Earnings Call Transcript - KMX Q3 2025

David Lowenstein, VP, Investor Relations

Thank you, Todd. Good morning, everyone. Thank you for joining our fiscal 2025 third quarter earnings conference call. I'm here today with Bill Nash, our President and CEO; Enrique Mayor-Mora, our Executive Vice President and CFO; and Jon Daniels, our Senior Vice President, CarMax Auto Finance Operations. Let me remind you, our statements today that are not statements of historical fact, including statements regarding the company's future business plans, prospects and financial performance are forward-looking statements we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our current knowledge, expectations and assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, we disclaim any intent or obligation to update them. For additional information on important factors and risks that could affect these expectations, please see our Form 8-K filed with the SEC this morning, our Annual Report on Form 10-K for the fiscal year 2024 and our quarterly results on Form 10-Q, 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?

Bill Nash, President and CEO

Great, thank you, David. Good morning, everyone and thanks for joining us. We're very pleased with the continued positive trends across our diversified business during the third quarter with retail, wholesale and cap all posting year-over-year gains. Our solid execution in a more stable environment for vehicle valuations enabled us to deliver robust EPS growth as we drove unit volume increases in sales and buys, maintained strong margins, stabilized the provision for loan losses and realized cost efficiencies. Our results reflect the strength of our business model and we're excited about the opportunities that lie ahead. Our best-in-class omni-channel experience is and will continue to be a key differentiator that gives us access to the largest total addressable market in the used car space and provides a strong runway for future growth. In the third quarter, we grew retail and wholesale unit volume year-over-year. We delivered strong retail and wholesale GPUs, expanded EPP gross profit and improved service gross profit year-over-year. We bought more vehicles from both consumers and dealers year-over-year, achieving a third quarter record with dealers. We grew cap income year-over-year and continued to advance our full credit spectrum underwriting model. We materially leveraged SG&A as a percent of gross profit and we achieved double-digit EPS growth. For the third quarter of FY'25, our diversified business model delivered total sales of $6.2 billion, up 1% compared to last year, reflecting higher volume partially offset by lower prices. In our retail business, total unit sales increased 5.4% and used unit comps were up 4.3%. Average selling price declined approximately $1,100 per unit or 4% year-over-year. Third quarter retail gross profit per used unit was $2,306 in line with last year's $2,277. Wholesale unit sales were up 6.3% versus the third quarter last year. Average selling price declined approximately $500 per unit or 6% year-over-year. Third quarter wholesale gross profit per unit was $1,015 up from $961 a year ago. We bought approximately 270,000 vehicles during the quarter, up 8% from last year. We purchased approximately 237,000 vehicles from consumers with more than half of those buys coming through our online instant appraisal experience. With the support of our Edmunds sales teams, we sourced the remaining approximately 33,000 vehicles through dealers, which is up 47% from last year. We continue to see increased adoption of our omni-channel retail experience. For the third quarter, approximately 15% of retail unit sales were online up from 14% last year, approximately 56% of retail unit sales were omni sales this quarter up from 55% in the prior year. Total revenue from online transactions was approximately 32%, up from 31% last year. All of our third quarter wholesale auctions in sales were virtual and are considered online transactions, which represents 19% of total revenue for the quarter. CarMax Auto Finance or CAF delivered income of $160 million, up 8% from the same quarter last year. In a few minutes, Jon will provide more detail on customer financing, the loan loss provision, CAF contribution and our progress on full credit spectrum lending. At this point, I'd like to turn the call over to Enrique, who will share more information on our third quarter financial performance.

Enrique Mayor-Mora, Executive Vice President and CFO

Thanks, Bill, and good morning, everyone. The momentum that we have been building over the last several quarters carried into the third quarter, as we delivered on all key financial fronts, positive retail unit comps, growth in wholesale unit volumes, robust vehicle margins, material growth and other gross profit per retail unit, growth in CAF income and strong flow through to the bottom line. Third quarter net earnings per diluted share with $0.81, up 56% versus a year ago. Total gross profit was $678 million, up 11% from last year's third quarter. Used retail margin of $425 million increased by 7% with higher volume and relatively flat per unit margins. Wholesale vehicle margin of $138 million grew by 12% due to increases in both volume and unit margins. Other gross profit was $115 million, up 25% from a year ago. This was driven primarily by a combination of EPP and service. EPP increased by $15 million, as we continue to benefit from higher Max care margins per contract. We expect margins per unit to be up slightly year-over-year in the fourth quarter, not by as much as we've experienced year-to-date, as we will be lapping over the initial rollout of margin increases that took place in last year's fourth quarter. Service margin improved by $10 million over last year's third quarter, recording in $11 million less. We achieved this performance improvement through successful cost coverage and efficiency measures and positive sales growth. We expect continued year-over-year improvement in the fourth quarter as governed by sales performance given the leverage deleverage nature of service. On the SG&A front, expenses for the third quarter were $576 million, up 3% or $16 million from the prior year. SG&A leveraged by 640 basis points driven by the growth in gross profit and our continued expense efficiency actions. SG&A dollars in the third quarter versus last year were mainly impacted by two factors. First, total compensation and benefits increased by $28 million. This was primarily driven by our corporate bonus accrual, which had been reduced in the last year's third quarter. Second, advertising was favorable by $9 million due to timing. Regarding advertising, we expect that our spend in the fourth quarter on a total unit basis will be higher than our year-to-date rate and last year's fourth quarter, which was $219 per total unit. This aligns with the previous guidance we have given on advertising that we expect full year spend to be approximately $200 on a total unit basis. I also want to point out one noteworthy item. As discussed last quarter, as part of our focus on efficiency, we have been evaluating our logistics operations. This quarter we incurred a one-time charge of $5 million related to equipment and leasing arrangements that hit the other expense line. This is more than offset by efficiencies gained in our logistics operations. Regarding capital allocation during the third quarter, we repurchased approximately 1.5 million shares for a total spend of $115 million. As of the end of the quarter, we had approximately $2.04 billion of repurchase authorization remaining. Now I'd like to turn the call over to John.

Jon Daniels, Senior Vice President, CarMax Auto Finance Operations

Thanks, Enrique, and good morning, everyone. During the third quarter, CarMax Auto Finance originated approximately $1.9 billion resulting in sales penetration of 43.1%, net of three-day payoffs as compared to 44% during last year's third quarter. The weighted average contract rate charged to new customers was 11.2%, a decrease of 10 basis points from a year ago. Third party Tier 2 penetration in the quarter was 17.9% in line with a year ago, while third party Tier 3 volume accounted for 6.5% of sales compared to the 6.9% seen in last year's third quarter. CAF income for the quarter was $160 million, which was up $11 million from the same period last year and was predominantly impacted by our net interest margin, which increased 35 basis points a year-over-year to 6.2%. The provision for loan losses was $73 million versus last year's provision of $68 million and results in a reserve balance of $479 million. While the $113 million provision for losses in the second quarter of this year was outsized and included a significant adjustment for the pre-existing receivable base, this quarter's $73 million provision represents our belief that based on observed performance within the quarter, our adjustment in Q2 adequately accounted for future lifetime losses. The $479 million reserve balance results in a reserve to receivables ratio of 2.7% as compared to 2.82% at the end of Q2. This 12 basis point reduction is due to the combined effect of the more normalized provision within the quarter and the previous credit tightening still in place. As a normal course of business, we are continuously exploring opportunities to help our customers through adjustments in our account servicing strategies. One such example is with payment extensions, which have historically impacted less than 1% of our portfolio in any given month and have been below industry levels. This tool has proven successful in helping customers navigate temporary challenges. During the quarter, we began testing an enhancement to our policy that further empowers delinquent customers to take advantage of a payment extension and more aligns with industry levels. While early performance results are encouraging and similar to those witnessed under the existing policy, we recognize that some customers will eventually return to delinquency and result in a charge-off. And for this, we have reserved accordingly. Regarding our full spectrum lending initiative during Q3, we continued to test our new credit scoring models and corresponding strategies across the entirety of both the Tier 1 and Tier 2 spaces. And in November, we began initial testing of our new Tier 3 model. During the quarter, we also successfully executed our second higher prime ABS deal. In the next several quarters we will remain disciplined in our testing plan, but we are excited for the significant growth opportunity that lies ahead for CAF. Now I'll turn the call back over to Bill.

Bill Nash, President and CEO

Thank you, Jon and Enrique. As I mentioned at the start of the call, I'm pleased with the continued momentum we're seeing across our business. The differentiated omni-channel capabilities we've built over the past few years have strengthened our business model and our key to our performance. With these core capabilities in place, we are focused on refining the experience for associates and customers and are well positioned to leverage, what we have built to support future top and bottom line growth across our diversified business. Some examples include this quarter, we completed the nationwide rollout of our customer shopping accounts. As a reminder, these make it even easier for customers to see the steps they have taken on their shopping journey, whether on their own or with help from an associate. In addition, these accounts guide customers' next steps and create operational efficiencies by empowering associates to seamlessly search and update customer records regardless of where they originated. In addition to the customer shopping accounts, tools such as Sky, our AI-powered virtual assistant are creating operating efficiencies and providing help when consumers need it. Our data show that customers are completing more remote steps year-over-year and this increase in remote steps is also improving conversion across all of our channels, online, in-store, and through our CECs. We continue to add helpful shopping information tools to our website. For example, now we show vehicle specific battery health information on most EVs. We also highlight tax credit eligible vehicles and allow customers to filter searches by cars that are eligible for the used EV tax credit. For supply, we've enhanced our industry-leading online appraisal experience. We are now able to give digital offers to approximately 99% of the customers who come to carmax.com for an appraisal. For finance as Jon mentioned, we recently began testing our new Tier 3 origination model. We're now testing new credit scoring models and the corresponding strategies across the full credit spectrum, which positions us to further grow cap income over time. And finally, we continue to focus on cost efficiencies, for example, we expanded our test of new transportation management processes that leverage data science algorithms and AI to provide new planning and execution capabilities. The process essentially dispatches moves and automates communication between drivers and stores. We're pleased with the results and expect to see benefits to cost of goods sold over time. In closing, we're excited about the future and our ability to grow sales and earnings. Our best-in-class omni-channel experience, which is enabled by our great associates, physical footprint, technology and digital capabilities all tied seamlessly together is a key differentiator that strengthens our competitive mode and we believe will be increasingly important to win consumers going forward. We're excited to be in a position to pivot from building capabilities to leveraging and enhancing them to drive growth through better execution, innovation efforts and experiences. With that, we'll be happy to take your questions. Todd?

Operator, Operator

Your first question comes from the line of Brian Nagel with Oppenheimer.

Brian Nagel, Analyst

First off, congratulations, nice quarter.

Bill Nash, President and CEO

Thanks, Brian.

Brian Nagel, Analyst

Okay, on the first part of the question, Brian, as far as the normalized unit comp. I think it's a little hard to say at this point. What I would tell you is we're really pleased with the sales momentum. If we look at the comps during the quarter, and you go back to some of my commentary at the end of the second quarter where I said, we were running a little bit lighter. We actually performed better throughout the quarter. And even if you normalized for the day of week adjustment that I talked about last quarter sequentially each month got better. And quite honestly, as we're going forward, obviously December's a little early on, but December's performance month to date has accelerated as beyond the comp of the third quarter. So, we feel good about that and we feel good about the trajectory of sales and all else equal, I would tell you as we think about the fourth quarter. What I would tell you is we think the fourth quarter will be stronger from a comp performance than the third quarter. And that's despite having some headwinds of a day a week. We lose a Saturday in the fourth quarter. We also lose leap day, which we had last year. So again, we feel good about the momentum going forward. And what was the second part of your question? It's on SG&A and the leverage. I can check in.

Enrique Mayor-Mora, Executive Vice President and CFO

So now Brian, we continue to make progress on our goal of hitting a mid-70% SG&A to gross profit. And that's going to require continued improvement in sales volumes. And Bill has talked about our recent trends here, in addition to the cost management efforts that we have been undertaking now for a couple of years and just to point you back to what some of Bill's prepared remarks, we're past the heavy investment phase of our evolution. We're at a point where we're pivoting from building capabilities to leveraging and enhancing them to drive growth and efficiencies. What this means is lower gross profit growth to leverage SG&A as compared to our heavy investment phase. So we feel really good about our ability to leverage. At the same time, we're going to take a look at investment opportunities. We're not going to leverage just for the sake of leveraging. If there are opportunities to grow the top line and bottom line robustly, we will do that. But yet we remain committed to our mid 70% SG&A leverage ratio as well. So we're encouraged by the trends.

Operator, Operator

Your next question comes from Sharon Zackfia with William Blair.

Sharon Zackfia, Analyst

I guess, when you think about the improvement you've seen over the last, six, seven months. Has it been a reflection more of conversion than traffic to the web or the stores? I guess if it has been more conversion, how much of that would you attribute to kind of prices coming down industry wide versus what you've been doing internally to kind of lessen the friction of the consumer experience?

Bill Nash, President and CEO

Yes, good morning, Sharon. Look, when I think about it, like if I look at this quarter for example, I would tell you I think that the performance is primarily driven by conversion, because if you look at our web traffic, it was fairly flat and it's conversion both looking at remote, engaged customers, but it's also conversion improvements in the actual store when customers are coming into the stores. And I think at the heart of your question is really, what's driving this? And what I would tell you is I do think it's a combination of internal and external factors to your point. Obviously, this is, I think our eighth quarter down our eighth quarter in a row where we have sales prices actually down a little bit year-over-year. So certainly as prices come down, I think that's a tailwind for us. I think having price stabilization, not a bunch of big price swings from an appreciation or depreciation, more specifically depreciation. I think that's a tailwind. But I would tell you equally important is the focus internally on execution through like experiences and efficiencies. And when I think about remote progression conversion or in-store conversion improvements, it's because we've improved the experience. I mean, even this quarter, talking about the customer shopping hub that's helping us convert more customers by taking out friction. The CECs, we've been rolling out some tools there, knowledge management tool, which we'll finish rolling out the fourth quarter, helping our CECs to provide better experiences. It's the work we're doing on our cost of goods sold and taking waste out of the process there so that we can take that and make sure our prices continue to be more competitive. It's the inventory management and the quicker turns that we're doing, there's just a lot of different things that we're working on internally that I think are also complementary to some of the tailwinds that we see externally. So, I wouldn't say it's all one or the other. I think it's somewhere in between.

Operator, Operator

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

John Murphy, Analyst

Just to ask about the same store sales comp in a different way, everybody in the industry, including folks at the auction houses are saying that there's a real shortage of used supply and it's tough to get vehicles, but you're putting up good numbers. Obviously you're doing well on the sourcing side. But one thing that's interesting, I think the average price was down about $1,000 year-over-year. So, I'm just curious if you're making a concerted decision on sourcing to maybe go down market a little bit in age and maybe trim to open up the market to yourselves and get away from some of the competition where things are tighter sort of at the high end. And is that something that might be able to continue going forward to support same store sales comp?

Bill Nash, President and CEO

Yes, John, it's a great question. First of all, we feel great about our diversified sourcing, both from consumers and dealers and specifically to your questions, when you think about the age, if you look at year over year mix, like 0 to 5, 5 to 7, 8 plus year-over-year, they're very similar. I mean, 0 to 4 is up a point. It's actually up a little bit, a little bit newer vehicle. So there really wasn't a big mix shift in age of vehicles. And I think from a supply standpoint for us, because we're buying so many vehicles both from consumers and dealers directly, I think that's a nice benefit and helps to allow us to source vehicles that are just hard to find out there. To your point, if you're having to rely on third party.

John Murphy, Analyst

So there is no change, but there is no change in what you're doing in terms of age or trim. Are you able to adjust trim levels to create better pricing? Typically, pricing in the industry tends to increase rather than decrease.

Bill Nash, President and CEO

Yes, I wouldn't say there's anything remarkable there. I think the only thing to note is the team has done a great job. If you look at our under $20,000 vehicles, we've done a great job bumping that number up kind of year-over-year, quarterly, sequentially, it's pretty similar. But year-over-year, it's a nice little bump up. And again, I think that goes back to the work that the team's doing on sourcing.

Enrique Mayor-Mora, Executive Vice President and CFO

Yes, 30% of our sales were cars less than 20 grand. So, tremendous work there. Last year 25%. So pretty material.

Operator, Operator

Your next question comes from Seth Basham with Wedbush Securities.

Seth Basham, Analyst

My first question is on your GPU performance in retail and then wholesale. Within retail, can you give us an update on your cost out initiatives? Are you still on track for $200 per unit? How much have you achieved so far and what are you doing with that savings? How much are you reinvesting in price?

Bill Nash, President and CEO

Yes, the $200, just to remind everybody that's really being driven by two large buckets, our reconditioning and our logistics. And I've spoken previously about the fact the way to think about it is probably 50-50 split $100, $100. And I tell you, on that journey, we're probably realizing about half of that. And I would split it up about half on reconditioning and half on logistics with the remainder coming in the upcoming quarters. We got a lot of good work going on there, feel really good about it. And so far what we're doing is we're passing the bulk of that on to the consumers, but it also allows us to make sure that we've got solid margins as well. And I would think that you should think about that going forward. I mean, we'll continue to look at it and we'll have decisions to make as we find it. But right now the bulk of that's going to the consumer.

Seth Basham, Analyst

And then as a follow-up on the wholesale side, how much of the improvement there do you think is because of market conditions relative to some of the things you're doing, like Max offer? You posted some really good numbers this quarter.

Bill Nash, President and CEO

Yes, I believe, like Sharon mentioned, it's a combination of factors. This environment is certainly better than a year ago, especially considering the significant depreciation we experienced then. When such steep depreciation occurs, we usually adjust our offers accordingly, which affects our buy rate. So that aspect shouldn't be overlooked. Additionally, the more stable pricing environment has been beneficial. Regarding the Max offer, I must commend the Edmunds team for their excellent work on that product. We've significantly increased our active dealers with the Max offer, probably by around 40% year-over-year. With more dealers participating, there's also increased volume in purchases. Therefore, I think both elements play a role in our improvement.

Operator, Operator

Your next question comes from Chris Bottiglieri with BNP Paribas.

Chris Bottiglieri, Analyst

I wanted to ask for more details about the allowance. Can you provide insight into what drives the expected loss on new originations and what influenced the decision to reduce the allowance? Is this primarily due to the remaining vote, or are you also decreasing the provision on new originations?

Enrique Mayor-Mora, Executive Vice President and CFO

And just to clarify, you know, the cut to provision, I just want to clarify how to think about that. Our provision, as we've laid out is going to be obviously on new originations. Chris, you referenced that new originations, what our expected loss or the life of those receivables are and then any true up that we need to do on the existing receivables based on observed performance in the quarter. Again, we said there's always going to be some form of a true up. Obviously, we said last quarter there was a sizable true up, no doubt that brought the total of the provision to $113 million. But there's always going to be a composition of those two things. If you look at our provision this quarter of those two things, again it's a much more normalized level, which suggests that to your point, the originations plus the true up, our true up was just not to the size that it was before, which is really ideally, what we want to have happened. To your question of origination, how we did $1.9 billion this quarter, remember that's against Tier 1 and the testing that's happening in Tier 2 and Tier 3. If you can assign some loss rate to that, you could see where it'd be maybe in the $60 million range from an origination standpoint. Again, we've tightened, remember in Tier 1, so that's helping us to some degree but we are testing in Tier 2 and Tier 3, it's going to offset that a little bit. And then the remaining obviously is going to be the true up. But again, a true up in a reasonable level, very different than last quarter and probably again that's why we refer to it as a normalized level of provision.

Operator, Operator

Your next question comes from Craig Kennison with Baird.

Craig Kennison, Analyst

Bill, I know you like to measure market share annually, but I think perceived market share has probably been something that held back your stock relative to peers at least this year. I'm curious, has prices stabilized? Do you have any evidence that you are back to gaining share?

Bill Nash, President and CEO

Yes, Craig, would I tell you, the last two quarters I've said, look, market share, I want to get back onto the annual cadence. Barring any type of big price swings and we just haven't seen any big price swings. So we'll update it at the end of the year. What do I tell you is we feel great about our sales momentum and we feel great about our ability to gain market share.

Operator, Operator

Our next question will come from Scot Ciccarelli with Truist.

Scot Ciccarelli, Analyst

Two part question. First, outside of the price stabilization, what else would you attribute the magnitude of industry improvement to. Bill, just given your long experience in the industry? And then kind of part two there is, can you guys provide some more color around the payment extension? Like how's that process work and how's it reflected in the P&L?

Bill Nash, President and CEO

Sure. Scot, on your first question, as far as the market, I mean, I think there's conflicting numbers out there as far as the growth of the overall used car market. I think, it's very volatile from a month-to-month standpoint. But outside of price stabilization and I assume what you're talking about there is kind of how I refer to it, you don't see a lot of appreciation or depreciation, which that's in fact kind of if you look at the depreciation curves historically for this time of year, they line up fairly nicely, which we haven't seen that in a while. I think, the other thing is just something I talked about earlier, it's just the prices continue to moderate and I think having a gap between a late model used car and a new car, I think that has continued to expand a little bit. I think that helps the industry, especially on the late model used cars. The only other thing that I would tell you is I think consumers are still pinched from an inflationary standpoint, so they're looking for alternatives and used cars, whether it's a two-year-old used car or a 14-year-old used car. I think that helps the industry as well.

Enrique Mayor-Mora, Executive Vice President and CFO

Scot, and I'll take your payment extension question first. I'll level set on kind of how we think about extensions and then specifically what we did. So, we really wanted to cite an example of where we're continuing to look for opportunity to help the consumer navigate. Again, temporary hardships. It's something that we've always done. It's very standard in the industry. Historically, as I said in my prepared remarks that's generally less than 1% of our units in any given month, and we've done some testing that has brought it just slightly above that level. But we think this is a really good opportunity to help the consumer and ultimately lower loss. That's the goal that we're trying to do, help people stay in their car. So specifically, what happened within the quarter is if you look at our extension policy historically, it's been and we really kind of targeted that customer. That's a couple payments behind. So if there are a few payments behind, historically we've said, look I need you to make both of those payments and then we can give you a payment extension. In this environment, certainly higher payments, people weren't able to take advantage of those opportunities. So we looked at customers who said, if you cannot make two, we tried to see if they could make both, but if they can't, can you make one payment? And there were incremental customers that were able to do that. And so that allows them to take then a period to kind of get their finances in order. Now, we've started that at the beginning of the quarter. We've been able to watch people come out of that extension period and then see how they're behaving. And we're very pleased with what we're seeing. It's very much in line with our previous policy. And so, we feel good about this action we've taken for the consumer. Now that being said, we know that some customers may unfortunately revert back into delinquency and loss. So that being said, we need to make sure that we have reserved accordingly for the actions that we've taken. And that's how placed on the P&L it's embodied in our provision and in our reserve. And we know that will happen, but we feel good about what we've done. We like the early results. Again, a relatively small number of customers we've impacted but we like what's occurred.

Operator, Operator

Your next question comes from Jeff Lick with Stephens.

Jeff Lick, Analyst

Congrats on a second consecutive positive quarter in the progress. The question revolves around the wholesale biz. Some pretty interesting growth dynamics 73 or 74 units of wholesale per retail, 50% growth in dealer buys, and with gross profit margins up as well. I'm just curious where you think you can take that. I think that's kind of a hidden source of gross profit, dollar growth for you. I'd love to know where you think this is going and how sustainable these games are?

Bill Nash, President and CEO

Yes, Jeff. Well, look, I want to take it as high as we can get it. I mean, there's a big focus internally. We've had it for a while to continue to buy more cars, whether they're retail cars or whether they're wholesale cars. And like I said earlier, this is a focus Edmunds has been able to really get more dealers signed up for this. I kind of think about the product. The product is in, let's call it a majority of the population but that majority of the population, there's a lot more opportunity with dealers out there. So, we'll continue to push this as hard as we can because again, we want every single car, whether it's a wholesale car or a retail car.

Jeff Lick, Analyst

And who do you think you're taking share from?

Bill Nash, President and CEO

Well, I think it's just a nice alternative for dealers. You know, they have different avenues of getting rid of unwanted cars, whether it's through your traditional brick and mortar auctions, whether it's through virtual auctions with other wholesalers. This is just one more tool that they have in their toolbox to leverage. And we see where a lot of dealers, they like using it and so we don't expect it to replace those other things, but it just gives them another opportunity to look at a different valuation.

Operator, Operator

Your next question comes from David Bellinger with Mizuho.

David Bellinger, Analyst

In terms of the operating environment, any noticeable differences lately or change in tone from your lending partners? Have they turned more aggressive post-election and willing to take on additional volume, maybe even those down the credit spectrum? Any additional color you can add as we gauge some of the lending appetite into 2025?

Bill Nash, President and CEO

Yes, I think short answer there is, I think they're kind of steady as she goes right now. They really haven't made significant adjustments. I think that plays through in the penetration that they see. And again, that's going to be a function of the lender and also the consumers that are coming to shop. But yes, I think generally, our partners love the CarMax business. They're supportive in tough times, and they're obviously supportive in good times, but they're being as careful as any lender should be right now. So I don't think a lot has changed over the quarter.

David Bellinger, Analyst

If I could just add one other quick one. You had pretty significant earnings growth this quarter on the 4% comp. Maybe a bigger picture question. But as you begin to leverage and harvest a lot of this investment spend in the past few years and pushing more volume through the system. Should we expect a comp in that low single-digit, mid-single-digit type range to yield double-digit earnings growth from here? And then maybe the buyback is an accelerant on top of that. How should we think about the earnings growth and the sustainability from here?

Enrique Mayor-Mora, Executive Vice President and CFO

I mean our objective is for robust top line and bottom line growth. And I think that's the position that we put ourselves in with the investments that we've made. The operating environment out there has been challenging for the past couple of years, which has kind of hit some of those benefits. But I think as we come out of that here, we've had two positive quarters of comps. And as Bill talked about, that accelerated our comps have accelerated here into the fourth quarter. And I would expect moving forward that, like you said, we're in a position to harvest the investments we've made. So, we're excited about where we are today and kind of our path moving forward.

Operator, Operator

Your next question will come from Michael Montani with Evercore.

Michael Montani, Analyst

Congratulations on the quarter. I have a two-part question. First, Bill, can you discuss the current number of 245 stores? Is there potential to increase that back to 300 stores? Additionally, how should we view the pace of build-out? Is there an opportunity to leverage multichannel strategies at this stage? The second part is regarding labor compensation and benefits growth. Given that the model has shifted to a more fixed cost structure, should we anticipate that compensation and benefits will grow at a slower rate than top line units, allowing for some nice leverage? How should we approach this?

Bill Nash, President and CEO

Yes, I'll take the first part, and then I'll let Enrique weigh in on the second part. So yes, we actually, 249 stores. So Michael, I want credit for the other four. So 249 stores. And look, we think we can go beyond for the long term, we say 200, 300 stores. Obviously, we well back to 200 stores. We can go past 300 stores. And I think the way we think about it is every year, we're evaluating the pipeline and there's plenty of stores out there to go. And although, we're reaching a lot of the population, there's a lot of opportunity to still put some stores even in markets that we're in. And then there are some markets that we're still not in yet. So the way we think about it is we look at that pipeline every single year. Sometimes stores get added in the pipeline, sometimes stores get taken off of the pipeline. And what I would tell you is I think we've got a strategic footprint and as we continue to go in progress with the omni-channel experience. If consumers are continuing to do more and we can sell more out of the existing footprint than we have and we end up taking some stores off of the end of the pipeline, that'd be great. But I think you should feel pretty good about getting beyond the 300 stores even with improvements of the omni because I think having a strategic footprint is critical.

Enrique Mayor-Mora, Executive Vice President and CFO

In regard to comp and benefits in terms of leverage, we would expect to lever more strongly than we had in the past on that line item as we've been lowering the variable cost of our business. We've certainly been talking about our direct selling model, the omni-channel model, right? And what I'd tell you is that we're in the very late innings of efficiency relative to having that direct selling model. It's more efficient than the previous model. This quarter, previous pre-omni model. This quarter, we were more efficient year-over-year when it came to per retail unit, total unit gross profit as well. And I'll point to a couple of things here that can really give you a sense of what's driving that. This quarter, year-over-year, our web chats through Sky were up 10% year-over-year. So that's driving, again, the consumer doing more of those activities on their own less need for labor. Containment rate was up 50% to 51% from 41%. That's more than a 25% increase in the containment rate. Again, customer being able to do more of the work on their own. At the same time, our SLAs on the web and phone were up year-over-year. So from a customer service standpoint, it's getting better. So you can see we're really fine-tuning that model. We feel really good and what that means at the end of the day is less labor, but more effective labor and that should help us drive down our comp and benefits relative to where we had been on a leverage standpoint moving forward. So we're really excited about it.

Operator, Operator

Your next question will come from Chris Pierce with Needham.

Chris Pierce, Analyst

Bill, you mentioned this in response to a previous question, but do you have data on the amount consumers are shifting from new purchases to used ones? Specifically, do you track whether you're attracting new customers and if that's driving their preference for used items? Additionally, have these markets been performing well?

Bill Nash, President and CEO

Yes. When I consider the overall used car industry, there was a significant volume of used cars exchanged last calendar quarter, approximately 40 million, but only about 35.5 million were exchanged last year. This decline primarily occurred in the 0 to 4% and 0 to 6% segments, which saw drops of around 18%. This is certainly a key area for us. Overall, consumers are feeling financial pressure, and the current state of the used car market, particularly affecting those selling late model cars, has created challenges over the past few years. However, I see this as an opportunity. I believe that consumers will return to the market, and we will eventually see volumes exceeding 40 million again. Right now, consumers are trying to manage the pressures they feel from inflation and other daily challenges.

Operator, Operator

Your next question comes from Rajat Gupta with JP Morgan.

Rajat Gupta, Analyst

Good execution on the cost side here. I just had one clarification on the comps and then had a CAF question. On the comps, I mean, just to tap in a bid on some of the comments that you made the industry acceleration that you've seen in November, it looks like it's continuing into December. Clearly, your results are benefiting as well. John mentioned earlier, like used car prices have actually probably gone up recently. So I'm curious like what do you think has really changed in terms of just the consumer mindset here? Is it just pent-up demand being unleashed somewhat both election anxiety, I don't know was there some hurricane benefit? Just curious if you could just add some color on those aspects? And I just had one quick one on the cash reserves.

Bill Nash, President and CEO

Yes, I can't say that the consumer mindset has changed significantly. I would refer back to my earlier comments about the internal improvements we've made to enhance the experience, reduce friction, and boost conversion rates. The fact that our prices are down year-over-year likely contributes positively as well. However, there are still consumers who are feeling financial pressure, particularly those with a monthly household income of less than $3,000, who are still significantly less active than before. Therefore, it doesn't seem like the consumer mindset has shifted much; it's more influenced by our actions and broader macroeconomic factors. Regarding hurricanes, their impact was minimal, likely less than half a percentage point, which is quite small.

Rajat Gupta, Analyst

That's helpful. So clearly, there was like some meaningful shift around just the omni experience this quarter. I know you mentioned at the analyst event in October that you had the later innings getting the fruit service investments. It does look like that kind of had a big benefit, would you say this quarter relative to just the last quarter?

Bill Nash, President and CEO

I believe this has been a gradual process rather than something that just occurred this quarter. We experienced some positive outcomes last quarter, and now in the third quarter, we see continued progress. Specifically, when it comes to conversion, providing customers with more options leads to better results. Looking at activities like vehicle reservations, pre-qualifications, appointments, and instant offers, the more customers engage in these actions, the higher the conversion rates. We’ve noticed ongoing improvements in remote operations, as well as significant enhancements in our physical stores. The stores are effectively utilizing the tools provided to them and enhancing customer interactions, especially when customers transition from in-store to online. Once we completed building these capabilities, our focus shifted to minimizing friction. With the rollout of order processing last quarter and now the ability to process orders anywhere, alongside the introduction of the shopping account, we see a lot of positive momentum. This will be important moving forward, as I believe consumers will increasingly seek this type of seamless experience. Those who can offer a frictionless process will come out ahead.

Rajat Gupta, Analyst

That sounds great. I believe you have already addressed my question regarding CAF. It appears there hasn't been a significant change in the macro environment, so the reduction in the reserve for CAF was simply based on the recent tightening and your initial observed performance. Is that correct? And has anything changed in your macro outlook that would lead to a lower reserve?

Jon Daniels, Senior Vice President, CarMax Auto Finance Operations

Yes. And again, I probably wouldn't think about like the reserve as being cut. I know that you're looking at a benchmark from like last quarter, but I'd probably reverse the thinking and say, you look last quarter, we looked at the overall performance and we made an adjustment that really kind of refilled that reserve bucket significantly and we feel that was adequate and it's kind of what we said in our prepared remarks. So I think about this return to normal, if you will, is just a recognition that that volume that we put aside at the end of Q2 was adequate for the receivable base that we have. So that's just how I just ask you to rethink about it.

Bill Nash, President and CEO

Yes, I agree with Jon because let me put it another way. If we hadn't made that adjustment last quarter, the figures would have been higher. We expected them to decrease because last quarter, we thought we needed that adjustment. However, Jon and his team did an excellent job with their estimates. So a decrease is expected. I align with Jon on this. Don’t view it as a reduction, because if the figures had moved in the opposite direction, it would indicate we didn't estimate correctly last quarter. Overall, year-over-year, it's actually increased slightly.

Operator, Operator

Your next question comes from David Whiston with Morningstar.

David Whiston, Analyst

It looks like inventory was a free cash flow drain for the quarter. I was just curious, is that building up for tax season? Or is there something else going on there working capital-wise?

Bill Nash, President and CEO

Yes. Total inventory increased slightly, which is expected as we are in production mode in anticipation of the upcoming tax season. This is a normal seasonal trend for us. I believe the team has excelled in managing inventory this year, and our turnover has improved compared to the same quarter last year. We feel well-prepared for the approaching tax period.

David Whiston, Analyst

And EPP penetration or EPP growth, was that penetration growth? Or did you raise prices?

Jon Daniels, Senior Vice President, CarMax Auto Finance Operations

Yes. We increased prices starting in the fourth quarter of last year. We have a product with fairly inelastic demand, and we implemented that price hike last year. Therefore, we will be comparing against that in this fourth quarter. We anticipate a smaller year-over-year increase in revenue. I actually expect a slight rise year-over-year in the rate, but that was primarily a margin enhancement we achieved last year. Consequently, penetration has decreased, but ultimately, we are still earning more money in that area.

Operator, Operator

You have a follow-up question from Michael Montani with Evercore.

Michael Montani, Analyst

Just wanted to get some early thoughts that you might have around the upcoming tax season and how you're thinking about and planning for that? And then also, we did notice some uptick in pricing recently that was alluded to before. So as it stands early in the quarter, are you starting to see your prices rise year-over-year as well?

Bill Nash, President and CEO

Yes. So Mike, on the tax season, look, I think tax season for us is all about flexibility. We're planning on having a decent tax season. You just kind of do a baseline, think about what it was last year and make sure you're prepared for that. But I think more importantly is to make sure you have that inventory that you need, but have the flexibility to go up or down depending on what you see. And I think the team has put us in a great position there regardless of if it materializes like last year, if it's better than last year, if it's softer, I think we're in a good spot. As far as prices, again, I think some of the durable actions we've taken and the diversification of sourcing, I feel good about our pricing right off the top of my head, I can't tell you for the December, how we're running, but I think we're probably a little bit lighter year-over-year. So we'll see how it pans out.

Operator, Operator

We don't have any further questions in queue at this time. I will now hand the call back to Bill for any closing remarks.

Bill Nash, President and CEO

Great. Thank you, Todd. Well, listen, thanks for joining the call today for your questions and support. As always, I want to thank our associates for everything they do, how they take care of each other and the customers and the communities. I want to wish all of our associates and all of you a great holiday season, and we will talk again next quarter. Thank you.

Operator, Operator

Thank you. This does conclude today's third quarter fiscal year 2025 CarMax earnings release conference call. You may now disconnect.