.2%, up from last quarter, but in line with our expected level of near 6%. The provision for loan losses was flat to last year at $81 million and resulted in a reserve balance of $493 million or 2.79% of receivables compared to 2.78% at the end of last quarter. CAF's continued investment in the Tier 2 space, offset by the previously implemented tightening in Tier 1, contributed to a consistent reserve-to-receivable ratio. As was highlighted last quarter, CAF has been building the capability and infrastructure to scale its participation across all credit tiers. First, CAF has leveraged its learning in Tier 2, along with its experience operating in both Tiers 1 and 3 to develop a new full-spectrum underwriting model, which we will begin to test in the second quarter. From a funding perspective, we plan to expand our current asset-backed securitization program from a single platform to one that more broadly incorporates CAF’s receivables across distinct prime and non-prime segments. We believe this will allow us to better align our offerings with each investor base and ultimately generate added funding capacity. To that end, our first non-prime ABS transaction is currently in the market with $625 million of offered notes. Having the ability to successfully decision and efficiently fund the entirety of the credit spectrum at scale puts CAF in a strategic position to further complement our full roster of lending partners while also driving additional finance income for the business. Now, I will turn the call back over to Bill.

Great. Thank you. As I mentioned earlier, we are encouraged by the positive trends we are seeing in pricing and vehicle value stability. I am proud of the durable actions we have been taking to support our business and further differentiate our offering, which are setting us up for continued improvements in our performance and future growth. Some examples include; we've expanded our vehicle sourcing capabilities by attracting more dealers to MaxOffer through product enhancements that make it even easier to use. We achieved record sourcing volume each month of the quarter and are excited about launching this capability in New York during the second quarter. We've increased used saleable inventory units while lowering total used inventory units through improved production management capabilities and focused inventory management in non-production stores. We have enhanced CAF’s ability to become a full-spectrum lender, which positions us to further grow CAF income over time. We've raised our EPP margins and improved service gross profit. We have achieved efficiency gains in our stores and CECs that will scale very well as we buy and sell more cars. We have launched a number of EV research tools through Edmunds to help educate and build trust with consumers. We've also established test stores in California to evaluate new capabilities that support our operational readiness for increased EV sales and also enhance the customer experience. Finally, we have continued to enhance our omni-channel capabilities; we are rolling out our new order processing system to our stores and plan for it to be available nationwide later this year. The system helps associates guide customers through each step of the buying journey and provides a more seamless experience for consumers who prefer to blend self-progression with assistance from associates. In addition to these actions, we are focused on driving down the cost of goods sold by pursuing incremental efficiency opportunities that we've identified across our logistics network and reconditioning operations. For logistics, we are testing a transportation management system that dispatches moves through a centralized team. The system automates communication between drivers and stores and provides new planning and execution capabilities. For reconditioning, we've identified opportunities to reduce costs such as parts acquisition, bringing elements of sublet work in-house and optimizing production workflow. In addition, we believe that balancing production capacity across our stores and stand-alone reconditioning centers will drive further efficiencies and potentially enable us to take on more MaxCare work over time. All of these actions continue to make us stronger and better positioned to support consumers and fuel our excitement about our future growth in sales and profitability. With that, we'll be happy to take your questions. Savanna?

Thank you. Our first question will come from John Healy with Northcoast Research. Please go ahead.

Thank you. Bill, I'd love to just kind of start with the top of the funnel for you guys just on same-store sales. I think you mentioned that comp trends improved as we move through Q1. I would just love to get your thoughts on maybe how those improved and maybe what you're seeing now? And just as a follow-up to that, how do you answer the share question because I think that's the biggest one investors bring up is we see these numbers for CarMax, but how do you feel you guys are performing in the market versus peers? And if there is a delta, how do you explain that delta? Thanks.

Thank you, John. Regarding your first question, I believe you are asking about comp trends. If we review the fourth quarter, we mentioned in our last call that midway through the quarter, we were experiencing mid-single-digit negative comps. The second half of the quarter improved compared to the first half, which was encouraging. In June, so far this month, we are seeing improved performance and are actually running slightly positive comp. This is a positive trend. In terms of market share, during the first three months of the year, for which we have title data, our performance in the first quarter of 2024 is higher than in the fourth quarter of 2023 and similar to last year’s first quarter. It's worth noting that the last two fourth quarters saw significant price corrections, and this quarter was no exception. We hit a low point in December and are now on the rise at a similar rate to last year. Year-over-year market share looks comparable. However, market share can be quite volatile in the short term. Unless there is a significant price correction, I plan to avoid discussing market share until the end of the year, as we are seeing some markets improving while others are declining. A longer-term perspective is more insightful. I will provide updates at the end of the year unless major macro factors emerge affecting our performance. We feel positive about the trends.

Thank you, guys.

Thanks, John.

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

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

Thank you for the question, Seth. Regarding losses and delinquencies for the quarter, I believe we were largely aligned with our expectations, which is also reflected in our provision year-over-year being essentially flat. Our reserved receivable ratio remained unchanged sequentially. We regularly publish quarterly data, which represents about 60% of our portfolio. The trends are as anticipated, and it's important to note that this quarter is typically high volume, resulting in a higher actual provision due to increased origination, which also tends to see lower credit quality associated with tax season. Overall, delinquencies and losses were essentially a non-event and aligned with our forecasts. As for the ramp-up of Tier 2 and Tier 3 lending, we should look to our current origination, where about 43% of our sales come from what we are doing right now, mostly in Tier 1. We have historically been larger in Tier 3, but currently only have a small share there as we focus our investments in Tier 2. We are particularly excited about our non-prime securitization program, which we believe will drive growth in the lower end of the credit spectrum and expand our offerings in the higher prime segment. In the near term, particularly for the remainder of the year, we will continue to learn about Tier 2 and will be testing our new models this quarter to better understand that segment, which will take time. As we grow in this area, we will keep everyone updated. Additionally, we feel there is potential for growth beyond our current 43%, though the exact timing and extent—whether it will be 45%, 47%, or 50%—remains uncertain, but we believe the opportunity is significant, albeit we probably won't exceed our current levels for the rest of the year.

I do think longer term as well, when you assess when you think about funding capacity, do you think us entering into this market, which we are really excited about, it is probably another $2 billion to $3 billion worth of funding capacity that we are going to give ourselves when you think about how deep we can eventually go over time. So this is a really exciting program, and we expect to drive our financing income incrementally moving forward.

Absolutely. Thank you.

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

Hi, great. Thanks for taking my question. It's on the expense side. So if you look at the ad spend per total unit, I think that was up about 5% year-over-year compared to your guidance for flattish. Maybe just walk us through any changes you are seeing there on the ad spend line. And just overall, how should we think about SG&A dollars in Q2 and over the balance of the year?

Thank you for the question. I would say that the changes are quite minor. From quarter to quarter, we might see some positive results in certain areas and a slight decline in others regarding total units, which is how we manage our overall advertising expenses. Therefore, I wouldn't view it as anything more than normal fluctuations from quarter to quarter. However, we are dedicated to maintaining an increase of approximately $200 per total unit for the remainder of the year.

SG&A on the rest of the year.

For the rest of the year, sorry, can you repeat the question again?

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

Yes. I think for the entire year, we are really focused in the first quarter; we are really proud of the fact that once you back out some of the noise that I spoke to, we were actually down SG&A year-over-year. I’d expect that for the balance of the year that is going to be a little bit more challenging from a total dollar standpoint, but what I'll reemphasize here is what we are focused on. And what we're focused on is putting ourselves in a position through active cost management to be able to lever on low single-digit gross profit growth. And that's really what we're focused on. And so when you look at where we've been for the past several years in our heavy investment phase, that is a different story, right? And it really speaks to us migrating more to a little bit more of a fixed cost structure and an ability to lever when sales roll around, which they will. And so that's how we think about our ability to leverage moving forward.

Got it. Thank you.

Our next question comes from Brian Nagel with Oppenheimer.

Hi, good morning.

Good morning.

I have a couple of questions that I'll combine. First, regarding the recent non-prime securitization, following up on Seth's earlier inquiry, what are the long-term implications for CarMax? Will this serve as a means to enhance market share and profitability? How should we view the business model moving forward with this new capability? My second question is separate. You've repeatedly mentioned sourcing vehicles from dealers. I'm curious about the sustainability of this approach and any potential benefits for margins or alternative sourcing. Thank you.

Thank you, Brian. I appreciate the question. I'll take the first one with regard to the non-prime securitization. Yes, I'm going to continue to anchor us to this kind of 43% of sales, as mentioned, we think there is some substantive volume that we can take above that. And the best way to kind of give orders of magnitude of the value, the long-term value here is we see it under the current financial situation, the current economics; for every one point of sales that we can grab, we think that can drive $10 million to $12 million worth of value to CarMax. Now bear in mind, that doesn't start day one when you begin to add that volume. Initially, you originate additional volume; you need to provision for loan losses, but eventually, it becomes accretive. And once you get to steady state, that's where I'm referring to the $10 million to $12 million. So as you can imagine, as you tackle on additional points, you tackle on additional value for CarMax. And in the long run, we think it is very substantial and something we are looking forward to going after.

Yes. Regarding the second part of your question about dealer sourcing, we are focused on finding vehicles wherever possible. Traditionally, we have sourced them through consumers, and for what we don’t acquire from consumers, we purchase at off-site auctions. This approach is another way to diversify. We buy from consumers and can also buy directly from dealers. When purchasing from dealers, the majority are retail cars, which differ from our consumer acquisitions. Although they are not as profitable as the consumer purchases, they are more profitable than the ones obtained through off-site auctions. We are optimistic about this area and believe there’s potential for growth. We are receiving positive feedback from dealers, and improvements to our platform have contributed to the ongoing demand. Comparing last year to now, active dealers using the platform have increased by around 50%, despite only adding a few more markets. We are encouraged by this progress.

Thanks, guys. Appreciate the color.

Our next question comes from Sharon Zackfia with William Blair.

Hi, good morning. Thanks for taking the question. I guess it's kind of on the improvement in sales you've been seeing. I mean, do you think that broader industry dynamics, do you think there's something operationally you are doing? I know obviously, at the top of the funnel is increasing conversion has been down a little bit. Is that starting to improve for you? And if so, kind of where and why? Thanks.

Yes. Thank you for the question, Sharon. Look, I think it is a combination of things. I think it reflects on just some of the continued work that we are doing internally, but it's also look vehicle prices, even though they were up quarter-over-quarter, they're always up from the fourth to the first; they were down $700 year-over-year. So we are seeing vehicle values be a little bit more stable. If you look at depreciation trends, for example, if you look at the last two years, they're all over the board from appreciation to depreciation, and they are steep both ways. This year is a little bit more what I’d call normal, although there is a difference in the first quarter last year, just to expand on some of my comments earlier. Last year, we saw appreciation kind of in this first time period of the year of about $2,500. And then we saw about $1,100 depreciation this year. We only went up about $1,000 and then kind of flat by the end of the quarter. So you have a little bit of year-over-year dynamics. But again, just the value stability that's nice. I mean, we’ve always worked in an environment where there has been appreciation and depreciation; what's more impacted us the last 1.5 years, 2 years is these big price corrections. So I think it is a combination of factors.

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

Great. Thanks for taking the question. Bill, I just had a question on strategy and operations. I think, like you can all see, the factual data on the unit comps and the market share, it's not where CarMax used to be historically. And if you look at your margins and like the EBITDA per unit, as you exclude the one-time items this quarter, they have not changed or improved. So I'm curious if you think the current strategy that you have around sourcing, the impact omni-channel has had on your in-store culture? Is all of that still the right approach? Or do you think something needs to change? Or are we just waiting for the industry backdrop to improve for CarMax to do better on all these metrics, especially when some of the public peers are doing better? Thanks.

Yes, Rajat. Look, I feel great about the strategy. I feel great about all the things that you talked about. I think what's really been the story for us particularly is really what you've seen over the last 1.5 years, and it's been more about these big price corrections. And what's going on in the market, the fact that we sell a late model, high-quality car from an affordability standpoint. So if you look at the data, you are seeing more 10-plus year-old cars being sold here in the last two years. I think that's even the same case for the first calendar quarter. So I think the impact on the business has been more macro-related, but we certainly have not been sitting here waiting for them to get better. We've been making ourselves stronger. And I think those dividends will continue to come back. They'll pay dividends as we go forward as sales come back. I mean keep in mind, last year I think the total used cars exchange was $35.5 million. It is typically north of $40 million. And the most impacted share of that group is the less-than-six-year-old. And again, it goes back to the affordability. So we feel great about our strategy. We feel great about the durable actions I told you that we've taken, which will continue to give us benefits as we go forward.

Yeah. I do think it's important to point out as well, and Bill talked about it in his prepared remarks. Going after aggressively going after reconditioning costs, going after logistics costs, and bringing those down. Those are material items moving forward that we anticipate that can support sales and that can support margin, both of those items. So we're excited about those. So Rajat, it is a matter of aggressively also going after what we can control, and we can control that.

The only other thing I would add is that when experiencing challenges like this, the goal is to emerge as a stronger company. If a similar situation were to arise in the future, we would consider what we could do differently. Some points we've already discussed include expanding our sourcing, focusing on the cost of goods sold, and addressing financing. I believe that financing will not only help us grow CAF income but also present opportunities for expanding units, as we see potential areas that our partners might have overlooked. Additionally, the work we've done to manage variable costs, including factors like EPP and increased net, also plays a role in our pricing decisions, such as whether to lower prices or maintain them. Overall, we've gained valuable insights and made significant improvements. Should a similar situation occur again, we will have more resources at our disposal.

Maybe just like on the June commentary, I mean, is it fair to expect that the positive trends you're seeing should only get better through the course of the quarter? Or is there some monthly seasonality or comps to keep in mind there? Thanks.

No, we are encouraged by the trend since the second half of the first quarter. As I mentioned, this positive trend has continued into June. We feel good about this and will keep pushing forward. While I can’t predict exactly what will happen this year, we are optimistic about the trajectory.

Great. Thank you.

Thank you.

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

Hi, good morning. Thanks for taking my question. Bill, you mentioned some cost of goods sold initiatives related to logistics and reconditioning. Do you expect those savings to flow through to the bottom-line or to drive lower prices? And then is there any way for you to quantify the per unit impact of those initiatives?

Yes. Great questions, Craig. From a quantification standpoint, I think we are targeting a couple of hundred dollars per retail unit over the next year or two through reconditioning and logistics. That's a significant amount, and we are excited about it. It won’t have an immediate impact, but we see a considerable opportunity in that area.

Do you expect that to impact the bottom line? Or is that something?

Yes. So what I would tell you is, I mean, obviously, you have a decision to make when you start to pull that in. As I sit here right now, I'd say look, we'd probably flow that through in the form of pricing. But certainly you have decisions to make as you realize some of those efficiencies.

Why not take those efficiencies to the bottom line if your prices are competitive today?

We have decisions to make, and we will consider factors like affordability and elasticity. It's difficult to predict how the situation will unfold because many elements are at play. In the past, we've taken some reconditioning savings to improve our bottom line, but in recent years, we've been passing those savings along to help manage overall margins and pricing. There are many factors we need to evaluate at that time.

Yeah, makes sense, Bill. Thank you.

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

So first, I just wanted to follow up that last question actually. Can you elaborate more on the parts acquisition? That sounds pretty material. Are you going direct to vendor and is sourcing yourself? Or are you asking your retail partners to reduce pricing? And then I have a question on credit. I know I'm breaking David’s rule; I apologize. I hope I'm not doing unintentionally, sorry. But the prospectus on new non-prime securitization would suggest there is $5 billion of this type of receivable. How does that $5 billion legacy portfolio that's behind that securitization, how does that differ between Tier 2? Like is Tier 2 just like a higher CNL than the legacy $5 billion? Can you just elaborate on how this is different?

Sure, Chris. Well, first of all, breaking David’s Rule, you're the only one that apologizes, and everybody has broken it up to this point. So we forgive you. The first part of the question I'll answer, and I'll pass it over to Jon on the credit question. So look, we've got unbelievable parts partners. Parts partners have been around for a long time. So we have national relationships with. So that's been great. We just see that there's some parts optimization internally that we can do better on and which parts we are getting from which source and which parts are being applied and not being applied. So that's just one of many things that we're working on. But I don't want you to come away; I think we had this we don't have good partners or whatever because we do, we have great national relationships, and we're pleased with those partners. We just think we can do a better job optimizing the parts.

Thank you for the question, Chris. Regarding the $5 billion legacy you mentioned, when I examine our overall portfolio or what we originate at 43%, it's important to note that most of it has historically been Tier 1 and is currently included in our ABS program. We plan to divide those receivables and establish a higher prime program aimed at a different investor base, which will help us scale the higher portion of historically securitized receivables. Additionally, we will incorporate Tier 2 and Tier 3 volume that hasn't been historically securitized into this non-prime program. This reflects our current origination strategy. Looking ahead, there are some Tier 1 pockets that we've tightened recently that we aim to regain, and we continuously seek those opportunities. Currently, Tier 2 and Tier 3 make up about 27% of sales, which represents a broad range of opportunities we can capture, and we will determine the right positioning for growth there. Our partners appreciate this volume, and we're excited for the demand on our vehicles moving forward. We aim to pursue some of that Tier 2 and Tier 3 volume, acknowledging there's potential for growth without wanting to take all of it. I hope this adequately addresses your question.

I would just add said one thing, Chris. I think a general way to think about that split in the program between high prime and non-prime from a FICO perspective, I think of the non-prime is less than 650 and then the high prime is greater than 650, just a general way to think about the two pools.

Gotcha. Okay. Thank you for all the help. Appreciate it.

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

Good morning, everyone. Bill, I know you have some questions about market share, but I want to approach this from a different angle. Based on what we've observed with the growth rates of Carvana and the public dealers, and considering your earlier comments about the mix, do you believe that your mix of late-model products is a key factor driving the growth rates we're observing? Or do you think other factors, such as credit approvals or others, might also be influencing this?

No, Scott. I believe the main factor is the significant price correction we experienced at the end of last year. It's important to remember that we maintain our margins, while many others in this fragmented market do not, leading them to liquidate inventory. This has certainly contributed to the decline we saw in the fourth quarter, although we are beginning to recover. Additionally, there has been an increase in sales of cars that are 10 years or older, a market in which we are not active. Historically, our focus has been on vehicles that are 0 to 4 years old, which account for approximately 70% of our sales. These vehicles have become more expensive, causing buyers to seek out cheaper options. We've noticed this trend in credit applications, where customers across all credit levels are looking for lower-priced cars. It's a combination of several factors, and we are committed to maintaining the high quality of our product despite these changes in consumer behavior.

Can I ask a follow-up? When you assess your markets, what is your highest market share in a specific market, so we can compare it to the 4% average?

Yes. Our highest markets are still over 10%. When we initially launched in 2020, we focused on our 15 oldest markets and noticed a nice increase in market share. While these markets grow more slowly than newer stores, they have consistently remained above double digits, exceeding 10%.

Got it. Thanks, guys.

Thank you, Scott.

Our next question comes from Chris Pierce with Needham. Please go ahead.

Can you discuss supply? I understand that we are observing an increase in commercial vehicles at auction year-over-year, with more growth anticipated. However, is the supply of cars that you require to return, which would assist in increasing the proportion of newer cars in the market relative to older ones, thereby helping you gain market share? What insights do you have from a supply perspective?

Yes, a lot has been said about a supply issue, but the truth is we are not facing challenges in sourcing cars. If there are any supply impacts, they relate to overall affordability, but we can manage supply. It's encouraging that the SAAR continues to rise, with the latest figure around 15.7%. We are beginning to see more cars entering the market, which is helping to lower the prices of used cars, particularly those that are 0 to 4 years old. This increase in inventory is positive for the industry and for us as well.

Okay. You’re not experiencing issues with supply, but you’re opting not to source older vehicles, which is impacting the share. I just want to clarify my understanding of where supply is headed and the decisions you are making regarding supply.

Yes, I appreciate the clarification. When you asked your question, you were focusing on the supply of newer vehicles. If there is any supply issue, it pertains more to older vehicles. We purchase many older cars, but there are limits to how many can be brought up to our quality standards. Therefore, if we experience any supply issues, it will primarily affect older vehicles that meet our standards. Currently, about one-third of our inventory consists of cars that are more than six years old, which is an increase from previous levels. However, if there are supply challenges, they would likely be more associated with older vehicles rather than newer models.

Is the supply of vehicles that meet the CarMax standard increasing, or has it remained the same? How should we consider the supply of vehicles that you plan to sell?

Yes, I think as we look forward, you look holistically, whether it is an older CarMax vehicle that meets our parameters or a younger one, I think the supply is improving just because of the dynamic that you talked about earlier because the SAAR is continuing to go up; eventually, those cars come into the market. So and the impact has on us as well prices just start to come down. And I think that's good for the industry, and it's good for us.

Okay, thank you for that. I appreciate.

Thank you, Chris.

And we will take our next question from David Bellinger with Mizuho. Please go ahead.

Hi, thanks, guys. Just another one. Regarding the CDK and the dealer software issues that are pretty widespread right now, does CarMax have any exposure there? Are you seeing any changes in volumes or consumer activity? Just any clarity you can provide on just some of the near-term implications from this widespread issue?

It's unfortunate for those dealers because I know there are many. We do not use CDK as our DMS. It has a small impact on us, primarily because we work with a lot of other dealers concerning parts. If their systems are down, it can slow down parts; there's also a minor impact on title work. However, I would say it's just a minor consideration in the overall context of how it affects us.

Got it. Thank you.

I'll hand the call back to Bill for any closing remarks.

Okay, great. I want to thank Jon and all of our associates for their hard work. I also appreciate everyone joining the call today. We recently published the 2024 responsibility report, and I encourage all of you to read it. It provides updates on several key initiatives, from climate-related efforts to the positive effects we're having on our local communities. We take pride in it, as it reflects our values and how we operate. It also positions us to deliver long-term sustainable value for our shareholders. Thank you for your time today, and we look forward to speaking again next quarter.

And this will conclude today's conference. Thank you for your participation, and you may now disconnect.