Earnings Call Transcript - KMX Q1 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 FY '22 KMX Earnings Release Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Stacy Frole. Thank you. Please go ahead.

Stacy Frole, Investor Relations

Thank you, Shelby. Good morning. Thank you for joining our fiscal '22 first quarter earnings conference call. I'm here today with Bill Nash, our President and CEO; Enrique Mayor-Mora, our Senior Vice President and CFO; and Jon Daniels, our Senior Vice President, CAF Operations. Let me remind you, our statements today 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 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 Form 8-K issued this morning and its annual report on Form 10-K for the fiscal year ended February 28, 2021, 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, CEO

Great. Thank you, Stacy. Good morning, everyone, and thanks for joining us. As you read in our earnings release this morning, we delivered exceptional performance in the first quarter with record results across all aspects of our business, retail, wholesale and auto finance and a solid flow-through to EPS. Our success reflects the continued progress we are making in our digital transformation and online experience, along with solid execution and our ongoing commitment to disciplined cost management. In addition, we benefited from the backdrop of a strong demand environment, enhanced by the impact of the most recent round of government stimulus payments. For the first quarter of FY '22, our diversified business model delivered sales of $7.7 billion, up 138% compared with the first quarter of FY '21 and net earnings per diluted share of $2.63, up $2.60 from a year ago. This also represents increases of 43% and 65%, respectively, from the previous record set in the first quarter of FY '20. Across our retail and wholesale channels, we sold approximately 452,000 cars, up 128% versus the first quarter last year and a 31% increase on a two-year basis from the first quarter of FY '20. We also bought 236% more cars in the first quarter of this year versus last year and 77% more compared with two years ago. As many of you know, for the past several years, our priorities in investments have focused on building an unmatched experience with a leading e-commerce platform that integrates seamlessly with our best-in-class in-store experience. The result has been a massive organizational transformation that includes building a comprehensive set of digital and hybrid processes to accommodate our customers in whatever way they want to interact with us. Our progress in executing this strategy has given us a very solid start to FY '22 and we remain confident in our long-term targets announced at our recent Analyst Day of 2 million retail and wholesale combined units sold per year and $33 billion of revenue by FY '26. In our retail business, total unit sales in the first quarter were up 101% and used unit comps were up 99% versus the first quarter last year. Compared with the first quarter of FY '20, total retail unit sales were up 21% and same-store comps were up 16%. In addition to strong unit sales, we reported $2,205 of retail gross profit per used unit for the quarter, up $268 versus a year ago and in line with the first quarter of FY '20. Given the strong demand environment for used autos and inventory constraints throughout the automotive industry, we pulled back on the expanded pricing test we introduced in the fourth quarter, we will continue to monitor macro factors and pricing elasticity and we'll adjust our pricing accordingly to maximize unit sales and profitability. For wholesale, our units sold were up 187% compared with last year's first quarter and were up 50% when compared with the first quarter of FY '20. Wholesale gross profit per unit increased to $1,025 compared with $978 for the same period last year and was in line with the first quarter of FY '20. The strength in wholesale was primarily driven by the introduction of our instant online appraisal offering, which we rolled out nationwide on carmax.com in February after launching on edmonds.com last year. We also benefited from significant appreciation of used autos in the broader market. CarMax Auto Finance, or CAF, continued to deliver solid results with income of $242 million. In addition, CAF and our partner lenders delivered strong conversion in all credit tiers. Jon will give you some more details on that coming up here shortly. Overall, we're extremely pleased with our performance, but we know there are opportunities to be even better. For example, on the operational front, inventory available for sale was below targeted levels throughout the entire first quarter. These lower levels are the result of recent demand and the temporary COVID and weather-impacted production slowdown we experienced in the fourth quarter. Remember, the fourth quarter is the time when we are ramping production ahead of the peak demand tax refund season. Our teams have done an amazing job producing inventory in the first quarter, and we expect inventory to continue to increase as we add additional production capacity at existing locations. Now, I'll turn the call over to Enrique, who will provide more information on our first quarter financial performance, and then Jon will share additional detail around customer financing.

Enrique Mayor-Mora, CFO

Thanks, Bill, and good morning, everyone. Together with the strong gross profit growth in retail and wholesale Bill just discussed, other gross profits increased to $142 million, up $111 million from last year's first quarter. This increase was driven by EPP growth of $61 million or 83%, driven primarily by retail sales growth and a stable penetration rate above 60%. Service growth of $42 million or 125%, driven by labor leverage due to our strong sales performance and prior year company support pay; and an improvement in third-party finance fees of $6 million or 57% due to our renegotiated fee structure and changes in tier penetration, partially offset by increased sales. Relative to the first quarter of fiscal year 2020, other gross profit grew $22 million or 18%. This was primarily due to volume-related growth in EPP and the benefit from our renegotiated third-party finance fees, partially offset by service deleverage. On the SG&A front, expenses for the first quarter increased to $554 million, up 71% from our COVID-impacted quarter a year ago. Robust sales in the first quarter, along with disciplined cost management, delivered strong leverage with SG&A as a percent of gross profit of 59.9%, down from 91.7% in the prior year's first quarter. The increase in SG&A dollars over the last year was primarily driven by a $108 million increase in compensation and benefits, which was primarily the result of comping over COVID-related payroll reductions last year, along with an increase in variable costs due to higher volume and in headcount as we continue to invest in our growth initiatives. Compensation leveraged by 25.8 percentage points versus last year, a $38 million increase in advertising expense driven by our previously communicated investment in advertising spend to amplify the CarMax brand, build awareness of our omni-channel offerings and drive customer acquisition. This year's increase was also impacted by reductions in last year's spend due to the pandemic. Marketing leveraged by 1.9 percentage points versus last year and a $79 million increase in other overhead due to comparing against the $40 million Takata settlement benefit recognized in last year's quarter. Our continued investments to advance our technology platforms and strategic initiatives and comping over pandemic-related reductions last year. SG&A as a percent of gross profit was comparable with the first quarter of fiscal year 2020. 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. For example, our CECs are a significant differentiator for us and an area of opportunity. In the first quarter, our CECs continued their year-over-year gains in efficiency and effectiveness through automation, data-driven algorithms and smart routing that ensures customers get the right support. We are very bullish about our future, given the strength and trajectory of our current business and the opportunities to expand into the broader used auto ecosystem. We recognize that we have an opportunity to capitalize on our leadership position to grow market share and deliver long-term shareholder value. Our approach to capital allocation is aligned with this belief and is supported by the significant amount of cash our diversified business model generates. First, we continue to focus on our core business by aggressively investing in the digital capabilities required to enhance our omni-channel experience, vehicle and customer acquisition, and the strategic expansion of our store footprint. Of particular note this quarter was the very strong ROI we are experiencing in vehicle acquisition, primarily through our instant online appraisal offerings. Second, we will deploy capital to pursue new growth opportunities through investments, partnerships and acquisitions. On June 1, we completed our acquisition of Edmunds. We are confident this transaction will create significant shareholder value over time. Additionally, of note on the P&L this quarter, other income increased $29 million when compared with the same period last year primarily due to a $22 million unrealized gain on an investment. As we've noted in the past, we have a portfolio of relatively modest investments across the used auto ecosystem. Finally, we will continue to return excess capital back to our shareholders. During the quarter, we repurchased approximately 1 million shares for $125 million. We have $1.21 billion remaining in current authorizations. Now I'd like to turn the call over to Jon.

Jon Daniels, Senior Vice President, CAF Operations

Thanks, Enrique, and good morning, everybody. Once again, the finance business has delivered outstanding results. For the first quarter, CAF's penetration net of free-day payoffs was 43.7% compared with 36.1% a year ago. Tier 2 decreased to 22.8% of used unit sales compared with 28.5% last year. Tier 3 accounted for 10% compared with 14.5% a year ago. You will recall in the first quarter of FY '21, at the beginning of the pandemic, we leveraged our long-term relationships and routed a portion of CAF's Tier 1 volume and all of the allocated Tier 3 volume to our Tier 2 and Tier 3 partners, which explains much of this year-over-year shift in tier mix. Note, this was done as a temporary measure, which limited CAF's origination volume while preserving the high quality of the portfolio. By the end of the second quarter last year, we've returned to our normal routing procedures. During this first quarter, CAF's net loans originated was $2.5 billion, marking the largest single origination quarter in CAF's history and the first quarter above $2 billion. The weighted average contract rate charged to new customers was 9%, up from 8.4% a year ago and 8.5% in the fourth quarter. Similar to the fourth quarter, this year-over-year difference in APR is a result of the credit mix of customers rather than an increase in the rate charged. Regarding the portfolio, the overall interest margin increased to 6.9% versus 5.9% in the same period last year as the strength of our ABS program continues to yield significant benefits in the form of lower funding costs. CAF income for the quarter was $242 million, up from $51 million a year ago. This significant year-over-year increase comes as a result of a substantial improvement in the required provision for loan losses, stronger net interest margin and higher receivables. Total interest margin in the quarter increased by $47 million or 24%, driven by the growth in originations and lower cost of funds. With respect to our provision for loan losses, in the first quarter, we experienced $7.2 million in net credit loss or 21 basis points of average managed receivables. As a percentage of the portfolio, this is the lowest reported loss we have experienced in over 20 years. The resulting favorability versus our expectations, coupled with the corresponding adjustment in our outlook for future losses, resulted in $24 million of income related to the provision in the first quarter. This is compared to a $122 million provision expense in the same period last year. This release of reserves resulted in an ending reserve balance of $380 million for the first quarter or 2.62% of managed receivables, which is a decrease from the 2.97% and at the end of the fourth quarter. Our reserve as a percentage of managed receivables has continued to trend downward towards more historical levels as our customers remain persistent in their willingness and ability to make their auto payment despite the uncertain environment. We believe this current adjustment effectively captures the positive loss performance we have seen over the past four quarters and is appropriate for the current macroeconomic environment. Finally, as previously mentioned, CAF increased its percent of Tier 3 volume to 10% by the end of the first quarter. This adjustment had a minimal impact on the reserve within the quarter, but as the higher volume continues to flow into the portfolio over subsequent quarters, we expect income and the provision to increase accordingly. With regard to where CAF will participate in the credit spectrum in the future, as always, we will continue to evaluate the lending environment and will consider future adjustments if and when we believe those changes are sustainable and in the best interest of our long-term business goals. Now I'll turn the call back over to Bill.

Bill Nash, CEO

Great. Thank you, Jon and Enrique. As I said at our Analyst Day in May, we are proud of the work our teams have done to put CarMax in the excellent position we're in today, and we are really excited about the tremendous opportunities ahead of us. Our multiyear investment in omni-channel experience has further enhanced our offering, which is the most customer-centric experience within the used auto industry. We are agnostic about how our customers shop and buy because we are positioned to give every customer a world-class buying experience regardless of how they shop with us. In turn, this gives us access to the largest addressable market within the states. In the first quarter, approximately 8% of our retail unit sales were online. As a reminder, when a customer completes all four of the major transactional activities remotely, so that's reserving the vehicle; financing the vehicle, if that's needed, trading in or opting out of a trade-in; and creating a sales order. We consider this an online retail sale. Because all our wholesale auctions were made virtual this quarter, 100% of wholesale sales, which represents 18% of total revenue, are considered online transactions. As a result, total revenue coming from online transactions was 24% in the first quarter. Omni sales represented approximately 56% of retail unit sales, up from 51% last quarter. As a reminder, omni sales or retail sales where customers complete at least one of those major transactional activities remotely, while all of our customers can buy a car online with assistance, we have been focused on providing a 100% self-service experience. Today, 40% of our retail customers can independently complete an online sale, up from 25% at the end of the fourth quarter. We expect to have this capability available to most customers by the end of the second quarter. We continue to leverage digital innovations to drive growth with our online instant appraisal offerings where customers can receive an online offer on their car in less than two minutes and have payment in hand the same day. In the first quarter, we bought approximately 163,000 vehicles through these online offerings, which represent 48% of our total buys from consumers. And since rolling out nationwide at the end of last quarter, we believe we have become the largest online buyer of used autos from consumers in the U.S. This is a significant competitive advantage that allows us to efficiently source vehicles, especially during periods of high demand, enabling us to remain competitively priced while producing attractive GPUs. On the retail side, we're making our online experience faster by improving our finance approval and flow process. We're making it easier by enabling customers to request car transfers and then manage and track them all online. And we're empowering our customers by providing them with financing information across our entire inventory as the first step in their shopping journey. This gives our customers greater confidence they can afford the vehicle they select. As we expand access and further enhance digital aspects of our experience, we need to reinforce awareness of CarMax's new capabilities and their values to customers. Since launching our new brand campaign and Love Your Car Guarantee offerings at the end of last year, we've seen strong growth in the awareness of our omni-channel experience with both web traffic and Google search volumes continuing to increase. As digital adoption by consumers and dealers continues to grow, we'll keep building on our investments in omni, our proprietary technology stack and our strong brand reputation to maximize growth in our core businesses. We're also pursuing additional growth opportunities in the broader trillion-dollar-plus used auto ecosystem that leverage our capabilities and strength in the industry. As Enrique mentioned, we recently completed the acquisition of Edmunds, one of the most well-established and trusted online guides for automotive information and a recognized leader in digital car shopping innovations. Edmunds brings us closer to a broader set of consumers and brings us closer to dealers. Our teams are super excited and are continuing to collaborate on new products that will support Edmunds dealers partners and consumers. We see tremendous opportunity and we'll provide updates as we launch new offerings more broadly. In summary, this was truly an exceptional quarter, and we are absolutely excited for the future. Our results reflect strong and disciplined execution across our diversified business model and further validate our strategies to enable sustainable growth and meaningful long-term shareholder value creation. We remain focused on enhancing our online capabilities to deliver the most customer-centric offering in the market. We will continue to accelerate our growth and market share gains while also laying the groundwork for future initiatives and growth opportunities. Now we'll be happy to take your questions. Shelby?

Operator, Operator

First question is from Craig Kennison of Baird.

Craig Kennison, Analyst

Hey, good morning. Thanks for taking my question. Congratulations on the wholesale momentum. My question goes to the GPU. Did you mention that you pulled back on the GPU experiment in the hot market? Will you go back to experimentation once the market normalizes?

Bill Nash, CEO

Yes, great question. So yes, we did suspend it. And if you remember last quarter, in the fourth quarter, I talked about we're going to continue to be monitoring those macro factors. And as we monitor the macro factors, especially like the inventory constraints and the elasticity, it didn't make sense to continue to do that. As I said in my opening remarks, we will continue to monitor those macro factors, and we're very open to continuing to do some different things with pricing. I would tell you right now, I probably would say we wouldn't do it, but we'll reserve the right just as the quarter progresses. But either way, we'll be able to provide great GPUs above $2,000.

Operator, Operator

Your next question is from Sharon Zackfia of William Blair.

Sharon Zackfia, Analyst

Hi, good morning. Sorry if I missed this, but did you talk about what your customer sourcing ratio was in terms of the retail business for the quarter? And then as you're looking at the online purchases, which obviously have ramped really quickly, how are those – how is the GPU on the online appraisals kind of comparing to the in-person appraisals? Are you seeing those kind of be relatively similar? Or is there a variance that can narrow over time?

Bill Nash, CEO

Great question. So when I think about the total buys that we bought from consumers, it's about a 50-50 split between retail and wholesale. And that's both as you think about traditionally customers coming into the store and doing the appraisal, but that also is very similar to the online purchases. As far as the productivity of the online purchase versus the traditional in-store appraisals, they're both great and they're very similar, which again, is a huge benefit as we think about inventory sourcing and being able to manage GPUs, pricing, that kind of thing.

Operator, Operator

Your next question is from John Murphy of Bank of America.

John Murphy, Analyst

I have a follow-up question regarding the supply build. You acquired 341,000 vehicles from consumers this quarter, which is close to your peak of 345,000 in a single quarter. I'm interested in understanding your capacity to buy directly from consumers. Additionally, when do you anticipate a more natural easing of supply from both consumers and auctions? There are unusual activities happening, like Davis and Hertz purchasing cars at auctions, when they usually serve as sources and sellers. How much more can you purchase from consumers? How significant will this be moving forward? Lastly, when do you expect the currently erratic supply situation to normalize?

Bill Nash, CEO

Yes. We have been heavily focused on buying directly from consumers, and our investments in that area are starting to pay off. We've purchased over 340,000 cars from consumers, which represents a 236% increase and a 77% rise compared to fiscal year 2020. This is quite impressive. A significant part of this success is due to easier access for consumers through our online platform, but we are also seeing positive results from new customers visiting our stores for appraisals. We are optimistic about both avenues. Regarding supply, some unusual factors are at play, but as I mentioned in the fourth quarter, supply hasn't posed a challenge for us. While our saleable inventory is currently lower than desired, our total inventory aligns closely with fiscal year 2020 levels. The real issue is more about production. Our online offerings, combined with traditional appraisals, reduce our reliance on external supply. Concerning your question about when supply will stabilize, there are certainly some constraints due to various factors affecting the market, and we've observed demand from new car customers shifting to the used car market. It may take some time to resolve this situation; I believe we are looking at the latter part of the year for improvements. In the short term, I don’t anticipate significant changes in supply over the next few quarters. However, supply is not a major concern, as there are still numerous cars being bought and sold. If you are purchasing off-site, it may require a bit more effort, but overall, we are confident about our total inventory position.

Enrique Mayor-Mora, CFO

Yes, John, what I would say is the 163,000 cars that we bought through our instant online offers really exceeded our expectations. That has been extremely well received by customers. And I think it's a really good example of the investments we've been making in innovation to make sure we're at the forefront of the consumer's mind. And again, that's 163,000 cars through our online offer. And really, we just stood up that product a quarter ago. So, we're really, really pleased with that performance.

John Murphy, Analyst

Can that ever significantly drive the consumer source vehicles way above 50%? I mean, is that the direction you're heading? I'm just curious what that target might be.

Bill Nash, CEO

Yes, we aim to increase that target as much as we can. Historically, we've been in the 35% to 45% range for the last several years. However, for this quarter, we've exceeded that range, reaching between 45% and 50%. Our objective is to push that figure as high as possible, and we are very encouraged by what we're seeing.

Operator, Operator

Your next question is from Michael Montani of Evercore.

Michael Montani, Analyst

I wanted to ask about any thoughts you all may have on the pricing environment, both in terms of the wholesale side as well as the retail side? And what you might be seeing recently in your discussions with Manheim? It sounds like they might have just seen an inflection point where the pricing is at least starting to moderate. So I'd just love to get some incremental thoughts that you all may have. And then secondly, what does that mean for the business if we do see some moderation, what does that mean for retail and wholesale?

Bill Nash, CEO

Yes, good morning, Michael. That's a great question. You've been following us long enough to know that the current pricing environment is truly unprecedented. From January until now, we've seen an appreciation of $5,000 to $6,000, which is remarkable. Our average selling prices have increased by a couple of thousand dollars. From an acquisition standpoint, they have risen a bit more, though this was slightly offset by factors such as mix and age. I believe we are reaching an inflection point. If we examine the consumer price index, the gap between new cars and late-model used cars has definitely narrowed. While new car prices are increasing, they are not rising at the same pace as used car prices. This is fairly self-corrective, as we approach a scenario where late-model used car prices are nearing new car prices. I think we are getting close to that inflection point, which is positive because when the gap narrows, it's a challenge for used car purchases. Conversely, when the gap widens between used and new cars, it benefits used car sales. Overall, I consider this a positive development.

Operator, Operator

Your next question is from Brian Nagel of Oppenheimer.

Brian Nagel, Analyst

Nice quarter, congratulations. My question is a follow-up to the previous one regarding pricing, Bill. We've all heard about the unprecedented pricing environment for used cars. As we analyze these results across different areas of the business, was the pricing environment a benefit or a challenge for CarMax? Additionally, how should we approach this as we look towards the remainder of the year?

Bill Nash, CEO

Yes. Typically, that pricing environment would pose a challenge for the used car industry overall. However, this quarter, the limited availability of new cars led more customers to the used car market, which contributed to an increase in used car prices. It's difficult to separate those factors because new customers are entering the market and stimulus measures are driving demand. Therefore, the usual impact of significant price increases on used cars doesn't seem to apply in the same way. Moving forward, without some of that stimulus, I expect pricing dynamics will normalize. Regarding Michael's earlier point, if we are indeed seeing a downward trend, that would be a positive development.

Enrique Mayor-Mora, CFO

Yes. I think the other thing as well is that the diversity of our business model really allows us to perform in any kind of environment. So while pricing may be a headwind in some sense, it's a tailwind to other parts of our business. And you see that in our results, and you see that kind of from quarter-to-quarter in our results just that diversity that is unparalleled in the industry.

Bill Nash, CEO

Yes. And I think the other thing at play here is, look, we've been doing this long enough that whether you see rapid appreciation or rapid depreciation. I think the way that we manage our inventory, how we buy the data that we leverage and the technology that we leverage, I think it's certainly a competitive advantage.

Operator, Operator

Your next question is from Rick Nelson of Stephens.

Rick Nelson, Analyst

Thanks. So, we saw the reserve reversal this quarter, allowance now at 2.62% of receivables. Historically, I believe that number has been more in the 2% to 2.5% range for Tier 1. I guess how should we think about that allowance account and potential for more reversals?

Bill Nash, CEO

Yes. Appreciate the question, Rick. Yes, right on the mark, 2.62% is our reserve as a percentage of receivables right now. And correct. Historically, we have sustained at the 2% to 2.5% is our targeted range for our Tier 1 portfolio. Now bear in mind that 2.62% incorporates both Tier 1 and Tier 3 included in there. So if you were to back that out, you can see that we really are in the operating range that we've previously stated. And we've trended downward nicely since that. I think it's a pretty substantial move we've made since the end of Q4 to now. And obviously, that's a reflection of the great performance that we saw in the quarter. So going forward, we think 2.62% is a really solid number for us across both the Tier 1 and Tier 3 portfolio, and we'll see how the customer performs in the future.

Operator, Operator

Your next question is from John Healy of Northcoast.

John Healy, Analyst

I wanted to ask a little bit about the SG&A levels. I know you've talked about a variety of investments. And clearly, those are paying off right now. But I wanted to get your view on kind of the traditional ad campaigns that you've launched? I know you've done the things with the NBA and some new television and I think radio ads. How do you feel about that spend? Is it still as effective as it once was? Are you happy with it right now? And do you see that continuing to be a big part of the SG&A as we go into next year? Or maybe should we expect some recalibration on that front?

Bill Nash, CEO

Yes, John. Let me start by discussing the effectiveness of our advertising spend. We're very pleased with it. For the quarter, our advertising expenses were actually lower than the guidance we provided for this year. I see this as a timing issue. We remain dedicated to advertising in a manner that prioritizes return on investment. Our results show that we experienced a record number of hits to our website this quarter, averaging 34.5 million, which is a significant increase from any previous records. We're also seeing web visits rise by about 60% year-over-year and approximately 40% when compared to fiscal year 2020. Google searches have experienced double-digit growth. We are very optimistic about the new initiatives we are implementing and how we are enhancing the omni-channel experience for consumers. However, I want to emphasize that this is not just a one-quarter achievement. We need to keep this momentum going, and we are committed to ongoing spending. Enrique, do you have any additional thoughts regarding SG&A?

Enrique Mayor-Mora, CFO

Yes, absolutely. If you take a look at advertising, we communicated last quarter and in our Analyst Day, we intend on spending more. And what we said was, we're going to spend this year on a per unit basis, pretty much what we spent in the back half of last year, which was a ramp-up in expense. And so, if you take a look at that and you compare it to two years ago, in FY '20, certainly a more normalized year. We're looking at an increase of over 40% on a per unit basis in our advertising costs, which is consistent with what we've communicated. But just to give you some context and perspective on how we think of the importance and more importantly, of the returns that we're getting from our advertising spend.

Operator, Operator

Next question is from Rajat Gupta of JPMorgan.

Rajat Gupta, Analyst

Congratulations on the strong sprint. I have a question about the pricing you mentioned earlier and how it might be starting to impact demand. Could you provide some insights on the progression through the quarter, specifically in March, April, and May, comparing it to 2019 levels? Additionally, any details on how the trend has been in the first few weeks of June would be appreciated.

Bill Nash, CEO

Yes, Rajat. So, we're pleased with the whole entire quarter. I mean when we talk about looking back to FY '20, don't forget the first quarter in FY '20 was a 9.5% comp and we're comping 16% on top of that. And we saw strong growth in every month of the quarter. And I've talked about it on the last call how March was a new record month for us. April was also a record month as it relates to April. May was also a record month as it relates to May. So we're very pleased with the strong performance throughout there. And we're very pleased with the performance as we enter into the new quarter. I'll tell you, I'll be excited to get to the second quarter because if you remember last year, we had a positive comp in the second quarter. And I'm going to knock on wood that we don't have to keep talking back to FY '20 because it's a lot of numbers to remember. But we'll certainly at the end of the second quarter talk more about that quarter, but we feel great about how the quarter started.

Operator, Operator

Your next question is from Scot Ciccarelli of RBC Capital Markets.

Scot Ciccarelli, Analyst

Good morning, guys. It's Scot Ciccarelli. So given the dynamics that we're seeing in the used vehicle market, obviously, the category is very hot, and you were more aggressive posture in vehicle purchasing activity. Can you shorten your reconditioning process further to improve throughput or maybe add more day capacity? Because, Bill, when I'm listening to you, it sounds like your own production capabilities may have limited some of your inventory offerings, and thus, your sales performance.

Bill Nash, CEO

Yes, Scot, you're absolutely right. Our inventory level right now is below target for the entire quarter, probably 40% lower than where we would like to be. In a normal environment, having that much less inventory is certainly a challenge. I believe it was a challenge, but it wasn't to the extent we would typically see, considering the overall market conditions. It really comes down to production. We usually build ahead of time to prepare, but we weren’t able to do that. Our operations team is doing an excellent job, and we are adding additional capacity in our existing facilities, so I expect that to continue to increase. One area we've focused on for improving efficiency is our flow production, and we have just completed rolling out the next version of it. We anticipate being able to achieve more throughput with our existing facilities and resources, which is exciting and will continue to benefit us. In line with our long-term goals, we will also be adding more capacity moving forward. So yes, it is fair to say that inventory was a challenge for us, but it's not due to supply issues; rather, it's more related to production. I must commend our operations team for not just meeting demand but also building upon it. If you look at our inventory recently, you’ll see that we are starting to increase it again.

Scot Ciccarelli, Analyst

So how long does it take to recondition, let's call it, an average car today? And where could that potentially go? Like can you knock off a significant amount of time? Or you just kind of you're pretty close to where you're optimized.

Bill Nash, CEO

I believe we can improve further to refer to a traditional car. It's important to note that the time required also varies based on the mix of vehicles; older vehicles generally take longer than newer ones. When considering the overall cycle time, which is the period until the car is ready for work, it typically ranges between 5 and 10 days, depending on the vehicle. Some vehicles can be done in significantly less time, and we have specific phases in production that we measure in minutes. However, I see this as an opportunity for improvement. With our new flow production system, we're already starting to experience increased throughput, which is encouraging.

Operator, Operator

Your next question is from Chris Bottiglieri of Exane BNP Paribas.

Chris Bottiglieri, Analyst

Thank you for taking the question. Strong quarter. I had a quick question on the GPU. So, it sounds like you pulled back on the price investments, the customer sourcing mix is as high as I've ever seen it. It sounds like used pricing was a tailwind to GPUs. I don't know if that's true or if you can confirm that. But were there any offsets like is it just costing work to recondition cars this environment or like anything that would mitigate some of these tailwinds on GPU that could speak to?

Bill Nash, CEO

For us, the pricing of used cars doesn't really boost our GPU. Our margins aren't influenced by vehicle prices; we consider many other factors. Therefore, it's not a significant advantage for us as it may be for others. Looking ahead, increasing our self-sufficiency will certainly benefit us. Our prices are very competitive, and I believe they are as competitive as ever. I am optimistic about our direction, our pricing, and our ability to deliver top-notch GPU for retail cars while maintaining very competitive prices.

Operator, Operator

Your final question is from Seth Basham of Wedbush.

Seth Basham, Analyst

Thanks a lot and good morning. My question is on the mix of sales that were purchased online, 8% this quarter versus 5% last quarter. Is that solely due to the increased eligibility of customers being able to buy entirely online? Or are there other factors? And as you get to 100% rollout of eligibility would you expect that metric to move up closer to 20%?

Bill Nash, CEO

The increase from 5% to 8% was influenced by geographic expansion and enhanced capabilities. I anticipate that figure will keep rising. I apologize for the confusion; you were inquiring about total online sales, not just self-service. Online sales actually increased from 25% to 40%. I expect this number to keep increasing as we introduce more features. The primary focus will be on enhancing self-service elements, specifically making transfers and trade-ins simpler and more seamless.

Enrique Mayor-Mora, CFO

We certainly expect that percent of sales and percent of revenues from online to go up. But at the same time, the beauty of our business model is that it's really up to the consumer and of omni, right? So to the degree the consumer wants to buy online, they can do that and more and more so. To the degree they want to come into the store and shop that way, they can do that as well. We expect the numbers to go up. But again, it's really going to be driven by the consumers and how they want to interact with us, whether it's in-store or online.

Bill Nash, CEO

Yes.

David Whiston, Analyst

Thanks. Good morning. I wanted to revisit the Edmunds acquisition. To be honest, I'm still not completely clear on the reasoning behind it. I understand there are benefits to vertical integration, particularly in procurement and retail. However, there are competitors of CarMax that pay Edmunds for lead generation. How are you ensuring that they still receive fair treatment, as otherwise, they may not want to do business with Edmunds, while CarMax is receiving preferential treatment? Could you clarify this for me?

Bill Nash, CEO

Yes. So again, we're thrilled to complete the acquisition as are the teams on both sides. As a reminder, they are that premium brand for automotive research. We're going to continue to operate them as a separate brand and a separate company. And we're excited to work with them to continue to drive more of the services for their consumers and their dealers and their OEM partners. We're going to invest in their brand, but we're also excited about the teams continuing to collaborate and progress on programs that help both companies and a great example of that is the instant offers. We developed that with them, initially rolled it out on Edmunds, and then we have it on carmax.com. And we think there's a lot of opportunity there with still and we think there's a lot of opportunity on content. So I think it's very important that we keep the Company separate, and we keep making sure that they're continuing to add value to their individual customers. And I think we can do both. And then as we continue to develop things jointly together that benefit both companies, we'll continue to highlight those in the future.

Enrique Mayor-Mora, CFO

No, we don't really talk about our investments. As I mentioned, we have a portfolio of relatively modest investments across the used auto ecosystem, primarily to ensure that we understand what is happening in that space. We had a significant gain this quarter on one of those investments, but we don't disclose which companies we're investing in.

Operator, Operator

There are no other questions in queue. I'd like to turn the call back to Bill for any closing remarks.

Bill Nash, CEO

Great. Thank you, Shelby. Well, hopefully, you guys can tell from our comments that we're extremely pleased with the first quarter results and that we are very excited about the future. And it's not just about the opportunities that come with having this largest total addressable market in the used auto retail, but it's also the opportunities that exist in our other core businesses. So if you think wholesale, you think CAF, and then even going beyond that into this larger auto ecosystem. And all of it is supported by the tremendous transformation, whether it's our omni-channel experiences, whether it's our proprietary tech stack, it's data or some of the other offerings that we highlighted on today's call. I want to thank you for your questions today. I want to thank you for your continued support; and as always, I want to thank our associates for their continued dedication of living our values, taking care of each other, taking care of our customers and communities. They are truly the success of CarMax. So we look forward to truly the success of CarMax. So we look forward to talking again next quarter. Thank you for your time.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.