KMX
#Thanks, Bill
Good morning, everyone
With regards to sales mix by finance channel, CAF net penetration decreased modestly to 44.2%, compared to 45% in last year’s third quarter, Tier 2 represented 15.4% of sales compared to 17% in last year’s third quarter, Tier 3 from third parties grew to 10.8% of used unit sales compared to 9.7% last year and similar to prior periods this year, sales where customers paid cash or brought their own financing also increased relative to last year’s third quarter
The allocation of sales across our lending channels was for the most part driven by the mix of credit applications
We continued to see growth in applications across the credit spectrum
It was more pronounced at the higher and the lower ends
Also, we did observe some weakness from one of our lenders in the Tier 2 space
For CAF, net loans originated in the quarter rose 8.6% year-over-year to $1.5 billion
This was due to CarMax’s sales growth and an increase in the average amount financed, partially offset by the lower penetration
CAF income increased 15% to $102.8 million, driven by a 10.4% growth in average managed receivables and a lower loss provision, which was partially offset by slight compression in the portfolio interest margin
Total portfolio interest margin was 5.7% of average managed receivables, compared to 5.8% in both the third quarter of last year and the second quarter of this year
For loans originated during the quarter, the weighted average contract rate charged to customers was 7.7%, compared to 7.3% a year ago and 7.6% in the second quarter
The ending allowance for loan losses was $128 million or 1.11% of ending manage receivables, up slightly from 1.10% in the third quarter of last year, but down sequentially from 1.15% in Q2 of this year
Now, I’ll turn to corporate finance items
As you probably noticed in the release, we experienced a reduction in our effective tax rate
The tax provision was positively impacted by $8.7 million in Q3. This relates to our adoption this year of the new FASB guidance regarding share-based compensation
The new standard requires the impact of share-based awards settlements to be reflected in the tax rate, whereas before it ran through shareholders’ equity
We expected this would introduce volatility to our tax rate and this is the first quarter where it has been significant
In regard to capital structure, during the second quarter, we repurchased 1.5 million shares for $107 million
That’s down from last quarter’s pace as you would expect based on the stock price during the quarter
Before I turn the call back over to Bill, I’ll comment briefly on tax reform and its anticipated impact on CarMax
Our federal tax picture is pretty straight forward
So we would expect the substantially lower corporate tax rate to benefit our financial results and cash flow in future periods
We are evaluating the magnitude of the benefit, now that the legislation has been finalized and is awaiting the President’s signature
Additionally, in the period of enactment, which we expect to be our fourth quarter, we will be required to revalue our deferred tax asset based on our estimated new tax rate
We believe this would result in a one-time unfavorable impact on our tax provision of an estimated $50 million to $65 million
This range could be impacted by our analysis of final law and our fourth quarter financial results
Now, I’ll turn the call back over to Bill
The subprime, <UNK>?
I don’t know if excited is the right word, because we are obviously more concerned about the denominator and overall growth would be best for us
But I can give you a little bit of color on the subprime
As I mentioned in the prepared remarks, we saw the volume of customer applications being strongest at the highest and lowest ends
So, I think, at least in our system that says that more customers at that low end are applying for credit than we have seen in the past
And another piece of puzzle from the perspective of the subprime penetration is, we have seen this quarter and in some last quarter as well an uptick in their conversion of the applications that they see, meaning conversion to sale
So there’s been a modest uptick in the performance of those subprime lenders
I don’t know how that persists, but obviously, after a period where we saw them declining several quarters ago, it’s encouraging
Mike, we can add a little color to that also
If you look back at our growth plans and our history, capital availability has not been a gaining factor for us in our decisions regarding growth and investing in our strategic initiatives
We are at the pace that we are at because we want to make sure that we can execute successfully on the growth and that we have the bandwidth to focus on innovation
So that’s always going to play into our thinking with regard to our pace of growth and how fast we move on things as well
Hi, <UNK>
I ---+ hey, <UNK>
I am ---+ I can’t really talk about what we are going to see in the following quarter, because it hasn’t happened yet
But I can give you a little color, Tier 2 and Tier 3 overall, there’s a number of things that have been going on here
The volume that Tier 2 you are seeing has been much more flattish, as I said, since the growth of applications has been more pronounced at the high and low end
So that’s planning it a little bit on the Tier 2. And then, as I did mentioned, we have a lender that has ---+ had a significant pullback
In the Tier 2 space we expected that every lender we are partnering with is going to bring some incremental value to the table
So if we see some weakness in one of the lenders, the incremental value that that lender is ---+ has been providing is likely to trickle down to Tier 3 and see them, and probably, have a little bit less conversion there
So we would expect that we are feeling some impact on sales
And it ---+ it’s an issue that has been percolating for the last several quarters
I can’t really say how long it’s going to be
But the conversion in Tier 2 is down a little bit, because of that and then so for a combination of the volume, the conversion and that one particular lender, I think, Tier 2 is a little bit is weaker than it has been historically
And conversely, we are seeing Tier 3 up a bit, because their performance has been a little bit stronger, and I think, we are seeing some trickle down from Tier 2 into that space, that we wouldn’t have otherwise seen
Hi, <UNK>
Yeah
I’ll speak to that, <UNK>
I mean, if you look at the CAF income picture from kind of a big picture perspective, receivables are up 10.4% in the portfolio, that’s the combination of what we are originating, what’s ---+ and what is rolling off
Our interest margin contributions are only up 8.8%
So we are still seeing a bit of compression in that
But as we are growing the portfolio, the loss provision is lower by $4.4 million this year and that’s really reflection of last year we were in an environment of escalating losses
So, not only were we missing our booked expectations, but we were building the provisions for expectation of higher losses
And this year in all three quarters we have been generally in line with our expectations
So that ---+ I think it’s pretty straightforward how the environment has evolved, like, where it goes from here, I am not sure
With regard to us versus others, I can only speak to what we are seeing in our system and the performance of our partner lenders, and as I mentioned in the Tier 3 space, we’ve seen some improvement in conversion of the applications that they see
And I could also remind you that back when we saw the subprime part of our business start to decline, we were ---+ we ---+ other people were not seeing the same thing at that time either
But I don’t know if we’re bellwether or we just run a little bit differently than what you’re hearing elsewhere
