Earnings Call Transcript - KMX Q2 2021

Operator, Operator

Good morning. My name is Carol, and I will be your conference operator today. At this time, I would like to welcome everyone to the CarMax Fiscal 2021 Second 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 Stacy Frole, Vice President, Investor Relations.

Stacy Frole, Vice President, Investor Relations

Thank you. Good morning and thank you for joining our fiscal 2021 second quarter earnings conference call. I'm here today with Bill Nash, our President and CEO; Tom Reedy, our Executive Vice President of Finance; Enrique Mayor-Mora, our Senior Vice President and CFO; and Jon Daniels, our Senior Vice President, CAF operations. Let me remind you that our comments 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 29, 2020, 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. I also would like to thank you in advance for asking only one question and getting back in the queue for more follow-up. Lastly, I want to take a moment to personally thank Celeste Gunther, who is retiring from CarMax. Celeste has been an integral part of our IR program for almost 20 years, and I'm sure you will all agree, she'll be deeply missed. Celeste, we wish you all the joy and happiness retirement can bring. Bill?

Bill Nash, President and CEO

Great. Thank you, Stacy. Good morning, everyone, and thanks for joining us. As you read in our earnings release this morning, we delivered a record quarter with sales up 3.3% to $5.37 billion, net earnings up 27% to $297 million, and EPS up 27.9% to $1.79. This performance was the result of strength across all aspects of our business: retail, wholesale, and CAF. We are proud to be the nation's largest and most profitable retailer of used cars. I'm also proud to say that this quarter we completed the rollout of our omni-channel offerings. This has been years in the making and has required a remarkable level of focus and change across our entire organization. During this time, we have evolved nearly every aspect of our business. From how we support and interact with our customers to how we structure our staffing to how we buy, sell and deliver cars. Our omni-channel experience is built to provide a personalized multichannel experience that empowers customers to buy a car on their terms. It is designed as a world-class in-store experience, a world-class online experience, and a seamless integration of the two, giving us the largest addressable market within the used car industry. No other used car retailer is in the position to deliver this iconic customer experience the way we can. Now turning to our results. For the second quarter, we achieved a 3.9% increase in total used units sold and a used unit comp growth of 1.2%. In June, we experienced a high-single-digit negative used unit comp which was more than offset by positive comps in both July and August. The improvement in sales was the result of a variety of factors, including solid execution in operations, finance, and marketing, in addition to a strengthening used car sales environment. In the quarter, we saw solid growth in web traffic, averaging approximately 29 million visits per month to carmax.com. During the second quarter, our saleable inventory was below our targeted level as we saw a rapid increase in demand from the first quarter. For the past three months, our teams have done a phenomenal job buying and producing vehicles at record levels, increasing salable inventory by more than 50% in the quarter. Today, I'm pleased to report that we've successfully ramped inventory to targeted levels, providing customers with more than 55,000 vehicles nationwide, the largest of any used car retailer. We offer a broad selection of inventory with a focus on zero to 10-year-old vehicles. This quarter, we saw 5 to 10-year-old vehicles increased to 27% compared with 22% last year as a percentage of our sales mix, reflecting customer demand for older and less expensive vehicles. Gross profit per used unit for the quarter was $2,214, up $31 per unit from a year ago. For wholesale, performance was supported by strong appreciation in the market and excellent execution by our teams. Volume was up 5.1%, driven by one more auction date in the quarter and a record buy rate. We also achieved record gross profit per wholesale unit of $1,086 in the quarter, the result of strong appreciation and operational execution. By the end of the quarter, we saw depreciation return to the marketplace. As a reminder, all auctions continue to run virtually throughout the quarter. As our results show, we have achieved a substantial recovery in our business. Over the past several months, our talented workforce has demonstrated incredible agility and ability to drive change in one of the most challenging environments that we've ever faced. We are proud to say that by the end of July, our team was back together again and we no longer had associates on furlough. We are now actively hiring across the country as we continue to grow our core business, enhance our omni-channel offerings, and pursue new opportunities. At this point, I'd like to turn the call over to Enrique to provide more information on our second quarter financial performance, and Tom who will provide additional detail around customer financing. Enrique?

Enrique Mayor-Mora, Senior Vice President and CFO

Thanks, Bill, and good morning, everyone. For the quarter, other gross profit increased $6.8 million or 5.8%. EPP profits grew by $6.1 million or 5.4%, largely due to the increase in used units sold. In the quarter, we also recognized $8.2 million in extended service plan profit-sharing revenues compared with $6.5 million recognized a year ago. In the second quarter, we maintained our ESP penetration above 60% compared with the prior year's quarter. Service profits increased $4.5 million or 31%, which benefited primarily from the improved sales growth and the employee retention tax credit from the CARES Act. The increase in EPP and service profits were partially offset by a $5 million increase in net third-party finance fees attributable to a shift in our sales mix by finance channel. On the SG&A front, expenses increased 2% to approximately $9 million to $490 million. SG&A per used unit was $2,256, a year-over-year leverage of $44 per unit on the quarter. Excluding the impact of stock-based compensation, SG&A leverage was $97 a unit. Notable SG&A expense drivers for the second quarter were: the opening of 14 stores since the beginning of the second quarter of last year, which represents a 7% growth in our store base; a $12 million or $53 per unit increase in share-based compensation expense; a 7.7% increase in advertising expense and continued spending to advance our technology platforms and support our core and omni-channel strategic initiatives. Our ability to leverage SG&A in the quarter was supported by the decisive actions we took at the start of the pandemic to appropriately manage costs in a challenging environment. We furloughed associates and froze hiring for a period of time, rightsized certain functions, aligned other overhead costs to the business, and paused our store expansion strategy, thereby reducing preopening costs in the quarter. We also experienced year-over-year favorability in the quarter due to lower self-insured loss and litigation-related expenses. We remain committed to ensuring we are efficient in our spending, and we expect that targeted areas of focus will continue to deliver improvements over time. Examples of these areas include improving the efficiencies of our customer experience centers or CECs, strategic sourcing, and inventory production. At the same time, we are very bullish about our future given our unique customer offering. We recognize that we have an opportunity to capitalize on our current position and grow market share. Accordingly, we remain in a period of investment as we continue to evolve our omni experience in the areas of vehicle and customer acquisition. We also plan to increase our year-over-year spending in marketing in the back half of this year, which Bill will address shortly. From a capital allocation perspective, we remain focused on growing the business while managing with the appropriate amount of caution given the uncertainty that remains in the macro environment. Two key updates. First, we are ready to resume store growth and are currently planning for 8 to 10 new stores in FY '22. And second, subsequent to the end of the quarter, we fully paid down the outstanding balance on our revolver. Given the turnaround in our business, the strength of the credit markets and our solid balance sheet, we are confident that we have the appropriate liquidity and access to capital. Finally, we ended the quarter modestly below our historical leverage target of 35% to 45% adjusted debt-to-capital when netting out cash. I'll now turn the call over to Tom.

Tom Reedy, Executive Vice President of Finance

Thanks, Enrique, and good morning, everybody. Similar to our retail and wholesale business, CarMax Auto Finance and our partner lenders delivered strong conversion in all credit tiers, and solid growth in CAF income independent of the favorable loss experience. As we previously discussed, CAF made some temporary underwriting adjustments early in the pandemic, with the goal of ensuring a financeable Tier 1 portfolio. While we remain cautious in our outlook, we are pleased with the trends we have experienced to date. Payment extensions are down significantly, delinquencies are trending favorably, and our July ABS transaction was well received. Consequently, in the back half of the quarter, we began originating our normal spectrum of Tier 1 business. CAF also curtailed its in-house Tier 3 lending at the start of the pandemic and did not originate any loans through this channel in the second quarter. Based on the trends I just mentioned, we have reengaged in the Tier 3 space in recent weeks. Now I'll turn to performance in the quarter. Net of 3-day payoffs, they were significantly lower year-over-year. Cash penetration was 42.6% compared with 42.2% a year ago. Tier 2 accounted for 22.3% of used unit sales compared with 19.7% last year. And Tier 3 was up to 11.1% compared with 9.6% a year ago. Year-over-year, cash net loans originated grew by 1% to $1.8 billion as the increases in used cars sold and penetration rate were somewhat offset by a lower average amount financed. For loans originated during the quarter, the weighted average contract rate charged to customers was 8.2%, down from 8.6% a year ago and 8.4% in the first quarter. The lower rate reflects our focus on a higher-quality portfolio for much of the quarter. Portfolio interest margin as a percent of average managed receivables increased to 6% versus 5.7% in Q2 last year. Combined with our growth in receivables, this drove an increase in total interest margin of 7.4%, independent of any favorability in the provision for loan losses. Total CAF income for the quarter was up 29% to $147.2 million. This improvement primarily reflected a reduced loan loss provision, plus the increase in both interest margin and average managed receivables. The provision for loan losses was $26 million in Q2, which results in an ending reserve balance of $433 million. That's 3.2% of average managed receivables, which is moderately lower than at the end of Q1. While its loss experience in June, July, and August was significantly favorable to the expectations we set at the end of Q1. The loss reserve continues to reflect the unpredictability of the current environment in the highly uncertain consumer situation. Our results in Q2 illustrate the importance of having a diverse group of lenders that can continually deliver high-quality finance offers to our broad range of customers in all economic environments. In addition, having a fully functioning captive finance such as CAF offers numerous contributions to the business model that are difficult to replicate. Now I'll turn the call back over to Bill.

Bill Nash, President and CEO

Great. Thank you, Tom and Enrique. As I mentioned earlier, we have completed the rollout of our omni-channel offering. The powerful integration of our online and in-person experiences gives us the largest addressable market within the used car industry. Along with the ability to buy online, customers are also seeking experienced guidance along the way. We are uniquely capable of providing this help whenever and wherever the customers want with our centralized CECs, experienced floor sales consultants, and personalized e-commerce capabilities. Buying a used car is still a highly considered and complex purchase. Customers don't want to be forced to interact 100% in-store or 100% online. Our competitive advantage is giving customers the option to seamlessly do as much or as little online and in-person as they want. While omni is now rolled out nationwide, it is still early in its evolution, and we will continue to make enhancements to meet and exceed our customers' current and future needs. One area of focus is our CECs. And although a relatively new capability for us and still maturing, they are quickly becoming more effective than our previous model. An example of how we are optimizing performance is by leveraging our data advantage and machine learning to ensure we get the right work to the right associate at the right time. We capture our customers' online interactions, combine them with the information in our customers' data mark, and provide a truly personalized experience that is much more effective in meeting the customer needs and improving our conversion rates. We believe that we have an unmatched opportunity to create a superior customer experience by leveraging our data and technology advantages, both online and in-store. Digital merchandising is another area of continuous improvement. By the end of this year, we will have rolled out approximately 95% of our photo studios, which provide a more immersive experience with high-quality photos, 360-degree interior and exterior views, feature scoring hotspots and reconditioning with new part call outs. We also continue to upgrade content on our website to help customers fully research a vehicle without ever having to leave carmax.com. All this provides our customers more confidence as they progress online. The other omni area of focus that I will highlight is our customer hub, which provides customers a means to track the progress they have made, both online and in-person. It is here that customers can manage certain aspects of their car-buying journey. They can bookmark and save vehicles they've selected online. They can submit financing pre-approval and compare their financing options. They can also get an estimate or an actual offer for their trade-in. And finally, they can complete the checkout process in the hub for the car they selected online or in-store and choose if they want a home delivery or a curbside pickup. Our omni-channel experience has been well received. Approximately 70% of our customers interacted with our CECs this quarter. Additionally, approximately 50% of our customers progressed their sale remotely, up from about 42% pre-COVID. Most of these customers still chose to come to the store to complete their transaction, and approximately 30% of our customers still opted for an in-store experience only. Again, the advantage of our business model is that customers have the choice as to how they progress their experience. This is what gives us the largest addressable market. We are focused on driving customer engagement strategies to ensure we continue to remain top of mind and the first choice for car buyers and sellers. We launched a national marketing campaign last year, which has reinforced the strength of our brand and established a solid platform for future campaigns. We've now introduced our omni-channel offering nationwide. Accordingly, as we go forward, our messaging will focus on clearly differentiating our brand from digital-only and traditional dealer brands by demonstrating the benefits of our omni-channel offering. Additionally, we will be increasing our year-over-year marketing spend in the back half of the year to expand our teams and investments in areas such as SEO, SEM, messaging, content, and social. Our goal is to drive high ROI customers to our digital properties while empowering us to create multichannel personalized campaigns. We have a unique retail customer experience that we are continuing to evolve to exceed our customers' expectations. At the same time, we are identifying and investing in new initiatives that we believe will also be solid contributors to our earnings growth. All of this leads to a very exciting future, but none of this would be possible without our great associates. I want to recognize all of them and the high-performance culture they maintain here at CarMax, a culture that values all individuals and perspectives. Over the past several years, we have taken on the largest transformation in our company's history, evolving nearly every aspect of our business. We also accomplished all these great results in one of the most challenging environments we've ever faced. And through it all, our associates have continued to live our values every day by putting people first and taking care of each other. I am very proud of what we've accomplished, and I'm excited about the opportunities ahead. At this time, we'll be happy to take your questions.

Operator, Operator

Our first question this morning comes from John Murphy from Bank of America. Please go ahead.

John Murphy, Analyst

Great execution in this environment, it's really impressive stuff. Bill, there's one statement in the press release that is kind of intriguing. You're saying inventory was a headwind to sales in the quarter. I'm just curious if you could expand upon that, if you think that will be relieved here in the near term, it sounds like in September, it was to some degree, but also as all these omni-channel efforts bear fruit and bring customers in, how do you think about sort of the change in inventory management as your addressable market grows dramatically, and do you need to inventory more or think about inventory in a different way than you have historically?

Bill Nash, President and CEO

Yes. Thank you, John. Well, first of all, I think omni or not omni, it won't change how we manage our inventory. I think it's one of the strengths of the Company that we've fine-tuned over the last 27 years, and we continue. And I can't say enough about the team. I mean, bumping up our inventory during the quarter about 50% is truly tremendous. And I think in any normal environment, having that amount of inventory shortage would be a significant headwind to sales. Now having said that, we're far from a normal environment, and I think it's hard to quantify the exact degree of how much it impacted our sales other than it absolutely had an impact on sales. But in the COVID environment, there are a lot of other competitors that were light on inventory. You had some stimulus money out there, so it's hard to know kind of what the offsets were to that headwind. But again, I'd just go back to saying that the team has done a remarkable job both buying and producing to get us into the spot where we are today. We ended the quarter. We were still light on inventory when we ended the quarter. But as of today, we feel really good about our total inventory position.

John Murphy, Analyst

Okay. And just one quick follow-up. In the future, as omni-channel expands, do you think you'll need to increase your inventories, or will you just be more efficient with them? I'm trying to understand whether inventory might go up by 10%, 20%, 30%, 40%, or even 50% as these efforts progress, or if you will simply manage inventory more efficiently.

Bill Nash, President and CEO

Yes. I mean, we went down the omni path because we expect this. This is a better customer experience, and we expect to sell more cars. And if we're selling more cars, that will also be reflected in our inventory; we'll have more inventory. So, and I think that's the way we've managed the business for the last 27 years. I don't see that deviating, so as we have more sales, we'll have more inventory.

Operator, Operator

Our next question comes from Sharon Zackfia from William Blair. Please go ahead.

Sharon Zackfia, Analyst

I guess a question on customer awareness of omni-channel. So, I'm glad to hear you're going to be bulking up the marketing around that, and that can happen in the fiscal year. But do you have any measures as to what kind of broader customer awareness is nationally versus maybe Atlanta where you started? And then a corollary question that adds as the tail. Given this is a long purchase cycle, in those early markets, do you continue to see that tail of omni-channel relative to kind of the more recent markets where you've rolled it out, if that makes sense?

Bill Nash, President and CEO

Yes, Sharon, I believe now is the perfect time to inform customers that everything great about CarMax is still intact, but we have introduced many new capabilities. We haven’t fully leveraged this aspect yet, although we have run some marketing campaigns. I can't provide specific details about national awareness of our omni-channel offerings, but that's one reason we plan to increase our advertising moving forward. Regarding our older markets, such as Atlanta, we feel optimistic about the gains we are seeing there and the awareness generated, as it has been established longer. I believe our advertising message will evolve to clearly highlight the differences between us and traditional dealers as well as online competitors.

Sharon Zackfia, Analyst

Bill, just a follow-up. How quickly are we going to see the new marketing?

Bill Nash, President and CEO

You will see it later this year.

Operator, Operator

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

Craig Kennison, Analyst

Celeste, best wishes to you. Thanks for all your support. Question on the wholesale business. Wholesale GPU was up $174. How much of that is a byproduct of higher prices versus a lower cost to process the vehicle? And then to what extent has the pivot to digital auctions increased the number of buyers at auction from like a broader geographic radius?

Bill Nash, President and CEO

Wholesale performance was outstanding and much of it was driven by the appreciation in vehicle values. During the onset of COVID, we experienced rapid depreciation followed by a swift appreciation. From the lowest point of COVID, there was likely a $3,000 to $4,000 increase in vehicle value, which certainly acted as a tailwind. However, I also want to acknowledge the excellent execution of our teams. Early in the quarter, there was a supply constraint due to traditional auctions being closed. Our team adapted quickly, and all of our sales have been conducted virtually. We are navigating local mandates to determine when we can reopen physical locations. Our goal is to resume physical operations while also integrating simulcasts as we launch new auctions. In terms of digital impact, I believe digital will significantly enhance the overall experience by attracting more participants to our auctions. More attendees can potentially drive prices higher, allowing us to offer a broader price range. We are particularly proud of our record buy rate this quarter, which increased significantly. Recently, we have been in the low 30s for buy rates, and this quarter we reached the high 30s, marking a substantial improvement.

Operator, Operator

Our next question comes from Seth Basham from Wedbush Securities. Please go ahead.

Seth Basham, Analyst

Can you give us a little bit more color on your gross profit per unit on the retail side through the quarter? How that trended? And what your outlook is as it relates to that?

Bill Nash, President and CEO

Yes. I think the GPU was fairly consistent throughout the whole quarter. I mean, I think we've been able to prove that we can manage in all different types of environments, the GPU. And I don't see any reason going forward that we wouldn't be able to continue into that traditional range. But I always give the caveat that we continue to test and check pricing elasticity because we want to make sure that we're driving the most total gross profit dollars. So I think as you look forward, I don't see a reason why we can't maintain those GPUs.

Seth Basham, Analyst

That's helpful. And as a follow-up, you mentioned some efforts around strategic sorting. Could you provide some more color on what you're referencing there?

Bill Nash, President and CEO

Yes. So I think, first and foremost, we want to accelerate and prove in our core buying channel. So that's both off-site and the in-store appraised lane. And the way I would think about that is it's not only our processes but leveraging data and technology better. And I think that's important because we're the largest buyer of used cars in the U.S., and we value more than 6 million cars on an annual basis. So continuing to make incremental changes there is significant. We also want to open up some new buying channels and expand our capabilities with some of our partnerships and other businesses. And then I think another area that I kind of put into the vehicle acquisition bucket is, we will continue to invest in our wholesale business. We're working on a new auction platform. The auction platform has been here since I started CarMax. And it's time to upgrade that. So the way we think about it is on a bunch of different fronts.

Operator, Operator

Our next question comes from Scott Ciccarelli from RBC Capital. Please go ahead.

Scott Ciccarelli, Analyst

Bill, I know you said you feel great about your performance in Atlanta and some of the older markets, but can you help quantify the usage of your omni-channel capabilities in markets where you've had that capability for a few quarters? And then I guess related to that, is there any way to size the overall sales lift that you think omni generated for you in the quarter?

Bill Nash, President and CEO

Yes. First of all, Scott, I think the incrementality of omni is really difficult to measure. Because you can't say, okay, well, you measure it just by who has it delivered to the home or who's in the store because we have lots of instances where customers that are coming to us anyway. They start online and they decide to have a home delivery or folks that come to us now because, 'Hey, I want it delivered to my home, I want everything online' and end up coming into the store. I think for us, obviously, rolling this out is because we believe that this is a superior model to deliver to the customer. And at the end of the day, it's all about sales and market share. But I'd tell you, along the way, the most important thing is us measuring the customer experience, no matter how they want it. So we'll be looking at different metrics, the CEC engagement, online progression, in-store only customers, alternative delivery customers, but we'll really be focused on the experience of those customers and how they feel about that, and we'll continue to move that needle. And everything that we've seen, whether it's in older markets or newer markets that we rolled this out, is being very well received. And this is despite having some just inherent headwinds, and I would go back to the CECs. They're immature. We have a lot of new folks there. We have new technology. And while we expected customers to migrate to this, we did not expect them to migrate as quickly. So in this quarter, we had more leads than we could actually handle in our CECs at certain times. So that's a headwind. And I think there's probably some experiences that we can improve on that customer experience as well. So again, we feel great about where we are today. And while it's the end of the rollout of omni, we really think about this as kind of like day 1. This is where we're just getting started, and this is kind of where we springboard to the future.

Operator, Operator

Our next question comes from Brian Nagel from Oppenheimer. Please go ahead.

Brian Nagel, Analyst

First off, congratulations Celeste and thank you for all your help over the years, it's much appreciated. My question is for you, Bill, and I want to take a broader perspective. Firstly, congratulations on the execution in such a challenging environment; you're doing really well. However, I hear your partner mentioning that you're nearing a turning point in the COVID crisis and will start to leverage a lot of the omni-channel investments made. So, if you take a step back and look at the overall environment, how would you describe the current consumer demand and its dynamics moving forward compared to the pre-COVID period?

Bill Nash, President and CEO

Yes, it's Brian. That's a challenging question to answer. There's still significant uncertainty in the market. We have high unemployment and rising COVID cases. It's an election year, which could complicate things further. Additionally, we are facing ongoing social issues. However, if you consider the latter half of the quarter, particularly the performance in July and August and how that has continued into September, we feel positive about our position amidst these uncertainties. Of course, there might be some fluctuations due to various macro factors, but we focus on the long-term outlook rather than just the next quarter. Overall, I feel confident about where we are now, and we will continue to make progress.

Brian Nagel, Analyst

If I could just ask a quick follow-up, Stacy, I think you may have touched on this. I know you usually don’t discuss quarterly trends, but how is the business performing early in fiscal Q3 or in September compared to the last couple of months of Q2?

Bill Nash, President and CEO

Yes, you're right, Brian. I don't like discussing these trends. However, I believe it's relevant in the current environment, and I hope we can move past needing to talk about the environment, which would indicate improvements. For September, we are seeing the same positive trends as in July and August, which is encouraging given the ongoing challenges. Overall, we feel confident about this.

Operator, Operator

Our next question comes from Michael Montani from Evercore. Please go ahead.

Michael Montani, Analyst

I wanted to follow up on the digital process a bit more. I have three parts to my question. First, can you provide an update on remote appraisals and share the capabilities there along with any future upgrades? Second, previously, Bill, you've mentioned that about one out of ten multichannel transactions were home delivery. Could you give us an update on how that is trending? Lastly, it was mentioned that 70% of transactions were multichannel, so I'm curious how that percentage compares in more mature markets versus those that have recently gained these capabilities.

Bill Nash, President and CEO

Okay, Michael. Regarding remote appraisals, as I mentioned earlier, when using our customer hub to purchase a car and have it delivered to your home, we provide the option for either an estimate or an appraisal. We are currently testing instant cash offers in select markets and plan to expand that in the near future. Concerning the home delivery statistic, the way I've described it previously is through alternative delivery, which includes both curbside pickup and home delivery. In the first quarter, we observed an increase, finishing just under 10%. We are still below that 10%, as most customers, while moving online, still prefer to visit the store. Regarding the 70% of customers engaging with the CEC, this does not indicate that all are progressing online; that’s the distinct 50% figure I provided earlier. Comparing this to older markets, we continue to see growth; that 70% has increased from over 60% in the first quarter. This growth is partly due to the completion of our rollout, and I expect this trend to continue as customers seek a more personalized experience.

Operator, Operator

Our next question comes from Rajat Gupta from JPMorgan. Please go ahead.

Rajat Gupta, Analyst

You mentioned an increase in marketing expenses during the second half of the fiscal year. Could you provide details or an estimate of how much these expenses might rise? Additionally, what should we consider as the normalized expense per unit moving forward? I have a follow-up question.

Bill Nash, President and CEO

Yes. Yes, you're right. I said it will be going up in the second half of the year. But I think the way to think about that is in the context of overall SG&A. And we've said in the past, hey, look, it's going to take 5% to 8% comps to leverage. We've picked up some efficiencies in SG&A. We absolutely expect to reinvest those back into the business. So even with the step-up, I worry less about what the advertising cost per car is, and more about in this context of the SG&A. Even with the step-up, we still would expect on an annual basis to leverage at that 5% to 8% comps. Keep in mind, in any given quarter it can dramatically swing.

Enrique Mayor-Mora, Senior Vice President and CFO

I'll just add that during the pandemic, we took prompt actions to reduce our cost structure. As the business has improved, we've reinstated much of that operational spending. However, we did implement some structural changes in staffing and operations that we anticipate will provide savings going forward. We're also concentrating on efficiency and our customer engagement centers. That said, we are in a growth and investment phase. I view those savings we are targeting as being partially redirected towards higher return on investment and our strategic investments that align with our growth plan. Therefore, the savings will support our growth. As Bill mentioned, the best way to understand this is by considering our expectation of leveraging with the same 5% to 8% comparable sales growth communicated previously.

Bill Nash, President and CEO

Yes. I would say we have efficiency savings throughout the company. It's not just related to store operations or customer experience centers. There are also improvements in logistics and wholesale operations. All of these areas create opportunities for savings and reinvestments in SG&A and cost of goods sold. It's not limited to a couple of specific areas; it's a company-wide effort.

Rajat Gupta, Analyst

Got it. And just on the SG&A, more of a housekeeping item. The other overhead costs of $65 million, I mean that seems to be tracking well below normalized levels, is there still some catch-up to be had there here in the next quarter? Just curious as to if there were any permanent reductions there? Or how should we think about that going forward?

Enrique Mayor-Mora, Senior Vice President and CFO

Yes. I think the way to think about that is roughly half of that favorability year-over-year reduced specifically to the cost-cutting efforts we undertook as well as certain spending limitations given the environment. But we reduced contractor spend our pre-open spend, relocation spend. And so those are cost-cutting efforts. The other half is what I mentioned in my prepared remarks, was about higher self-insured loss last year and litigation last year versus this year. So again, half kind of cost-cutting, the other half, I would view more as a one-time.

Rajat Gupta, Analyst

Understood. Just to clarify, is the 5% to 8% comment you made something that will be applied moving forward? I'm curious when that might decrease to a lower level. Should we expect that rate for the next 12 to 18 or even 24 months? I'm interested in how we should view that leverage declining.

Enrique Mayor-Mora, Senior Vice President and CFO

Yes. I would think of that as an annualized number moving forward. Again, from quarter to quarter, there's so much that can happen within a quarter. So I would view that, again, moving forward, at least the next 12 months is how we're viewing the business.

Bill Nash, President and CEO

Yes. I want to emphasize that if our sole focus this year were on omni, then our guidance of 5% to 8% would have been lower because it requires less effort. However, as Enrique mentioned, we are currently in investment mode. We are making investments that will benefit different areas of the business. For instance, enhancements in wholesale may not directly enhance the leverage on our retail cost per car sold, but they will improve wholesaling, which will ultimately provide benefits to both the top and bottom line of the Company. This is another key point to keep in mind during our discussion.

Operator, Operator

Our next question comes from Rick Nelson from Stephens. Please go ahead.

Rick Nelson, Analyst

A quick question for Tom, related to CAF. Last quarter, you talked about an expected loss rate of 2% to 2.5%. If I look at this quarter's provision, $26 million, that represent 1.4% of receivables originated. Charge-off rate was below historical norms, curious about the expectation as we push forward.

Tom Reedy, Executive Vice President of Finance

Let me provide some additional insights on the loss provision. We previously mentioned that our income has been significantly boosted by a lower loss provision of $26 million, compared to $45.5 million last year. This indicates approximately $55 million in extra reserves for the originations during this quarter, as well as $30 million from favorable developments tied to loss performance and economic adjustment factors. It's worth noting that economic adjustment factors have moderated the impact of our strong loss performance on the provision amount. Although our loss performance was considerably better than what we forecasted at the end of Q1, it justified a release of some reserves. However, as I highlighted in my earlier comments, the overall allowance of 3.2% still accounts for uncertainties in the economy and consumer behavior. Regarding our target range, we're unable to change the existing portfolio, but we've observed improved performance. We're optimistic about the capital markets and our financing capabilities. In our latest deal, we observed a significant spread between APR and the cost of funds, one of the highest in recent times. This spread allows us to maintain a good return even in a slightly higher loss environment. Considering all these factors, we feel comfortable operating a bit above the 2% to 2.5% range for a while, given the current circumstances. We believe investing that money offers better returns than giving away profits to others at this time.

Rick Nelson, Analyst

Got you, okay. That's helpful. Then I think 6% this quarter haven't seen that since 2016. Any spread targets as we push forward?

Tom Reedy, Executive Vice President of Finance

It's hard to say. The 6% expansion we observed this quarter was primarily due to a decrease in funding costs. When examining the rates we charge customers, our objective is to remain competitive as a market lender and not to upset anyone regarding the offers they receive from CAF. During the quarter, we felt there was no need to lower APRs. As I've mentioned before, we will consider this moving forward. If the competitive landscape allows us to maintain those margins, we will do so. If competition becomes more aggressive and the market requires lower margins in the finance sector, we will adapt accordingly. However, at this moment, we are confident in our current position.

Operator, Operator

Our next question comes from David Whiston from Morningstar. Please go ahead.

David Whiston, Analyst

Question about used gross margins per unit, which increased by 50 basis points because dollar profit remained relatively stable even though average selling prices decreased. How could average selling prices drop despite higher auction prices? Were you more self-sufficient during the quarter?

Bill Nash, President and CEO

Yes. So it's a great question. So the ASPs went down. The reason they primarily went down is because of that mix shift that I cited earlier, where we sold a higher percentage of older vehicles. So that takes it down. Acquisition price was fairly flat. I think there's a lot of inventory that we bought during the quarter that hasn't necessarily sold that is a little bit more expensive. But the main driver of what you see there is the mix shift in age.

David Whiston, Analyst

Okay. And then is it fair then that you're probably not going to assume that's going to be a long-term trend, especially if they can get better?

Bill Nash, President and CEO

The mix shift, look, I mean, the beauty of the business is, we'll have out there whatever our customers are demanding. So if the customers want old or less expensive cars, then we're going to make sure we put them out there. So that's all driven by customer demand.

Operator, Operator

Our next question comes from Michael Montani from Evercore. Please go ahead.

Michael Montani, Analyst

I have two questions. Firstly, I would like to know if you could provide any additional insights regarding roll rates, the effects of forbearance, government programs, and deferrals on the credit side. Overall, what is your perspective on CAF? Secondly, I have a brief follow-up question.

Bill Nash, President and CEO

To address the quality of the quarter from a CAF perspective concerning losses, we felt it was a strong quarter. It's important to highlight the improved losses during this period. There are a couple of reasons for this: First, in Q1, we experienced unfavorable losses, while in Q2, we saw favorable results, indicating some shifts took place. Regarding payment deferrals, we effectively provided relief to our customers, which was particularly beneficial earlier in the quarter. We eventually returned to regular practices, but that relief helped lower delinquency and avoid losses. Additionally, the federal stimulus during the quarter provided financial support to our customers, enabling them to pay their bills, and there were also fewer spending opportunities available. This likely contributed positively to our loss performance, although we recognize it's somewhat speculative. Looking ahead, it's challenging to predict the future regarding roll rates due to existing uncertainties. Overall, we felt confident that we managed our customer relations well this quarter, and we're pleased with our current numbers. From a reserve viewpoint, that uncertainty is mirrored in our reserve adjustments. Overall, it was a positive quarter in terms of losses.

Michael Montani, Analyst

Great. So that's helpful color. And then just the other main question I'm getting before and during this call today is around market share. I've had folks who are a bit concerned because there's some other smaller competitors that might be growing faster. And the data we've seen from Cox is really showing that over the summer, the industry contracted like a mid- to high single-digit rate. But I guess I'm curious to know kind of what you all would be using to gauge that as well? How do you see that unfolding into the back half of the year as we think about some of the multichannel capability set?

Bill Nash, President and CEO

Yes. We previously mentioned how our sales in the first quarter were significantly affected by the volume we handle in our stores and the occupancy restrictions we faced. We had to adapt our operating models, focusing on appointment-only services and curbside pickup. While we assess market share annually, the primary aim of our omnichannel strategy is to enhance customer experience, ultimately increasing market share, regardless of external macro factors. We will keep moving forward. I am extremely proud of the team’s performance; going from negative 40-plus comparisons in one quarter to achieving record earnings in the next is commendable, especially given that we are still managing occupancy restrictions in about half of our stores, most operating at 50% capacity. The stores have excelled under these constraints, and although it becomes challenging with lower capacity, I am optimistic about our position. Overall, I believe we have a solid foundation to continue increasing our sales and market share.

Operator, Operator

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

Chris Bottiglieri, Analyst

I wanted to ask more about the store opening plan for 2022. I guess it's a little bit below trend. I would imagine it's probably the environment, but could just remind us what kind of goes into opening a store, what's the timeline, how long will that takes? And maybe just more directly, is this the new cadence of store openings we should expect beyond 2022? Or is this just product environment. Then I have a follow-up.

Bill Nash, President and CEO

Yes. Chris, I think the way you should think about this is it's more a factor of just ramp time. We were going to open up 13 stores this year. We've been opening up 13 to 16 for several years. The plan was to open up 13. But just given where we are this year and what it takes to start ramping, that number is more reflective of construction timing than anything else. So I wouldn't, at this point, read into that.

Chris Bottiglieri, Analyst

Okay. That's helpful. Can you remind us how preopening works? You're not opening stores right now, but it affects other overhead for the next several quarters. What is a good rule of thumb for preopening expenses per store? It would be helpful to understand the impact of not opening any stores unless you provide that information.

Enrique Mayor-Mora, Senior Vice President and CFO

Yes, those costs will start rolling in a good three to four months before a store opens in a material way. And I would say on average preopening cost is going to roll about $1 million, $1.5 million, but that will be spread out again over that time period.

Operator, Operator

This concludes our question-and-answer session. And I will now turn the call back over to Bill Nash for closing remarks.

Bill Nash, President and CEO

Thank you, Carol. Well, listen, thanks for joining the call today and for your questions and your support. We are definitely confident in our ability to seamlessly merge our world-class in-person experience with our world-class online experience, along with our diversified business model, we'll continue to pursue earnings and market share gains for many years to come. I just need to thank again all of our associates. They are the reason that we remain a disruptive force within the used car industry. And finally, I've got to give a shout out to Celeste as well and best wishes to her. She's been here for a long time, knows CarMax better than anybody that I know. So she will absolutely be missed, but I wish her well. So again, thank you for your time today, and we will talk again next quarter.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you once more for participating, and you may now disconnect.