Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter Fiscal Year 2023 CarMax Earnings Release Conference Call. At this time, all participants are a in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Lowenstein, AVP Investor Relations. Please go ahead.

Thank you, Corless. Good morning. Thank you for joining our fiscal 2023 fourth quarter earnings conference call. I'm here today with Bill Nash, our President and CEO; Enrique Mayor-Mora, our Executive Vice President and CFO; and Jon Daniels, our Senior Vice President, CarMax Auto Finance Operations. Let me remind you, our statements today that are not statements of historical fact, including statements regarding the company's future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our current knowledge, expectations, and assumptions, and are subject to substantial risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, we disclaim any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our Form 8-K, filed with the SEC, this morning, and our annual report on Form 10-K for the fiscal year ended February 28, 2022, previously 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. The current challenges in the used auto industry are well documented, with affordability pressured by broad inflation, climbing interest rates, tightening lending standards and prolonged low consumer confidence. We are continuing to leverage our strongest assets, our associates, our experience in our culture to build momentum and manage through this cycle. While there are many macro factors that we cannot control, we have taken deliberate steps to support our business both the near-term and the long run. This quarter, we reduced SG&A further. We delivered strong retail GPU through our vehicle acquisition, reconditioning and margin management strategies, while continuing to test price elasticity. We adjusted offers to deliver strong wholesale GPU, while increasing unit sales quarter-over-quarter. We aligned used saleable inventory units with market conditions, while driving down total inventory dollars more than 25% year-over-year. And finally, we raised CAF's consumer rates to help offset rising cost of funds while still growing CAF’s penetration. We are prioritizing initiatives to drive efficiency and improve experiences for our associates and customers. We believe these steps will enable us to come out of this cycle leaner and more effective, while also positioning us for future growth. Reflecting on fiscal ‘23, we achieved a number of key milestones in each area of our diversified business model. We enabled online self-progression for all of our retail customers; enhanced our wholesale shopping experience; and completed the nationwide rollout of our finance-based shopping prequalification product. All of these accomplishments further position our business for growth as the most customer centric experience in the industry. I'll talk more about these later in the call. And now into our results for the fourth quarter of FY ‘23. Our diversified business model delivered total sales of $5.7 billion, down 26%, compared to last year, driven by lower retail and wholesale volume and prices. In our retail business, total unit sales declined 12.6% and used unit comps were down 14.1%. Average selling prices declined approximately $2,700 per unit or 9% year-over-year. In addition to the macro factors I mentioned previously, we believed our performance continued to be impacted by transitory competitive responses to the current environment. Our market share data indicated that our nationwide share of zero to 10-year old vehicles remained at 4% for calendar year 2022. External title data shows that the market share gains we achieved during the first-half of the year were offset by share losses during the second-half of the year as we prioritize profitability over near-term market share. For context, we have lost the market share during prior down cycles. In those cases, we recovered the market share and then continued to grow up to new heights as economic conditions improved. We remain focused on achieving profitable market share gains that can be sustained for the long-term and plan to continue running extensive price elasticity tests. The results from our most recent test confirmed that holding margins during the quarter was the right profitability play. Despite the decrease in average selling price, fourth quarter retail gross profit per used unit was $2,277, up $82 per unit year-over-year, demonstrating our ability to appropriately value vehicles and effectively manage margin in inventory. Wholesale unit sales were down 19.3% versus the fourth quarter last year, but improved from the 36.7% decline during this year's third quarter as our total boughts’ from consumers and dealers improved sequentially. Wholesale average selling price declined approximately $3,200 per unit or 28% year-over-year, that we saw some appreciation beginning in January. Wholesale gross profit per unit was $11.87, which is consistent with last year's fourth quarter. Margin benefited from the recent price appreciation I just mentioned and from strong dealer demand, particularly at the end of the quarter. We bought approximately 262,000 vehicles from consumers and dealers during the quarter, down 22% from last year's record, but a sequential improvement from the 40% decline during this year's third quarter. Our self-sufficiency remained above 70% during the quarter. We purchased approximately 247,000 cars from consumers in the quarter with a little more than half of those buyers coming through our online instant appraisal experience. We sourced approximately 15,000 vehicles through dealers, up 4% from last year. In regard to our fourth quarter online metrics, approximately 14% of retail unit sales were online, up from 11% in the prior year, approximately 52% of retail unit sales were omni sales this quarter, down from 55% in the prior year. Nearly all of our fourth quarter wholesale auctions in sales which represents 18% of total revenue remain virtual and are considered online transactions. We began a small wholesale auction simulcast test during the quarter to gauge dealer interest in resuming in-person attendance and will continue to test options for live attendance during FY ‘24. Total revenue resulting from online transactions was approximately 30%, down slightly from last year. CarMax Auto Finance or CAF delivered income of $124 million, down from $194 million during the same period last year. Jon will provide more detail on customer financing, the loan loss provision and CAF contribution in a few moments. 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. Our continued focus on managing what is in our control drove a sequential improvement from the third quarter across key financial metrics, including EPS, gross profit and SG&A. Fourth quarter net earnings per diluted share was $0.44, down from $0.98 a year ago. Total gross profit was $611 million, down 14% from last year's fourth quarter. Used retail margin of $387 million and wholesale vehicle margin of $143 million declined 9% and 20% respectively. The year-over-year decreases were driven by lower volume across used and wholesale. This was partially offset by strong margin per unit performance. Used unit margins increased from last year's fourth quarter and wholesale margins per unit were flat year-over-year. Other gross profit was $81 million, down 24% from last year's fourth quarter. This decrease was driven primarily by a decline in extended protection plan or EPP revenues. In addition to the impact of lower retail unit sales, profit sharing revenues from our partners decreased from $33 million in last year's fourth quarter to $16 million in this year's quarter. This was partially offset by stronger margins and a favorable year-over-year return reserve adjustment. Penetration was flat year-over-year at approximately 60%. Third-party finance fees were relatively flat over last year's fourth quarter with lower volume and fee generating Tier 2 offset by lower Tier 3 volume for which we pay a fee. Service was also relatively flat over last year's fourth quarter, reflecting sequential improvement in year-over-year performance. We have maintained our technician staffing levels and have put in place key efficiency and cost coverage goals for our teams. This supports our expectation of improved performance in FY ‘24, compared to the full FY ‘23 year. The extent to this improvement will also be governed by sales performance given the leverage, deleverage nature of service. On the SG&A front, expenses for the fourth quarter were $573 million, down 8% from the prior year's quarter and down 3% sequentially from this year's third quarter. SG&A as a percent of gross profit was higher than the fourth quarter last year, due primarily to the 14% decrease in total gross profit dollars, compared to last year's quarter. The change in SG&A dollars over last year was mainly due to the following factors: first, we reduced advertising by $34 million. Second, total compensation and benefits decreased $17 million, which included an $18 million increase in share based compensation. Excluding the latter, compensation and benefits was down $35 million of which $18 million was due to a lower corporate bonus accrual in the quarter. Third, other overhead increased by $6 million. The year-over-year increase in investments in our technology platforms and strategic growth initiatives was primarily the result of decisions made in prior quarters. This was partially offset by a favorable year-over-year comparison due to costs incurred in last year's fourth quarter associated with a significant ramp in staffing and favorability in a variety of other smaller cost this year. During the quarter, we continue to take steps to better align our expenses to our sales. This included further reducing staffing through attrition in our stores and CECs, limiting hiring and contractor utilization in our corporate offices and continuing to align our marketing spend to sales. While our advertising expense on the dollar and per unit basis was lower year-over-year on the quarter, our investment for the quarter and full-year on a per unit basis remains aligned with last year's full-year spend level. For fiscal ‘24, in total, we anticipate maintaining per unit spend at a similar level to FY ‘23 with per unit spend varying from quarter-to-quarter. We believe that at this point, we largely have the resources in place to meet our near-term omnichannel and other digital investment needs. Accordingly, our expectation is that we will bend the expense growth curve on our omnichannel investments and our overall SG&A. In FY ‘24, we expect to require low single-digit gross profit growth to lever SG&A, well below the levels we've guided to during the investment heavy phases of our omni transformation. As a result, we expect to deliver stronger flow through of gross profit growth to profitability. While we expect that the front half of the year will benefit from the cost management actions we took in the back half of FY ‘23, the magnitude of the year-over-year benefit relative to the 8% decrease we experienced in Q4 may be muted, particularly in Q1. This dynamic stems from rolling over a more comparable period for advertising and a corporate bonus accrual in Q1 than the fourth quarter declines that I noted earlier. While not providing specific guidance beyond FY ‘24, we expect that this bending of the SG&A growth curve will carry over beyond this year. This will support our pathway back to a lower SG&A leverage ratio with the initial goal of returning to the mid-70% range over time. Hitting this range will also require healthier consumer demand. Regarding capital structure, our first priority remains to fund the business. Given the recent performance and ongoing market uncertainty, we continue to take a conservative approach to our capital structure. While our adjusted net debt to capital ratio was slightly below our 35% to 45% targeted range, we are managing our net leverage to maintain the flexibility that allows us to efficiently access the capital markets for both CAF and CarMax as a whole. In keeping with the school of maintaining flexibility, we continue to pause our share buybacks. Our $2.45 billion authorization remains in place as does our commitment to return capital to shareholders over time. For capital expenditures, we anticipate approximately $450 million in FY ‘24, similar to our FY ‘23 level. This spend is primarily being driven by investments in land and the build out of facilities related to long-term growth capacity for production and options. New store development is also contributing to CapEx, albeit at a lower level as we have slowed the pace of openings in FY ‘24. In FY ‘24, we plan to open five new locations including two more stores in the New York City metro market, as well as our first off-site production location in the Atlanta metro market. Our extensive nationwide footprint and logistics network continues to be a competitive advantage for CarMax. Our liquidity remains very strong and we ended the quarter with approximately $350 million in cash on the balance sheet and no draw on our $2 billion revolver. Now, I'd like to turn the call over to Jon.

Thanks, Enrique, and good morning, everyone. During the fourth quarter, CarMax Auto Finance originated $1.9 billion, resulting in penetration of 44.7% net of three-day payoffs, up from the 41% seen in the same quarter last year and in line with Q3. The weighted average contract rate charged to new customers at 10.9% was up 110 basis points from Q3 and 270 basis points from the same period last year. We were pleased with our ability to increase consumer rates within the quarter, while maintaining a consistent share of finance contracts sequentially and growing our share of finance contracts substantially on a year-over-year basis. Tier 2 penetration in the quarter was 19.4% lower than typical seasonal levels. Tier 3 penetration was flat to last year at 6.9%, while our long-term lending partners continued to complement each other in providing strong credit offers to our customers, we did observe year-over-year tightening as both rising interest rates and delinquencies likely led to these adjustments. Of note, CAF has also adjusted its underwriting standards in reaction to the current environment, including towards the end of Q4 reducing its targeted percentage of Tier 3 volume from 10% to 5%. CAF income for the quarter was $124 million, down from $194 million in the same period last year. The $70 million year-over-year decrease is primarily driven by a $44 million increase in loan loss provision, as well as a $61 million increase in interest expense, partially offset by growth in interest and fee income. Within the quarter, total interest margin decreased to $262 million, down $22 million from the same quarter last year. The corresponding margin to receivables rate of 6.3% is down approximately 100 basis points year-over-year and 125 basis points from the near 10-year peak seen in this year's first quarter, driven mostly by the significant interest rate jumps absorbed during the past year. In response, we have made numerous pricing moves over the last 12 months, including in the fourth quarter that should cause the reduction in margin to slow and allow this portfolio rate to level off in fiscal year 2024. The loan loss provision in Q4 of $98 million results in an ending reserve balance of $507 million or 3.02% of ending receivables. This is compared to a reserve of $491 million last quarter, which was 2.95% of receivables. This sequential 7 basis point adjustment in the reserved to receivable ratio reflects unfavorable performance within the portfolio, as well as the uncertain macro environment along with the continued increase in cash Tier 2 and Tier 3 volume. We continue to target and operate within the 2% to 2.5% cumulative net credit loss range for our core Tier 1 portfolio and we believe we are appropriately reserved for future losses. Regarding further advancements in our credit technology, we continue to stabilize and improve upon our nationally available best-in-class pre-qualification product, finance-based shopping or FBS. During the fourth quarter, we fully deployed yet another of our large lending partners within the FBS platform, now bringing the total to five of well-established lenders that are providing decisions on the full vehicle inventory for an applicant and co-applicant, leveraging a soft credit pull. Note what truly makes this product distinct in used auto industry is our ability to calculate over 6 million unique credit decisions every minute from multiple finance sources, each leveraging their own distinct credit models and then to make these offers digitally available to customers wherever they are shopping in the store, at home, we're walking the lot. During this upcoming first quarter, we hope to add additional finance partners to the platform as work is already well underway. Now, I'll turn the call back over to Bill.

Thank you, Jon and Enrique. As I mentioned at the start of the call, even as we navigated the challenges of fiscal ‘23, we achieved a number of key milestones during the year by focusing on making our omnichannel experience faster, simpler and more seamless for our associates and customers. I'm proud of the progress that we've made on our journey to deliver the most customer synthetic experience in the industry. Some highlights from this year that will have a lasting impact across our diversified business model are for retail we enabled online self-progression capabilities for all of our customers. As we evolve our omnichannel experience, we're also updating our operating models to drive efficiency gains in our stores. During the year, we launched self-checking capabilities for appraisal customers and also enhanced e-sign functionality to better enable self-progression. Our e-commerce engine combined with our unparalleled nationwide fiscal footprint is a competitive advantage. Our ability to deliver integration across digital and physical transactions is a key differentiator in both the experience we provide in the total addressable market available to us. For wholesale, we rolled out a modernized mobile friendly vehicle details page that displays the most relevant information from dealers they need to preview our wholesale inventory, creating a shopping experience for dealers that is similar to how consumers shop our retail inventory. We also expanded MaxOffer, our digital appraisal product for dealers to approximately 50 markets, which enable us to build on our leading position as a buyer of cars. We utilize our admin sales team to sign up new dealers for the service, which provides profitable incremental wholesale volume. For credit in CAFs, we completed the nationwide rollout of finance-based shopping, our multi-lender prequalification product. As Jon mentioned, this gives customers the flexibility to digitally receive quick credit decisions from a majority of our lenders across the entire vehicle inventory. Over 80% of our customers have used this online tool as they begin the credit process. In addition CAF is equally focused on coming out of this cycle leaner and more effective. The team is already leveraging the new loan receivable system that we deployed a little over a year ago to deliver on savings opportunities with many more expected in the upcoming years. Looking ahead to fiscal ‘24, we will build on last year's initiatives and prioritize projects that unlock operating efficiencies and create better experiences for our associates and customers. We are confident that the actions we will take position us better to capture the upside when the market improves. Some examples include: for retail, we are leveraging data science, automation and AI to make it even easier for customers to complete key transaction steps on their own and to go back and forth between assisted health and self-progression. We are also building digital tools that will support customers across key transaction steps and their journey and give them better insight into their remaining steps. These tools will drive online sales and make it easier for customers to opt in to express pickup. This delivery option offers customers the ability to complete their transaction at one of our stores in as little as 30 minutes and represents a win-win opportunity. Our research shows that customers love this experience when utilized and it will enable us to lower cost over time. For wholesale, we will leverage our modernized vehicle detail page to offer new services. Some examples include AI enhanced conditional reports, and proxy bidding capabilities. We will also improve MaxOffer by rolling out our instant offer experience to all participating dealers. These tools will enable us to drive incremental operational efficiencies as we continue to scale our wholesale volume, all while providing a better experience. For CAF, we're working to integrate our finance-based shopping product into our stores and customer experience centers more seamlessly, so that all consumers can enjoy the full experience. As Jon mentioned, we will also continue to pursue opportunities to add additional lenders to the platform, which will expand the breadth and depth of offers available to our customers. While these are a few good examples, our entire organization from Edmonds to Logistics is focused on improving efficiencies and experiences. We are confident in the future of our diversified business. We will continue to evaluate our performance relative to our long-term financial targets annually. As we start fiscal ‘24, we are affirming the targets that we updated in April ‘22, selling between 2 million and 2.4 million vehicles through our combined retail and wholesale channels by fiscal ‘26 generating between $33 billion and $45 billion in revenue by fiscal ’26, and growing our nationwide market share of zero to 10-year old vehicles to more than 5% by the end of calendar ‘25. I want to thank and congratulate all of our associates for the work they do. They are our strongest differentiator and the key to our success. Last week, Fortune Magazine named CarMax is one of its 100 Best Companies to Work for, for the 19th year in a row. I am incredibly proud of this recognition, particularly as we faced a challenging year. It's due to our associates' commitments in supporting each other, our customers and our communities every day. Over our nearly 30-year history, we've navigated many challenging environments and have emerged stronger each time. This environment is no different and I'm confident that the actions we are taking will enable us to drive robust growth as the market improves. With that, we'll be happy to take your questions. Corless?

Absolutely. At this time, we will open the floor for questions. [Operator Instructions] And your first question comes from the line of John Healy with Northcoast Research.

Guys, wanted to talk just a little bit about the CAF business to start off. Enrique, just hoping maybe you could hit us with kind of maybe your thoughts on where maybe some of the key metrics might look out maybe, say, the next quarter or so? Maybe on kind of losses as well as recoveries and maybe the crosscurrents there? But also just kind of on your cost of funds and where that's kind of moving to of late, as well as kind of the coupon rate that's going to the consumer? And is there a lag? Is there a catch-up period? Just how we can think about maybe some of those dynamics moving for -- as we start fiscal ‘24? Enrique Mayor-Mora: Yes. Thanks for the question, John. I'll address the cost of funds and kind of how to think about that. Then I'll turn it over to Jon to talk about the business. So from a cost of funds perspective, what I'd tell you is that the securitization market, which we're largely dependent on, the market is open, is constructive currently and what we've seen, you signed in our first deal where the cost of funds came down relative to the deal that ended in 2022, right? And so we do believe that, that the benchmarks continue to come down, spreads continue to be healthy and we would expect that to, kind of, carry forward. Per timing, you would expect us to be in the market here in the near-term. But we would expect to be able to execute our deal. And again, I think relative to a couple of deals ago where the market really was compressed and the cost of funds was one of the highest we had seen in many, many, many years, it's come down from there. Still higher than obviously what we'd like them to be, but certainly better than where they had trended a couple of deals ago.

Sure. And I'll jump in on the other metrics. Just to piggyback on the cost of funds, obviously the other component there is the kind of APR, that's in the deal as well. Last time, we were at 9.09%, we just cited that we were 10.9% on our originations in this quarter, we've done a great job of raising rates through the year. So you can imagine that to drive through into future deals as well. So if spread settles in and our APRs are higher, that should benefit us. With regard to losses and delinquencies, as mentioned in the prepared remarks, again, we've taken our reserve up to $507 million, that's 3.02% of receivables. Did mention that some of that is driven by unfavorability in the portfolio and the macro environment. I think the entire industry is feeling a higher sense of delinquency in the consumer for us in the existing book of business. You've got some -- you've got definitely higher inflation making it more challenging for consumers. Our newer originations are purchasing at a higher average selling price, therefore, there's a higher payment. So people are having to work through having a higher auto payment than they might normally be used to. So all of these factors or things we're watching very carefully. We've reserved accordingly for it, but definitely a rise in delinquencies that we've done a nice job with and hasn't fully trended its way into losses and we think we're going to be able to continue to serve the consumer well. The other thing I'll add to that is we did mention in the prepared remarks and we have tightened -- many lenders have tightened on their -- in our platform, as well as outside of the industry and we've tightened as well. But something that we've done on a regular basis, we did it in the great recession, we did it at the start of a pandemic. We've done it many times in between. So we have tightened just to make it a little more conservative to watch this consumer carefully. But again, with our tightening, our partners will be happy to pick up that volume as we've done. So looking out hard to say where losses and delinquencies are going to be, but we think we're in that 2% to 2.5% range as we always have. We think we're well reserved and we'll watch the consumer carefully.

Great. Thank you.

And the next question comes from Michael Montani with Evercore ISI. Your line is open.

Great. Thanks for taking the question. Just wanted to ask on retail and wholesale GPUs. Those were both, I think, stronger than we were anticipating. If you could just provide some update on the pricing volatility that we're seeing pretty unprecedented, I think both at retail as well as at wholesale. And then competitively what you're seeing in the market, how sustainable is this, kind of, strong discipline in GPU I guess for those two segments?

Sure. Good morning, Michael. Yes, on the retail and wholesale GPU, obviously, they did come in stronger. I think the wholesale benefited a little bit we saw some appreciation in the latter part of the quarter, which when that generally happens, we usually trail whether it goes up or comes down. So I think that added a little bit of favorability there. I think as you go forward thinking about wholesale, I would land probably more in the line of where we've been historically $900 to $1,000. On the retail side again, we did expansive price elasticity testing and determined that we could have sold a few more cars, but we actually would have made less money. So we held the retail GPUs, they're pretty similar to the third quarter. They were up year-over-year and that's more of a function of the fact that we continue to have a higher mix of older vehicles, which carry a little bit more margin. I think just in the retail pricing environment in totality, we did see some depreciation at the beginning of the quarter, we saw a little bit of appreciation at the latter part. If you go back a year ago, not this year, they just completed the year before, prices appreciated about $7,500 and that's in the zero to five-year old cars this year. By the end of the calendar year, they had come back about $5,000, I would expect, even though we've seen some recent appreciation, I would expect to probably start to see a little bit more depreciation as we go forward. So that should continue to give a little bit of relief on the overall retail sales price.

Thank you.

Sure.

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

Hey, good morning and thank you for taking my question. We're hearing that some banks [Technical Difficulty]

Corless, I think we may have lost Craig.

Craig, your line is open.

Yes, good morning. Can you hear me?

Yes, we can hear you, Craig. Go ahead.

Thank you. Yes, so we've heard that some banks are pulling back on floor plan credit for some of your competitors. I'm wondering since you self-fund your inventory, would you expect an advantage sourcing inventory in this environment?

Yes. I think it's hard to say, I mean, what I would tell you is because our self-sufficiency is so high, we just really haven't had an issue on sourcing environment. It's not like we're going out and competing in the auction lanes as much as we used to. I think it remains to be seeing what the impact is on competitors and where they get their funding. I guess theoretically, it could cause prices to go down if they are not able to source financing to keep inventory on the lot. But that remains to be seen.

Thank you.

Yes.

The next question comes from the line of Rajat Gupta with JPMorgan. Your line is open.

Great. Thanks for taking the question. Just had like a question on SG&A and one within that. Maybe just on the store occupancy car, it was lower quarter-over-quarter by roughly 10%, despite five new stores opened. Is there something we're missing there? We would have expected it to be up sequentially given the new openings, but I just want to make sure, are we not missing any one-timers there? And then I have a quick follow-up.

Great. Yes, thanks, Rajat. Yes, I don't think we’re missing anything, I thing a couple of points here. One is that there was some timing of spend from quarter-to-quarter things will vary. So we had some timing favorability this quarter over the previous quarter. In addition, given the volumes and where they're at, we had a bit of a pullback in our rent as volumes flex, we will move up in terms of our off lot short-term capacity to accommodate volumes. And given where volumes are at, we did have a pullback in our off-site capacity. So you'll see that reflected in occupancy through a lower rent. So those are the two bigger items I'd tell you within the quarter.

Understood. That's helpful. And in terms of just budgeting purposes for SG&A for the year. What kind of view are you taking on the used car market this year? Do you expect the industry, especially the zero to 10-year old space to grow this year and do you expect to grow share within that -- with the level of ad spend that you're guiding to? Just curious like what kind of shape of recovery are you assuming in your budgeting plan?

Yes, Rajat, thanks for the question. Look, we're certainly not economists, but I think there's some publications and I think like COGS for example has the used market overall being down a little bit this year. I think you also have it softer in the front part, I mean, softer in the front part a little bit better in the back half. I think that's kind of the way we think about it as well, but that remains to be seen. And as always on the market share, our goal is whether the market is a good market or a bad market. We want to gain profitable market share and I spoke to just the transitory pressures that we continue to see in this quarter as it relates to market share. But given previous experiences, we would expect that to turn and then we'd get back into gaining market share.

Understood. Thank you.

Sure.

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

Hi, good morning.

Good morning.

So a question I want to ask. So kind of comments, it sounds like you are telegraphing for this year now a lower leverage point. I mean, you're going to leverage expenses at lower rates of growth. So I guess the question I have is to make sure I'm correct in that assessment. And then what changed? I mean, what were you -- what levers were you able to pull in order to allow them to happen? And then, again, kind of going back to your comments for clarification, should we assume that as the business eventually strengthens out of this cyclical trough that leverage point will remain more skewed than it had been previously?

Yes, everyone. Thanks for the question. I'll give you my thoughts first and I'm sure Enrique will have some thoughts as well. But you're exactly right, we are -- send in the message that we expect this to be at a lower rate going forward. And if you think about the past few years, every year we update and say, okay, this is what it's going to take to lever and we're running that five day in this past year, prior year we said, hey, it's going require more than that, because of the investments we knew we were making plus some of the carryover investments. We hadn't been giving longer term guidance, because quite honestly, while many companies have gone from a pure brick and mortar to more of an omnichannel, there really hasn't been any other example of companies doing that with what I call considered purchase where there's a lot of back and forth between physical and digital properties. And so I almost equate this to renovating an old house, which unfortunately haven't experienced with that too. You don't know what you don't know until you get into it. And every time you pull down a wall in old house there's some new surprise there. Well, with this, every time we would turnover a rock as it related to the omnichannel experience, there were two other rocks underneath it. And I think what we've gotten to the point of is that we've built out our product organization. We feel really good about the resources there. We've got the base of the capabilities. Now it's about enhancing, and then as we enhance and finish some things, we'll shift people to work on different things. So we feel good about the resources that we have at this point. And I'll let Enrique add any other… Enrique Mayor-Mora: Yes, just to build on that a little bit, [Steve] (ph), as I said in my prepared remarks, we are past the investment in heavy phase for omni transformation. We believe, largely speaking that we have the resources in place, we're appropriately staffed and now it's really a matter of executing on our plans to really focus around enhancing efficiencies, enhancing and strengthening experiences for our customers and for our associates, right? But we believe we passed that point. So we do think that now and for the guidance that we've given, low-single-digit gross profit growth is what we're going to need to lever. And I would think about that as well as carrying beyond FY ‘24 and into, while not giving specific guidance, I would think about that. That is kind of where we are in our maturity curve as a company and that's kind of how I think about it for the next period of time.

Alright, guys. I appreciate the color. Thank you.

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

Hi, good morning. A few things around SG&A. Just want to make sure I understand the context around leverage. So are you referring to SG&A leverage as a percent of sales or SG&A to gross profit? So just want to make sure, well, level set on what metric you're using. I also want to clarify the cadence in the first quarter, are you referring to sequential moderation in the decline or year-over-year moderation? I think that's, kind of, important to quantify as well? And then lastly and I'm sorry it's a multipronged question. It's just on the ad spend, so it’s a little surprised to hear and I think I heard correctly that ad spend per car would remain consistent year-over-year. And I just wondered the thought process behind that given the environment we're in, which it sounds as if a lot of people are just priced out of cars' period. So I wonder about keeping that ad spend, kind of, at the same level versus retracting maybe more towards the $300 level that you had historically? Enrique Mayor-Mora: Yes. Thank you, Sharon, for the multiple questions. And see here if I can…

Couple of clarifications, I'm using the clarifications [Multiple Speaker] Enrique Mayor-Mora: I guess the others, and you asked different here, right? So on the first one, absolutely, we moved to leverage being defined as SG&A to gross profit. So not retail units, not sales because as you know, as we've migrated and transformed ourselves it's also about just solely per retail unit. There's also a better wholesale business, a better CAF business. So we take a holistic look and our leverage point specifically is on gross profit. So I think that was your first point of clarification. The second for the first quarter, yes, it is an important point and I had it in my notes here that I spoke to. So in the fourth quarter, right, we -- year-over-year, we were down 8% in SG&A. So, what we're communicating here is that in the first quarter of FY ‘24 upcoming year that decrease may be muted, compared year-over-year decrease in the first quarter versus last year's first quarter would be muted compared to that 8%. And that's just because we'll be -- will have more comparables when it comes to the corporate bonus accrual, which in the fourth quarter was down pretty materially as I call that in my notes. As well, our fourth quarter last year, our marketing spend was much higher than what it was in this fourth quarter, which provided some relief in this fourth quarter. So that presents a little bit of more of a challenge for the first quarter of FY ’24, as compared year-over-year, as compared to FY ‘23. And then lastly, on marketing per spend, we made a decision a few years ago to take our marketing per unit spend up along with our journey here and our transformation and that's where we currently what we intend on keeping it. We believe we have a strong line of sight into ROI and very accretive properties and investments here. Our marketing team does a fantastic job and being able to track what is accretive. What is ROI generating and what is not ROI generating. So we have a pretty good understanding of our portfolio of investments when it comes to marketing and currently, we think that 350 roughly per unit spend is appropriate for where we are.

And Sharon, the only other thing I would add to that is, and Enrique said this in his comments, it can vary quarter-to-quarter. You may be up in some quarters, you may be down in some other quarters and that will really be dictated by some of the ROI that we're seeing. We're always going to have some brand spend out there, because I think it's important long-term. So the other thing I think of note here is that when we think about advertising, we also -- it's not just about customer acquisition, it’s also about vehicle acquisition. So there may be sometimes we spend up a little bit more in trying to buy cars from consumer. So again, we'll continue to monitor this.

Okay. Thank you.

Thank you.

Your next question comes from the line of Scot Ciccarelli with Truist Securities. Your line is open.

Hey, guys. Scot Ciccarelli. Obviously, retail prices are still up quite a bit. Average rates also up and so monthly payments are up meaningfully? I know it's causing a double-digit decline in comps, but I guess what kind of impact is it having specifically on your conversion rate? In other words, like when we look at the sales decline, is it being driven more by reduction in traffic or kind of the first swing at the plate that you guys get? Or is it more kind of people get close to finish line and then just decide that they really can't afford what they're looking at? Like is it one more than the other or are they -- those factors about the same?

Yes, great question, Scot, and welcome back to the call.

Thank you.

It's -- we see the traffic top of funnel, so it's not top of funnel. The degradation really happens at the conversion point and which can make sense as you find a car that you like, you start working through and all of a sudden you realize, wow, that monthly payment is more than I can afford and then you see where they fall out, which is the reason why we've been talking about vehicle affordability is one of the biggest factors that impact our sales. So it's all about conversion, not necessarily top of funnel.

Yes. And I'll just add on to that, Scot. Just one ahead of thing, what we mentioned the FBS platform and one of the things we're so excited about that, right? So many people are shopping for that monthly payment online out the gate, not in the store necessarily. And so being able to -- if they pick vehicle X and it ends up being a higher payment for them, we're providing them the capability to see payments on all the vehicles with multiple lenders so they can pivot relatively quickly. So we think again once the shock of the higher ASPs come down over time just having that tool out there to adjust that price when in that payment as needed will really benefit us. And we'll springboard out of this thing.

Okay. So total demand is still there. It's just the affordability or the ability to close is really the main challenge if you will?

Yes, the interest is definitely there. And I think some of the web traffic continued strength in the web traffic is also because of the finance based shopping product that Jon just talk to people just trying to figure out what can I afford? Maybe they're not ready to buy a car, but maybe they're just looking to see what can I afford?

Great. Thank you very much.

Thanks, Scot.

Your next question comes from Daniel Imbro with Stephens Inc. Your line is open.

Yes. Good morning, everybody. Thanks for taking my questions.

Good morning. Enrique Mayor-Mora: Good morning.

Enrique, I want to ask on SG&A maybe a little bit different way. You talked about attrition for a few quarters now and you're making -- it seems like good progress driving down that compensation line? Where are staffing levels today in the stores or CECs versus a year ago or before these attrition? Are we 15% lower? Is headcount 20% lower? And then where should that go as growth improves? Because on one hand, I think Bill just mentioned you should stay more lean going forward, but I thought in your prepared remarks you said working toward the mid-70s SG&A to gross ratio over time? So just trying to put those pieces together, if you could talk about kind of the staffing where we're at and where that goes and what it means for long-term SG&A margins? Enrique Mayor-Mora: Yes. I'm going to tell you is that we believe we're largely speaking appropriately staffed. There's still some pockets where there's probably some overstaffing that we're working through, right? And, we do it in a healthy way, which is just through attrition. And that's the approach we've taken for the past period here. But largely speaking, we think we're appropriately staffed, kind of, across the board. Compared to last year, right? We were down when it comes to like what flows through SG&A, because we do have a large service department and service associates that flows to our COGS. But just through SG&A, we're down about 10% year-over-year, right? And that's really, kind of, staffing in our CECs as we've rightsized in our stores as we've rightsized as well and that's where you'll see it offset a little bit by our corporate overhead staffing, but net-net we're down about 10%. So that's kind of where we are. When it comes to like the 70% mid-70%. Yes, we're actually striving to get there. Our goal is to get back to a leverage rate that's more reflective of a stronger flow through and a business model that we're striving to get to. Now to get to that number, we're also going to need some help in sales, right, as well to support that. And we expect to get there over time. I think to get there in FY ‘24, I would tell you it would be a strong stretch just, kind of, given where we ended FY ‘23 and kind of where volumes are at. And just the environment that we're operating in. But we are controlling what is in our control and I think we've done a pretty effective job here of taking our SG&A down and thinking about our business model and the maturity curve in terms of where we are with our omni transformation. And now it's really a matter of, kind of, reallocating resources internally to work on the most accretive projects that we have.

Yes. And Daniel, the only other thing I would add to that is even as we -- as business returns, we're heavily focused on finding efficiencies. The business model has really changed within the store with omni. So we're looking at more efficiencies in the CEC, so as more volume comes in, CECs don't have to grow as fast. We've already taken -- we've reduced the sales force, because of the CECs, because customers are coming more progress, which is another reason why we're really focused on this self-progression, the more customers can progress on their own, our floor sales consultants can handle more associates. So as we think about the future model, we're trying to get efficiencies not only at the corporate side, which we feel pretty good about the teams we've got there, but also just become more efficient in the field operations.

And if I could squeeze a clarifier, not another question. I guess you guys used to be in the mid to high-60s, it sounds like you reduced headcount 10% the CEC is making more efficient. I guess why wouldn't that or something better than that be the target you're working towards Enrique rather than the mid-70s. I guess have there been incremental expenses from the omni and admins that have just have raised that long-term SG&A margin? Enrique Mayor-Mora: Yes. And what I said is that our first step, right, so our initial goal is to the mid-70s and then longer term, we do have as part of our aspirations to get back to roughly where we were. I don't know if we'll get back fully to where we were in the medium term here, but certainly our first step is to get to the mid-70s.

Yes. And I think Daniel on that, keep in mind part of the omni transformation is we've gone from an organization that worked with all legacy systems that really didn't cost us anything to a combination of systems that we built in-house, but also software-as-a-service. And software-as-a-service is an expense that we used to not have. So things like software-as-a-service, the product organization that we built out, we've got 60 product teams that really enable having this omni channel experience both to have the store and the digital. So that expense isn't going away. We didn't use to have that expense. Theoretically, the CECs will be offset with the sale. So that should watch, but there are the things like cybersecurity that because we have so much of a digital presence now you had to step up your spend there. So there are some things which is why to Enrique’s point, our first goal is, hey, let's get back to the 70s because we know we've got some headwinds on things that we didn't use to have and then we'll continue to work on taking it below there.

Great. Appreciate all the color and best of luck.

Thank you.

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

Thanks a lot and good morning. My question is on retail GPU, pretty good performance this quarter. Curious to know whether or not you think the market dynamics helped you on that metric? And then looking forward, should we be thinking about that flat year-over-year for 2024 fiscal or should there be a movement one way or the other based on the price elasticity expectations and other factors?

Yes. Good morning, Seth. Yes, I think the market dynamics did help, because again, we were doing pricing elasticity tests and as I said earlier, we could have sold some more cars, but overall profitability would have been down. So I think that, that did help. Now as far as going forward, I think, I'd probably get more in the range of where we historically. I think, you know, part of it will depend on what the macro factors, because we'll continue to test elasticity. But if you think about we've been, kind of, in the 2,100 to -- roughly 2,100, 2,150 22,000 in that range. I would think somewhere in that range is probably a good target to think about for the upcoming year. But again, it's going to be dependent on what we see from the market factors.

Okay. And just as a follow-up thinking about the trade-off between unit sales and GPU market share is clearly an important goal of yours. Is there a point in time where you'll be more aggressive on price to regain market share to meet your long-term targets. You truly believe this is transitory? Is there any reason why it may not be?

Yes. No, it's a great question. And again, we've always said this idea of proper market share and that hasn't changed. You know, if I look at the market share for 2022 relatively flat. You can argue it was slightly up, but we call it relatively flat. For the first-half of the year, we saw good market share gains. In fact, most several of the months were double-digit gains. We hit August, August, I would call was fairly flat, and then we saw declining gains really from September through December. And we've seen this before, if I go back to ’08, ’09, if I go back to COVID, although they're very different circumstances, we've seen where we've lost market share for a period of time, then it flattens out. We start from a month-over-month, we start to grow it back. We get back to where we were before we started and then we continue to increase. I would expect this to not be any different. I'm encouraged as I look at the data that we have so far, if you look at August through or really September through December, it was decreasing market shares month-over-month. I think December, January, my hope is we've kind of bottomed out there. We don't have the February data yet, but I'm hoping that we bottomed out, which means that, okay, market share should from month-over-month will still be probably below year-over-year, but we should start to climb back out.

Thank you.

Sure.

Your next question comes from Chris Bottiglieri with BNP Paribas. Your line is open.

Hey, guys. It's Chris Bottiglieri. I just wanted to ask on CapEx, can you elaborate a little bit more there. The omnichannel is slowing a bit and you're only opening five stores. Just trying to get a sense for like why the CapEx is stepping up? Are you planning to reaccelerate store growth in FY ’25, this incurring some upfront capital costs there? And then you mentioned -- sorry, there's a long way to question, you said a lot on the call. You mentioned that you're opening up these off-site recognition centers and auction centers. Are these more capital intensive in your stores trying to understand what strategies and what these investments help to accomplish? And just can you elaborate that will be really helpful? Enrique Mayor-Mora: Yes, Chris, thanks for the question. Yes, so year-over-year in FY ‘24, we expect our CapEx spend to be roughly the same as what it was, but what's making it up is changing a little bit, right? And so by far, the largest contributor to our CapEx in FY ‘24 is going to be really that's starting to build out our off-site production, our off-site auction capabilities to ensure that over time, over the longer term that we're able to meet our long targets, right? We feel good about our near-term and our ability to hit kind of our sales, our auction levels, but we also need to plan for the future at the same time. So that consists of buying land across the country. It also consists of this year building out and opening our first off-site production auction -- production site sorry which will be in Atlanta and the metro market there. And the way to think about that is the size of it will be roughly and this way to think about them moving forward in our off-site production locations will be roughly the size of our largest production locations that we have in our stores currently, right? Large acreage, so 20 plus acres as well is how to think about them. And from a CapEx spend, they'll be similar to the CapEx that we had spent in the past on, kind of, our production locations just for those. But that is actually driving the largest piece of our CapEx spend. There is some anticipation that stores will continue to grow in FY ’25, right? Still, it was going to kind of see how the market, how we perform, how the macro environment is. We have lowered that amount for FY ’24 as you know, we're at five new stores and we'll see in FY ‘25, but there is some planning for that, that goes ahead even this early on in the year, because it does take quite a bit of time to get a store open.

Yes. And Chris, I would just add to that the planned spend for the capacity, it's no different than what we've done in the past. We used to build production stores as we're going into new markets. Well, what we've been doing here lately, because we haven't opened up a bunch of production stores, we've been leveraging the existing production. So we had planned to add capacity. So it's really no different than what we've done in the past. It just happens to be okay now is time that we start to do some additional production builds. And the really only difference is that some of them will not be attached to stores, but still in close proximity to stores, because that's a big competitive advantage.

Yes. That's really helpful. And then just related, I think you mentioned something effective opening up simulcast to get on wholesale. Can you maybe just elaborate there? It seems you're getting really strong wholesale volumes in GPUs to understand like the motivation there and what that means for revenue and cost? Just any thoughts would be helpful.

Yes. No, it's a good question. We just want to make sure that we're both maximizing the experience for our dealers, as well as maximizing the ultimate price that our cars sell for. And so we're just doing small tests just to see, hey, having a -- both a physical sale, but also virtually broadcasting it, are there new dealers that might show up? Or do you get extra bid. So we -- in our efforts to make sure we're being efficient as possible, we don't want to leave any [Indiscernible] unturned. So I don't really think about it as a big SG&A spend, because a lot of -- like the testing that we're doing is what I would call more of a post card sale. So you actually have the cars running through, but you have the auction lane open for folks to bid in that kind of thing. So again, small tests, we're going to continue to see what we can learn. But to your point, we feel great about the margins what we can put on cars. But again, we always are looking to get a little better.

That’s okay. Thank you for the time. Appreciate it.

Thank you.

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

Good morning, guys. Just two very quick follow-ups or clarifications. In the press release you said total interest margin would level off in 2024. I'm just curious as we look at the last three years running in ‘21 and ‘20, you did about 7% collateral spreads in those pools and in the last four, you did 4% collateral spreads. Is there something in sort of the forward market or what you're about to launch where you think the spreads are going to open up quite a bit. It just seems hard to understand how -- if we think about this -- that, that spreads could level off and maybe not compress? And then just a second question, Bill, on the franchise -- I'm sorry, on the market share gains. Is there room to gain in the six to 10-year old segment? I mean, if you kind of think about that 4% in one -- in the zero to 10-year old market, is there significant room in these older vehicles where you might have higher grosses over time?

Sure. Yes, thanks John for the question. I'll take the NIM one. So I think first -- most important to point out is you're coming off of probably a 10-year peak in Q1 previous of this year. You really benefited from low funding costs. Lenders were able to capture a lot of margin there. You look at some of those deals you referenced, I mean, very, very strong margin. So while we'd love to have been to stay up there, it was probably never going to happen and you've seen us come down sequentially quarter-over-quarter. I think if you look at what -- how we have been able to raise rates for our consumers and obviously, Enrique already mentioned earlier, we do think that the ABS market is kind of improving. We're probably better matched with our rates to how we'll do long-term funding costs out there. And so we think that when we look out, you never know where funding costs are going to go, you never know what consumers are going to walk through the door. Ultimately, we need to remain competitive and make sure that we're able to sell cars and provide competitive rates for our consumers. But when we look out, we've come down off of this peak. We think that we're well matched with our rates versus what we can fund this stuff for in the future and we do think we can level off in ‘24.

I'm sorry, does the match mean that you're going to get back to 5% to 6% collateral spreads you think in the near future? That's what you've seen, but things are somewhat more normal. So I’m just curious if that's what you think you're going to get to soon?

Sure. Yes. If you just look at those previous deals, you look at the ‘23 one deal, again, an APR of 9.09%, we just referenced that we're at 10.9% this quarter and I could tell you that's not where we ended the quarter, so you're going to see in subsequent deals APR is higher if funding costs are more reasonable, I think we're absolutely going to be better matched funding costs for rate out there, that's exactly what I'm referring to.

Thank you.

And John, on the market share the six, 10, remember, we always measure market share zero to 10. I do think six to 10 is an opportunity. I mean, if you look at our recent sales like even this quarter, vehicle is over six years over 60,000 miles. If I look at where we were year-over-year, we're probably 10 points higher, we're probably high 30s as a percent of sale. The real question will be is prices come down. Do consumers start to go back to newer model vehicles? So we'll see, I think we're in a great position. We obviously have shown that we can acquire those vehicles and recondition them. So it's a great lever as we go forward.

Okay. When you just think of that as a structural opportunity, right? I mean, if those consumers go back to the younger, cheaper vehicles, you still have those 10-year old vehicles that you can sell. Wouldn't that just augment your, sort of, long-term structural growth? I mean, I'm just curious, I mean, it just seems like a huge opportunity.

Yes, I think so. But again, some of it will be just on consumer demand. If the folks that are coming into our stores are looking for later model vehicles, lower mileage, we're certainly going to put more of those on our lot, so we'll manage to whatever the consumer is looking for.

Okay. Thank you.

Yes. Thank you.

Your next question comes from Chris Pierce with Needham. Your line is open.

Hey, good morning. About halfway through Q1 here, I was just curious if you could comment on used ASPs, retail ASPs and what you're seeing? They came down 7% sequentially in Q4, but I know Q3 was a little bit artificially inflated. Just given that's been talked about wholesale demand and strong wholesale price increases as a trace, if that's flowing through the retail or not as much, because of the retail wholesale spread? Just kind of curious what you're seeing quarter-to-date for retail ASPs?

Yes, I think, Chris, it's a little early, because the vehicles we're selling right now, we sourced in the last quarter. So I don't think it's really going to impact up to this point what your retail ASPs are. So I would think about this quarter right now, our retail ASPs are probably similar to what they were for the quarter. And again, we had a little bit of appreciation that we saw there. Keep in mind that the depreciation flows through much quickly on the wholesale cars, because you're turning those -- that inventory every seven days.

Okay. Perfect. Thank you.

Yes.

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

Thanks. Good morning. Just curious if you've seen a noteworthy pullback from CAF lending partners or I'm sorry from your lending partners, because your CAF gross penetration was up 330 bps. And related to that, Jon, I think you said earlier, you wanted to -- your goal is just to add new lenders. Were you talking about ABS lending or also for the Tier 2 and Tier 3 partners?

Sure. Yes, just to your first question, David. Yes, certainly when partners pull back, the pie sums to a 100, so CAF can benefit from that. But I think CAF's penetration is really again us remaining competitive in that tier space and winning the volume outright. But yes, we did see our Tier 2 partners certainly pull back, Tier 3 tends to benefit from that, because those customers who typically would be Tier 2 may move down and get picked up by Tier 3. But I think that just speaks to the quality of our platform, right? If CAF pulls back Tier 2 picks up, if Tier 2 pulls back Tier 3 picks up or other partners in Tier 2, but we did see pullback in the Tier 2 space certainly. And your second question was probably with regard to my prepared remarks and about adding a subsequent lender, we were referring to the FBS platform. We have five, again, long-term lenders on there, which means that they are operating with a soft pull they are decisioning all the vehicles using their models in minutes and getting it back to us so we can provide that to the consumer and provide as rich an offer as possible. Every lender you add, we added one in Q4, we hope to add another one in Q1 just further strengthens the set of offers across all the inventory that the customer can see and helps them to convert. So that's what I was referring to.

And those are -- David, those are long-term lenders that we already have that we're pulling in [Multiples Speakers]

Absolutely, it’s not adding a brand new lender, although I'm sure we have plenty of lenders that would love to come into our space. But this is existing in our typical in-store environments that we're going to add into this again very rich FBS environment.

Okay. Thank you. And are you seeing any increase in repossessions or do you expect that to happen later this year?

So if your question is, increased repossessions. Obviously, as losses go up, as you're seeing delinquencies certainly in the industry, it will lead to losses then you're going to see added repossession. So I think the entire industry is seeing that. We are seeing that to some degree, if that's your question.

Yes. Thank you very much.

Yes.

Thank you. We don't have any further questions at this time. I'll hand the call back to Bill for any closing remarks.

Great. Thank you. I want to thank everybody for joining the call and your questions and support. I do want to congratulate all the associates again on being named a great place to work for 19-years in a row. And like I said earlier, we believe we're well positioned to navigate this environment and emerge even stronger. We look forward to talking with everyone next quarter. Take care.

Thank you, ladies and gentlemen. That concludes the fourth quarter fiscal year 2023 CarMax earnings release conference call. You may now disconnect.