Good morning. My name is Carol, and I will be your conference operator today. At this time, I would like to welcome everyone to the CarMax Fiscal 2021 Fourth Quarter and Year-End Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to Stacy Frole, Vice President, Investor Relations..

Good morning. Thank you for joining our fiscal 2021 fourth quarter and year-end earnings conference call. I'm here today with Bill Nash, our President and CEO; Enrique Mayor-Mora, our Senior Vice President and CFO; and Jon Daniels, our Senior Vice President, CAF Operations.

Let me remind you, our statements today regarding the company's future business plans, prospects and financial performance are forward-looking statements we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements are based on management's current knowledge and assumptions about future events that involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them.

For additional information on important factors that could affect these expectations, please see the company's Form 8-K issued this morning and its annual report on Form 10-K for the fiscal year ended February 29, 2020, filed with the SEC.

Should you have any follow-up questions after the call, please feel free to contact our Investor Relations department at 804-747-0422 extension 7865. Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow-ups.

Bill?.

Thank you, Stacy. Good morning, everyone, and thanks for joining us. We have a lot of exciting news to cover today. Our comments will focus on material fourth quarter and fiscal 2021 performance insights, updates on our digital enhancement and, of course, the Edmunds acquisition, which we announced this morning.

Then we will open it up for your questions. For the quarter, total retail used unit sales were down less than 1% from last year's record sales, and used unit comps were down 2.3% when compared with the same period a year ago. It's worth spending a moment on the events driving our results for the fourth quarter.

As we discussed on our last call, entering the quarter, retail sales were pressured due to a surge in COVID-19 cases, which tightened occupancy restrictions and shelter-in-place orders. Sales began to accelerate towards the end of December and into January.

By the beginning of February, we were trending towards mid-single-digit comp growth for the quarter, excluding the impact of Leap Day in the prior year. However, starting in the middle of February, retail sales were affected by the severe winter weather across a large portion of the U.S., closing more than 65 stores in 1 day.

Sales were also impacted by delays in tax refunds relative to last year's timing and a lower inventory position due to COVID and weather-related production constraints. On a 2-year stack, total retail used unit sales for the fourth quarter of FY '21 were up 13.8%, and used unit comps were up 8.7%.

March sales were robust when compared with both COVID-impacted March last year and a record March in 2019. During the month, the initial distribution of tax refund and stimulus checks began, weather improved and customers continue to respond favorably to our ongoing digital enhancement and other strategic initiatives.

In addition, the underlying metrics we track, including website visits, online progression and activity at our customer experience centers, or CECs, indicate continued healthy demand for used vehicles as we head into April.

Full year market share data indicates that our share of 0- to 10-year old vehicles in our current comp markets fell from approximately 4.7% in 2019 to 4.3% in calendar 2020.

We had strong momentum entering the year, and we're gaining significant market share up until the start of the pandemic, when 95% of the country was under shelter-in-place orders and approximately half of our locations were closed or under limited operations.

As markets reopened and our omnichannel experience was launched nationwide, we began gaining market share again. During the last 5 months of 2020, we saw market share gains, and we expect those gains to accelerate in 2021.

Atlanta, where we have been in operations since 1995, and our most mature omnichannel market, continues to outperform the company, maintaining its market share in 2020, despite pressure from COVID. During the last 5 months of the calendar year, our market share in Atlanta increased 13.8%.

Over the past 2 years, since we first introduced our omnichannel experience, our market share in Atlanta has increased 10.9%. Retail gross profit per used unit for the fourth quarter was $2,086 compared with $2,195 last year. This GPU is consistent with our expectations and commentary on the last quarter's call.

It reflects the impact of the expanded pricing and marketing test we rolled out in select markets, in combination with our national multimedia marketing campaign and the improvements to our omnichannel experience. Early results for these tests were positive, so we expanded to more markets in the quarter.

We're going to continue with testing, while also monitoring macro factors. We expect to maintain attractive margins above $2,000 in the first quarter. Enrique will provide additional details around the profitability flow-through on different aspects of our business that are contributing to the success of these tests in just a moment.

Our wholesale business delivered another good quarter when you consider the impact of one less auction day compared with the same period last year. For the fourth quarter, wholesale volume was down 1.2%. Wholesale gross profit per unit was comparable to the prior year at $990 per unit.

We estimate the one less auction day in this quarter impacted the number of wholesale units sold by several percentage points. Now I'd like to turn the call over to Enrique to provide more information on our fourth quarter financial performance; and then to Jon, who will provide additional detail around customer financing.

Enrique?.

Thanks, Bill, and good morning, everyone. For the quarter, other gross profit decreased $4 million or 3.2%.

This decrease was due to a $14 million reduction in service profits driven largely by our previously announced year-end thank you bonus for 22,000 full and part-time associates across the company, many of whom work in our reconditioning and service functions, bonuses related to production [glitches] [ph] and company support pay related to COVID.

Partially offsetting this was favorability in EPP and third-party finance fees. EPP grew $2.6 million year-over-year for the quarter driven by a favorable reserve adjustment and an increase in profit sharing revenue. This was partially offset by lower sales volume and a slightly lower penetration rate in the quarter.

Third-party finance fees improved by $7.7 million in the quarter primarily due to the renegotiated fees with our partners, which Jon will talk about shortly. For SG&A, expenses for the fourth quarter increased 14.7% or approximately $71 million to $556 million. SG&A per unit was $2,713, a year-over-year deleverage of $368 per unit on the quarter.

The increase in SG&A was primarily driven by an increase in stock-based compensation of $33 million or a deleverage of $160 per unit; an increase in advertising expense of $23 million or a deleverage of $115 per unit, which was in line with our previously communicated expectations as we focus on heavier support for our next brand campaign; and continued spending to advance our technology platforms and strategic initiatives.

Our approach to SG&A and costs heading into next year remains consistent. We will continue to invest in our business at this inflection point in our industry, specifically in marketing and in our strategic initiatives. Regarding marketing.

As we head into next fiscal year, we expect our spend to remain elevated with similar per unit trends experienced in the second half of fiscal 2021.

Our advertising spend will continue to focus on clearly differentiating our brand and demonstrating the benefits of our omnichannel experience, in addition to ROI-based digital investments that are delivering strong results. Included within this spend is an increased focus on vehicle acquisition.

We believe we are well positioned to aggressively grab market share through the promotion of our omnichannel experience and new product offerings, such as Love Your Car Guarantee. We also remain focused on ensuring we are appropriately managing our spend, targeting specific areas of opportunity.

This includes our CECs, which are maturing and becoming more efficient and effective through automation, data-driven algorithms and smart routing with the goal of ensuring customers get the right support. This past year, our CECs were more efficient than the prior year, and we expect this trend will accelerate in FY '22.

Regarding our SG&A leverage point in FY '22. We would expect to require a 5% to 8% comp on a 2-year stacked basis in FY '22 to lever in FY '22. As previously communicated, in periods of investment like we are in now, we'll need to be at the higher end of the range to lever.

This 2-year comp approach is reflective of the impacts of lapping over COVID and due to the continued investments in the business we made this past year. Now I'd like to take a moment to provide an update on the financial aspects of the pricing tests we ran in the fourth quarter. As Bill mentioned, we like what we have seen so far.

While these tests confirm what we have historically seen regarding price elasticity, several factors have changed, resulting in a stronger flow-through from the increased sales and, thereby, resulting in greater profitability.

These factors include higher profitability levels of our CAF originations, our lower variable cost structure as we continue to leverage our centralized CECs and the favorable changes to our third-party lender fee structure. As mentioned earlier, we will continue to perform pricing tests in the first quarter, while also monitoring macro factors.

Our goal remains to maximize both unit sales and long-term profitability. Our unique and diversified business model still generated a significant amount of cash this past year, despite a challenging environment.

From a capital allocation perspective, this positions us well to reinvest in the growth of our core business, fund new growth opportunities such as our announced acquisition of Edmunds, and return capital back to our shareholders. Regarding Edmunds, we expect to pay for the transaction with a combination of cash and equity.

We anticipate this transaction will close in June and expect their financials to have an immaterial impact to CarMax's EPS in fiscal year '22. We are confident this transaction will provide significant shareholder value creation over the longer term.

We continued executing our share repurchase program, and during the fourth quarter, we repurchased approximately 700,000 shares for $66 million. We currently have $1.34 billion of authorizations remaining, and we are committed to returning capital back to our shareholders. For capital expenditures, we anticipate approximately $350 million in FY '22.

As we've pivoted our business to be more technology driven, the profile of our CapEx has followed suit. Approximately 1/3 of our capital spend in FY '22 will be focused on investments in technology, up from about 15% just 4 years ago. In FY '22, we plan to open 10 new locations, with the first grand opening expected later this month.

As was the case with our more recent openings, these locations are predominantly cross-functional stores and have a smaller footprint and can leverage our scale and the presence of other locations in nearby markets.

Our national footprint and nationwide logistics network continue to be a competitive advantage for CarMax, and we remain committed to an appropriate level of investment on these differentiated assets.

We are confident that the foundational investments we are making in our omnichannel experience, our proprietary tech stack and our highly recognizable and trusted brand set us up for accelerated market share gains in 2021. Now I'd like to turn the call over to Jon..

Thanks, Enrique, and good morning, everyone. CarMax Auto Finance and our lending partners once again delivered solid results. For the fourth quarter, CAF's penetration, net of 3-day payoffs, was 43.5% compared with 43% a year ago. Tier 2 was up slightly to 21% of used unit sales compared with 20.5% last year.

Tier 3 accounted for 9.5% compared with 10% a year ago. This distribution across the credit tiers is primarily reflective of the credit mix of applicants observed in the fourth quarter. Year-over-year, CAF's net loans originated were comparable to the prior year quarter at $1.8 billion.

The weighted average contract rate charged to new customers was 8.5%, up from 7.9% a year ago and down slightly from 8.6% in the third quarter. Similar to the third quarter, this year-over-year difference in APR is attributed to the mix of CAF customers seen within the Tier 1 space, rather than an increase in the rate charged to these customers.

Regarding the portfolio. The overall interest margin increased to 6.4% versus 5.8% in the same period last year, as we continue to realize significant benefit from lower funding costs. Our most recent securitization in January closed with a near record spread between the APR we charge to customers and the rate we pay to fund the receivables.

Our ABS investors continue to recognize the consistency and performance of the CarMax origination channel, and we appreciate their support. CAF income was up 68% to $188 million in the quarter, reflecting a reduced loss provision, plus an increase in interest margin.

The provision for loan losses was $5 million, resulting in an ending reserve balance of $411 million for the fourth quarter. The total reserve is 2.97% of managed receivables, which is lower than the 3.17% at the end of the third quarter.

Our reserve as a percentage of managed receivables has trended downward over the past 3 quarters, as our customers have exhibited a willingness to make payments, even in these continued challenging times.

We believe our current reserve is adequate and considers both the positive payment behavior recently observed as well as the future uncertainty of the macro environment. I would also like to provide an update on the arrangements we have with our third-party lenders that Enrique referenced earlier.

Our agreements with our partners have resulted in CarMax historically receiving a $300 participation fee for each of the agreed-upon finance contracts purchased within the Tier 2 space.

Within the more subprime Tier 3 space, where CAF keeps approximately 5% of the volume, CarMax has historically offered lending partners a $1,000 discount for providing financing to a customer that we believe would otherwise not be able to purchase a vehicle from CarMax.

At the beginning of the fourth quarter, this Tier 2 participation fee increased to $400, and our Tier 3 discount was reduced to $750. If this structure have been in place for the entirety of FY '21, and penetration rates remain the same, it would have resulted in annual savings of approximately $30 million or $40 on a per unit basis.

With regard to future changes in the Tier 2 and Tier 3 space, as of March 2021, CAF has begun to methodically increase its percent of Tier 3 volume beyond the 5% level, and we anticipate reaching and maintaining a 10% share in Tier 3 by May 31 this year.

CarMax will continue to evaluate the lending environment and will consider future adjustments, if and when, we believe those changes are sustainable and in the best interest of our long-term business goals.

Bill?.

the completion of the national rollout of our omnichannel experience, giving us a common platform across all of CarMax that leverages our scale, nationwide footprint and infrastructure; the move of all wholesale auctions into a virtual environment; the national expansion of our new online instant appraisal offering on carmax.com and edmunds.com, strengthening our leadership as the largest buyer and positioning us to become the largest online buyer of used autos from consumers; and finally, the introduction of the Love Your Car Guarantee, an industry-leading signature customer experience.

All of these were possible because of our exceptional associates. They came together to take care of each other and our customers, while also innovating for the future. Customer response to our omnichannel offering is strong, and we are continuing to work to further improve and enhance the digital customer experience at every step of the sale.

One critical advantage of our omnichannel model is the ability for the customer to choose how they progress their experience. As previously discussed, our initial rollout of our omnichannel platform enables customers to buy a vehicle online. The parts of the transaction may have required assistance from our CECs.

In the fourth quarter, we made significant progress enabling self-service for all components of the sale. Exiting the quarter, approximately 25% of our customers were eligible to buy vehicle online independently if they chose, up significantly from the third quarter. We expect most of our customers to have visibility by the end of the second quarter.

Additionally, in Q4, about 3/4 of our customers advanced their transaction digitally, with approximately 5% buying the vehicle online. We consider an online purchase to be when all major activity leading up to the purchase is performed independent of our stores.

We expect our online sales will grow robustly, as we continue to enhance our marketing and digital capabilities. As a reminder, we will be hosting a Virtual Analyst Day on May 6, where we will take a deeper dive into our online capabilities and our technology and data advantages.

At that time, we will also discuss new metrics around online orders and how they are fulfilled as well as providing insight on our longer-term outlook and expectations. Now I'll take a moment to highlight some recent enhancements we have made to the customer experience.

First is our online instant appraisal offer, which allows us to quickly give customers an offer on their vehicle. This offering was first introduced and tested on edmunds.com in June. In February, we completed the national rollout of this offering on carmax.com.

Early response has been strong, with online buys quickly exceeding our expectations, providing us with a clear pathway to become the largest online buyer of used autos from consumers. At the end of the fourth quarter, we launched the ability for customers to get penny-perfect, transactable financing offers in our online checkout process.

With these enhancements, customers can apply and accept finance offers without needing the assistance of an associate to submit a credit application over the phone or in the store. We are rapidly expanding this feature to our overall customer base in the first quarter.

We know our customer-centric approach is a differentiator for CarMax, and we will never stop innovating on behalf of our customers. In January, we introduced our new industry-leading signature customer experience, Love Your Car Guarantee.

This gives customers the ability to take 24-hour test drives before committing to purchase, and extends our 7-day money back guarantee to a 30-day money back guarantee, which is unmatched in the automotive industry. It's too early to identify trends, but preliminary results show these offerings are highly valued by our customers.

As we continue enhancing our online experience and offerings, it's important to educate our customers on our omnichannel experience to differentiate and elevate the CarMax brand and our position in this evolving marketplace.

In the fourth quarter, we introduced the next phase of our national multimedia marketing campaign that began last year to increase awareness of our core omnichannel capabilities, which was highly successful. We set records every week for web visits since being introduced, reaching more than 8 million weekly visits by the end of February.

After the campaign launch, web traffic and Google query volumes were both up over 25% versus the prior months. We want to continue this momentum and ensure customers understand that CarMax offers the ultimate flexibility to shop and buy on their terms, their way.

Accordingly, as Enrique mentioned earlier, we are planning on increasing our spend on both awareness and acquisition marketing in FY '22.

We will continue to evolve our business as an omnichannel retailer by innovating at an accelerated pace, leveraging our scale across technology, data, talent and physical assets to unlock opportunities to compete across the used auto ecosystem.

This is why we're excited to announce that we've signed a definitive agreement to acquire Edmunds, one of the most influential and popular automotive research sites in the world.

Over the past years, our teams have had the opportunity to collaborate with Edmunds on a number of strategic initiatives, including our instant online appraisal offer and leveraging its proprietary content on carmax.com. We've been extremely impressed with its technology, content and online experience as well as its talented tech and creative teams.

We believe we can both unlock additional value by working together to streamline the user experience across the entire car buying and selling journey, in addition to identifying other digitally focused opportunities.

One thing that has become clear is that we share a commitment of delivering the highest quality online experience to our customers and dealers. Edmunds is a widely recognized and deeply trusted brand.

It will continue to operate its core business independently and will remain focused on delivering confidence to consumers and excellent value to its dealer and OEM clients.

We are confident this transaction will drive shareholder value as we are able to leverage our combined size, scale and extensive industry expertise for the benefit of both businesses. To sum up, we are very proud of our performance during this difficult year.

We're even more excited about how our continued investments in our existing business and in Edmunds are positioning us to be further differentiated and even more competitive.

We expect robust top line, bottom line and market share growth for the upcoming year that is a result of not only lapping COVID, but demonstrating the impact of the investments we've made and the experiences we are providing. At this point, we will be happy to take your questions.

Carol?.

[Operator Instructions]. Your first question this morning comes from Sharon Zackfia from William Blair..

I have two questions, but I think the first is pretty [vast] [ph]. Your inventory has gone down a lot in March, kind of an unusual amount.

Can you talk about how you're positioned from an inventory perspective to meet demand and whether there will be any kind of unusual cost this quarter to ramp back up inventory? And then the second question was on CAF and the expansion of Tier 3.

Can you give us any idea of what the profitability is of Tier 3 on a per car basis relative to the $750 that you discount to the third-party lenders?.

Okay. Sharon, first, I'll talk about the inventory, and then I'll let Jon talk about the CAF question. So you are right. At the end of the quarter, our saleable inventory is low. But again, that is a function of the fact that we had some COVID and weather shutdowns. So in the rise in COVID, we had to shut down some production locations.

We also had some production locations shut down because of the weather. And so that's really why we're a little bit behind on saleable inventory. At the end of the quarter, I think we were down about 20% on saleable inventory. I would just point out, though, that if you look at our overall inventory year-over-year, we're actually up a little bit.

So we've got the inventory. It's just a matter of producing. In fact, I think we ended the quarter north of 155,000 units. So it's just a matter of working through that. And we're confident we have the capacity. Now it's just a matter of getting the inventory back to our target. So -- and I'll let Jon answer the CAF question..

Yes, Sharon, thanks for your question. On Tier 3, moving from 5% to 10% for CAF, the profit per unit on that vehicle is relatively consistent to our Tier 1 vehicle. It will sit depending on funding costs between $2,000 and $2,500 in this funding environment.

We'll see how it plays out over the course of the year, and that's -- you can compare that to the $750 we would pay in a discount. I think an important point to note here is, though, because of CECL regulation, we will have to, as we book those loans, reserve for the full loss impact of that immediately.

And so therefore, this will probably be a headwind for us in the upcoming year. But obviously, the lifetime profit will play itself out over time..

Can I just ask a follow-up? So on your website right now, it says there are 24,500 cars.

Is that -- is there some disconnect there between what's on the website versus what you actually have?.

Yes. So Sharon, on the website, all that you're seeing right now is saleable inventory. We have very little that we put as far as coming soon. What you don't see on there are customer transfers. You don't see the transfers that are going between stores, so say, a hub store and a satellite. You don't see sale pending.

If you took all that into consideration, you actually at least double the number that you currently see on the website. And then, of course, it doesn't include the work in process, which is really what gets you to about the 150,000 total units that we have..

Your next question comes from Craig Kennison from Baird..

Bill, you've said that you want CarMax to be the largest buyer of used autos from consumers.

What is your estimate for that total addressable market in terms of the number of cars? And then on a related note, can you share any metrics to illustrate your activity levels or your buy rate activity on the online appraisal tool that you're using to source those cars?.

Sure. Craig, so first of all, let me just clarify something. It's not that I want to be the largest buyer of used cars from consumers. We're already the largest buyer of used cars from consumers. I certainly want to continue to buy every single one that we can. If I think about the total addressable market, 40 million used cars exchange hands every year.

And in that number, obviously, is person to person. So that's how I kind of think about the overall market. And as far as the online appraisal offer, yes, we're really excited about this. It's exceeding our expectations. On carmax.com, we really got it up kind of middle of February, so we only have the partial month.

And obviously, we've been testing, so we have seen some trends before that. But if I look at the quarter as a whole, the online buys were about 10% of the total appraisal lane buys that we made. And of that, just because we got the carmax.com up towards the end of the quarter, most of those buys came through our relationship with Edmunds.

But as I said, just the trajectory of where we see those things going, we think, in very short order, we'll buy more than anyone else online from consumers..

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

I just wanted to kind of maybe stay on this line of questioning on sourcing vehicles. I mean, obviously, the market itself is very tight right now without a lot of flow into the secondary market, the used market. But there's also a lot of dealers and maybe even some new competition that are grabbing vehicles or buying vehicles as well to resale.

And particularly with the new vehicle dealers, they're higher in the funnel and getting access to some trade-ins, obviously, as people are selling new vehicles.

So Bill, just curious, as you think about this going forward, how much of this tightness in supply that you can get for yourselves to retail is transitory? And how much of it is somewhat more of a secular shift than an increased focus by the dealers and maybe the other competition and is making it a little bit harder to get inventory? And then also, is this Edmunds purchase or acquisition, really, the key here is focused on sourcing vehicles online? Is that really what this is? Because I know it's a big lead generator for a lot of dealers, so there's a lot of other angles to what Edmunds delivers.

But is the key to you sourcing these vehicles directly from the consumer online?.

All right, John, I'll try to hit all this. You got a lot of stuff in there. First of all, as we've been talking about for several quarters, vehicle acquisition is a strategic initiative that we've been focused on. And to your point, if you look at the supply out there, yes, the supply is probably going down a little bit versus prior years.

The great thing for us is that we get such a large amount through the appraisal lane. It really helps to alleviate anything outside of CarMax.

Our focus with the online is to continue to drive as much as we can of buying vehicles right from the consumers, and we see this as a potential to really increase our self-sufficiency, which we think is a huge competitive advantage. And again, it's one of the reasons why we've been focused on it, and we'll continue to invest in here.

Now as far as Edmunds goes, look, the online piece of Edmunds, that's only a small piece. It's only a small benefit of the whole transaction. That's not the reason that we have decided to acquire Edmund. It absolutely has been a successful partnership on that piece of it, and we think there's a lot of opportunity to still do on the acquisition.

But there's other components. We've been working with the content, for example. There's other things at Edmunds that we feel like having the 2 companies come together will take 2 great companies and strengthen both of them.

So self-sufficiency and buying through the A lane, increasing that, whether it be through online or through the traditional A lane is absolutely a focus for us going forward..

Yes. It's important to remember as well that we buy cars better than anybody. We always have and we'll continue to do so. All we're doing now is that we're extending that to online. So the combination of in-store and online, we're just going to continue doing that better than anybody..

Can you guys just give us an idea of where you think you will go in sourcing vehicles directly from the consumer as opposed to auctions? I know we traditionally thought around 50-50, but sometimes -- different times, it kind of ebbs and flows.

I mean, is this kind of thing where you're going to 60% to 70% to 80% source from consumers and move away from auctions?.

So John, the way I think about it is more on the self-sufficiency side. First of all, whether it's a retail or a wholesale car, we want them all. But I think -- when I think about from a self-sufficiency side, we've been somewhere in the, let's call it, 35% to 50% self-sufficiency over the, let's call it, the last 5 years.

I would expect this to take us to numbers that really are historic highs, if not kind of breaking the ceiling on the self-sufficiency. So our goal is to continue to see how far we can push that number on the north side..

Your next question comes from Seth Basham from Wedbush Securities..

Bill, I was hoping you could provide some more color around the price tests.

How broadly do you expect to extend those? What have you learned in terms of the sweet spot for discounts? And how much lift are you seeing from tests, thus far?.

Yes. So Seth, I'll talk a little bit about kind of the extent of the test, and I'll let Enrique just talk about the focus here. But -- so as I said in the comments, we did expand the test. We have the test in a bunch of stores. Now I would say that we never would -- will expect to do this in all the stores. It just doesn't make sense.

And we know the differences between markets and different stores, and the elasticity is very different in different markets. So as I've said in the opening remarks, we're going to continue with this into the first quarter, but we're going to monitor the macro factors. And obviously, there's a lot going on right now as far as from a macro standpoint.

We talked a little about, in John's question, that the -- a lot of supply has tightened up a little bit. You've got some things going on, on the new car side as far as new car availability. You -- we've got tax refunds that are going that have been delayed and kind of pushing into March. You've got stimulus money out there.

So there's a lot of different things kind of going on. Also macro factors, you have to watch. You just continue to monitor what your competitors are doing. And whether that's their sales price or their margins, you have to take all that in consideration. So we'll continue with these. Like Enrique said earlier, we're pleased with them.

But I'll turn it over to Enrique and let him just expand on some of the profitability stuff..

Yes, absolutely. So it's important to remember, we're solving for 2 things, right? We're solving for driving increased sales to lower prices. But at the same time, we're also driving for increased profitability. And what we've seen in this test is really 2 things. One is the same level of sales elasticity.

However, what we've seen is greater profitability flow-through, and there's really kind of 2 reasons why we've seen that greater flow-through. Number one is higher finance income, so CAF originations much more profitable in this environment as well as the renegotiated third-party finance fees.

And the second is just lower variable costs as we migrate towards our CECs. And so we've been really pleased with the results. We've seen, again, increased sales and increased profitability. So we expect to continue to test and, as Bill mentioned, while also watching the macro environment..

That's helpful. Just as a follow-up, when do you expect to have better data on whether or not you plan to roll this out across the chain? Obviously, this is a unique period of time with all the macro factors you mentioned.

Could this be a multi-quarter test before you have a clear picture?.

Yes. I think it's a great question, Seth. Just because of those macro factors, we generally -- we get reads on these very quickly. Like I said, we got to read it. We like the results. But again, we've got to see how the rest of this quarter shapes up from -- it's more of the macro factors versus kind of internally. So I would stay tuned on that.

I think we'll probably have an update on that in the -- on the Analyst Day in May..

Your next question comes from Brian Nagel from Oppenheimer..

So I'm going to -- I've got a couple of questions on merging together. First off, just with regard to -- Bill, you talked about the business into -- I guess, into the fiscal Q1 or March.

Can you help size better just that sales reacceleration, particularly against the -- I guess, you thought it was on kind of a mid-single-digit used car unit increase in February until the weather hit. And then the second question I have, a bit just unrelated.

But with regard to the renegotiation of the fees in the finance business, those of us who watch CarMax for a long time, we've talked about this before a long time.

Why now? I mean why -- what allowed you to -- you as a company to make this shift at this point?.

Great, Brian. I'll let John talk about the CAF in just a moment. I can't believe it's taking us like 5 or 6 questions for somebody to actually ask about the sales performance, but I appreciate you asking. Look, if I think about March, as I said in the opening remarks, it's robust. And actually, it's a great -- March has been a great month for us.

It's been a record month for us. We've sold more than 100,000 cars in the month of March for the first time in the company's history. And I would tell you, it doesn't really make sense to think about comps this year versus last year just because of the COVID impact.

The way I think about them is we should really be comparing them to March of 2019, so 2 years ago. March of 2019 was the old record of number of vehicles that we sold.

And what I'm most encouraged about is if I compare our March performance this year to 2 years ago, we're seeing double-digit growth on top of that March, which just really speaks to a lot of the things that are going on. I mean, sure, some of what's going on are macro factors beyond our control.

When you think about the pushing of the tax -- some of the tax refund money into March, you think about the stimulus, I absolutely get that, and that's helping drive some of that tailwind. But we're really excited about the tailwind beyond that. So we're -- as we said in our opening remarks, we're excited about 2021.

I think the quarter -- I'm sorry, 2022 -- FY 2022. The quarter, unfortunately, it's just -- it's the ending of a very volatile year for us. I would just remind everyone. If you go back to FY '20, it was a great year, double-digit top line growth, high mid-single-digit comp growth.

We continue that into the beginning of FY '21, up until the point we hit the pandemic. And then since the pandemic has been in place, it's obviously been a very volatile year. Looking at the fourth quarter, the pandemic also started -- caused some of the volatility at the beginning of the quarter with December.

And we talked about that in the last call, we had a big surge in COVID cases. And we had a bunch of markets that went back into lockdown mode. I'll give you one example. The state of California, which has been typically one of the most restrictive states, limiting occupancy to 20% and 25%, that went back into that mode of 20%, 25% in December.

A market like that, what we saw is that occupancy restriction causes that market to perform on average north of 10% worse than the rest of the organization. So we had that headwind on the occupancy restrictions in December and in January.

Both of those 2 months, we had more than 50 stores that were less than 50% occupancy, and that -- less than 50% is difficult for us. You get to 50% above, we can work through that. But just given the traffic that comes into our store, it's hard to manage that. But that being said, we started out December, negative 4.

We're able to do better than that at the end of December. We were still negative. But then coming into January, and if I look at January, it was the most normal, if there is such thing, normal month. We didn't have tax refund delays. We didn't have bad weather. What we really had to contend with were these occupancy restrictions.

And even with the occupancy restrictions, we were seeing comps north of 7% in January, which we feel great about. And I really do think that's continuing some of the trends that we saw in the prior year and our investments coming forward.

Then we get into February, clipping along, and like I said in the opening remarks, we were looking -- even though we started down the hall, we were looking at a mid-single-digit comp, excluding the impact of Leap Day. Now keep in mind, Leap Day last year was a Saturday, and our stores are at the busiest day of the week.

So excluding that, we were at mid-single-digit comp, and then we hit the weather constraints and just the delay of the tax refunds. I think, in February, returns were down about 30% year-over-year. So that's a little bit more color on that. Let me pass it to Jon to talk about the other questions..

Sure. Brian, thanks for your question on the piece. So your question was why now. And a fair question. I think, really, three things I'd point to there versus I think it's just a very favorable lending environment right now.

I think customers are performing well, and I think those finance companies and lenders are anxious to extend money out to customers that are performing well. It's absolutely a favorable funding environment. That's very clear. So those 2 things certainly made it easier.

And I think all of our lenders in our platform are really excited about CarMax's growth. So they're excited about what's coming in the future. They love CarMax collateral. So all those things together, I just made it feel like it was the right time.

I think some might want to drive home, though, as we think about fees or our entire platform, whether it be the fees and discounts, the partners that we have in the platform, where CAF participates in the platform, the most important thing we're looking to deliver from our finance platform is highly competitive offers across the credit spectrum in all economic environments.

And we want to do that such that we can scale that as CarMax scales. So we're always going to look at that platform and look to optimize it. It felt the right time to make the fee changes now, but we were very careful and looked at what the impact of sales were there.

And if we make any changes in the future, we will stay very focused on providing those strong credit offers. So that's the most important to us..

Brian, one more thing, too. I just want to point out. I talked about the occupancy restrictions. I'm going to knock on wood. But as of right now, although we have about 1/3 of our stores still on occupancy restrictions, the key factor is we only have one store at this point that's less than that 50%. And again, that's an important threshold for us..

Got it. I appreciate all the color. So Bill, just to clarify. So the month of March, you sold 100,000 cars, if I heard that right, and that's up double digits from -- you're saying that's up double digits from what the number was for '19..

That's correct. And I think that's the way we should all be thinking about this year. I think, trying to relate comps this year versus last year, I think that's a -- I just don't think that's a good exercise. I think we should relate it back to '19, which was a great year for us, and we sold a lot of cars.

And so that's what's really encouraging is that if you look at -- because that March of '19 was the past record, and we beat that by double digits..

Your next question comes from Scot Ciccarelli from RBC Capital Markets..

Well, just can I verify the double-digit you just referenced on Brian's question? Is that comp? Or is that total that includes new stores?.

That is both. It's both. It's comp and total..

Got it. Helpful.

So especially since you are trying to help everyone understand kind of like the sales pace and variances, et cetera, can you provide any more details on what you're seeing in the Atlanta market from a market share sales perspective just given the seasoning in your omnichannel offering? And kind of related to that, is there anything unique that you're doing in that market? Because at one point, I know there were some unusual things you're doing with marketing and pricing that you hadn't rolled out everywhere.

Or is everything kind of a blanket offer -- a blanket testing at this point?.

Yes. So Scot, on the Atlanta, as I said in the opening remarks, the -- we actually maintained the market share in Atlanta. And if I look at the fourth quarter, comps in Atlanta were actually about 6.5%. So we -- again, we're encouraged by that.

And look, we have some older waves that we've rolled out omni that also had comps in the quarter, but then you also -- it gets hard to look at the waves because the waves had some stores that were impacted by weather, some that weren't. So again, Atlanta is kind of the clean look at it.

As far as different things, when we started doing the expanded pricing test and looking at the marketing, a lot of that was from the learnings that we had in Atlanta. So we're starting to -- obviously, we've started to put that out in other markets.

I think the other thing to remember is when we roll new things out, so for example, if you think about self-serve, the first market we put that in is Atlanta. Generally, we roll things there first. So they're always getting things a little bit earlier than everyone else. So that would be the other -- the difference that I would point to as well.

But on the self-serve, again, I just -- we're excited about that because I think the team has done a tremendous amount of work. We -- coming out of the second quarter, we've got 25% of our customers were available to use it. And we think that most of the customers by the end of the second quarter will have that option..

That's helpful. And just one more follow-up, if I can.

Is there any demographic differences for people utilizing the omnichannel than what your typical customer cohort would be?.

Yes. No, it's interesting. We don't really see any big shift in demographics. It's -- it very much mirrors the typical CarMax customer that would come into the store..

Your next question comes from Michael Montani from Evercore ISI..

Just wanted to ask, if I could, where the self-sufficiency ratio was for fiscal fourth quarter and then for the prior year. And then I had a quick follow-up for that..

Yes. So Michael, the self-sufficiency for the quarter was around -- it was a little bit above 40%, 41-ish percent, and that's up from the prior year's fourth quarter, where it was down in the 30s, mid- to -- really kind of mid-30s, around 35% or so..

Okay. And then the follow-up I had was just to get some sense of magnitude on the potential tailwind to GPUs from self-sufficiency. I've been thinking of it as maybe $600 to $1,000 a unit, all else equal.

And I guess, I wouldn't insinuate that you all would flow all of that through, but it just seems like if GPU is still going to be down, even with that kind of a tailwind, it suggests that you're getting really sharp on price and doing a lot of free transfers. So just wanted to understand how you think about striking that competitive balance as well..

Yes. I mean, I think you bring up a good point. I mean, the more we can buy through the appraisal lane, it obviously is -- it's better from a profitability standpoint. If you think about it, you're not paying auction fees in a lot of cases. In all the cases right now, we don't -- we're not having to transport them from an auction.

They're actually at the store. So we take that's part of how we manage our overall margin. And at times, we'll take some of those synergies, and we'll obviously pass along in prices, which would be really hard for you guys to see. Other times, obviously, we have the option to manage our margin and get to the margin where we want to be.

So it's a balancing act, and it's one that we'll continue to take into consideration as well as continuing to look at the macro factors as we go forward on our pricing test..

Your next question comes from Rajat Gupta from JPMorgan..

Just to follow up on like the 100,000 number for March. Maybe talk about some stimulus and tax refunds shift, maybe some recovery from the poor weather in Texas, some deferred purchases because of that.

Like is there any way to quantify how many of those 100,000 units may have been a shift from Feb to March as you have seen in any other normal year? And just like just -- could you give us a sense of the mix of alternate delivery channel volumes in the fourth quarter and in March as well? And I have just one more follow-up..

Okay. Rajat, so as far as the sales shift, really, it's hard to quantify, especially break it down between the weather and the delay in tax refunds.

I think the best way to think about that is kind of how I talked about it earlier that, coming into February, middle of February, we would have -- excluding the impact of the Leap Day, we would have been running about a mid-single-digit comp. And obviously, that's not where we ended up. So that's one way to think about. We ended up at negative 2, 3.

That's one way to think about the weather and the taxes combined, but it's really hard to parse out. And it's hard to know exactly, obviously, how much is impacted. So as far as the alternative delivery, just to remind everybody, alternative delivery is both home delivery, but it's also express pickup or curbside pickup.

That's still -- we're seeing still -- it's under 10% of overall delivery. And again, that's a number, while we have reported out on it, it's one that -- it's not like we're trying to drive that. Again, this is all about giving the customer the experience they want. If they want home delivery, great. If they want to pick it up in the store, great.

So -- but to answer your question, it's about -- it's under 10% of the overall. I think the other thing, Rajat, is the thing that I introduced, which is the online sales. That's kind of a new way, a new metric that we're -- we talked about on this call. And obviously, in May, we'll have more on these metrics.

But 5% of our customers essentially did the whole transaction online. And then to us, we don't care how they get it fulfilled, whether it's in the store or if it's at-home. And we expect that 5% to continue to go up..

Got it.

And so just on a previous question, like have you been able to gauge any impact from the stimulus package separately that might have helped March? Or any sense of that? Like what kind of contribution that might have had to your growth in March?.

Yes. So I mean, obviously, it's having an impact. Again, it's like the weather and the tax delay refund. It's hard to gauge. But I think the thing that we're excited about is you've got different ranges, and it's not an exact science. But we just feel like the increase that we're seeing is beyond the stimulus. It's beyond the weather rollover.

It's beyond the delay in tax refunds. And it really speaks to all the investments that we've been making on so many different fronts. And that's what we're excited about..

Got it, got it. That's helpful. And then just on the SG&A line, you talked about increased investment. The overhead cost bucket moved higher sequentially. Our understanding, based on some comments on like previous earnings calls, were like there were some permanent reductions that took place there.

So just curious on how we should think about that line item specifically going into fiscal 2022 and beyond. What kind of investments are going on there? Like how much is fixed versus variables, et cetera? Just any color on that would be really helpful..

Yes. The way we think about it now is absolutely the right time to invest in growing our business, and that's the path forward that we've been taking. The industry and CarMax, we're at an inflection point, so we believe investment is the right point in time is now.

I think it's also important to recognize that the investments we're making are also impacting our appraisal and our wholesale business, which we have focused some of our investments on, and we'll be talking about that in the upcoming Analyst Day.

We'll speak to think -- we'll speak to how we think about SG&A in light of these investments at a really growing multiple components of our business, not just our used unit business. I would look specifically. To answer your question, the other line in SG&A.

That actually is where you'll find some of our strategic investments, and we expect that line will go up.

It has been offset over the past year and will continue to be offset by efficiency gains that we have across the business and that we're always focused on, but that line item specifically tags to our strategic investments as well around technology..

And Rajat, the only other thing that I would add to that is if all we were focused on this year was continuing our -- improving our omnichannel experience, you would have seen a cost of -- a bend in the cost curve from an SG&A standpoint.

But to Enrique's point, now is the time to continue to invest, and we're investing in all different parts of the business. So -- which is also why Enrique said, you got to look at the kind of the two year 5% to 8% in order to lever. So I just wanted to add that as well..

Got it. That's super helpful. And then if I could just squeeze in one more on the Edmunds. You talked about like neutral from an accretion standpoint, including like the financing and the equity, I guess.

Any way to think about like just like gross profit or like EBIT contribution from the deal? Will you be reporting that? When will that go in effectively? Or will it just be a separate line item or something? Just any color on that would be helpful. That's all..

Yes. We do anticipate that we'll be reporting Edmunds as an operating segment, so you'll have a view into, certainly, the revenue, which we announced today, what their last year's revenue was as well as profitability.

What I'd tell you, though, is if you take a step back from an impact accretiveness, dilution impact upon the transaction, it's really immaterial to CarMax in the immediacy. What I'd tell you is that we expect to create a significant amount of shareholder value creation from the acquisition, and we expect that to start in fairly short order as well.

We have been partnering with Edmunds and the great people there for over the past year at this point, so we are really familiar with what benefits we can both accrue from our relationship. And we decided to exercise our option and pull the full acquisition, largely because we've seen the benefits over the past year of our partnerships..

Your next question comes from Rick Nelson from Stephens..

Like supply constraints are pretty low document. It's on the new car side. I'm curious how you see that impacting your business.

And any view as to when you think new car supplies will normalize and how that might impact when they hit?.

Yes. Rick, it's hard to know when the new car supply is going to continue to ramp up. I mean, they're obviously facing some major chip shortage. I think the supply -- the tightening of the supply is going to be around here for a while.

That being said, I go back to some of my earlier comments, which is we source a lot of vehicles through our appraisal lane. And the more that we do that, the better it is for the organization. So we don't rely on the wholesale supply for all of our inventory, which -- I feel like there's plenty of supply out there.

You've got to work a little bit harder, but I would add on top of that is because we're buying so much to the appraisal lane, it doesn't really have that much of an impact on our business, other than it could cause the overall sales price -- the average sales price to go up for everyone..

Your next question comes from Chris Bottiglieri from Exane BNP Paribas..

So first one, I want to follow up on the Tier 2, Tier 3. Congrats on getting that lower Tier 3 fee. Never made sense in the first place. But once we exit this bizarre credit world that we're in, where losses are lower, right, but higher unemployment, if things go back to kind of pre-COVID trends.

Do you expect the change in fee structure to stick? Is this permanent? Or is this like -- that is the piece that what I want to understand, whether it's environment-driven or like, moving forward in perpetuity, will that $750 stay?.

Yes. I mean, thanks for the question, Chris. It's hard to say if it's going to stick. This is very fluid environment. We're always looking to optimize the platform clearly. Clearly, it's a very positive credit environment in which we're operating right now, but I think our lenders are in this for the long haul. They see the growth potential there.

So we will work with them carefully and assess if the fee structure is correct. We don't expect it to whipsaw back and forth quarter after quarter, but we will keep a careful eye on it. Again, one thing I want to drive home is, again, our structures with our partners, we have many partners in place.

They provide the quality offers that we are able to give our customers in all the economic times, bizarre economic times and good times as well. So they have been critical to the success that we have had over the years, including the Tier 3 space, where we believe that is truly an incremental sale. So we value them.

We work very carefully with them to make sure that everybody is winning in this platform, and we're poised for growth. So we feel real good about our platform right now..

Got you. That's really helpful. And then my next question is on the allowance. Obviously, a lot of noise this year because the loss environment we spoke about a second ago and then CECL implementation.

So can you kind of help frame for us like how to think about the allowance? Like let's just say the world goes back to normal, credit losses normalize, CECL is still intact.

Like what's your allowance look like given the profile of the risk characteristics you're looking at today? Like what's a normalized allowance for a kind of normal cycle? Like what should that number look like? It's been just hard to forecast, frankly..

Sure. Yes. So the metric that I'll point you to, again, is that reserve divided by receivables, it's 2.97% for this quarter. Remember, coming down from 3.17% the previous quarter. Remember, also in that metric is the Tier 1 allowance, the Tier 3 allowance and the required recovery expense for CECL.

So I would say we're still north of what we consider normal times. We've always quoted 2% to 2.5% for the Tier 1 business. Obviously, again, you get that Tier 3 in the recovery in there. But we're still north of it.

And I would point you that 2% to 2.5% for Tier 1 business is probably where we would expect to revert back to when things go back to normal..

This concludes our question-and-answer session as we have reached 10:00 a.m. Those who are waiting in queue can reach out to Investor Relations to have the questions answered. I will now turn the call back over to Bill Nash for closing remarks..

Thank you, Carol. Look, we've covered a lot today. A few takeaways. One, we feel great about the trajectory of the business and the outlook for fiscal 2022.

We think that the past investments, our current investments, our ability to quickly innovate, innovate on things like the online appraisal, innovate on things like self-serve, that it will create an omnichannel experience and a value proposition that's really unrivaled in the car industry and will allow us to capture an increased market share.

We're excited about the Edmunds acquisition and working with that talented team to make both companies stronger. And finally, I look forward to our Analyst Day on May 6 to dive a little bit deeper into the business and discuss new metrics and share how we're thinking about the future.

I also just want to take a moment to thank all of our associates for their contributions. This past year, it was extremely challenging for everyone, and our associates did a remarkable job of not only taking care of each other and the customers, but really helping us to innovate the company forward. And I'm tremendously proud of all their efforts.

And I'm proud to work with all of them. And finally, to all of you on the call, we appreciate your continued support at CarMax, and we look forward to talking with you again at our Analyst Day on May 6..

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