Earnings Call Transcript - KMX Q1 2020

Operator, Operator

Good morning. My name is Tiffany and I will be your conference operator today. At this time, I would like to welcome everyone to the CarMax Fiscal 2020 First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Katharine Kenny, Vice President, Investor Relations.

Katharine Kenny, Vice President, Investor Relations

Good morning. Thank you, Tiffany. Thank you all for joining our fiscal 2020 first quarter earnings conference call. I'm here as usual with Bill Nash, our President and Chief Executive Officer and Tom Reedy, our Executive Vice President and CFO. Let me remind you that our statements today regarding the company's future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current knowledge and assumptions about future events that involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see the company's annual report on Form 10-K for the fiscal year ended February 28th, 2019, filed with the SEC. Lastly, and last time, let me thank you in advance for asking one question and getting back in the queue for follow-up. Thank you. Bill?

Bill Nash, CEO

Thank you, Katharine. Good morning everyone and thank you for joining us today. Before I get started, I do want to take a moment to personally thank Katharine, who many of you know is retiring at the end of July, so this is her last call. Katharine has run a very successful IR program for us over the past 13 years and I'm sure that you all agree that she will be deeply missed. Katharine, we wish you the best in your retirement. I hope it exceeds your expectations. I'd also like to introduce Stacy Frole, who similar to Katharine has a very strong IR background. And as many of you already know, Katharine and Stacy have been working closely together over the last months to ensure a smooth transition in Investor Relations' communications. So, welcome Stacy and again, congratulations, Katharine. For today's call, I'll start with our first quarter highlights. I will then turn the call over to Tom to discuss our financials in more detail before providing an update on our omni-channel rollout, which continues to perform very well. Then we will open it up for your questions. As you read in the earnings release this morning, we are pleased to announce a very strong start to fiscal 2020 with net earnings growth up 11.8% and EPS up 19.5%. We achieved a 9.5% increase in used unit comps and a 13% increase in our total used units sold. This strength in retail is the result of a combination of many factors, including our solid execution, which was supported by enhancements to the customer experience; a robust lending environment; and a delay of February tax refunds into our first quarter. Conversion for the quarter increased year-over-year, while store traffic remained relatively unchanged. Our website traffic grew 15% from a year ago. Gross profit per unit for the quarter was consistent with the prior year at $2,215. We continue to drive efficiencies in our inventory management systems, allowing us to maintain margins while offering attractive prices. In addition to strong retail sales in the first quarter, we reported higher wholesale units with volume up 6% for the quarter versus a year ago. This was the result of an all-time record buy rate as well as the growth in our store base year-over-year. Gross profit per wholesale unit was $1,043, an increase of 3.1% compared with last year. This strong wholesale performance likely benefited from the delay in tax refunds as well. As a percentage of sales, zero to four-year-old vehicles decreased less than 1% to 76% versus 77% in the first quarter of last year. Total SUVs and trucks accounted for about 46% of our sales, up from 43% this time last year. At this point, I'll turn it over to Tom.

Tom Reedy, CFO

Thanks Bill and good morning everybody. For the quarter, we saw strong performance in other gross profit, which increased 11.6%. This was largely driven by an 11.2% increase in EPP net revenues, reflecting the combined effects of strong used volume growth along with increased penetration and margins, which were partially offset by an increase in the cancellation reserve. Also remember, in last year's first quarter, EPP revenues included $4 million related to the adoption of the new revenue recognition standard. On the SG&A front, expenses for the quarter increased 11.7% to $490 million. Factors impacting our SG&A spend included the opening of 18 stores since the beginning of the first quarter last year, which represents a 10% growth in our store base; higher variable costs associated with our strong sales growth; a $14 million or $46 per unit increase in share-based compensation expense; as well as continued investment in technology platforms and digital initiatives. SG&A per used unit was $2,183, a $26 decrease year-over-year. We're pleased to show leverage in the midst of substantial investment and the $46 per unit increase in share-based compensation. While the quarter did benefit from some timing differences, we were able to offset a portion of the growth spend with efficiencies and will continue to focus our efforts on this. Our provision for income taxes benefited from the impact of stock option settlements by $3.1 million. This translates to an 89 basis point reduction in our effective tax rate for the quarter. Now, I'll turn to CAF and customer finance. In the quarter, we saw higher application volume and strong performance across all credit tiers. Tier 2 accounted for 20.3% of sales compared with 17% last year, while Tier 3 accounted for 11.5% versus 10.9% a year ago. CAF penetration net of three-day payoffs was 41.4% compared with 42.9% in last year's first quarter. While we saw increased allocations across the board, it was definitely more pronounced in the Tier 2 and Tier 3 space. Year-over-year, CAF net loans originated grew by 9.7% to $1.8 billion as the increase in used cars sold was somewhat offset by the decrease in CAF net penetration rates. For loans originated during the quarter, the weighted average contract rate charged to customers increased to 8.9% compared with 8.4% a year ago and 8.7% in the fourth quarter. CAF income of $116 million was up just slightly compared to the first quarter last year. The impact of growth and average managed receivables was offset by a $7 million increase in the provision for loan losses and a slight compression in portfolio interest margin. This margin was 5.6% versus 5.7% a year ago and 5.5% in Q4. The provision for loan losses was $38 million in Q1 versus $31 million in the prior year period. The increase arises from portfolio growth along with some unfavorable loss experienced versus our expectations, which translates into a related increase in the overall allowance for losses. The allowance at $147 million represents 1.14% of ending managed receivables versus 1.13% in Q1 of last year and 1.10% in Q4. While the allowance has increased a modest four basis points sequentially, it remains well within our range of expectations given our origination strategy and portfolio mix. As we discussed last quarter, we are committed to enhancing shareholder value through continued investment in our associates, our business and our capital structure. During the quarter, we opened three stores, two in new markets, Waco and McAllen, Texas; and our second store in Memphis, Tennessee. Earlier in June, we opened our Atlanta customer experience center. Over the next 12 months, we're anticipating opening 14 more stores and two customer experience centers. During the first quarter, we repurchased approximately 3 million shares for $205 million. Since starting the stock buyback program in 2012, we have returned more than $4.6 billion to shareholders and we have $1.9 billion remaining in current authorizations. Now, I'll turn the call back over to Bill.

Bill Nash, CEO

Thank you, Tom. As we look towards the future, we continue to believe the unique and powerful integration of our in-store and online capabilities provides us with a significant competitive advantage. And as consumers continue to do more online, it's important that we provide them with the ability to shop on their terms anywhere, anytime. While we are still in the early stages, we are very pleased with the results in our Atlanta market. The strong performance we saw last quarter carried over into the first quarter. Once again, we saw double-digit comps and the Atlanta market continues to outperform the overall company in both comp sales and appraisal buys. Our finance penetration is similar to the rest of the company, while max care penetration is slightly lower. Home delivery continues to experience high conversion, although it remains a small percentage of our overall sales in Atlanta. As I mentioned last quarter, we believe our unique omnichannel experience could be more efficient than our current model. We do anticipate some inefficiencies in some of our operations in the near-term, however, we know that we will be able to improve as omni markets mature and our customer experience centers become fully utilized. We continue to enhance our omnichannel capabilities and experiences for both our associates and customers based on their feedback and reactions. We remain confident that we are moving in the right direction and our omnichannel experience will be one of the key drivers of comp sales and market share growth going forward. Here are some specific updates on the progress of our rollout. The Atlanta customer experience center, or CEC, just opened this month, and we will be opening one in Kansas City in late July. We are also in the process of working on a third location, which will open later this year. Over time, the three large CECs will each staff more than 300 associates. Having spent some time in our new Atlanta CEC, I'm convinced that this is the right solution for continuing to improve our customer experience. The technology is state-of-the-art and integrates well with our store systems. Our associates are excited and well-positioned to focus on progressing the customer online and providing an exceptional experience. With the opening of the Atlanta CEC, we rolled the omnichannel experience to the majority of our Florida stores earlier this month. Later this quarter, we will continue the rollout to new markets, including those in North Carolina and Virginia. We remain on track to provide our omnichannel experience to the majority of our customers by the end of fiscal year 2020. As I've said on prior calls, to bring omni to life, we're leveraging the strength of the CarMax model that we've built over the past 25 years along with new technology and digital capabilities. This is an experience that we can tailor to each individual customer. This is the future of car buying. We're off to a great start, and we're excited about the future. And at this point, we'll be glad to take your questions.

Operator, Operator

Your first question comes from Scot Ciccarelli with RBC Capital. Your line is open.

Scot Ciccarelli, Analyst

Good morning guys. Hi. So, I guess I was hoping you might be able to shed a little bit more light just regarding the inflection that we happened to see this quarter. I mean we had a couple of quarters that might've been – I guess, a lot of people would term them as relatively underwhelming 3Q, 4Q. And obviously, we're still early in the Atlanta rollout, so you can't just point to omnichannel as what caused the inflection here. So, if you can provide any more color on that, I think that'll be fantastic for the group. Thanks.

Bill Nash, CEO

Sure, I spoke in my prepared remarks about the tax rate and lending environment, but let me provide some additional details. We emphasized improved execution, particularly in conversion. The store excelled not only in face-to-face conversion but also in driving online traffic into the store, resulting in significant conversion success. Our buyers performed exceptionally well in acquiring vehicles this quarter. We also experienced some efficiencies in shipping logistics, and as we've mentioned before, when we achieve these efficiencies, we typically pass on cost savings through price reductions. Additionally, we made strides in enhancing the customer experience through our digital initiatives. You may have noticed our new website, which we launched nationally based on feedback we've gathered in omni markets. We implemented improvements in the search experience that focus on speed and navigation. Furthermore, overall auction supply seemed to increase slightly, which benefits us, and this was mirrored by some changes in the new versus used car pricing gap. In summary, a combination of various factors contributed to our positive performance, and no single factor was solely responsible for the improvement.

Scot Ciccarelli, Analyst

If I were to break down the impact of tax refunds, which is a temporary phenomenon, how would you estimate the effect of the shift in tax refunds?

Bill Nash, CEO

Yes, like last quarter, I mean, we thought we probably missed out on about a week's worth of tax refunds last quarter, so that's what we expected rolled into this quarter.

Scot Ciccarelli, Analyst

Got it. Okay. Thanks guys.

Bill Nash, CEO

Thank you.

Operator, Operator

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

Brian Nagel, Analyst

Hi, good morning. Thank you for taking my question. Congratulations on a nice quarter.

Bill Nash, CEO

Thank you, Brian.

Brian Nagel, Analyst

So, first off, Katharine, congratulations on your retirement. It has truly been a pleasure working with you all these years, so congratulations.

Katharine Kenny, Vice President, Investor Relations

Thanks Brian.

Brian Nagel, Analyst

And Stacy welcome.

Stacy Frole, Investor Relations

Thank you.

Brian Nagel, Analyst

I want to follow up on Scot's question. Looking at the significant increase in used car unit comparisons from Q4 to Q1, you mentioned some shifts in the credit metrics in your prepared comments. My question is, to what extent did a more engaged group of lending partners or seemingly looser credit extension from CAF contribute to the improvement in used car unit comparisons? Additionally, was the change in CAF a deliberate decision by management, or was it simply a reflection of market conditions?

Tom Reedy, CFO

Yes. Brian, I'll address your questions. Firstly, the CAF has not significantly altered its origination strategy. We continue to conduct tests, but the quality and structure of our originating portfolio remains consistent. Any shifts in our mix, particularly regarding CAF penetration, typically arise from changes in the customer mix. As I mentioned earlier, we observed an increase in application volume across all credit qualities, notably stronger at the lower end. This generally benefits Tier 2 and Tier 3 customers in terms of their attachment rates. However, we have seen solid performance from our partners in both Tier 2 and Tier 3. The situation is similar to what we experienced last quarter, but Tier 2 has shown improvement during the latter half of last year. Year-over-year, we’re seeing stronger conversion rates. In Tier 3, recall that in the third quarter, we adjusted the allocation of applications among our partners, leading to higher year-over-year conversion. From a sequential viewpoint, all tiers have performed similarly to earlier this year, and we are pleased with their results. Did that cover everything, Brian?

Brian Nagel, Analyst

Yes, that definitely helps. To sum it up, as we examine the significant acceleration in comps over the past few months, are you saying that there haven't been any dramatic changes in credit to contribute to this?

Tom Reedy, CFO

The only thing I would say is the strength of Tier 2 would definitely be a help compared to last year because, as you can imagine, a customer who receives a CAF offer is much more likely to convert to a sale than a customer receiving a Tier 2 offer, and that's more likely to convert than one receiving a Tier 3 offer. Given that Tier 2 is seeing more volume and is incrementally a little bit stronger year-over-year, you would expect that some of those they approve who would have gone down to Tier 3 probably wouldn't have turned into sales. But there are so many moving parts that it's difficult to quantify it.

Bill Nash, CEO

Yes. Brian, and I was just reiterating, if you think about all the different factors, there was no one factor that was the majority of the lift.

Brian Nagel, Analyst

Got you. So, let me clarify this. I'm a Tier 2 piece, so can we get more insights on what changed there? As we look at the rest of fiscal 2019, how should we assess the sustainability of that?

Tom Reedy, CFO

Over the second half of last year, we observed an improvement in our lender performance, which we measure by the percentage of applications that convert into sales. This conversion rate increased during that period and has remained stable since then. Additionally, there has been an increase in customer volume in that area, which also benefits the lenders, although it is outside of our control.

Brian Nagel, Analyst

Appreciate all the details. Congrats and thank you.

Tom Reedy, CFO

Thanks Brian.

Operator, Operator

Your next question comes from the line of Armintas Sinkevicius with Morgan Stanley. Your line is open.

Armintas Sinkevicius, Analyst

Good morning. Thank you for taking the question.

Bill Nash, CEO

Good morning.

Armintas Sinkevicius, Analyst

When I consider the discussion regarding Atlanta, with back-to-back double-digit comparable sales in consecutive quarters and the ongoing rollout of the initiative, how should I evaluate this in relation to the traditional model? Specifically, as you open these new stores, what should we anticipate in terms of the impact from the omnichannel initiative, using Atlanta as a reference point?

Bill Nash, CEO

Yes, I can definitely share that when we enter a new market, the results will vary each time. For instance, during our Atlanta rollout, we introduced not just a new experience and alternative delivery methods, but also some fresh advertising, expanded free transfers, and pricing tests. As we expand into new markets, what I can assure you is that we will maintain consistency in offering the new experience, updated website features, and alternative delivery methods, along with increased advertising efforts. However, we will evaluate each market individually to determine the most effective approach at that time. Therefore, it’s challenging to generalize the performance of one market to predict outcomes in all future markets.

Armintas Sinkevicius, Analyst

Okay. And then just one other one on the SG&A side. How should we think about the timing of the SG&A spend here in the second and third quarter? You're opening up customer experience centers. How much of that is you're starting to see efficiencies at your store level? Or are we opening in the customer experience centers first and then there will be some natural attrition at the store level and also the cost of the grand openings there? Just any way we can contextualize the SG&A that would be helpful.

Bill Nash, CEO

Yes. For this quarter, as Tom mentioned earlier, we experienced some leverage. There were some timing issues with the advertising spend that we expect to increase. Regarding the customer experience centers, we are still in the process of ramping them up. I wouldn't say we've seen significant efficiencies between our customer experience centers and our staffing and store operations yet, as we are in a transition period where we are aligning staffing in the store with the ramp-up of the customer experience centers. Therefore, the optimization from the customer experience centers has not yet become apparent.

Armintas Sinkevicius, Analyst

Okay. I appreciate it.

Bill Nash, CEO

Sure.

Operator, Operator

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

Sharon Zackfia, Analyst

Hi good morning. And I just want to say, it's nice to see Katharine go out on a nice high comp there. So, have a good retirement, Katharine.

Katharine Kenny, Vice President, Investor Relations

Thanks.

Sharon Zackfia, Analyst

Yes, I have a follow-up question regarding the CECs. When do you plan to roll out omnichannel nationwide? You mentioned that the majority of markets would be covered by next February, but what are the plans for the remaining areas? How do you envision the number of CECs needed across the country to provide this experience? Also, regarding the startup inefficiencies, is the issue primarily related to the labor of the 300 employees at the CECs causing the three to four-month delay you mentioned previously?

Bill Nash, CEO

Yes. Sharon, we believe that we have opened the first of the three major locations, and we plan to open the other two this year. We feel confident that these three will cover most of the country. There may be a few smaller locations due to state regulations that require a physical presence for selling activities. The CEC is classified as a selling activity, so locations in those states will be necessary. I consider these three locations to be the main ones that will enhance our omnichannel capabilities. Regarding efficiency, as I mentioned previously, we expect to reduce the store staff by at least one person for each new hire at the CEC, and we plan to achieve that through normal attrition. Initially, there may be some intentional inefficiencies for the first few months as we roll this out because once we activate the omnichannel, our stores will have excess staff since they won't need to handle e-Office tasks, calls, or assist customers in that manner. However, I believe we can manage this adjustment over a two to three-month period, and we are committed to supporting our associates during this transition.

Sharon Zackfia, Analyst

Okay. Thank you.

Bill Nash, CEO

Thank you. Sharon.

Operator, Operator

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

Craig Kennison, Analyst

Hey good morning. Thanks for taking my questions. Katharine, you will be missed.

Katharine Kenny, Vice President, Investor Relations

Thank you.

Craig Kennison, Analyst

So, lots of focus on the omnichannel and disruption in retail channel. And that makes sense to me, good reason for those questions, but there's also disruption unfolding in the wholesale channel. We've got more dealer-to-dealer digital platforms that are emerging there. How are you thinking strategically about the wholesale market and whether there's an opportunity to be as disruptive there?

Bill Nash, CEO

Yes, it's a great question, Craig. And I think a lot of times people overlook the wholesale, but it's a huge business for us. And I think it's a huge competitive advantage. Just like with our retail customers, we want to make sure we give our wholesale dealers a great experience as well, and so we're testing different things. For example, we've tested some online selling. Keep in mind, though, our average vehicle is still 10 years old, over 100,000 miles. There are a lot of dealers who'd still want to come and look at that, but I think we're in a great position to continue to move and make changes in that space just like we are at retail. So, it's one that we haven't really focused on in this call here, but it's another one of the initiatives. We have several things that we're working on to improve that part of the business as well.

Craig Kennison, Analyst

Thank you.

Operator, Operator

Your next question comes from the line of Rick Nelson with Stephens Inc. Your line is open.

Nicholas Zangler, Analyst

Hello, everyone. This is Nick Zangler stepping in for Rick. Congratulations to Katharine, and Rick sends his best wishes. I wanted to ask about the Atlanta market briefly. The unit sales are showing strong double-digit growth again. Can you share if the growth margin was consistent this quarter compared to the last? Last quarter indicated double-digit comparisons, while the overall company showed 2.8%. Was that growth margin maintained in the Atlanta market, given that this quarter it was 9.5%?

Bill Nash, CEO

Yes. Nick, what I would tell you is we talked about the double-digit comps last quarter; we have them again this quarter. They did increase a little bit even over last quarter. So, we feel really good about that.

Nicholas Zangler, Analyst

Okay, great. And just your general thoughts on tariff implications on demand for used vehicle unit sales. You believe that this could potentially be even a tailwind as used vehicles are perceived to be more affordable going forward. Thank you.

Bill Nash, CEO

Yes, it's hard to tell at this point, Nick. You probably know as much as we do. That's one that we'll stay close to. Obviously, we're a little bit less reliant on anything coming in from outside of the states. So, theoretically, you would think that's a good thing, but it's too early. I don't know. I don't know the answer to that.

Nicholas Zangler, Analyst

Great. Thank you very much, guys.

Bill Nash, CEO

Thank you.

Operator, Operator

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

John Murphy, Analyst

Good morning, everyone, and congratulations, Katharine. We look forward to keeping in touch. I have a question that has a couple of parts. When we look at the CECs and your omnichannel strategies, Bill, it seems like the business will become more asset-light over time, potentially requiring fewer stores to serve areas, while increasing the productivity of your existing locations. As you consider the future, not just this quarter but overall, how far do you believe you can expand these CECs into new markets without needing a physical presence, or with a significantly reduced physical presence compared to the past? Additionally, in this new environment, do you think GPUs could be much lower since the asset intensity might decrease, yet you could still achieve the same or even better returns over time?

Bill Nash, CEO

Yes. So John, I believe that we have a significant competitive advantage due to the infrastructure we've developed over the last 25 years. Our stores are a valuable asset that will support our omnichannel experience. Regarding your question about future growth and physical store expansion, we aim to continue increasing sales and capturing market share. This will involve adding some new stores along with maximizing our current locations to connect with customers in ways we couldn't previously. If we excel in serving customers we couldn't reach before and some stores at the end of our growth potential are closed as a result, we would see that as a positive outcome. However, I still believe there will be a balance between both strategies. Concerning GPU, the rollout of our omnichannel experience is a separate decision from GPU pricing. We don’t see them as interconnected at this time. We believe we can enhance the omnichannel experience while maintaining our current GPUs, as they are distinct decision-making processes.

John Murphy, Analyst

But there's no initial indication suggesting that the Atlanta rollout and the developments in Florida could allow us to reach significantly more customers due to this omnichannel strategy. I would never imply that our existing stores are obsolete; that notion is unreasonable. These stores will remain productive. However, looking ahead, would you consider opening stores without physical inventory? It appears to be a genuine opportunity where we can still utilize our physical presence but operate more efficiently. Is there any preliminary insight on what that could entail?

Bill Nash, CEO

Yes. No, it's way too early to know what kind of lift we can get out of our existing infrastructure. But keep in mind; we only have 206 stores at this point. They're all strategically located. We have some areas where we have holes; it would be beneficial to have stores. So, again, I go back to it's going to be a combination, and we'll see how much of a lift we can get by being able to continue to improve the omni experience.

John Murphy, Analyst

Great. Thank you very much.

Bill Nash, CEO

Thank you.

Operator, Operator

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

Seth Basham, Analyst

Thanks a lot. Good morning and congrats Katharine, we'll miss you. My question is around free transfers. You talked about that being a driver of improved sales in Atlanta. Can you talk about how many free transfers increased in the quarter on a year-over-year basis, for example and whether or not you're rolling out additional free transfers to other markets?

Bill Nash, CEO

Yes. Free transfers, while we opened it up, it's just not that significant of a factor. And as we roll forward in new markets, we'll make a decision within each market that we roll out. It's not necessarily a play that we'll do every single place.

Seth Basham, Analyst

Got it. And then as a follow-up, thinking about the very wide new to used car spread that we're seeing right now, how much do you think that boosted comps? And do you think it's sustainable?

Bill Nash, CEO

Our data indicates that there is improvement, particularly in the latter part of the fourth quarter, and that positive trend has continued. However, I must emphasize that it has not reached the levels we've seen in the past. While I believe the trend is encouraging, it is just one of many factors to consider.

Seth Basham, Analyst

Thanks.

Bill Nash, CEO

Thanks Seth.

Operator, Operator

Your next question comes from the line of Chris Bottiglieri with Wolfe research. Your line is open.

Jacob Moser, Analyst

Hey guys, it's actually Jake Moser on for Chris. Thanks for taking the question.

Bill Nash, CEO

Good morning.

Jacob Moser, Analyst

Good morning. So, I know you said it's a low percentage today, but I'm curious for more color on the uptake of home delivery in Atlanta and how that is trending and where you're thinking it might get to over time. And then for your recent launches in Florida, are you using the same home delivery process where you have effectively a mobile office with two employees?

Bill Nash, CEO

Yes, it's still too early to determine the future potential of home delivery in Atlanta. We will keep an eye on it, but we don't have any updates at this time. In Florida, we are utilizing existing store associates for home deliveries, unlike in Atlanta where we had a separate team. We have introduced a new role in the stores for handling home deliveries and express pickups. Express pickup allows customers to complete most of their transactions online but still visit the store for a test drive and to learn about options. We have completed some pick-ups in under 30 minutes, particularly when customers prefer not to test drive and just want to review options. Currently, we still have two associates going out to assist customers; one is in the mobile business office and the other handles the inventory unit the customer is interested in.

Jacob Moser, Analyst

All right. Great. Thanks for taking the question.

Bill Nash, CEO

Sure.

Operator, Operator

Your next question comes from the line of David Whiston with Morningstar. Your line is open.

David Whiston, Analyst

Thanks. Good morning. I know we had a really awesome quarter here, so I actually want to look at it the other way and just say what, as a management team, are you guys maybe not satisfied with? Or what are you pushing people internally when you address people at the store level or the corporate level? What could you guys actually be doing better right now?

Bill Nash, CEO

Yes. Well, first of all, the store team is doing a phenomenal job. If you think about all the change that we're going through as an organization, it really does impact every single associate, and the store teams have risen to the occasion. They're excited about it. They're glad that we're continuing to evolve. They're glad we're continuing to meet the business. And so we feel really good about that. Now, I think we have lots of opportunity as we continue to roll this out. We still have a lot of inefficiencies here and we've talked about that in the past, some of them are by design and some of them are just because we've opened up new capabilities. And so what we're excited about, our first push is really get this omni experience out to our consumers. But equally important is it's got to be a great experience for the customers, it's got to be a great experience for our associates. We want to make it as profitable as possible. We want to have the most efficient system available. So there's lots of things that we're focused on with the overall long-term growth to continue to grow sales and market share. So, to be honest with you, I feel great about where we are and I feel great about the opportunities that we have to continue to improve it.

David Whiston, Analyst

Thanks. And just one follow-up there on your comment. When you said a lot of inefficiencies, were you referring to the whole enterprise or the omnichannel rollout?

Bill Nash, CEO

I believe the inefficiencies I mentioned are specifically related to omnichannel. However, we also see opportunities to eliminate waste in other areas of the organization. We are never satisfied with our current status and continuously strive for efficiencies in SG&A, our reconditioning process, and buying logistics. There is potential for improvement across the entire organization, but my earlier comments specifically addressed the inefficiencies in omnichannel.

Operator, Operator

Your next question comes from Scot Ciccarelli with RBC Capital. Your line is open.

Scot Ciccarelli, Analyst

Thanks guys. Just following Katharine's rule about one question here, so back in the queue. Will, we know there was some debate in the marketplace last quarter regarding what the two-year stack was in Atlanta. So, I guess I was hoping now that we're back in a public forum, if you can help us understand what you've seen on two-year stack basis in Atlanta, specifically where you have the omnichannel rollout, of course, both last quarter and then in this quarter? Thanks.

Bill Nash, CEO

Yes. Scot, first of all, thanks for getting back in the queue. You just made Katharine smile on her last earnings call that you actually followed the rules. Yes, so this quarter, positive two-year stacks just like last quarter. I don't think we talked about it last quarter, but we had positive two-year stacks last quarter as well.

Scot Ciccarelli, Analyst

Can you tell us whether this quarter was higher or lower than what you saw in 4Q?

Bill Nash, CEO

This quarter was higher.

Scot Ciccarelli, Analyst

Got it. Thanks. And my goal is always is to make Katherine happy. So, there you go.

Bill Nash, CEO

Thank you, Scot.

Operator, Operator

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

Seth Basham, Analyst

Thanks. One follow-up question for me. It's just around CAF. Obviously, you experienced some higher than expected loan losses in the quarter. We've noticed some deterioration in trends for selling more recent securitizations. In response to that trend, did you plan on tightening terms for any of your loans? Did you do that this quarter with the lower penetration rate? Or how are you thinking about that going forward? Thank you.

Tom Reedy, CFO

Yes, the penetration rate this quarter was purely a result of the mix coming through the door. And as I mentioned, the allowance as it is, is quite a comfortable spot. Obviously, it represents our best estimate of what future losses will be. And so losses trend to that rate. We're very comfortable that we're still originating a highly financeable, highly profitable portfolio, so I wouldn't foresee any changes. Obviously, caveat that with the future is the future and we'll continue to monitor it and adjust as appropriate to the extent it is. But at this point, we're very comfortable.

Seth Basham, Analyst

Thank you.

Operator, Operator

There are no further questions in queue at this time. I turn the conference back over to our presenters.

Bill Nash, CEO

Thank you, Tiffany. Listen, I'm sure you can tell from our comments today, we're proud of our results and what we're working on. We're excited about the future. The results we discussed today, and this goes back to one of the questions that was asked, the results of today are really the product of our associates. It's their hard work, dedication to an exceptional customer experience, desire to innovate and their unwavering commitment to our values, that's the reason we're successful. And so to all of our associates, thank you for what you do every day. It's absolutely an honor to work side-by-side with you. And for those of you on the call, thank you for your interest. Thank you for your continued support of CarMax, and we will talk again next quarter.

Operator, Operator

This concludes today's conference call. You may now disconnect.