CarMax Inc (NYSE: KMX) Q1 2021 Earnings Call Transcript

CarMax Inc (KMX) Q1 2021 earnings call dated Jun. 19, 2020

Corporate Participants:

Stacy Frole — Vice President, Investor Relations

Bill Nash — President and Chief Executive Officer

Tom Reedy — Executive Vice President, Finance

Enrique Mayor-Mora — Senior Vice President and Chief Financial Officer

Analysts:

Scot Ciccarelli — RBC Capital Markets — Analyst

Seth Sigman — Credit Suisse — Analyst

Sharon Zackfia — William Blair — Analyst

Seth Basham — Wedbush Securities — Analyst

Rajat Gupta — JPMorgan — Analyst

Armintas Sinkevicius — Morgan Stanley — Analyst

Brian Nagel — Oppenheimer — Analyst

Craig Kennison — Baird — Analyst

Michael Montani — Evercore ISI — Analyst

Presentation:

Operator

Good morning. My name is Carol, and I will be your conference operator today. At this time, I would like to welcome everyone to the CarMax Fiscal 2021 First Quarter Earnings Conference Call. [Operator Instructions] Thank you.

I would now like to turn the call over to Stacy Frole, Vice President, Investor Relations.

Stacy Frole — Vice President, Investor Relations

Thank you, Carol. Good morning. Thank you for joining our fiscal 2021 first quarter earnings conference call. I’m here today with Bill Nash, our President and CEO; Tom Reedy, our Executive Vice President of Finance; and Enrique Mayor-Mora, our Senior Vice President and CFO.

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 29th, 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?

Bill Nash — President and Chief Executive Officer

Great. Thank you, Stacy. Good morning, everyone, and thanks for joining us. Before I get started, I wanted to comment on the significant social challenges we are facing as a country. At CarMax, we stand united against racial injustice, hatred and violence. I’m proud that our values have always been focused on doing the right thing and treating everyone with respect regardless of race, ethnicity or background. But we need to do better as a company and as a country. I want our associates, communities and shareholders to know that we are committed to doing more. Change must start at the top, and that’s why I’m personally champing this to ensure we make a positive difference for the future.

Now, moving to the highlights for the quarter. As you read in our earnings release this morning, our first quarter performance was significantly impacted by the coronavirus. At the peak in early April, sales were down more than 75%. During this time, 95% of the country was under shelter-in-place orders, and approximately half of our stores were closed or under limited operations due to the mandates of public health officials and government agencies.

Limited operations means the stores could sell cars but were limited to appointment only, curbside pickup, home delivery or some combination of all three. Social distancing guidelines and occupancy restrictions also limited operating capacity at our open stores, including our largest stores which prior to the virus routinely saw more than 100 customers shopping in the store on any given day. To put this further into perspective, more than 80% of the days in the first quarter were impacted by stores that were closed and/or under limited operations. As of May 31st, all of our stores were open, but we still had more than 50% of our stores running with occupancy restrictions and more than 10% with limited operations as I described earlier.

Since we believe our first quarter results are not indicative of future trends, we will not spend a lot of time on commentary that was included within this morning’s release. However, we will provide insight into how we navigate the crisis, recent trends and near-term strategic priorities, we believe, create opportunities to further distance ourselves from other used car retailers and thrive in this new environment.

Let me start by saying how proud I am of our associates; response to this challenging and rapidly changing environment. They continue to live our core values everyday by taking care of each other, taking care of our customers and giving back to help our communities. At the start of the pandemic, we had to make an extremely tough decision to furlough more than 15,000 associates due to store closures and lower demand. I’m pleased to say that as of today, we’ve called back more than 85% of these associates, and we expect to return to normal operating levels in the very near future.

We’ve accomplished a lot this quarter. Our teams were quick to react at the start of the pandemic implementing robust plans to reduce the risk of exposure and further spread of the virus in our stores as well as following the mandates of public health officials and government agencies, which were changing daily. We introduced social distancing and sanitation procedures to reduce the risk for our customers and associates. We also launched new initiatives such as contactless curbside pickup, a temporary extension of our 90-day warranty and cash payment assistance to meet the near-term needs of our customers. We quickly shifted our entire wholesale business from in-person to online auctions, and we continue to keep our appraisal end open where possible for customers who wanted to or needed to sell their cars.

In addition to keeping our stores open and selling cars to customers, we were very pleased with our margin and inventory management for both retail and wholesale in the steepest depreciation environment we’ve ever experienced. We also exited the quarter in an even stronger liquidity position than we had entered. Since hitting a trough in early April, we have seen our sales progressively improve as stores reopen, occupancy restriction start to ease and customers begin to reengage in car buying.

Looking at more recent performance, we are encouraged by the trends we experienced in late May and early June. Web traffic is up year-over-year and reaching new highs, a reflection of the great work our marketing team is doing to capture demand in pay channels and strength in non-brand SEO performance.

In addition, leads coming into our customer experience centers, or CECs, continue to increase week over week. Although we have four stores still on limited operations and more than 50% with occupancy restrictions, for the first two weeks of June, our comp unit sales have been within 10% of last year’s sales with many stores comping positively.

We recognize the current environment has accelerated a shift in consumer buying behavior. Customers are seeking safety, personalization and convenience now more than ever in how they shop for and buy vehicle. For us, this reaffirms that our strategy is the right path forward. And the current environment creates a unique opportunity for us to accelerate our omni-channel experience and other digitally-driven investments.

Before the crisis, we were already making significant investments in digital merchandising, online financing and customer lead management tools as we rolled out our new omni-channel experience. It’s an experience that gives customers the opportunity to buy online, in-store or a seamless combination of both. We expect to complete our omni-channel rollout in the second quarter and are focusing our efforts on optimizing this customer experience with new enhancements.

Our proven business model and ability to act quickly allowed us to meet consumer expectations while remaining financially strong. This in turn enables us to continue to aggressively invest in our core business and pursue new opportunities for growth, which I’ll speak to shortly.

Right now, I’d like to turn the call over to Enrique, who will provide a financial update, and then Tom who’ll provide additional detail around customer financing.

Enrique Mayor-Mora — Senior Vice President and Chief Financial Officer

Thanks, Bill, and good morning, everyone. Our diversified business model, solid balance sheet and strong cash generation position us extremely well to manage through challenging times. This strength also allows us to be opportunistic in the short-term while maximizing our long-term growth and earnings potential, further distancing ourselves from our competitors.

I’ll begin with an overview of our operating performance, followed by a review of our financial position. On the GPU front, our teams did a great job managing margins despite a period of unprecedented marketplace depreciation and operating limitations. Our GPU of $1,937 for the first quarter represented a decrease of $278 per unit versus the prior year. Our wholesale gross profit per unit was solid at $978, down by only $65 per unit versus the prior year quarter. This was despite sharp declines in wholesale values in late March and April. Our strong GPU management is a testament to the strength of our professional buyers, our proprietary algorithms for buying, selling and appraising cars and our experience in managing through challenging times.

Our wholesale business experienced a 48% decrease in year-over-year unit sales. Wholesale unit sales were negatively impacted by lower appraisal traffic from stores being closed or having limited operations, as well as a decline in our buy rate. During the second half of the quarter, we began to see steady improvement in both areas as the country began to reopen and our auctions transitioned online. Our sell-through rate at our auctions in the quarter was consistent with our historical rates of over 95%.

For the quarter, other gross profit decreased by approximately $89 million. This was driven by a $55 million decrease in service department profits and a $38 million decrease in EPP revenues. The decrease in EPP profits is attributable to the decrease in used units sold, slightly offset by a $7 million benefit related to the receipt of profit sharing and favorable cancellation reserve adjustments. We were also pleased to maintain ESP penetration rates above 60% for the quarter. The decrease in service profits reflects overhead deleverage as well as the pay continuity we provided our technicians despite a reduction in production. Service profits also continued to be adversely affected by the increase in our post-sale warranty period from 30 to 90 days and by a crisis-driven reduction in retail service.

As you may recall, the extension of the warranty from 30 to 90 days was implemented in May of 2019. As a result of the recent improvement in sales in May and the first part of June, we are ramping production to increase our inventory levels. We therefore expect continued service inefficiencies in the second quarter as it takes time to return production to a normalized operating state.

During the first quarter, as sales began to be negatively impacted by the pandemic, it was important that we align our operating expenses with the state of the business. At the same time, we took advantage of our financial strength to continue making investments in our omni-channel experience and other digital initiatives that provide us with the competitive advantage.

For the quarter, SG&A decreased by more than 20% or $116 million. This is due to a decrease in variable expenses associated with the reduction in sales volume, in addition to temporarily furloughing associates, reducing advertising spend and aligning other overhead costs to the business. SG&A for the quarter also benefited from a $40 million gain on settlement of a class action lawsuit and a $17 million reduction in stock-based compensation expense. As the business improves, we expect our SG&A costs will ramp as associates return from furlough, our advertising spend increases based on increasing demand, and we continue to invest in strategic initiatives, which Bill will discuss shortly.

Now, I’ll provide you with an overview of our financial position. We ended the first quarter in a stronger liquidity position than we started. As of May 31st, we had approximately $660 million of cash and cash equivalents on hand and $1.08 billion in unused capacity on our revolving credit facility. This compares favorably with the $700 million and $300 million respectively we had at the end of March and that we announced on our April 2nd fourth quarter call. We were able to increase our liquidity by selling through inventory and quickly aligning costs to the lower volume. We did this while continuing to invest in our omni and digital experiences.

From a debt perspective, we ended the first quarter with approximately $1.7 billion of long-term debt, excluding non-recourse notes payable, consisting of approximately $370 million outstanding under our revolving credit facility, $800 million of senior notes and term loans and approximately $535 million in financing obligations largely related to sale leasebacks on select stores. It’s important to note we have no near-term maturities as the earliest is in 2023. We ended the quarter modestly below our historical leverage target of 35% to 45% adjusted debt-to-capital when netting out the approximately $660 million in cash we accumulated.

During the first quarter, we opened four new stores and required minimal capital spend to complete. Previously, we mentioned it was our intent to open 13 stores during fiscal year ’21 and a similar number of stores in fiscal year ’22. We continue to pause on any additional spend on store expansion activity in FY ’21 and we’ll revisit this decision later in the year. In addition, while we remain committed to returning capital to shareholders, our share repurchase program is currently on hold as well. We are extremely proud of our ability to improve our liquidity position during a very challenging quarter while at the same time continuing to push forward investments in our omni and digital initiatives. All of this positions us favorably to profitably grow market share as the economy and consumer rebounds.

I’ll now turn the call over to Tom.

Tom Reedy — Executive Vice President, Finance

Thanks, Enrique, and good morning everybody. Since vast majority of customers who purchased a vehicle obtained some sort of financing, it’s important that we ensure our broad range of customers have access to lending in all economic conditions. So, having CAF along with a diverse group of partner lenders, who recognize the value of CarMax’s origination channel allows us to consistently provide high quality finance offers to our customers.

In the first quarter, our lending channel continued to deliver, providing offers to 97% of customers applying for vehicle. Having a captive finance arm offers numerous contributions to the business model that are difficult to replicate. Within the origination channel, CAF captures considerable finance income while generating some incremental sales. CAF fully services all of the customers it finances, continuing CarMax’s outstanding brand promise throughout the life of the finance contract. We have more than 800 CAF associates, and the entire team did a phenomenal job this quarter, quickly mobilizing to work remotely while responding to the increasing demands of our customers.

In mid-March, as the pandemic escalated, we put in place a variety of measures at CAF to help our customers. This included suspending repossessions, waiving late fees and providing payment relief under our disaster policies. Our service offerings did evolve throughout the quarter as we focused on supporting our customers while also protecting our portfolio.

Similar to auto — to our retail and wholesale business, CAF’s performance is also impacted by the coronavirus. For the quarter, originations decreased substantially due to closed stores and lower sales demand. In addition, CAF penetration net of three-day payoffs decreased to 36.1% from 41.4% a year ago due to the shift in the customer credit mix, some temporary underwriting adjustments in certain pockets focused on preserving our high quality portfolio and some testing of loan routing to our third-party partners.

Tier 2’s penetration increased to 28.5% in Q1 from 20.3% last year as it benefited from CAF’s routing tests and the change in customer credit mix in the quarter. Tier 2’s conversion also remained strong. Tier 3 for the first quarter increased to 14.5% from 11.5% a year ago as it also benefited from the change in customer credit mix.

CAF income for the quarter was $51 million, which was predominantly affected by the impact of the increase in this quarter’s provision for loan losses to $122 million, which understandably is significantly up from the $38 million in Q1 of last year. For the first quarter, the ending reserve balance was $437 million versus $147 million a year ago. The significant increase in the loss reserve arose from two factors; first, the required adoption of the new Current Expected Credit Loss accounting standard, which is commonly referred to as CECL; and second, an unfavorable adjustment for experience arising from the coronavirus.

Upon the adoption of CECL, we recorded a $202 million increase in the allowance for loan losses on the first quarter opening consolidated balance sheet with the corresponding adjustment of $153 million net of tax to retained earnings. As previously discussed, the most significant element of CECL requires us to reserve for expected lifetime net losses, whereas previously we reserved for the following 12 months. In addition, CECL requires the incorporation of economic adjustment factors as a component in the lifetime loss projection.

Just to be clear, the initial adjustment for the adoption of CECL ran through retained earnings, it did not impact the Q1 provision for losses. Post adoption, any changes in the loss expectations are applied to the entire remaining life of the portfolio and run through the provision in accordance with CECL. The $122 million provision for loan losses in the first quarter includes an increase of $84 million on our estimate of lifetime losses to receivables on the books as of the end of Q4. This is a nearly 25% increase in our expectations, largely resulting from the coronavirus turmoil and worsening economic factors. The remaining $38 million largely reflects our estimate of lifetime losses on this quarter’s originations.

As a result, our loss reserve is now 3.32% of ending managed receivables at $13.4 billion. Recall, this includes cash Tier 3 receivables, which represent roughly 10% of the reserve and 1% of the portfolio. With the underwriting adjustments I mentioned earlier, we are currently targeting new loan originations range or the higher end of our historic target range for cumulative net loss, which is 2% to 2.5%. As we mentioned last quarter, CAF is not originating Tier 3 loans at this time.

We believe our efforts to help customers minimize defaults and maximize the ultimate flexibility of loans are having an impact. At this time, delinquency rates are lower year-over-year. However, this number is somewhat distorted due to payment extensions that have been granted. As one would expect, payment extensions spiked in April and have declined significantly in recent weeks as customers have exhibited the ability and willingness to pay.

Going forward, we will continue to manage payment extensions with the focus on providing our customers with appropriate relief, while at the same time protecting our portfolio. We’ve demonstrated an ability to finance CAF receivables and support the core business with the execution of a $1.15 billion ABS transaction in April. And we maintained warehouse lines totaling $3.5 billion of capacity, of which $1.55 billion was available at the end of May.

Finally, we strive to provide our customers with an iconic experience during the car buying process and their multi-year finance experience. Like our omni-channel investments, we have been making a large investment in our auto finance customer platforms that will provide more opportunities for customers to self-serve and provide flexibility to offer more customized experience. We look forward to rolling out this technology in FY ’22.

Our expertise, resources and strong lending partnerships remain instrumental in helping us successfully manage through this challenging an ever-changing environment. I’d like to take a moment to thank our teams in Atlanta and Richmond for their dedication and hard work.

And now, I’ll turn the call back over to Bill.

Bill Nash — President and Chief Executive Officer

Great. Thank you, Tom and Enrique. Our record sales, earnings and market share gain last year, combined with the changing consumer behavior in favor of omni-channel offerings, validate our strategy as the right path forward. We believe that CarMax is unmatched in the industry as an omni-channel used car retailer, and now more than ever customers want to personalize seamless and multi-channel experience that allows them to shop on their terms, whether that is online, in-store or a combination of both.

Over the past several years, we’ve invested more than $300 million in digital initiatives, technologies and our associates. These investments focus on modernizing our systems, expanding our digital offerings and reorganizing ourselves to innovate quickly, while capitalizing on the inherent advantages of being a larger company. I am extremely proud of how these investments have empowered us to quickly adapt to an ever-evolving consumer and operating environment. I’m also excited about the opportunities we’ve set ourselves up for in the future.

The priority of our near-term strategic investments will focus on our customer experience, vehicle acquisition and our wholesale business. In addition, we will continue to assess opportunities to become a leaner, more agile and more cost-effective organization over the long-term, which in turn funds new ways to evolve and grow.

Our omni-channel offerings are the next evolution of the exceptional customer experience that CarMax is already known for, providing a truly unique retail experience by personalizing each customer’s journey through multiple channels is a significant differentiator for us. With the rollout of omni-channel almost complete, our focus is turning towards improving and evolving this experience. For example, last year, we began testing a post-sale home delivery process where a customer can buy a car fully online before it is delivered to their home. While most customers prefer to see and drive vehicles before purchase, some want to purchase without taking these steps. It is our goal to quickly scale this capability nationwide by the end of this year were allowed by law for any customer who wants to shop this way.

Another experience area that we will continue to focus on is our centralized CECs. While we know they will provide significant long-term benefits, in the near-term, they will run with some inefficiencies as they ramp. Opportunities exist to drive effectiveness through improved, associate training and specialization of roles. We also see opportunities to gain efficiencies through automation, data-driven algorithms and smart routing to get the right customer to the right associate at the right time.

When it comes to vehicle acquisition, we are the largest buyer of used vehicles, which provides us with unique avenues to efficiently source cars. In the near-term, our investments are going to focus on improving our core buying channels and opening up new buying channels. We will also continue to invest in modernizing our wholesale auction platforms, which will enable us to operate all auctions simultaneously online and in person.

Finally, there are a variety of areas we are looking at to become leaner, more agile and more cost-effective over the long-term. These include store and reconditioning efficiencies and adapting our workplace for the future, further separating ourselves as one of the best places to work in America. The rapidly changing consumer behavior is favoring companies with omni-channel offerings, and we believe we have the best omni-channel experience in the used car industry.

We provide a personalized, multi-channel experience that empowers customers to buy a car on their terms, all while taking steps to keep our customers safe across their car-buying journey. It is designed as a world-class in-store experience, a world-class online experience and a seamless combination of the two. No other used car retailer is in the position to deliver this iconic customer experience the way we can, because of our talented associates, our physical footprint, our online experience, our infrastructure and national brands.

We are very excited about the future as we continue to leverage all of our capabilities, while also advancing with new innovations.

At this time, we will be great — be glad to take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question this morning comes from Scot Ciccarelli from RBC Capital Markets. Please go ahead.

Scot Ciccarelli — RBC Capital Markets — Analyst

Good morning, guys. I hope everyone is well and healthy down there. Bill, I have a question just regarding your performance. I mean, we obviously saw a very nice sequential improvement since kind of late March, early April. But the fact is, you are still posting negative comps, call it, 10% or just under 10%. When I think we’ve seen both e-commerce competitors and franchise competitors shift to positive comps in their used business. So I guess, I’m wondering are there any structural reasons why CarMax would be underperforming others by that magnitude, especially given your outperformance, call it, in the fourth quarter?

Bill Nash — President and Chief Executive Officer

Yeah. Good morning, Scot. So, I think, first of all, it’s a little difficult to do comparisons at this point. You have to look at growth rates going into it. You have to look at growth rates that they’re currently at. I think you have to look at geographic differences. I also think you have to take into consideration different responses to the mandates, because I can tell you, even though we are following mandates in every single market, we know that there are others that were not following mandates.

But I think the biggest factor — I think, the structural factor that I think it’s important to remind everyone, and I talked about this in my opening remarks about the limited operations and the occupancy restrictions. Keep in mind, we sell on average more than 300 cars a month. We have locations that sell upwards of 1,000 cars a month. And when you start talking about limited operations or occupancy restrictions, let me bring it to life for you. We had occupancy restrictions in a bunch of markets where all you could have were 10 customers in your store at a time, that’s 10 total customers. So it doesn’t matter if they’re for appraisals, if they’re for buying or they’re there for retail, you can only have 10.

So I think that alone, the occupancy restriction and the limited operations probably hurt us a little bit more just because of the sheer volume. Because again, if you’re a dealer that sells 60 to 100 cars, even limiting [Phonetic] it to 10 customers at a time is not as impactful on them as it would be for someone like us.

Scot Ciccarelli — RBC Capital Markets — Analyst

So, with that in mind, is there any way to potentially estimate the impact that some of these occupancy restrictions have had on your business within the last couple of weeks?

Bill Nash — President and Chief Executive Officer

Yeah. It’s hard to pinpoint down to specifics. In my opening remarks, when we had — at the peak, we had half of them that we either closed or limited operations. At that point, the bulk of them were closed. So we had about 70 stores that were closed, 35 were under limited operations, and then the remaining 100-plus had occupancy restrictions. And over time, what we saw is that shifted from store close to limited operations and eventually from limited operations to occupancy restrictions.

Now, the great news is, the occupancy restrictions although currently we still have half of our stores that have occupancy requirements, they’re starting to ease. So, instead of having only 10 customers or 20% occupancy or 30% occupancy, you’re starting to migrate more to 50% occupancy, which makes a big difference. We still have four stores that are running limited operations right now, but we hope to get them back up to full operations based off the mandates in the near future.

Now, keep in mind, with the rise of the virus spiking in some markets, at any given point in time, we may have to close a store here and there because of a positive test result in the store. Our normal protocol, we close, we do a big deep clean and then we reopen. So, if I look back, in Q1, it probably — it’s right around 73% of the days we ran with limited operations, about 70% — a little above 70% of the days, we ran with closed — totally closed operations. And when you look at them combined, about 62%-ish of the days out of the quarter had both things going on, closed and limited operations.

Scot Ciccarelli — RBC Capital Markets — Analyst

Okay. Very helpful. Thanks, guys. Good luck.

Bill Nash — President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Seth Sigman from Credit Suisse. Please go ahead.

Seth Sigman — Credit Suisse — Analyst

Hey, guys. Good morning. Thanks for taking the question. I want to follow-up on that last point. So, Bill, you did discuss some stores returning to positive in the recent weeks. So, if you’re running down 10% overall quarter-to-date, it does imply a pretty big gap still across the store base. So, I just want to confirm, is that purely the occupancy restrictions or are there other regional differences and any other trends that maybe you can speak to across the store base? And then, if you can, anyway to give us a sense on how positive or how much stores are positive versus not [Phonetic], that would be helpful. Thanks.

Bill Nash — President and Chief Executive Officer

Yes, Seth. So, regionally if you look at it throughout the quarter, obviously there were certain markets that were a lot more restrictive for a lot longer time period. And some of the West Coast stores come to mind. So, right now, I think the occupancy restrictions and the limited operations are the big driver of the difference between — keep in mind, there’s lots of different mandates out there by local level. And so, the more restrictive the mandates are, the more it’s going to have an impact on our business.

So that’s really what’s driving, I think, the different performance, as well as some of these markets have been open for three, four weeks now, other markets are just starting to kind of reopen. So, I think that’s been the — that’s the big driver between the differences. But again, we’re pleased both with how occupancy restrictions are starting to ease, and we’re pleased with the fact that we do have a bunch of our stores already comping over significantly higher sales last year.

Seth Sigman — Credit Suisse — Analyst

Okay. Any way to quantify what significant means, how much over last year?

Bill Nash — President and Chief Executive Officer

Well, it’s not quite a majority of the stores at this point, but we do many stores that are comping.

Seth Sigman — Credit Suisse — Analyst

Okay, perfect. Thanks very much.

Bill Nash — President and Chief Executive Officer

Thank you.

Operator

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

Sharon Zackfia — William Blair — Analyst

Hi. Good morning.

Bill Nash — President and Chief Executive Officer

Good morning, Sharon.

Sharon Zackfia — William Blair — Analyst

Good morning. I was hoping you could talk about some of the shifts you alluded to in consumer behavior, and put some more numbers around that. Obviously you’ve been rolling out omni-channel and you rolled out curbside pick-up pretty aggressively earlier in the quarter. Look, what kind of opt-in rate did you get on either delivery or curbside pickup? Any indication on how that’s also trending as markets reopen would be, I think, useful.

Bill Nash — President and Chief Executive Officer

Yeah. Sure, Sharon. So, first of all, the way I think about our omni-channel experience, I don’t necessarily measure it kind of through alternative delivery, although I’ll speak to that to answer your question. The way I think about the omni-channel experience is, how many of our customers are engaging with us online with our CECs. And prior to the virus hitting, it was roughly about 50% of our sales were coming through engagement with our CECs.

Fast forward to now, that number is north of 60%. And I think that’s reflective of customers wanting to do more things online. If you look at kind of alternative delivery, so for us it’s about home delivery and curbside. At the peak, when most stores were closed and running under limited operations, and the markets that offer those services combined, you’re looking close to about 15% penetration. The interesting thing though is now markets are starting to open. We still see heavy engagement online, doing things ahead of time, but customers are still opting to go to the store. So the number has actually settled down now between those two, right around 10%, a little bit under 10%.

Sharon Zackfia — William Blair — Analyst

Thanks for that. And if I could follow-up with an additional question, just on the GPU pressure you saw this quarter, I mean, obviously you managed inventory very well. Are you expecting any kind of incremental GPU pressure in the second quarter, or do you feel like you’ve kind of managed through that and have a lower cost inventory at this point?

Bill Nash — President and Chief Executive Officer

Yeah. No, I think we’re in great shape. Again, I said this on my opening remarks that the team did a phenomenal job. And just to put it in perspective, if you go back to ’08 and ’09 in the Great Recession, over the worst depreciation cycle, so over about a year’s time, we saw $3,500 in depreciation. In this period, over about a five-week period, we saw about $2,500 of depreciation. We’ve never seen the magnitude of depreciation like we saw this time. The team did a phenomenal job rightsizing our inventory, and we certainly did not go into fire cell mode by any stretch of imagination. But we did do strategic markdowns on certain pieces of inventory to make sure that we got it into the right level.

So, I feel really great about our position. I feel really great about our margins going forward. And assuming that the economy, obviously there’s lots of uncertainty with the economy right now, but assuming that we continue on this cycle, I think we — the GPU headwinds are beyond us.

Sharon Zackfia — William Blair — Analyst

Okay. Thank you.

Bill Nash — President and Chief Executive Officer

Thank you, Sharon.

Operator

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

Seth Basham — Wedbush Securities — Analyst

Thanks a lot and good morning. My first question is just around restraints on sales that you haven’t mentioned so far in the Q&A. First is on inventory and second is on CAF underwriting. Any sense of how you can quantify how much those held back your sales in recent weeks?

Bill Nash — President and Chief Executive Officer

Yeah. I’ll talk about the inventory. So, obviously when the virus hit, our immediate focus in — when the virus hit, our immediate kind of crisis focus was really about, okay, the health and safety and financial wellbeing of our associates, the health and safety of our customers, but then also the financial security of the organization. And part of that financial security was rightsizing the inventory. And we always make sure we have the inventory that’s appropriate for sales. So this was no different. When we saw the demand go down, we absolutely got into the mode of, okay, let’s get our inventory right-sized.

Now, the great news is, the sales have come back better than what we expected over a quicker time period. And we’ve got our production facilities all back up and operational, but it is a bit of a headwind right now. If you look at the sales demand and our inventory is lighter than where we want to, but truthful I’d rather be on this side of the equation than the other side of the equation.

So, again, I think the team did a great job. And we’ll work over the next few weeks to get the inventory right-sized. We’ve already started to fill back up our pipeline. Our sale of inventory is less down — I mean, it’s more down year-over-year than our total inventory. So, now it’s just a matter of getting it produced, which our teams do a phenomenal job on.

And then, I’ll let Tom talk a little bit about CAF.

Tom Reedy — Executive Vice President, Finance

Yeah. Hey, Seth. Because there’s so many moving parts, it’s really hesitate to try and tease out precise numbers on drivers of sales. But what we saw during the quarter was not just a shift in mix of overall credit for customers, but even a shift in the mix within Tier 1. And that means a greater proportion. When you look at how CAF approves, we have segments that we buy, and a greater portion of the Tier 1 mix was at the lower most — higher loss segments. So, in order to preserve our portfolio and financeability as we target on a go-forward basis, we made some, I would call it, fine-tuning by carving out at least for the time being some of those highest loss segments.

And what does that mean? That means that those loans go down to Tier 2 and they see them first rather than us. We know that overall there is some pressure on conversion when you go to Tier 2, because the offers aren’t quite as nice as what they see at CAF. But for the most part, our Tier 2 lenders are delighted to see those and accommodate them, because it’s the high end of what they typically buy.

So, we did see them taking up for the most part. I think there was some pressure, maybe one or two points on sales based on the adjustments we made. But as we see credit mix go back to normal, and that means both the increase in the overall FICO score and mix within Tier 1, that pressure will diminish because a lower percentage of the portfolio falls into those categories and is getting pushed down to Tier 2.

Seth Basham — Wedbush Securities — Analyst

Thank you.

Bill Nash — President and Chief Executive Officer

Hey, Seth. The other thing I’ll mention that you did not mention as far as the headwind is, I would also consider the CECs to be a bit of a headwind this quarter as well. Because of that big jump up that we saw from folks engaging online, we expected to get there. We had no idea we’re going to get there over about a four-week period. So, we had to ramp up the CECs, which in the near-term, is a bit of a headwind. Our service levels were not at where we want them to be. But again, we’re fixing that right now, and that will continue to improve as well.

Seth Basham — Wedbush Securities — Analyst

Thank you. And just as a follow-up, Tom, as it relates to your loan loss provision, your current balance, which is 3.3% of loans, that’s up in the range that we saw at the peak of the Great Recession. And for loans originated in the quarter, 3.8% is well above it, understanding that there is some shift in the credit profile of what you originated this quarter. But how do we think about where that loan loss rate and provision is likely to go going forward?

Tom Reedy — Executive Vice President, Finance

Well, the way things work, we may take our best information and make an estimate on where we expect the portfolio to end up. So, for existing loans, that 3.32% is our expectation based on everything we know today. We would not expect that to evolve unless we were to learn new information or new things to evolve in the economy.

As far as new originations, as I said, we’ve made some adjustments to our origination strategy and we expect that those should evolve in kind of the higher end of our target range of 2% to 2.5%. That’s what we’re striving to do and that, I think, ensures a financeable portfolio and keep things going.

Seth Basham — Wedbush Securities — Analyst

Understood. Thank you.

Operator

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

Bill Nash — President and Chief Executive Officer

Good morning.

Rajat Gupta — JPMorgan — Analyst

Hi. Good morning. Thanks for taking my questions here. I just had one clarification from a prior question, and then one follow-up. So, on clarification, the 10% to 15% penetration level you talked about for omni earlier, is that — does that mean that 10% to 15% of sales — unit sales right now is completely through the alternative delivery channels or I just want to make sure like I’m understanding that definition correctly?

Bill Nash — President and Chief Executive Officer

Yeah. So, the 10% to — so, at the peak of the virus, when we had the most stores closed or in limited operations, we saw in the markets — the eligible markets that have the home delivery and the curbside, we saw peak — combined peak close to 15%. If you looked at it as a percent of total sales across the whole organization, it was around 10%, and it settled in. It was a little bit above 10%, but it’s now settled back in to a little — around 10%, a little bit under 10%.

Rajat Gupta — JPMorgan — Analyst

Got it. So that will mean like around like 15,000 units or so in last quarter were through the alternative channel? Is that the bulk for us roughly?

Bill Nash — President and Chief Executive Officer

Roughly. Yeah, maybe a little bit higher.

Rajat Gupta — JPMorgan — Analyst

Got it. Thanks for clarifying that. And then, just on the cost side of the equation, just through the crisis process and the furloughs and the headcount reductions, do we — should we expect to see any permanent reductions in SG&A when you’re back to more normalized levels of sales? And relatedly, during the ’08, ’09 crisis, you did see significant improvement in efficiencies related to reconditioning. I mean, there was a structural shift in your retail GPU. Do we — should we expect something similar or maybe of a lower magnitude this time around as well? Just want to clarify on those two points. Thanks.

Bill Nash — President and Chief Executive Officer

Yeah. I’ll talk about the reconditioning side, and then I’ll let Enrique talk about the SG&A. So, on the reconditioning side, as I said earlier, we’re going to continue to look for ways to take cost out. The reconditioning well be one. If you remember back in ’08, we had significant improvements there. What I would say is, I think there are going to be incremental improvements in the reconditioning. So, I wouldn’t say that you’re going to see — back then, it was north of $250 per unit. There is no big, okay, go do this, and it’s going to be $250. There’s going to be a lot of incremental things. We’re going to be rolling out our new version of flow into all the stores, we pick up efficiencies there, as well as we’ll continue look for procurement efficiencies both in the reconditioning side, but in the store side as well.

And I’ll let Enrique talk about the SG&A.

Enrique Mayor-Mora — Senior Vice President and Chief Financial Officer

Yeah. From an SG&A perspective, within the quarter, we focus our actions aggressively on better aligning what we’ve traditionally considered as fixed costs really to match the lower demand. So, items like staffing through our furloughs, advertising reduction, reduction in contractors, store-based project, home office-based projects really were all acted on aggressively within the quarter.

But as sales rebound, we do expect these costs to increase, as I spoke to earlier, but we’re always looking at ways to get more efficient. It’s kind of too early to tell whether or not there are some systematic opportunities. What I will tell you though is that we will continue to invest in our business as well. So we have a strong balance sheet. We have a strong financial position, and it allows us to continue to invest in our growth as well.

Bill Nash — President and Chief Executive Officer

Yeah. I think the other thing to add to that, if you looked at what we were thinking about before the coronavirus, we’re going to be coming into this year, we were going to continue to make investments. In the past couple of years, we’ve talked about needing comps in the range of 5% to 8% in order to lever. If you looked at what we were looking at coming into this year, if all we’ve been focused on with omni, the omni experience, we would have levered better than that.

Now, we have made the decision to hit some new strategic initiatives, some of which we continue to hit into this quarter, some of them we put on hold. But that gives you a little bit of color. We still — this year had been a normal year. We would have still been in the 5% to 8% range, but it’s just so hard to know at this point, as sales come back, we’ll continue to adapt.

Rajat Gupta — JPMorgan — Analyst

Got it. Great. Thanks for the color and good luck.

Bill Nash — President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Armintas Sinkevicius from Morgan Stanley. Please go ahead.

Armintas Sinkevicius — Morgan Stanley — Analyst

Good morning. Thank you for taking the question. I was hoping you could quantify the growth in the web traffic and the growth in the lead to the customer experience center that you highlighted in the press release.

Bill Nash — President and Chief Executive Officer

Yeah. So that growth I was talking about was the first two weeks of June, both leads and traffic were double-digit.

Armintas Sinkevicius — Morgan Stanley — Analyst

Both leads and traffic, okay. And what was it for the quarter?

Bill Nash — President and Chief Executive Officer

For the quarter, web traffic was down about 11% and leads weren’t far off from that.

Armintas Sinkevicius — Morgan Stanley — Analyst

Okay. And then, just a quick one here. As we think about less new vehicle inventory coming to market, there being a pressure on new vehicle inventory. Maybe you could talk about the age of your portfolio and how well positioned or not you are to be able to sell nearly new vehicles to the market that may be demanding them?

Bill Nash — President and Chief Executive Officer

Yeah. So, as far as the source goes, we don’t feel like we have a problem on finding the vehicles. We’re in production mode right now, which is really building the inventory back up, but the concern isn’t about being able to find the vehicles. We’ll be able to source those. I will tell you, during the quarter, pretty much the wholesale market external market froze because a lot of the sales were closed, dramatically low vehicles being offered for sale. But at that time, we weren’t out really buying anyway, so it didn’t really matter.

And it’s gone to the point now where, if you look at the volume that you’re seeing in the sales and you look at the sales rate that you’re seeing in the external sales, they really have come back. They’re very near getting back to pre-virus levels.

Armintas Sinkevicius — Morgan Stanley — Analyst

Okay. But are you seeing you selling younger cars or older cars, where are you seeing the most demand?

Bill Nash — President and Chief Executive Officer

Yeah. Well, during the quarter, we had a little bit of a shift mix to — from zero to [Phonetic] two-year-old car shifted to five plus. So that was — that’s what we saw during the quarter. We also saw — if you look at our average selling price for the quarter, it was up a little bit, but that’s primarily due to the fact that we had a shift mix into large SUV gas closures [Phonetic], which are more expensive year-over-year. We were several percentage points up on that, and because a lot of the inventory that was sold in March and April was acquired back in the appreciating market time of the pre-virus.

Armintas Sinkevicius — Morgan Stanley — Analyst

Okay. Appreciate it.

Bill Nash — President and Chief Executive Officer

Thank you.

Operator

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

Brian Nagel — Oppenheimer — Analyst

Hi, good morning. Thanks for taking my question.

Bill Nash — President and Chief Executive Officer

Good morning, Brian.

Brian Nagel — Oppenheimer — Analyst

So, Bill, on the last quarter conference call, and I was right [Phonetic] we’re in the beginning of the COVID crisis. I asked you, we discussed this kind of the nature of what was then very quickly diminish in demand. So here, you’re saying today, it’s very encouraging that we’re seeing this rather significant sales pickup late into the quarter than into the current quarter.

So, you’ve gotten much better with data, watching your customers. I mean, as we all trying to figure out kind of what we’re rebounding to, we’ve got this with CarMax within retail in general, how would you characterize this demand right now? Is there pent-up from the weaker sales maybe several weeks ago, or do you see underlying — real underlying demand taking hold that’s likely to sustain itself?

Bill Nash — President and Chief Executive Officer

Yeah. Brian, it’s hard to know for sure. I mean, I think there’s absolutely some pent-up demand because people were staying at home for several weeks. So, I think there’s some of that. I think the CARES Act has given some folks money. And I think that’s one of the reasons why you see the increase in Tier 3. I think that it’s a little bit like tax refund money. When folks have it, they tend to go out. And the biggest population that we see that driving are the lower FICO-type customers.

As far as the sustainability, it’s hard to tell. I mean, right now, it’s such an uncertain environment out there. I mean, we’ve got high unemployment. You’ve got these spikes in the coronavirus cases. You got the social challenges going on. So, I think we’re well positioned, and having come through this, I think we’re more agile and resilient than even before. So I think we’re prepared for wherever it may go, but I think it’s too early to say, hey, this is going to be — where this is going to go? And is this going to be sustained? I think it’s going to depend on a lot of macro factors. But what I can tell you is that we’ll be ready to pivot any way we need to.

Brian Nagel — Oppenheimer — Analyst

That’s really helpful. And then, my follow-up question, and I think it’s a bit of a follow-up to some of the prior questions. Just with regard to inventory. And I know there’s a lot of moving parts out there right now. But as we think about with that spread, if you will, between new and used car pricing, given what you’re seeing right now, how is that shaping up in this environment?

As you look forward, I mean, what I’m saying, are you seeing — for whatever — because of the dynamics or shifting dynamics, actually better inventory acquisition opportunities that could basically help to bolster sales down the road?

Bill Nash — President and Chief Executive Officer

Yeah. So, during the quarter, it really was a kind of a non-story as far as the gap widening or collapsing. And I think as we look forward, there’s a lot of factors that you have to kind of weigh in. What’s going to happen with new cars as far as the manufacture and how much production they’re going to actually be able to do? They’re struggling to get open back up again and get new cars out there. So, I think that will be something that weighs into it.

I think there’s probably a lot of wholesale inventory that needs to be released through the sales that kind of got backed up a little bit. So I would expect to see additional wholesale inventory being offered. So, I think it just depends. It depends on the new car and how that continues to progress as well as when the timing of some of this wholesale inventory really starts to come out.

I mean, I talked about the depreciation during the quarter, but what’s remarkably, which is as remarkable as the decline was how quick it’s come back. And so, I think, the wholesale market is pretty self regulating. And at some point, if it gets too high, it will just slow down sales, and it corrects itself. But I think supply — we will be fine on the supply side. But as far as the gap between new cars really going to depend on, I think, production of the manufacturers.

Brian Nagel — Oppenheimer — Analyst

Okay. Well, thanks a lot. Appreciate all the color.

Bill Nash — President and Chief Executive Officer

Thank you, Brian.

Operator

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

Craig Kennison — Baird — Analyst

Hey. Good morning. Thank you for taking my question. Wanted to ask about the wholesale business, that pivot to all online wholesale auction sales happen really fast, that’s tremendous execution on behalf of that team. I would like to understand the economics of that digital-only model versus your traditional format. Are you experiencing any differences in like the proceeds per unit, or what you see as your cost per unit? And do you see this as a permanent change? Thanks.

Bill Nash — President and Chief Executive Officer

Yeah. Thanks for the question, Craig. And you’re right, it was awesome. The team did a phenomenal job. We’ve talked about in the past the fact that we’ve been testing some simulcast technology. And really within a matter of about two weeks, got all of the sales converted over to the virtual platform is truly remarkable, and the team did a phenomenal job.

As far as the economics, it’s a little too early to talk about that. But what I will tell you is, during that time period, we didn’t see any degradation of dealer attendance. So, we already had a very high dealer-to-car ratio. And obviously the more dealers you have, the more your vehicles will bring as far as price goes. So, I think that our physical presence in having online auctions, but also complementing it — I’m sorry, having the physical presence and having running these auctions, and then also complementing it with the online is great, because I think it will continue to open up the sales to even more dealers.

And when you have more dealers, theoretically you should be able to get more value for your cars. And if you can get more value for your car, then you — for us, you want to put as much on it for the consumer as we can, so we can buy as many units as possible. So, I think it’s a little early, but I would expect that having the online will make it available to more dealers.

Craig Kennison — Baird — Analyst

Thanks, Bill.

Operator

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

Michael Montani — Evercore ISI — Analyst

Hey, guys. Good morning. Thanks for taking the question. Just, first off, wanted to start on the advertising front. I was curious to see, Bill, if you could give any color about where you see kind of full year and even next quarter kind of ad spend per vehicle going, just in light of the fact that the sales is recovering? And then, I had a follow-up on multi-channel.

Bill Nash — President and Chief Executive Officer

Yeah. So, if the virus hadn’t been here, I think we had already talked about, last year we stepped up a little bit on a per unit basis when it came to advertising. This year, we were planning on — if you look at it on a per unit basis, that’s the way we look it, we would spend a little bit more and really a lot of that was also to support the omni-channel rollout.

Obviously we pulled back on all different pieces of advertising during the quarter, but we’ve been ramping it back up again. And so, I would expect the rest of the year to get more on par, assuming that business continues like this, I would expect to get more on par what we would have been expecting had the virus not hit us.

Michael Montani — Evercore ISI — Analyst

Okay, great. And then, just on the multi-channel front, in the release, you mentioned that a lot of that rollout was now kind of completed. And so, I just wanted to drill into that to understand better — like how many of the stores currently are offering ship-to-home or home delivery capabilities? And then, secondly, as it relates to the CECs, at what point in time could we anticipate that those would — start to generate kind of net favorability and efficiency gains as they gain scale?

Bill Nash — President and Chief Executive Officer

Okay. So, on the omni-channel experience, at the end of the quarter, we were roughly, let’s say, it was available. Omni-channel experience was roughly available in about 65% of the markets. We’re now in the 70%-ish, mid-70%-ish. We will be done with rolling the omni-channel out next quarter.

Now as far as home delivery goes, when we’re all said — when we get it rolled out — omni-channel rolled out everywhere, home delivery will probably right off the bat. At that point, only be available to about 85% of the markets just because there’s some small one-off markets and some different logistics that we’ll have to work through.

As far as the CEC efficiencies coming into this year, we didn’t expect the CEC efficiency — we didn’t expect the CECs to really become efficient because we knew we are going to continue to ramp omni and as we are ramping up, but we knew they are going to be inefficient. So I would expect the efficiencies really — to really take hold in next fiscal year. But I tell you, I’m really pleased with some of the progress we’ve already made on the conversion. If you look at the conversion of the CECs versus the conversion of our old process, we continue to see improvements there. And so, we’re excited about it. We think it’s going to give us a lot of great benefits as we look forward.

Michael Montani — Evercore ISI — Analyst

Great. Thank you.

Bill Nash — President and Chief Executive Officer

Thank you.

Operator

This concludes our question-and-answer session as we have reached 10 AM. Those remaining in queue can reach out to Investor Relations to have their questions answered. I will now turn the call back over to Bill Nash for closing remarks.

Bill Nash — President and Chief Executive Officer

Great. Thank you. Thank you, Carol. Yeah. So, look, I would just say, look we’ve never experienced such a rapidly changing environment in all aspects of our business, whether it’s retail, it’s wholesale, or CAF. In my opening remarks, I talked about all the different accomplishments. And I’d tell you, it’s really — it’s because of the strength of our culture, the unique business model and our financial structure that really has enabled us to navigate all this.

We feel really good about our investments and our path forward, and we believe our omni-channel experience is fundamentally different than any other used car retailer, because of that fact it is designed in the world-class in-store or world-class online, but equally important, it’s a world-class combination of the two. I want to thank all of you for your questions today. Thank you for your support.

And as always, I have to thank our associates for their continued dedication to living our values each and every day. You are the success of CarMax. So, thank you for what you do, and we will talk again next quarter.

Operator

[Operator Closing Remarks]