Thank you for standing by. Welcome to the Fourth Quarter Fiscal Year 2022 CarMax Earnings Release Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. David Lowenstein, AVP, Investor Relations. Please go ahead, sir.

Thank you, Jess. Good morning. Thank you for joining our fiscal 2022 fourth quarter earnings conference call. I am 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, CarMax Auto Finance 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 in 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?

Great. Thank you, David. Good morning, everyone and thanks for joining us. For the fourth quarter of FY ‘22, our diversified business model delivered total sales of $7.7 billion, up 49% compared with last year’s fourth quarter, driven by growth in average selling prices and wholesale volume gains partially offset by a decline in used units sold. Net earnings was $159.8 million for the fourth quarter and $1.2 billion for the fiscal year. Fourth quarter net earnings per diluted share was $0.98, down 23% from a year ago. During our call in December, we shared that we were pleased with our sales performance at the start of the fourth quarter. However, we began to see pressure after the holidays that continued through the end of the quarter. In our retail business, total unit sales in the fourth quarter declined 5.2% and used unit comps were down 6.5% versus the fourth quarter last year. We believe several macro factors weighed on market-wide used car sales, including consumer confidence, vehicle affordability, the Omicron COVID surge and lapping stimulus benefits paid in the prior year period. While the fourth quarter used market was challenging, we are extremely proud of our accomplishments for fiscal 2022 and we believe we are well positioned for continued long-term success across our retail and wholesale business and CarMax Auto Finance. Our full year results reflect significant growth in sales, market share and earnings as well as a solid progress on our strategic initiatives. In fact, our retail market share growth this past year was the highest it’s been during my tenure as CEO and is a reflection of our focus on delivering the most customer-centric experience in the industry. Our market share data indicates that our nationwide share of 0 to 10-year-old vehicles grew 13% from 3.5% in calendar 2020 to 4.0% in 2021. Despite posting a decline in sales during our fiscal fourth quarter, comparing our results to published used vehicle SAAR data suggest that we continued to take share during the quarter. We believe we are well-positioned to deliver profitable market share gains in any environment. Across our retail and wholesale channels, we sold approximately 343,000 cars in total during the fourth quarter, up 11% versus last year’s period. For the fiscal year, we sold approximately 1.6 million retail and wholesale cars combined, up 38% year-over-year. We continue to be the nation’s largest buyer of vehicles from consumers. We bought approximately 324,000 cars from consumers during the quarter, up 69% versus last year’s period. For the fiscal year, we bought approximately 1.4 million cars from consumers, up 95% year-over-year. Self-sufficiency continued to be strong during the fourth quarter, remaining above 70%. We reported fourth quarter retail gross profit per used unit of $2,195, up $109 per unit versus the prior year period. With used car prices remaining elevated, we chose to pass along some of our self-efficiency acquisition cost savings to consumers via lower prices. We believe we struck the right balance between covering inflationary cost, maintaining margin and keeping our vehicles more affordable. Our approach reflects our continuation of our commitment to doing what’s right for the customer, which ultimately drives the growth of our business. Wholesale unit sales were up 43.8% from the fourth quarter last year and gross profit per unit was $1,191 compared to $990 a year ago. The strength in wholesale units was primarily driven by the ongoing success of our instant online appraisal offering. Wholesale valuations remained historically high during the quarter, which supported margin relative to the fourth quarter last year. CarMax Auto Finance or CAF delivered income of $194 million, up from $188 million during the same period last year. In a few minutes, John will provide more detail on customer financing and CAF contributions, but at this point, I’d like to turn the call over to Enrique, who will provide more information on our fourth quarter financial performance. Enrique? Enrique Mayor-Mora: Thanks, Bill and good morning everyone. Total gross profit was $711 million, up 11% from last year’s fourth quarter. This increase was driven primarily by wholesale vehicle margin of $177 million, which was up 73%. The continued growth of the wholesale business is providing us with a strong gross profit lever. Used vehicle margin of $427 million was relatively flat over last year’s fourth quarter, with the decrease in units largely offset by an increase in margin per unit. Other gross profit was $107 million, down 4% from last year’s fourth quarter. This decrease reflected a $33 million decline in service profit primarily due to the deleverage driven by the reduction in sales and the staffing and efficiency impacts from the Omicron COVID surge in the fourth quarter. Our intent continues to be to operate service-as-a-profit center, which from quarter-to-quarter can be impacted by sales trends and staffing disruptions. Partially offsetting this decline was favorability in EPP and third-party finance fees as well as $20 million of margin contribution from admins. EPP grew by $6.3 million or 5% year-over-year for the quarter, with penetration stable at approximately 60%. This favorability was driven by an $11 million year-over-year net benefit from the recognition of profit sharing revenues and adjustments to our cancellation reserves. Recall from our second quarter call in September, one of our providers implemented a timing shift in their performance period for profit sharing revenues. All of our providers now utilize the same timing, which aligns recognition as applicable to our fourth quarter. Third-party finance fees improved by $4.7 million, with income of $1.8 million compared to a cost of $2.9 million last year. This improvement was driven by lower Tier 3 volume compared with last year’s fourth quarter. On the SG&A front, expenses for the fourth quarter increased to $621 million, up 23% from the prior year’s quarter due to continued investment in our strategic initiatives and in marketing, the consolidation of Edmunds and growth costs related to the increase in appraisal buys, new stores and customer support at our customer experience centers or CECs. SG&A as a percent of gross profit deleveraged to 87.3% from 79% during the fourth quarter last year. This deleverage was primarily due to the decline in sales that occurred in the quarter. The increase in SG&A dollars over last year was mainly due to three factors. First, a $43 million increase in total compensation and benefits driven by our continued strong ramp in staffing, including proactive staffing in anticipation of tax season and wage increases. Additionally, we had a $16 million increase in annual bonus-related compensation plus the inclusion of admin’s payroll this quarter versus a year ago. Partially offsetting this increase was a $42 million decrease in stock-based compensation. Second, a $40 million increase in other overhead. The primary drivers of this increase include investments to advance our technology platforms and strategic initiatives as well as growth-related costs. Third, a $19 million increase in advertising expense through our ongoing plan to drive customer acquisition and amplify the CarMax brand by continuing to build awareness of our omnichannel offerings. For the full year, SG&A as a percent of gross profit was 70.7%, leveraging approximately 1 point over last year’s percentage of 71.6%. Our approach to SG&A and costs heading into next year remains consistent. We will continue to invest in our business. At the same time, we remain committed to ensuring that we are efficient and effective in our spend and we continue to target areas of focus that we expect will deliver results over time. We expect to require an increase beyond the 5% to 8% range of gross profit growth to lever in FY ‘23. This is largely driven by the timing of strategic investments and growth-related costs as well as heightened inflationary pressures. While we expect to remain in investment mode over the next few years, we expect our leverage point to go back down after FY ‘23. Our capital allocation philosophy remains consistent. We will continue to invest in our core business, consider new growth opportunities through investments, partnerships or acquisitions and returned excess capital to our shareholders. In regard to our share repurchase program, we repurchased approximately 872,000 shares in the quarter for approximately $102 million. For the full year, we have repurchased approximately 4.5 million shares for $561.6 million, and as of March 31, 2022, we had $721.7 million of authorizations remaining. As communicated today, our Board of Directors has expanded our share repurchase authority by $2 billion with no expiration timeline. The Board’s authorization reflects CarMax’s ongoing commitment to long-term shareholder value creation through growth and return of capital. For capital expenditures, we anticipate approximately $500 million in FY ‘23. This increase in spend is driven by long-term growth capacity initiatives for our auction, sales and production facilities in addition to continued investments in technology. In FY ‘23, we plan to open 10 new locations, including our first 3 stores in the New York City metro market. Our extensive nationwide footprint and logistics network continue to be a competitive advantage for CarMax, and we remain committed to an appropriate level of investment on these differentiated assets. Now, I’d like to turn the call over to Jon.

Thanks, Enrique and good morning everyone. Our CarMax Auto Finance business delivered strong results once again. For the fourth quarter, CAF’s penetration net of 3-day payoffs was 41% compared with 43.5% last year. Tier 2 increased to 23.7% of used unit sales compared with 21% last year, and Tier 3 accounted for 6.7% of sales compared with 9.5% a year ago. Year-over-year reduction in CAF’s penetration is attributed to a larger percentage of customers coming in with outside financing. Our Tier 2 partners continue to provide highly competitive credit offers as they compete for additional volume within the Max channel. These strong offers, along with the decrease in conversion in the lower portion of the credit spectrum driven by higher average selling prices and corresponding monthly payments, contributed to the swap and penetration between Tiers 2 and 3. During this year’s fourth quarter, CAF’s net loans originated was nearly $2.1 billion. The weighted average contract rate charged to new customers was 8.2%, down from 8.5% a year ago and 8.3% in the third quarter. The difference in EPR is primarily a result of the credit mix of customers booking with CAF. CAF income for the quarter was $194 million, an increase of 3% or $6 million from the same period last year. Total interest margin increased $64 million, driven by $42 million in higher interest and fee income from our continued growth in receivables and $22 million in lower interest expense from the past ABS deals that continue to provide value over time. This improvement in CAF’s margin and the growth in average managed receivables more than offset a substantial increase in the provision for loan losses, which was a more normalized $54.4 million in the current year’s fourth quarter versus $4.6 million in the prior year’s fourth quarter. In the prior year’s fourth quarter, the provision for loan losses benefited from the continued reduction in the reserve that was established at the start of the COVID pandemic. The current quarter’s provision of $54 million resulted in an ending reserve balance of $433 million or 2.77% of managed receivables. This is largely consistent with the 2.75% at the end of the third quarter and includes a 3 basis point adjustment for additional Tier 2 and Tier 3 volume originated by CAF. I also want to take the opportunity to highlight a few of the accomplishments made since our last call regarding our online finance experience. As a reminder, nearly 2/3 of our customers begin their financing process on carmax.com, applying on any vehicle in our inventory or simply a requested dollar amount. Our unique finance-based shopping engine, available to most of our customers, allows for multiple lenders to decision a single customer or co-applicants on our entire inventory to provide a full suite of personalized decisions available at the consumer’s fingertips. This tool is incorporated into the search page within carmax.com, allowing the user to sort and filter not only on the vehicles characteristics, but also on important finance terms such as monthly payment and down payment. During the month of March, we further enhanced this experience and are now testing a no-impact-to-your-credit-score feature, along with the streamlined application process that provides real-time credit decisions on our full inventory. We believe that our differentiated multi-lender platform, coupled with these and additional enhancements that are on the horizon, will further strengthen our digital shopping experience. Now, I will turn the call back over to Bill.

Great. Thank you, Jon. Thank you, Enrique. As I mentioned earlier in this call, I am very proud of how we performed in fiscal 2022. We bought and sold more vehicles than ever before through our retail and wholesale platforms. We’ve continued to innovate, to aggressively invest in core areas of our business and to pursue new growth opportunities. As a result of these efforts, we’ve achieved double-digit year-over-year growth in our market share, and we believe we are well positioned to take even more share. We have continued to build out new and enhanced capabilities, and as those capabilities have come to market, we have continued to see positive returns. Some highlights from this year that will have a lasting impact are, first, enabling online self-progression capabilities currently available to approximately 90% of our customers with full availability for every customer anticipated by the end of this first quarter. Next, leveraging our online instant appraisal offering to buy a record number of cars directly from consumers, which enable us to nearly double our self-sufficiency as we drive – as well as drive sustainable wholesale unit growth. Also, transitioning CAF’s legacy auto loan receivable servicing system to brand new technology, which provides CAF a modernized foundation for growth and allows us to enhance our customer experience. And finally, rolling out the finance-based shopping capabilities that Jon just described, our e-commerce engine, combined with our unparalleled nationwide physical footprint, is a key value to our customers and helps us provide what we believe is the best experience in the used car industry. Our ability to offer seamless integration across digital and physical transactions gives us access to the largest total addressable market and is a key differentiator, one that we will continue to enhance. In regard to our fourth quarter online metrics, approximately 11% of retail unit sales were online, up from prior year’s quarter of 5%. Our wholesale auctions remain virtual, so 100% of wholesale sales, which represents 23% of total revenue, are considered online transactions. Total revenue resulting from online transactions was approximately 31%. This is up from 17% in last year’s fourth quarter. Approximately 55% of retail unit sales were omni sales this quarter, up from 51% in the prior year’s quarter. In the fourth quarter, we bought approximately 162,000 vehicles from customers through our online instant appraisal. That represents about half of our total buys from consumers. This fiscal year, we bought approximately 707,000 cars through this channel, again, representing roughly half of our total buys from consumers. Going forward, we will continue to evolve our online and in-store capabilities to enable a more seamless experience for our associates and customers. I would like to highlight 4 key areas of focus for FY ‘23. First, as John mentioned earlier, we are deploying a more sophisticated version of our finance-based shopping capability that enables real-time decisions and offers our customers the ability to pre-qualify for a loan with no impact to their credit score. Second, adding self-service capabilities to enhance in-store interactions, including appraisals and express pickups. Third, growing vehicle acquisition through attracting new customers and pursuing partnerships as we expand our appraisal offering to dealers and other businesses. And finally, continuing to leverage data science, automation and AI to improve efficiencies and effectiveness across our buying organization, business offices and CEC. Again, we are very proud of the strong results for fiscal ‘22 as they are in large part due to our relentless focus to provide our customers the best experience in the industry. We are in a strong position moving forward, and we will continue to invest and innovate to achieve profitable market share growth. During our Analyst Day last May, we announced long-term targets of achieving 2 million combined retail and wholesale units sold and $33 billion of revenue in FY ‘26, up from $1.2 million and $19 billion, respectively, during FY ‘21. Though we don’t anticipate updating our targets annually, our strong performance in FY ‘22 has given us a new perspective on these targets that we believe is appropriate to share at this time. We’re revising our FY ‘26 targets to reflect a range of 2 million to 2.4 million combined units with revenue between $33 billion and $45 billion. These ranges reflect the macro factors we had earlier that could result in ongoing volatility in consumer demand and vehicle pricing. In regard to market share, I’m excited for the future and confident that we will expand it beyond 5% by the end of calendar 2025. Last, but most importantly, I want to thank all of our associates for the work that they do. They are truly the keys to our success. Just yesterday, Fortune Magazine named CarMax as one of its 100 Best Companies to Work For for the 18th year in a row. I’m incredibly proud of this recognition as it is due to our associates’ commitment to supporting each other, our customers and our communities every day. I want to thank and congratulate all of our associates. With that, we will be happy to take your questions.

Thank you. [Operator Instructions] Your first question comes from Craig Kennison with Baird. Your line is open, sir. Please go ahead.

Good morning. Thanks for taking my question. I guess I’m curious about the online instant appraisal tool. Just a number of questions about that. How would you assess your competitive positioning and the competitive landscape in that market? How are you different? Are you putting enough marketing spend behind that effort while you have this competitive advantage? And then Bill, I think you mentioned plans for fiscal 2023 to roll this out to other dealers. Maybe you could shed some light on that?

Sure. Good morning, Craig. There is a lot in that question. So first of all, I feel really great about our IO success. I think it’s really been so successful because of a bunch of reasons. One, I think it’s really the experience and the ease of use of the product. I think it also has the backing and the brand recognition of CarMax, and I mean, let’s not forget, this is what we do. We’ve been buying cars from consumers since 1993. We have started advertising, obviously, for it. If I look at the fourth quarter and think about our advertising spend, we break it down between kind of brand awareness and acquisition awareness. I would tell you. The acquisition awareness, we spent a little bit more on vehicle acquisition awareness this past quarter than we have in previous quarters, so we feel good about the advertising. Now I think, obviously, I think everybody in the marketplace is benefiting a little bit from higher valuations, but I think that’s the minority of the bump that we’ve seen, so we’re excited about that. As far as my comments earlier, yes, look, first of all, we’re going to continue to improve that experience for our consumers. But we’re also – we’ve been testing and we will continue to roll this out to make it available to other dealers. It’s an easy way to get rid of inventory that they are looking to get rid of as well as we will look for other partnerships where we can leverage this.

Our next question comes from Sharon Zackfia with William Blair. Your line is open. Please go ahead.

Hi, good morning.

Good morning.

Thanks for all the color on the long-term plans. I’m sure everyone is interested in kind of how you can pivot in the current consumer environment, particularly with used car prices where they are. And you talked a little bit about kind of passing on some better prices to consumers in this quarter, but I’m wondering. First, I guess, if you have any kind of additional insight on how much stimulus might have benefited you in the year ago period, both in the fourth quarter and in March now that you’ve lapped that? If there was any distinct Omicron impact that was isolated to the fourth quarter? I think that would be helpful to know. And then just given where gas prices are and used car prices, are you seeing any kind of falloff in demand for SUVs? How are you pivoting for that? And then are you shipping average age of your inventory somewhat older to try to make the price points more affordable? I know there is a lot there, but I think it’s important to kind of cover all of that, sorry. It’s like a 12-part, one-part question.

Yes. That’s a creative way to get like 14 questions into the first one. But look, I’m happy to take all of them. So let me start, first of all, just on your – the last two, the gas prices. Look, for the quarter, we really didn’t see much of an impact on gas prices as far as a shift. If I look at gas guzzlers from a sales standpoint, very similar year-over-year. So I do think that’s an area that we need to continue to monitor as we go forward. We have seen an uptick, for example, in things like EV searches, and Edmunds has seen that as well. But we’ve certainly navigated that before and been very successful as consumers want something different. We’re right there for them. So I’m really not worried about that, and we will be able to pivot on that. Your question on average age of vehicles, we did – from a retail standpoint, we did see a shift to a little bit older car, which obviously is a little bit cheaper. I think the mix, if I’m looking at 0 to, let’s say, 0 to 4 year-over-year, I think there was about 10 points which changed from that bucket into the little bit higher, maybe the 5 to 7 bucket. So we have seen a little bit of shift there. And again, the beauty of our business is, as we see customers looking for different types of inventory, we make sure we get that inventory out there. So we feel good about that. As far as just commentary around the comps, look, I highlighted a whole bunch of different things that are macro factors that I think are weighing on the overall used car industry. If I had to rank in order of magnitude, and again, this is – it’s hard to exactly quantify each one. But I would probably say that the high prices are at the top of the list, followed by the COVID surge. We did see a COVID surge in January. And then I think coming out of the COVID surge, I think it kind of transitioned into this whole lower consumer confidence. And then I also think the lapping of the federal stimulus. There was some stimulus came out last December, January time frame, primarily more in January, and then there was even more stimulus coming out in March. So I think – that certainly weighed in on the quarter. And I think it’s also probably just adding to the softness as we look into the first quarter as well. How did I do it? Did I get all your questions?

Yes, I think so. I will get back in the queue. Thank you.

Alright. Thanks, Sharon.

Our next question comes from Rajat Gupta with JPMorgan. Your line is open. Please go ahead.

Great. Thanks for taking the question. Maybe just on the SG&A run rate, the $130 million in overhead cost, is that kind of like a good baseline to assume for that particular line item going forward? I’m just curious how does that toggle with any changes on the volume side, given things are a little weaker in the near-term? And then maybe if you could comment on CAF, given like the somewhat worsening affordability environment. How confident are you in terms of being able to pass through any benchmark rate increases or widening in ABS market? How confident you – in terms of you being able to pass that through to the consumer in this kind of environment? And if you’re not able to do that, how should we think about the implications to the CAF business? Thanks.

Yes. I’ll let Enrique talk about the SG&A. And then the CAF business, we will let Jon answer that, so. Enrique Mayor-Mora: Yes. So, Rajat, I want to make sure I understood your question. Are you talking specifically about other overhead or just over SG&A as a whole?

Other overhead. Enrique Mayor-Mora: Yes. So other overhead this quarter really was it’s a continuation of our investment in our technology spend and also costs related to growth. So you got to keep in mind the tremendous amount of cars that we’re buying through the A lane, to the appraisal lane, as well as an increase in our wholesale business. So I would say that was certainly up this quarter. I would expect it to continue to be up. I think taking a step back, though, in taking a look at overall SG&A and all its components. Heading into next year, we do expect, as I mentioned in my prepared remarks, to need in excess of the 5% to 8% growth in growth profit in order to lever, and that really has to do with the timing of our investments this year. We were successful in staffing the business up. As you recall at the beginning of the year, we had some staffing challenges and we ramped up that staffing throughout the year, and that will comp into next year. So really, when we look at that higher and 5% to 8% gross profit for next year, it’s driven primarily by that timing of that staffing investments that we need to continue to grow this business.

Yes. Rajat, I can take the affordability question. Appreciate that question. Yes, I think we’ve mentioned before in the kind of the non-CAF customer, lower credit spectrum customer, certainly, we feel affordability is maybe often price them out of the market. You can see that probably reflected in our Tier 3 percentage of sales. But if you look at the CAF customer, I think there is impact there as well. If I look at kind of the micro aspect here, customer last year was coming in purchasing a $20,000 car, maybe putting $1,000 down. Now they are coming in and they are financing $19,000 in that case, they are coming in and they are borrowing $28,000 and they – if they saw that same $1,000 down, they are asking for $27,000. CAF has a decision to make, as all lenders do, are they going to let that person borrow that much more money? So there is an affordability question there. I think what we are seeing is, in the case of CAF, and we will speak to our penetration this quarter CAF was not necessarily just allowing someone to borrow that $27,000. Potentially, their income didn’t increase at the same level as their requested amount. So there are other lenders out there that maybe were willing to provide that larger dollar amount, so that did affect our penetration. People are taking longer terms out there. Right now, you see a much higher prevalence of used car loans higher than 72 months. It’s clear, it’s marked year-over-year. CAF actually does not provide a loan greater than 72 months, even though people are trying to manage that affordability through term. That may or may not be the right decision for them, but CAF is exacerbating that. So I think there is a couple of things that affect the penetration and are clear impacts of affordability for the customer. The last thing to your point on rates, we clearly have seen a signaling that rates are going to go up. They have gone up initially. They are going to probably continue to go up this year. The back half of this quarter, CAF actually did do some price testing up. We’ve often shared where we will price test down or up randomly. We did a movement up this quarter. We did see that clearly impact our penetration, but we think it’s the right thing to do as we manage our margin. We think as prices go up, we will continue to do that testing, and we think other lenders will follow in kind or be compressed. So we will pass that along as we see fit. We want to remain highly competitive in the marketplace, but yes, we want to make sure that we’re managing margin as well. Enrique Mayor-Mora: And Rajat, just to expand a little bit on that SG&A. I think it’s important to remember as well that we’re focused on capturing the opportunities in our transforming and fragmented industry, right? So whether it’s the right time to invest for us, and whether there is periods of strong industry performance or more challenged industry performance like we faced in the fourth quarter, our goal is to take profitable market share, which as Bill talked about in his prepared remarks, we do believe in the fourth quarter, despite sales being down that we still have market share in our segment. And again, that is our objective as we continue to move forward, which means we’re going to continue to invest. It’s just a huge opportunity for us, and that’s where we’re going to continue.

I’ll take our next question from Brian Nagel with Oppenheimer. Your line is open. Please go ahead.

Hi. This is [indiscernible] on for Brian Nagel. Good morning.

Good morning.

So the question that we wanted to ask was on the nature of the deceleration in the used car business from fiscal Q3 to fiscal Q4. You talked about the factors previously. How should we think about the factor of declining consumer confidence? When did it come about in Q4? And how should we consider this dynamic into fiscal Q3?

Yes. I think, as I said earlier, consumer confidence was obviously one of the factors. I think we actually – right after we saw the COVID surge, I think as we’re kind of transitioning out of that, we started to see kind of just lack of consumer confidence. And I think that’s a very similar situation that we’re in right now, just for the reasons that we talked about. From an affordability standpoint, you’ve got interest rates going up. Inflation, you’ve got the Ukraine-Russia war. There is just a lot weighing on the consumer right now. So as far as when that turns around, I don’t know. But again, I think to Enrique’s point earlier, I mean, we’re going to continue to manage this. We’ve managed through cycles like this before, and we think we’re in a position to do it in a way that we can continue to gain market share.

We will go next to John Healy with Northcoast Research. Your line is open. Please go ahead.

Great. Bill, I just wanted to ask kind of a big picture question. You’re talking about affordability kind of being a headwind to the business, which makes sense. Which makes us all kind of realized that with higher rates, maybe values need to come lower. So maybe you could give us your thoughts in terms of the relationship between unit and ASP, and maybe how you think ASPs and the used car market kind of maybe fluctuate over the next 6 to 12 months? And with that, is there still a lot of confidence that you guys are going to protect GP potentially at the expense of same-store sales? And is the $2,100 GP kind of benchmark, in your view, achievable even in a kind of softening used car market where maybe values and what you have in inventory maybe are pressured a little bit?

Yes, good morning, John. Thanks for the question. First of all, the affordability, while you’re right, it’s a headwind for retail, it’s actually good for wholesale, as you saw our wholesale margins. And I think that’s one of the benefits of having the diversified business because as you saw, our GPU for wholesale was up. I think the unit ASP, if you’d ask me, probably 3 or 4 months ago, I would have said I was hoping later this year, we will see some relief. I’m just not sure. Especially given the war in Ukraine and Russia, I’m not sure new car supply is going to come around later this year, that’s to be determined. I think that’s a big factor that will help mitigate just some of the overall price inflation in both new and used cars. But what I will tell you is, though, to your question about GPU, I think that we’re in a great spot. I mean, if you look at the benefit we’ve got with self-sufficiency, and I talked a little bit about that, we – everybody is seeing inflationary pressure as well. The nice thing is we have a lever that’s offsetting those inflationary pressures. So if you didn’t have a lever offsetting inflationary pressures, that’s obviously going to be either cutting into your margin or it’s going to be raising your average selling prices. And then we still have benefit left over beyond that to pass along to the retail consumers. And I think our self-sufficiency benefits are still kind of maturing. I think there is more potential there and how we manage that and how we do our offers, that kind of thing. So as I think about the future, even if you get into a depreciating environment, which we have shown over time in a depreciating environment, we are still able to maintain very consistent GPUs. I think with self-sufficiency, I think with our diversified business which the CAF profit that can be generated wholesale – additional wholesale profit that can be generated I think we can maintain very good margins per unit as well as having great retail front prices. So I think we’re well positioned for however the market, if it’s going forward.

Great. Thank you, guys.

Thanks, John.

We will go next to Daniel Imbro with Stephens. Your line is open. Please go ahead.

Hey, thanks, guys. Wanted to ask one, just on the tax refund season, I mean, I think they started earlier this year and total dollars paid are actually up. Enrique, I think you mentioned you hired proactively ahead of tax season. So I’m curious, did you guys see the expected pickup maybe in transit as those got paid out? And have the trends you’ve seen as tax refunds got paid out changed your opinion of the underlying health of the consumer kind of as you look for the rest of fiscal ‘23 ahead of us?

Yes, Daniel. I think when I look at the tax season this year, I think it’s very representative of what we saw last year. Now remember, last year, it was a late tax season in comparison to what we normally see. So this year was – timing was very similar last year. I do think the refunds are a little bit higher this year versus last year. But I think the other complicating factor that you don’t have this year that you had last year was the stimulus that was paid out in January and March, so it’s really hard to decouple all that. I would just go back to my comments on the consumer confidence earlier, which is – which, I think, is – regardless of the kind of the tax season, I just think the consumer isn’t as strong a position as they were a year ago.

We will go next to Michael Montani with Evercore ISI. Your line is open. Please go ahead.

Hey there. Good morning and thanks for taking the question. I wanted to ask, if I could, on the capacity front. If you could just bring us up to speed now in terms of some of the incremental hires that you were looking to do and the ability to recondition the vehicles in light of some COVID disruptions, etcetera. Do you feel that you all are kind of appropriately staffed now, able to get kind of the full recon work through that you would have hoped for? So, that was kind of the first question.

Yes. So, we feel great about both our capacity, production capacity and our staffing at this point. Pretty much the whole year, first quarter, second quarter, third quarter, as I talked about trying to get staffing ramped up, I talked about lower inventory. And coming out of the third quarter, I had made comments. Look, we are well on our way to getting inventory to where we need to be. I don’t think inventory was necessarily a big topic for the fourth quarter. When I look at our inventory levels, I always look at it on a kind of a per average store, and have always been historically, on average, it’s about 320. We are not quite at the 320. But I would tell you, I don’t think it was a big story. I do feel like we have got the capacity we need. We obviously can – right, currently, we have – we can build more than 1 million cars a year. And the capital expenditures that Enrique talked about earlier, that’s all part of our natural planning process. As we look out to the future, we already have some production facilities we are working on, but these are additional production facilities. As well as just given the success of our wholesale business, we want to make sure that we can accommodate all the space. So really, it’s just us doing business as we normally do it. Enrique Mayor-Mora: Yes. From a CapEx perspective, we are really just matching our capacity to the longer term demand. And like Bill said, it’s just natural kind of steps we are taking, just being very thoughtful in our approach to capacity expansion to make sure that over time, we can meet the longer term targets that we have set out there.

Yes. I think the only difference in the capital expenditures, which Enrique has called out on a couple of different calls now, is just the stepped-up investment in technology. Just as a bigger percent of our overall CapEx spend. Enrique Mayor-Mora: Yes, it’s actually fairly interesting. And I talked about this on Analyst Day, but if you go back a few years, about 15% of our CapEx spend was on technology. And now that we have been transforming our business, as we look to this year and next year, we are looking at about 30% of our overall CapEx spend is related to technology, so certainly, not in the direction of becoming omni-channel retailer.

And then one of your major competitors did an acquisition in the wholesale channel recently. And I guess what I wanted to do is build on the comment you just made. So, do you feel that given the step-up in CapEx spend towards tech, and then given some of the alternative profit opportunities you have, do you think that there is enough in-house, or is there potentially an opportunity set to kind of bolster the core capabilities inorganically?

Are you talking about from a production capacity?

I think one is just on the wholesale business, right? You guys have done a great job this past year there. Is there an opportunity to potentially grow that platform even faster inorganically? And then also as it relates to the tech side, given the stepped-up investment in CapEx, is that kind of adequate, or potentially, is there some inorganic capabilities that you might be targeting as well?

Yes. No. Look, we feel great about the auction business. As you know, we continue to run that 100% virtual right now. When you think about the CapEx, your auction expense is a lot less than your overall production expense. Because production, you are building out facilities, they are expensive. Auctions you just essentially need space at this point. I mean there is some build out on some larger auction facilities, but – to hold this inventory. But we feel great about the plans and are very comfortable with how we have been operating, and the fact that we can continue to grow the wholesale business, really, at a quicker pace than just kind of along with the normal growth that it sees when it’s growing as we sell more retail cars.

We will go next to Seth Basham with Wedbush Securities. Your line is open. Please go ahead.

Thanks a lot and good morning. There has been a fair amount of talk about market share on this call. And I know you don’t measure market share on a quarterly basis, but in the fiscal fourth quarter, according to CAF, the used vehicle retail saw a decline 4%. Your unit sales on a retail basis declined more than that, so you would have lost market share. Can you please give us some sense as to, is that because you are protecting GPU, or are there other reasons why you might have lost market share in quarter?

Yes, Seth. When we look at market share and even in the fourth quarter, we had great market share growth, and we go off of Pulp data, which is title data. The reason we only look on an annual basis is because it was really like a two-month to three-month lag there. So, we are very confident that we gained not only market share for the whole year, but we gained not only market share for the whole year, but we gained it for the fourth quarter. And as my comment said earlier, we feel really, really good about market share gains in the first quarter despite what’s going on in the macro factors. And when I look at the market share, it doesn’t matter if you break it down zero to 4-year-old cars, 5 years to 7 years, 8 years to 10 years, we got double-digit growth in all those buckets. So, we feel great about it. And the other thing I would point out is that market share growth is primarily – it’s coming through comps. It’s not like we have opened a whole bunch of new markets, and that’s what’s driving the market share, which, again, we are excited about.

Got it. Okay. And then just a follow-up on the CAF business, if you don’t mind. Your loan loss provision was in a normal range, I guess you framed it, Jon. And as you think about the credit environment now and then going forward, we have seen deterioration. But from your perspective, you don’t expect any further deterioration, so there is no need to further increase your loan loss redos going forward?

Yes. Fair comments, Seth. Yes. No, I would say just point to our reserve-to-receivable ratio steady from last quarter to this quarter, we mentioned we felt like we were kind of returned to pre-pandemic levels. We think we are there. We feel really good about our reserve right now, and we have a good handle on the business. . So, if all things perform as we expect, really, the focal point on the future provision will be on the new originations. And then obviously, there is a mix of Tier 1, Tier 2, Tier 3 and the volume we originate, but I think we are pretty steady and in a good spot.

We will move next to Chris Bottiglieri of BNP Paribas. Your line is open. Please go ahead.

Yes. Thanks for taking the question. So, first question is on the EPP, obviously, that kind of true up given the change in accrual status. How do we think that for next year? Should we just take like a fourth quarter average and that’s kind of like the new run rate, or is it going to be kind of like this year where it’s Q4 weighted on EPP? Enrique Mayor-Mora: Yes. I think there are different considerations in EPP, right. The kind of the core business, which is driven by sales and an attach rate from our ESP and EPP products. And then there is a year-end profit sharing that we have with our partners. So, I think on the prior year, I think it’s growing our business, growing our penetration, that will continue to grow. And then the consideration in the fourth quarter this year was that we had more profit sharing revenue than we did last year in the fourth quarter, just our profit sharing was higher. And so given the timing of when we recognize that. If you recall, last year, we actually had one of our partners in profit-sharing revenue that was in the second quarter. They were recognized on a quarterly basis. They have moved in fiscal year ‘22 to an annual basis, so now all of our recognition of profit sharing is in the fourth quarter, which is why we saw a little bit higher this year of profit sharing in the fourth quarter. But taking a look at our business, again, if you take a look at the core sales, you take a look at EPP attachment rates, which has been going really well. We are stable at about 60%, and we would expect that to continue moving forward as well.

Yes. The only other thing I would add to that, Chris, is our goal isn’t to generate a bunch of profit sharing. I mean we want to have these things priced fairly for the consumer. You got some profit sharing, just – I think it was more driven by people just lack of driving, things like that. But our goal is not to necessarily drive a big revenue recognition at the end of the year.

Got it. A bigger picture question on customer sourcing. So, you talked about the instant appraisal business and growth in customer sourcing, I know it’s difficult to tease out. But based on like the age profile of the vehicle that you are buying from those, how much of this is incremental purchases could come from a private party market as a statement of TAM versus do you think you are coming from other dealers, or indirectly, the cars that would have gone to auction or would have been traded in retail? Is there a way to make sense internally for what – like how much of the payment growing versus taking share? And lastly, just a perspective on buyer rates, like once you appraise a car, what’s the buy rate is like today versus where it was pre-COVID?

Okay. So, Chris, just on kind of incremental share, we are in the process of developing kind of a buy share that looks at vehicles that originally were with the consumer. The last person that they were was essentially with the consumer, and so we are working on a metric there. We feel great about – we have certainly increased that by share. We know that, and now we are just trying to be able to quantify it more. So, that’s something we are looking at. But we certainly are comfortable that the bulk of this are coming from other consumers. As far as the buy rate, Historically, the way we talked about buy rate before instant offer was how many people come into the store and ended up getting an appraisal, and then what did we – what percent of those cars would we actually buy. Then we added the instant online appraisal in the way we buy – we measure buy rate now is you take – because we are issuing probably a couple to 3 million instant offers in a quarter, and there is a lot of folks who just kind of shop and to see what their vehicle is worth. So, the way we calculate buy right now is the instant offers when they show up at the store, how much of those actually convert in addition to the traditional way that we looked at it. And we are in the 40% on buy rate. If you look at it the more traditional way that we used to look at it, it’s probably in the low-30%ish, 30%ish. So hopefully, that’s the color that you needed.

Yes, far more complex. I appreciate it. Thank you.

We will go next to David Whiston at Morningstar. Your line is open. Please go ahead.

Thanks. Good morning, on CAF penetration, more three-day payoffs. If you were to say fiscal ‘17 or so, it is down, and I am just curious. It looks like, obviously, Tier 2 is taking more business. And is that just an essential thing on your part, or is there something else driving that decline? And then by roughly mid-decade, where do you want your penetration, either gross or net, to be?

Yes. I appreciate the question, David. Yes, I mentioned in our earlier comments around affordability, let’s just talk about penetration and appreciate you going back to pre-pandemic levels. Historically, Q4 is not going to be one of the highest CAF penetration quarters, obviously being wedged up against tax time. But that being said, it is down, we are losing penetration to outside financing. I mentioned previously, we really believe this is an affordability aspect. People are coming in looking to borrow more money given the ASPs that are out there. As a lender, we have a decision to make, which is, are we going to ask for more money down. We are going to let them borrow that full amount. In some cases, we are not letting them borrow that full amount that they are asking for given the higher ASP, and perhaps there is another lender externally that’s willing to provide that full amount, even though the income maybe not have gone up at the same level. So, we think we are losing in that case. I also mentioned around the longer terms. People are clearly managing affordability to extending that term. That is far more impactful to lowering the monthly payment than any rate adjustment, so we do not provide a greater than a 72-month term on a used loan right now. CAF does not actually impacted CarMax. None of our lenders do. So, we think there are people out there that are absolutely providing that. That’s been shown in the data. So, I think those two things are contributing to penetration. I also mentioned we did price testing up which, again, trying to be in line with where interest rates are headed to manage our margins. So, we did see some impacts there. So, I think that’s what’s changing the actual penetration for this quarter. To your question of where do we want it to be, I think we probably think more about it as we want to be highly competitive. There are ebbs and flows all the time based on what external folks do, but we want to remain highly competitive and provide our higher-end customers an opportunity to finance internally. But that’s what we love about our platform. You can do a three-day payoff. We do have other lenders pick up stuff if we don’t want to extend the full amounts, and we can still sell the car in CarMax. So, I don’t think we are targeting a penetration, and I would expect it to ebb and flow over time, especially as prices come down. Enrique Mayor-Mora: And I think approaching our CAF business that way is really what leads us to have a really strong portfolio of receivables out there and a really strong and consistent performing business in CAF.

Well, and I think it’s also the reason that you want to have also other lenders so that if we keep our portfolio in paper very, very consistent, having other lenders there in CarMax’s camp is a great thing.

And let me just clarify something you said. Did you say not only capital, the Tier 2 and Tier 3 partners do not do over 72 months?

Right now in the CarMax stores or in the CarMax business, we do not offer a used loan greater than 72 months. It’s something that we may or may not consider in the future. But right now, that is not what we are doing across CAF or our other lenders.

Okay. And do you think inevitably you have going to have to over 72 months?

We have chosen not to. Again, we are trying to make the right decision for the customer. We are not necessarily convinced that 84 months is best on a used car, so we will see what the market dictates. And we obviously know that prices are increasing and terms are increasing, but we also expect prices to probably normalize as well, and it might not be necessary. But again, we want to make the best decision for the customer, and we feel like we are still able to sell vehicles without providing that today.

Alright. Thank you, guys.

Thank you.

Next, we will go to Sharon Zackfia with William Blair. Sharon, your line is open. Please go ahead.

Hi. I just had a quick follow-up. I know that you have planned more investments in marketing, but CAF really floated up in the fourth quarter. I think it ended up at around $350 million for the full year. Is $350 million like a right run rate? And I am wondering how you think about the guardrails around marketing in an environment where the consumer just may be incredibly distracted?

Yes. No, great question, Sharon. And look, I think back on kind of pre-pandemic, if I look at our overall advertising spend, we are spending – as we said we would, we said we are going to spend more. We are spending about 70% more than pre-pandemic, which if you look at it on a unit basis, it’s probably about a 55% or so increase on a per unit basis. I think we kind of came right in the range of where we talked about being this year when we started out this year, in that mid-$300 per unit. And I would tell you, I think we are at a point where there are certain things we want to make sure that we advertise and get out there, especially as we have new functionality. And I can’t see us necessarily taking a step back on our advertising. Now, to your question, do you continue to step up, that’s where we will figure out what’s going on in the dynamics, where is the consumer right now, to figure out if we go beyond that. But I think a good way to think about it, is the spend on a per unit basis this year will be similar to what it was for last year.

Thank you.

Thank you.

We will go next to Daniel Imbro with Stephens. Your line is open. Please go ahead.

Yes. Thanks so much for taking the follow-up. I just want to follow-up on the instant offer with consumers. Right now, consumers having positive equity in their cars, I would think that would make it easier to buy from them just because they are making money on each one. But as we return to negative equity in vehicles over the coming years, do you think that will make it harder for you guys to customer source, or how do you anticipate that impacting your ability to source and kind of have success with instant offer as we return to negative equity? Can you just roll that into financing or how do you handle that?

Yes. So Daniel, I mean surprisingly, there are still folks that have negative equity out there today, albeit it’s down just because the prices are up hot. But that’s an environment that we have lived in for the last almost 30 years. We have consumers coming in with negative equity. Now you have got, obviously, is this price appreciation, is there a risk down the road that some customers, it may be harder for them because they can’t come up with a big enough down payment or whatever. But again, the way I think about it is – and Jon talked a little bit about this. If you look at loan-to-value, loan-to-values have actually gone down. People are putting more down payments down, so I think that’s a good sign. I think the other thing is all these customers are buying today, it’s not like they are going to all decide to trade in a year from now or 2 years from now or 3 years from now. They are going to be sprinkled throughout time, and we will manage the business just like we have in the past with other customers that have negative equity. So, we feel like we will be able to manage it both from a sales standpoint, but also to your point, on the buy standpoint as well.

Great. Thanks so much. Best of luck.

Thank you.

Thank you. And we don’t have any further questions. At this time, I will hand the call back to Bill for any closing remarks.

Great. Thank you, Jess. Well, listen, I want to thank all of you for joining the call today and your questions and your support. I look back, FY ‘22 was a great year. It is great sales. It’s great earnings, it’s great market share. We have been making investments and those investments are paying off, and we are really excited about the opportunities ahead of us as we continue to be that positive and disruptive force within the used car industry. And again, I want to thank all of our associates because they are the reason for our success. Appreciate everything that they do on a daily basis, and we will talk again next quarter. Thank you again for your time.

Thank you. Ladies and gentlemen, that concludes the fourth quarter fiscal year 2022 CarMax earnings release conference call. You may now disconnect.