Earnings Call Transcript - KMX Q2 2022

Bill Nash, CEO

Good morning and thank you for joining us. As you read in our earnings release this morning, we delivered a record level of used sales for the second quarter and an all-time record for wholesale vehicle sales, as well as robust CarMax auto finance income growth. For the second quarter of FY22, our diversified business model delivered total sales of $8 billion, up 49% compared with the second quarter of FY21, driven by higher average selling prices and volume gains. Net earnings per diluted share was $1.72, down $0.07 from a year ago as we rolled over last year’s pandemic-driven expense reductions and also continued to invest in our growth. Across our retail and wholesale channels, we sold approximately 420,000 cars in total, up 20% versus the second quarter last year. For the six months of FY22, we have sold approximately 872,000 retail and wholesale cars combined. We also bought 59% more cars from consumers in the second quarter this year versus last year and achieved record self-sufficiency of approximately 70%. Our omnichannel platform, unique customer offerings, solid execution, and macro factors are driving performance across our company. In our retail business, total unit sales in the second quarter were up 6.7% and used unit comps were up 6.2% versus the second quarter last year despite headwinds from inventory levels, staffing, and overall used car valuations. Our teams made steady progress in building our saleable inventory during the quarter and we achieved sequential growth each month despite the strong retail demand that carried into the second quarter. While it remains below our targeted levels, we are on pace to grow our saleable inventory during the balance of the year. In addition to strong unit sales, we reported $2,185 of retail gross profit per used unit, in line with our historical second-quarter performance. For wholesale, units sold were up 41.4% from a record second quarter last year. Wholesale gross profit per unit was $1,005 compared with $1,086 for the same period last year. The strength in wholesale units was primarily driven by the ongoing success of our instant online appraisal offering that rolled out nationwide on carmax.com in February after launching on edmunds.com last year. We also benefited from still elevated valuations of used autos in the broader market. CarMax auto finance, or CAF, continued to deliver solid results with income of $200 million. In addition, CAF and our partner lenders delivered strong offers in all credit tiers, though we did see a sequential decline in Tier 3 volume relative to the first quarter. John will provide more details on customer financing and CAF contribution shortly. Now I’d like to turn the call over to Enrique, who will provide more information on our second quarter financial performance, followed by John. After that, I’ll update you on the progress against our strategic priorities and then open up the call to Q&A. Enrique?

Enrique Mayor-Mora, CFO

Thanks Bill and good morning everyone. Total gross profit was $815 million, up 8% over last year’s second quarter. This was driven by wholesale vehicle margin of $189 million, which was up 31%, and used vehicle margin of $507 million, which was up 5% from last year’s second quarter. Other gross profit was $120 million, down $7 million from last year’s second quarter. Favorability in the quarter included $22 million of margin contribution from Edmunds since our June 1, 2021 acquisition. This was on revenues of $34.5 million, which is noted as advertising and subscription revenues in the earnings release. Other gross profit also benefited from an $18 million improvement in third-party finance fees with income of $3 million compared with $15 million in costs last year. This was driven by lower Tier 3 volume compared with last year and our renegotiated third-party finance fees. Offsetting this favorability, service was down $40 million, primarily the result of rolling over favorable items from the prior year’s quarter and short-term headwinds during this year’s quarter. Specifically, we competed over last year’s COVID-related cost reductions. Additionally, we experienced higher 90-day warranty cost timing stemming from the significant increase in sales during the first quarter of fiscal year ’22 compared to last year’s first quarter. We also realized lower retail service margin as production capacity was focused on reconditioning retail cars. Also impacting other gross profit, EPP was down $6 million or 5.4%. While penetration was stable at above 60%, last year’s second quarter included a benefit of approximately $8 million in profit-sharing revenues that were not recognized this year due to a timing shift in the performance period for one of our providers. On the S&GA front, expenses for the second quarter increased to $574 million, up 30% from our COVID-impacted quarter a year ago as we continued to invest in our strategic initiatives and growth. As a reminder, last year during the pandemic, we took aggressive cost containment actions particularly during the first half of the year. SG&A as a percent of gross profit was 70.4% compared to 58.8% during the prior year second quarter. The increase in SG&A dollars over last year was primarily driven by three main factors: first, a $55 million increase in total compensation and benefits driven by staffing and sales growth and by the inclusion of Edmunds payroll this quarter; second, a $41 million increase in other overhead due to investments to advance our technology platforms and strategic initiatives; third, a $35 million increase in advertising expense as previously communicated to amplify the CarMax brand, build awareness of our omnichannel offerings, and drive customer acquisition. We estimate that the COVID-related cost savings in SG&A in the prior year quarter was between $25 million to $30 million. For the first six months of FY22, SG&A as a percent of gross profit was 64.8%, leveraging five points over last year’s first half rate of 69.3%. We remain committed to ensuring we are efficient in our spend and we expect that targeted areas of focus will continue to deliver improvements over time. We achieved an additional reduction year-over-year from our core CDC cost structure during the second quarter. Additionally, our Omnichannel capabilities will unlock new opportunities as we leverage automation to reduce expenses and streamline operations. For example, our online instant offer program is resulting in a more efficient buying organization as we continue to leverage the power of automation, AI, and data science. On capital allocation, our ongoing focus is to deploy capital in our business to grow market share and deliver long-term shareholder value. That includes investing in digital capabilities to enhance all aspects of our omnichannel experience, such as online vehicle acquisition which is already generating a strong ROI. We also continue to invest in the strategic expansion of our store footprint and look for additional paths to create incremental value. In regard to our share repurchase program, we remain committed to returning excess capital to shareholders and repurchased approximately 1.8 million shares in the quarter for approximately $220 million. Now I’d like to turn the call over to John.

Jon Daniels, CFO, CarMax Auto Finance (CAF)

Thanks Enrique and good morning everybody. Once again, our finance business has delivered outstanding results. For the second quarter, CAF’s penetration net of three-day payoffs was 43% compared with 42.6% a year ago. Tier 2 decreased to 21.6% of used unit sales compared with 22.3% last year. Tier 3 accounted for 7.2% compared with 11.1% a year ago. As a reminder, last year CAF decided to strategically route a portion of its Tier 1 volume and all of its allocated Tier 3 volume to partners to preserve the high quality of its portfolio during the start of the pandemic. These changes were rolled back by the end of Q2 last year. During the quarter, we observed strong offers from our Tier 2 partners as they competed for additional volume within the CarMax channel. We also saw a decrease in application volume and conversion to sale for applications in the lower portion of the credit spectrum. We believe these decreases are due in large part to the higher average selling prices seen across the industry. During this year’s second quarter, on the strength of record used unit sales, CAF’s net loans originated was nearly $2.4 billion. The weighted average contract rate charged to new customers was 8.5%, up from 8.2% a year ago but down from 9% in the first quarter. Similar to the first quarter, this year-over-year difference in APR is a result of the change in credit mix of customers rather than an increase in the rate charged. For our portfolio, overall interest margin increased to 7.2% versus 6% in the same period last year, resulting in a year-over-year increase of $65 million or 33%. This strong net interest margin highlights the strength of our ABS program and the favorable state of the capital markets. Given we recognize income over the life of our loans, we will benefit from this higher net interest margin across multiple years. CAF’s income for the quarter was $200 million, up from $147 million a year ago. This significant year-over-year increase comes as a result of the stronger net interest margin and higher receivables. Our expense related to the provision in the second quarter was $35 million and resulted in an ending reserve balance of $398 million for the second quarter, or 2.66% of managed receivables. This is in line with the 2.62% at the end of the first quarter while also reflecting a modestly higher percentage of Tier 3 loans in the portfolio as a result of our decision to retain 10% of Tier 3 volume. We believe our future outlook on losses and corresponding reserve is appropriate given the current macroeconomic environment. With regard to our lending platform and specifically where CAF participates across the credit spectrum, we are constantly evaluating the landscape and remain committed to making decisions that we believe are sustainable in the long term and in the best interests of our customers. During the second quarter, in coordination with our business partners, we began a small test of CAF originating in the Tier 2 space. Much like when CAF entered Tier 3, this test will remain in place at low volumes for an extended period as we take the time to understand both the Tier 2 customer and how CAF’s participation in this space can best enhance the range of credit options, improve the customer experience, and drive profitability. Now I’ll turn the call back over to Bill.

Bill Nash, CEO

Thank you Jon, thank you Enrique. I’m very proud of how our teams have driven strong results this quarter across our diversified business model, and we’re excited about the incredible opportunity that lies ahead. We’ve intentionally built our omnichannel platform to give every customer the ability to progress to a sale or a buy, regardless of how they shop with us. We’ve found that most customers don’t want to shop for a car in a way that is tied solely to an in-store or digital experience. While we provide the ability for customers to buy a car 100% in-store or 100% online, our omnichannel capabilities really differentiate CarMax by enabling our customers to personalize their experience with a mix of digital and physical interactions to meet their needs. In the second quarter, approximately 9% of our retail unit sales were online, consistent with our first quarter and up from the prior year’s quarter of 3%. As a reminder, we consider it an online retail sale when a customer completes all four of the major transactional activities remotely, so that’s reserving a car, financing the vehicle if that’s needed, trading in or opting out of a trade-in, and creating a sales order. Our wholesale auctions remain virtual, so 100% of wholesale sales, which represent 21% of total revenue, are considered online transactions. Total revenues resulting from online transactions was 28%. This is up from 24% in the first quarter and up from 18% in last year’s second quarter. Approximately 55% of retail unit sales were omni sales this quarter, flat to the first quarter and up from the prior year’s second quarter of 49%. Omni sales are those where our customers complete at least one of those major transactional activities remotely. We’ve been focused on completing the rollout of our 100% self-service experience, where customers can independently complete the entire car buying process online if they so choose. Currently, a little more than 50% of our customers have access to a complete end-to-end, unaided online experience. We are on track to bring this capability to all of our retail consumers by the end of the fiscal year. Remember, while rolling out access to these capabilities will enable more customers to complete a 100% self-service online experience, all customers currently can buy a car online with assistance from an associate. In the second quarter, we bought approximately 188,000 vehicles from customers through our online instant appraisal, which represents about half of our total buys from customers. That’s a 15% increase from our record first quarter number. This growth supports our belief that we’ve become and are further expanding our position as the largest online buyer of used autos from consumers in the U.S. We are continuously enhancing our ecommerce offerings to exceed customer expectations and to seamlessly integrate with our best-in-class store experience. Let me share a few examples. One of the areas we’ve enhanced is our financing process. Nearly 65% of our finance customers start their loan process online with a pre-approval application, and as of the second quarter, 100% of those customers now receive a digital decision that includes customized loan terms. A majority of those customers through no additional time or effort are provided digital access to their personal financing terms on every car in our inventory, allowing them to shop with more confidence. In addition, what differentiates our experience is the ability to provide these inventory-wide credit offers using multiple finance partners, including CAF. This ensures we provide our customers with the most attractive rates and terms. We’re excited about our progress on this crucial part of the car buying journey. We also continue to advance what we believe is industry-leading digital merchandising, which is critical to providing customers an immersive experience with our inventory as they shop remotely. This quarter, we added 360-degree interior views from the driver’s side and the back seat of the vehicle and continue to advance vehicle hotspots, which are call-outs to help the customer understand key vehicle features. We also continue to leverage artificial intelligence to ensure that our photos are consistently high quality to best represent our inventory. We’re hearing very positive feedback on these advancements that help customers understand and fall in love with our vehicles as they shop online. In relation to our acquisition of Edmunds, we’re very pleased with our progress as our teams have hit the ground running on new innovations. We will continue to invest in the Edmunds brand and work together to unlock opportunities to compete across the larger used auto ecosystem. We are really proud of the quarter and the significant progress we have made in advancing our omnichannel strategy. We are well positioned to deliver the most customer-centric experience in the used auto industry, which will enable sustainable growth and create meaningful long-term shareholder value. With that, we’ll be happy to take your questions, so Kevin?

Operator, Operator

Our first question comes from Brian Nagel of Oppenheimer.

Brian Nagel, Analyst

Hi, good morning.

Bill Nash, CEO

Good morning Brian.

Brian Nagel, Analyst

David, congratulations on the new role.

David Lowenstein, Analyst

Thank you.

Brian Nagel, Analyst

I guess the question I want to ask, and I know you talked about this a bit in your comments, but as we look at this quarter and the 6.2% used unit comp, maybe you can help us better contextualize that. I mean, against that backdrop and clearly with COVID, coming out of the COVID crisis, a lot of the internal initiatives, is there a way to think about that number on a more normalized basis? How is it tracking versus what you view as the real health, the underlying health of your business? Then as a follow-up, just from a positioning standpoint, you and your team are talking more and more now about used cars together with wholesale cars as a measure of overall sales. Does that reflect more a strategic shift on the part of CarMax? Thank you.

Bill Nash, CEO

Thank you for the questions, Brian. Regarding your first question, we are very satisfied with the approximately 6% comparable store sales growth. It's important to consider the context of the environment. We encountered several challenges during the quarter. Firstly, our inventory is below our desired levels, likely around 30% less than our typical target at the quarter's end. Additionally, we continue to face staffing shortages, although the situation has improved somewhat. This understaffing affects our ability to meet service level agreements and, in some instances, hampers our responsiveness to customer inquiries, which is concerning, and we are addressing this issue. Furthermore, a broader macroeconomic factor is the increase in used car valuations; year-over-year, acquisition prices have risen by about $6,000. Enrique and Jon mentioned in their opening remarks that this might lead some used car buyers to exit the market. When considering our comparable store sales in light of these material challenges, we feel good about our performance for the quarter and the overall progress we are making. As for your second question about used and wholesale vehicles, we do discuss these areas differently, which links back to what I mentioned during analyst day. While we are recognized primarily as a used car retailer, we are much more than that. We are an excellent retailer, wholesaler, and financier. With the addition of Edmunds and our dealer services, we are enhancing our position within the broader used auto ecosystem, which is why we address both aspects.

Brian Nagel, Analyst

That’s helpful, Bill. Just a follow-up on the initial question, is there a way to quantify what that 6.2 would have been had you not faced these headwinds in the quarter?

Bill Nash, CEO

Yes I’ll tell you, Brian, it’s hard, and I’ll give you one example. The inventory being that down, that substantially down inventory would be just in itself a significant headwind. Now, I will tell you, I don’t think the normal elasticity applies right now because a lot of folks are under-inventoried; but what I will tell you is we feel like when you take all three of those things and add them up, they’re material headwinds, so again we’re pleased with how the quarter came out from a comp perspective and just overall.

Operator, Operator

Thank you. Our next question comes from Sharon Zackfia with William Blair.

Sharon Zackfia, Analyst

Hi, good morning. The inventory dynamic has been, I think, pretty obvious throughout the quarter for anyone kind of looking at your website. What is your line of sight into getting inventory back into kind of more normalized levels? I know you mentioned you expect it to continue to improve, as it did during the August quarter, but is this something where you’re three, six months out? To quantify, is it a staffing issue, is it the acquiring of vehicles that’s the issue? Help us understand where the pinch point is right now on the inventory side.

Bill Nash, CEO

Thank you, Sharon. To clarify, we are not having issues with acquiring the vehicles. I mentioned in my opening remarks that we are about 70% self-sufficient, so it's certainly not a sourcing issue. As I discussed in response to Brian’s question, we have faced challenges primarily due to the circumstances in the fourth and first quarters. The fourth quarter is usually when we build our inventory, but we couldn’t do that this time due to COVID and winter production disruptions. Then, we experienced record sales in the first quarter, so we are still recovering from that situation. As I told Brian, we are currently about 30% below our target and about 15% lower year-over-year. Comparing this year's second quarter to last year’s, we are approximately 15% behind. We have made significant progress each month in increasing our inventory, and we intend to continue building it for the remainder of the year. The timeline for returning to our desired inventory levels will depend somewhat on demand. Regarding staffing, while we were able to build inventory during the quarter, we still faced some challenges on the staffing front. However, we are making solid progress overall, and we have continued to improve staffing this quarter as well.

Sharon Zackfia, Analyst

I know you mentioned to Brian that it’s kind of hard to quantify the impact of the inventory, but I’m curious if you’ve seen conversion go down, just because obviously every used car is like a snowflake and if you don’t have as broad an inventory, you have to be losing sales. Is there any way to look at conversion as a metric that might indicate what’s been left on the table?

Bill Nash, CEO

Yes, I believe conversion was slightly down. We assess conversion in a couple of ways, both from the top of the funnel and in the store. The store performance was quite strong, but we did experience a decline in conversion at the top of the funnel. We see this as a significant opportunity because one of the primary reasons people don’t purchase from us is that we lack the specific vehicle they are seeking, and this issue is heightened when our inventory is low.

Operator, Operator

Thank you. Our next question comes from Rick Nelson with Stephens.

Rick Nelson, Analyst

Thanks, good morning. Wanted to follow up on CAF and the strategy to more Tier 3 business at CAF. Can you compare the profitability of a Tier 3 unit sale to a third-party lender, and what are the risks, I guess, with this strategy?

Jon Daniels, CFO, CarMax Auto Finance (CAF)

Sure, thank you for your question, Rick. Regarding a Tier 3 unit, there's typically a higher cost associated with funding and a higher risk customer profile, but the overall cost will be slightly lower than a more prime loan, depending on the funding conditions and the APR we can charge, landing in the $2,000 to $2,100 range if we manage to capture all the financial benefits. However, this does involve greater risk in terms of funding. We have successfully renegotiated fees with our partners, and we currently pay $750 for the Tier 3 loans that they handle. As we discussed earlier, in Q1, we began to capture about 10% of the volume in the Tier 3 market. We are pleased with this volume and appreciate it, and we will keep evaluating the right mix. Ultimately, whether we or our partners increase Tier 3 business, it’s essential for us to offer excellent credit options to those customers. In our current credit platform structure, we believe we achieve that, which addresses your question. Overall, we are satisfied with how it’s structured today and feel we’re providing great offers to these customers.

Bill Nash, CEO

Yes, and Rick, the only thing I would add to that, whether it’s Tier 3 or Tier 2 for that matter, it really is about balancing the sustainability of the program, the profitability, and then the customer experience, so we take all that into consideration.

Rick Nelson, Analyst

Fair enough. Thanks and good luck.

Bill Nash, CEO

Thank you Rick.

Operator, Operator

Our next question comes from Craig Kennison with Baird.

Craig Kennison, Analyst

Hey, good morning. Thanks for taking my question. Bill, the surge in vehicles sourced from your online appraisal tool is really impressive. Do you have a feel for what those sellers would have done without the tool - would they have shown up at a CarMax store, would they have gone to another dealer, would they have sold through some person-to-person listing service? Where are they coming from?

Bill Nash, CEO

We’re pleased with the online performance. We’re seeing a lot of additional units coming through, as our traditional appraisal process remains very strong. We believe there’s significant added value in offering this service. While we’re not certain where those sellers would have gone, it’s possible they might have sold through other channels. Regardless, we feel positive about the additional business we are capturing.

Craig Kennison, Analyst

And what percentage of online offers are you able to purchase, and does that tell you anything about the competitiveness of your offer?

Bill Nash, CEO

Yes, our buy rate is traditionally assessed through our appraisal and trade. The buy rate in the appraisal lane remains very high, around the low 30s. When we evaluate online offers, we consider how many customers show up at the store after receiving an online offer, and of those, how many actually complete a sale. The conversion rate for customers who come in with an online offer and finalize their sale is significantly higher than that of the traditional appraisal lane.

Operator, Operator

Thank you. Our next question comes from Rajat Gupta with JP Morgan.

Rajat Gupta, Analyst

Great, thanks for taking the questions. Just had a question on some of the investments that you had made in the second quarter. Clearly advertising picked up, the other investments picked up, you’ve added more headcount. Could you give us any color on how much of this has started to benefit comps? Maybe if you could give us some color on how September is tracking, that would be useful. Then just on GPU, given the rising used vehicle pricing environment you’re back in again, great August into September, likely into October-November as well, you’ve previously given us some color on the GPU number for retail. Any similar color you could provide us for fourth quarter as well? That’d be useful, and that will be all, thanks.

Enrique Mayor-Mora, CFO

Hey Rajat. With regard to SG&A, we firmly believe that now is the right time to invest in growing our business. We’re very bullish about our future, given the strength and trajectory of our business, and we’re going to continue to invest in our growth, we’re going to continue to invest in the omni and ecommerce functionality as we move forward. But we are on track by the end of this year to offer up to all of our retail customers 100% self-sufficiency online, our self-service online. We’re going to continue to invest in the acquisition of customers by marketing. The investment in marketing is something that we had communicated last year that we were going to step up our marketing advertising and other channels as well. Again, we believe we have a superior platform and we want to make sure that we’re communicating that in an effective way to our consumers, but at the same time, there’s also a very targeted ROI opportunity in advertising as well that we’re investing in, and then lastly we’re going to continue to invest in the acquisition of vehicles. The instant offer program that we launched that has had tremendous success is just an example of one of those investments that just provides an outstanding ROI, so we’re going to continue to invest. Now that being said, we do expect to lever over the longer term because at the same time that we’re investing, we also have cost efficiency plays, whether it’s the CECs or whether it’s the buying organization or whether it’s other channels as well. We have opportunities to get more efficient in how we work, and so we’ll continue to do that. But I think it is important to remember that we’re on track with our investments, we’re on track with our performance at this point.

Bill Nash, CEO

Yes, Rajat, I want to emphasize that we are pleased with the advertising performance, which resulted in approximately a 19% increase in web traffic. Our average monthly website flow exceeded 34 million, indicating that our investment is paying off. Regarding your question about GPUs, I believe we're in a situation similar to last quarter. We are continuously testing, and a few quarters ago, we discussed the need for broader scale testing due to various profit channels within the organization. While those factors still exist, we must carefully consider macroeconomic influences and evaluate our inventory levels. We need to understand elasticity, which we're still assessing through our ongoing tests while being mindful of competitors. It didn’t seem prudent to deviate significantly from our historical margin trends. Ultimately, we aim to maintain very competitively priced inventory. Moving forward, you should expect GPU levels to align more closely with historical averages, similar to the second quarter.

Operator, Operator

Thank you. Again ladies and gentlemen, if you have a question or a comment at this time, please press the star then the one key on your touchtone telephone. Our next question comes from Michael Montani with Evercore.

Michael Montani, Analyst

Hi, thanks for taking the question. Just wanted to follow up on the cadence of the comps throughout the quarter and then to start the third quarter. From our work, it looked like the trends had accelerated nicely into August and basically could have been up double digits into September, so just wanted to see if you all would comment on that, if you could do it quantitatively, and if not that, if you could provide some color as to why trends may have strengthened, if it’s inventories or enhanced multi-channel.

Bill Nash, CEO

Yes, good morning Michael. Obviously I’ve already said we’re pleased with overall comps for the quarter. We had positive comps every single month and we really continue to trend. It started since March. March was not only a record, all-time high record, but it was a record for the month. April-May-June-July-August have all in their respective been a record month for us, so we feel great about that. To your point, we’re also very pleased with the start of the third quarter. Now, obviously we’ll talk more in detail about that at the end of the third quarter.

Michael Montani, Analyst

Okay, and then if I could, just on the margin front, two questions there. One was some folks had been anticipating a little upside on GPU due to pretty inelastic demand at the moment. Just wanted to understand if there’s something we need to also consider in terms of the volatility of the pricing in the environment, or if perhaps there’s more investment you all are making. Then the other one was just on advertising spend for the year and if there’s any kind of cost reductions to consider as we cycle 3Q and 4Q. What you called out in 2Q was helpful, $25 million, $30 million.

Bill Nash, CEO

Okay, yes. On the margins, look - we’re always looking at our margins, and I know we probably have some competitors where the big spike up in average selling prices, they’ll take more margin. You’ve followed us long enough to know that ASPs don’t really drive our margins. We feel very comfortable about where our margins are. For us, it’s about making sure we get a great margin but also having great prices, so again to the question I answered earlier, I think the third quarter, you can think about margins more in the historical trend. Could you have taken more margin? Yes, but again, we’re in this for the long haul and we want to make sure our prices are super competitive all the time, and we feel great about that. I’ll let Enrique speak to the advertising.

Enrique Mayor-Mora, CFO

Yes, so two questions. On advertising, we had communicated earlier this year that our expectation for advertising on a per-unit basis for this year was going to be similar to what we spent in the back half of last year, so somewhere in the mid-300s per unit, and we’re on track so far this year and our expectation is that we’re going to meet that for the full year. In regards to comping over COVID and the $25 million to $30 million that we estimate that last year was kind of one-time savings, that was really focused on the front half of the year. There still are some of those that will carry over into Q3, but not to the same level of materiality as what we saw certainly in the first two quarters of the year.

Operator, Operator

Thank you. Our next question comes from Seth Basham with Wedbush Securities.

Seth Basham, Analyst

Thanks a lot, and good morning. My question is around GPU and the pricing environment. Bill, maybe you can comment on what’s happening with wholesale price trends and retail price trends through the quarter and how that’s impacted your retail GPU.

Bill Nash, CEO

Yes, when I look at retail from a mix adjustment perspective, retail pricing increased by about $6,000 regarding acquisitions. Wholesale pricing rose by around $3,000, which are significant jumps compared to what I've seen in the past. Our high level of self-sufficiency creates numerous opportunities moving forward, influencing both our margins and pricing structure. During the quarter, we started with very high prices, which remained elevated for a while before experiencing a slight decline. However, unexpectedly, they began to appreciate again, and by the end of the quarter, we were likely back at the high levels we had at the end of the first quarter. This situation is intriguing. I can speculate that due to chip shortages, the wait for new cars may be longer than initially anticipated, prompting some buyers to purchase more used cars to replenish their inventories since new car availability is limited. This creates an interesting dynamic in the market that we're observing.

Seth Basham, Analyst

Yes, so the fact that prices started to appreciate again after the back half of your quarter unexpectedly should indicate that you could have captured incremental margin on those unit sales, so your GPU exiting the quarter was probably stronger than it was in the beginning of the quarter? Is that the right way to think about it?

Bill Nash, CEO

No, I would think that how we manage our GPU doesn’t really consider the average selling prices. There are other factors involved, so it’s best to view it as fairly consistent throughout the quarter.

Operator, Operator

Thank you. Our next question comes from Adam Jonas with Morgan Stanley.

Adam Jonas, Analyst

Why are you still buying back stock? You have an incredible growth opportunity right now, and you're facing competitors who can afford to lose money without needing to return cash. I understand the business generates cash, but isn't it time to rethink this strategy and focus on growing the business instead of continuing with the buybacks?

Enrique Mayor-Mora, CFO

We have an operating model and business model that generates a significant amount of cash, and we are making the right investments at the right time to foster our growth. Despite this focus, we still believe we have excess cash to buy back stock and return it to shareholders. We are fully committed to our level of investments, as reflected in our spending and capital expenditures, and we will continue to invest aggressively. Even while pursuing these investments, we have sufficient cash to buy back shares.

Operator, Operator

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

John Murphy, Analyst

Good morning. I have a question about two pressure points. First, regarding inventory, it seems that the shortage of new vehicles will continue into next year, likely past the middle of 2022. Do you believe the situation will improve before then? Additionally, when it comes to staffing, finding qualified candidates at reasonable wages is becoming increasingly challenging, which may lead to cost inflation in SG&A and complicate hiring efforts. I'm trying to understand if you can adjust your strategy in response to these macro factors and when you anticipate they will ease, as they are overshadowing the positive aspects of your performance and complicating the narrative, though these challenges are outside of your control.

Bill Nash, CEO

I believe that regarding the chip situation, I can only promise that my predictions might be inaccurate. I agree that this issue will likely continue throughout this year and possibly into next year, keeping prices for used cars high. This is why I'm excited about our investments in vehicle acquisition and initiatives like our instant offer, which help mitigate some of these challenges and present us with opportunities. As I mentioned earlier, we're making progress in increasing our inventory, and we're feeling optimistic about that. When it comes to staffing, we have always prioritized our associates, who are key to our success. During this time when every employer is looking for staff, we're no exception. We've continued to invest in our associates this quarter and have made pay adjustments that we're proud of. For 17 consecutive years, we've been recognized as one of the best places to work, which is advantageous for our employer brand. Despite some challenges, we are making progress in both inventory and staffing, and we are excited about the opportunities that initiatives like self-sufficiency and instant offers provide.

John Murphy, Analyst

Is it fair to say, or perhaps just a follow-up, that achieving SG&A leverage will be challenging during this period of macro pressure? You have performed exceptionally well in same-store sales and gross figures despite these challenges. Some may have concerns about this, but what you accomplished this quarter regarding gross and volume is commendable. Do you anticipate being able to achieve SG&A leverage by the end of calendar year 2022? It seems like it could be difficult to achieve. What are your thoughts on this, and where should we consider that inflection point?

Enrique Mayor-Mora, CFO

Yes, we certainly are in investment mode, as we’ve made clear, and you can go back to our analyst day. We’re really focused on driving our top line. We are focused on driving market share and meeting and exceeding our target that we laid out there, which is greater than 5% market share by FY26, and that does require investments like we’ve been talking about, the investments in the different areas that we mentioned, certainly. Will it be harder to leverage? Well, in that kind of environment it is a little harder to leverage, right, and our expectation is that our gross profit will continue to grow, it will grow robustly, and on the back of that gross profit growth, there are opportunities to leverage specifically for this year for the entire year. Our expectation continues to be that we should be able to leverage for this year. It’s hard to look quarter to quarter. You just can’t look in quarter to quarter just because there are so many things that pop in and out of a quarter; but for the full year, we feel pretty good about that. Then moving forward, again we are in growth mode and we’re investing accordingly, and at the same time and as I speak to every quarter, we do look at opportunities to get more efficient. There are investments we’re making to drive the top line, there are investments we’re making to help pull out cost as well, and we always have a sharp eye to that, so we’ll continue to do our best on that. At the same time, we are focused on market share growth and the opportunities that lay ahead of us, and we’re really excited about them.

Operator, Operator

Thank you. Our next question comes from Ali Faghri with Guggenheim.

Ali Faghri, Analyst

Good morning, thanks for taking my question. Sorry, but another question on retail GPU here. I recognize that retail prices don’t really drive CarMax’s GPU, but just the self-sourcing improvement from sub-50% to 70% this quarter by itself should have been a big boost to GPU given the cost advantage from acquiring from consumers versus auction. I know you said you kept your prices competitive, but it also doesn’t seem, at least based on our work, that you are meaningfully outperforming peers on volumes either, so how do I tie that all together?

Bill Nash, CEO

Yes, well first of all, we feel really good about our pricing position, and we’ve been looking at this for a very long time, so we feel very good about where we are from a pricing standpoint. Look, this is one quarter. Some things have a longer tail, but I would also go back to the fact that, look, we had some major headwinds, and when you add them all up together, they were hard to overcome, which I’ve already talked about - you know, the inventory, just the pricing, the staffing. Those are headwinds over the self-sufficiency. I think what we’re most excited about is this self-sufficiency and the opportunity that that gives us as we continue to move forward.

Operator, Operator

Thank you. Our next question comes from David Whiston with Morningstar.

David Whiston, Analyst

Thanks, good morning. I hear you say you’re happy with pricing, but then when I look at Page 6 at the GPU, gross margin per unit there, it’s down considerably year-over-year and also down versus the quarter two years ago. It’s obviously a competitive marketplace though, too. Do you plan to raise prices?

Bill Nash, CEO

Well David, just to clarify, the GPU performance, if you compare it to last year's second quarter, which was a record, we are only slightly below that level. Based on our historical average, we are on the higher side of GPU. There might be a slight misunderstanding there. Can we increase GPUs? Definitely, and we will continue to observe the macro factors to determine what makes sense. Our self-sufficiency provides us with many opportunities moving forward, but we are also focused on the long term and want to ensure that our customers receive excellent value consistently. Therefore, we will keep considering all factors as we progress.

Operator, Operator

Thank you. Just to be clear, I was talking about the 8.3% versus the 11%, and then the 10.5% two years ago. That’s why I asked about pricing.

Bill Nash, CEO

Oh, I’m sorry. You were talking more about ASP? Yes, and again, I’d just throw that out.

Enrique Mayor-Mora, CFO

If you look at it on a per-unit basis, it’s going to be skewed, artificially skewed as a percent of revenue just because retail prices are just up, like, 30% since the beginning of the year, so it’s hard to look at as a percent of revenue. We really look at the business on a per-unit basis.

Bill Nash, CEO

Yes, and we manage it differently than a lot of the other publicly traded auto retailers.

Operator, Operator

Thank you. Our next question comes from Chris Bottiglieri with Exane BNP Paribas.

Chris Bottiglieri, Analyst

Hey, thanks for taking the question. Just had two quick ones on other gross profit. I guess just first, trying to understand the service gross profit seemingly went negative this quarter because of the warranty issue. Next quarter or whenever, does this go back to the 20% to 30% gross margin rate you’ve historically had, or is there something, like some kind of a lag, to all this warranty stuff that we should be thinking about?

Enrique Mayor-Mora, CFO

Yes, service this quarter, we were upside down $40 million year-over-year on the quarter, and we estimate that a material amount of that were headwinds we faced in the quarter that were really shorter-term in nature. The two largest ones I’d tell you, number one was the 90-day warranty that you mentioned, and when you think about it, right, our comps this year in the first quarter were 99%. Last year in the first quarter, they were negative 42%, and so you’re looking at a lot more volume from a 90-day perspective warranty work that carries over into the subsequent quarter, so that very much is a timing play right there. Then the second piece is, similar to SG&A, we just had prior year one-time COVID-related savings in support pay and the employee retention credit plan as well, that are more shorter-term in nature. The material amount of that is really shorter-term. What I’d say is historically we’ve run service as a positive margin contributor. The exception was last year - certainly during COVID it was not, but prior years it had been a positive margin contributor, and as we move forward on an annual basis, we do expect that to continue to be a positive margin contributor as well. But this quarter, certainly those two headwinds made it a little bit harder.

Operator, Operator

Thank you. Again ladies and gentlemen, if you have a question or a comment at this time, please press the star then the one key on your touchtone telephone. Our next question is a follow-up question from Rajat Gupta with JP Morgan.

Rajat Gupta, Analyst

Thanks for letting me get back in the queue here. I just wanted to follow up in terms of a housekeeping question around SG&A. How much of the quarter-over-quarter pick-up in SG&A was due to the Edmunds acquisition, and if you could say what are some of the buckets in SG&A also, that might be very helpful. Thank you.

Enrique Mayor-Mora, CFO

Yes, regarding Edmunds, I mentioned in my prepared remarks that from a gross profit perspective, Edmunds contributed about $20 million. This will be reflected in the 10-Q that we will file tomorrow. As an operating segment, we will report on Edmunds' revenues and gross profit moving forward, but that will be the extent of our reporting on them. However, I can tell you that overall, they were slightly accretive to CarMax, so you can estimate their SG&A with that information.

Operator, Operator

I’m not showing any further questions at this time. I’d like to turn the call back to Bill Nash for any closing comments.

Bill Nash, CEO

Great, thank you Kevin. Well listen, thanks for joining us today, for your questions and your continued support. We’re confident in our ability to seamlessly merge our world-class in-person and online experiences, add to that our diversified business model and we’ll be able to continue to drive growth and market share gains as we move forward. As always, I want to thank our more than 27,000 associates for your continued dedication, to living our values each day, taking care of each other, the customers, and our communities. You all are the reason that we remain a positive disruptive force within the used car industry. Again, thanks for everyone’s time today, and we will talk again next quarter.

Operator, Operator

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.