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CarMax, Inc. (NYSE:KMX)
Q1 2019 Earnings Conference Call
June 22, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

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 CarMax Fiscal 2019 First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I would now like to turn the call over to Katherine Kenny, Vice President, Investor Relations.

Katherine Kenny -- Vice President Investor Relations

Good morning, thank you for joining our Fiscal 2019 First Quarter Earnings Conference Call. I'm here today with Bill Nash, our President and Chief Executive Officer, and Tom Reedy, our Executive Vice President and CFO. Before we begin, let me remind you that our statements today regarding the company's future business plans, prospects, and financial performance are forward-looking statements that we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on 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 annual report on Form 10-K for the fiscal year ended February 28, 2018, filed with the SEC.

Before I turn the call over to Bill, let me thank you in advance for asking only one question and getting back in the queue for your follow-ups. Bill?

Bill Nash -- President and Chief Executive Officer

Great, thank you, Katherine, and good morning everyone. Our used unit accounts for the first quarter were negative 2.3% against another tough year-over-year comparison. The comps were driven by lower traffic and better conversion and represented a significant improvement from the previous quarter. Total used units grew by 1.6%. While used vehicle evaluations were still higher than in last year's first quarter, the year-over-year change in our mixed adjusted vehicle acquisition cost was more favorable in the first quarter than in the fourth quarter. Industry data indicates some signs of recovery in the used vehicle marketplace since the slowdown at the end of last year. These signs include improving supply at auction and more normalized depreciation.

Our website traffic grew in Q1 by 16%, similar to the previous quarter, again, due to website and SEO enhancements. Gross profit per used unit remained consistent at $2215.00 compared to $2212.00 last year. We had another strong wholesale quarter with units up 9.6% year-over-year. This, again, was due to our buy rate, which rose to a multi-year first quarter high and to the growth in our store base. As we've said in the past, when used vehicle prices are higher, we can offer our customers more for their vehicles, which supports our buy rate.

Our gross profit per wholesale unit was flat at $1012.00 in both periods. The decrease in other gross profit was driven by lower service profits, again, negatively impacted by our lower used unit comps. Remember, as we said last quarter, at lower unit volumes, we would expect service overhead to de-lever. We also experienced a reduction in third-party finance fees due to shift in sales by finance channel. These were partially offset by increased EPP revenue. EPP revenue grew with sales but also benefited from provider cost decreases, which created an opportunity for some margin enhancement and $4 million related to the new revenue recognition standards.

Before I turn the call over to Tom, let me cover our sales mix and SGNA expense. As a percentage of our sales, zero to four-year-old vehicles decreased to about 77% versus over 78% in the first quarter last year. Large and medium SUV and truck sales were almost 28%, up about a half a percent from both last year's first quarter and the fourth quarter. On SGNA, expenses for the quarter increased about 9% to $438 million, or a year-over-year increase of $143.00 per unit. There were several factors that impacted the SGNA expense, including the opening of 18 stores since the beginning of the first quarter of last year, which represents a 10% growth in our base, and increase of $9 million, or $43.00 per unit, related to share-based compensation expense, and our continuing investment in technology platforms and digital initiatives.

Now, I'll turn the call over to Tom.

Tom Reedy -- Executive Vice President and CFO

Thank you, Bill, and good morning everybody. In the first quarter, our sales by finance channel were primarily a result of the mix of credit applications we received. While application volume was slightly down year-over-year, we did see some growth at the very high and low ends of the credit spectrum. We experienced growth in CAF and Tier 3 originations. Tier 2 fell due to a combination of application volume and a change in the year-over-year lender behavior, which we discussed last quarter. Tier 2 accounted for 17% of sales, compared with 19% last year. While we experienced some tightening by Tier 2 last spring, performance has been relatively stable since that time. Third party Tier 3 represented 10.9% of used unit sales compared to 10% last year.

And CAF penetration and 3-day payoffs grew to 42.9% compared to 41.9% in last year's first quarter. CAF's net loans originated in the quarter grew by 8% to $1.7 billion versus $1.5 billion last year. This was due to growth in the average amount financed, which was in line with the increase in CarMax's average selling prices and the growth in CAF penetration rate on top of the modest increase in CarMax unit sales.

CAF income increased 5.7% to $116 million. This was due to a combination of the 8.7% growth in average managed receivables and the continuation of modest compression in portfolio interest margin. Total portfolio interest margin was 5.7% of average managed receivables compared to 5.8% in the first quarter of last year and 5.6% last quarter. For loans originated during the quarter, the weighted average contract rate charged to customers increased to 8.4% compared to 7.8% a year ago and 7.9% in the fourth quarter, a reflection of our response to the current interest rate environment.

The ending allowance for loan losses was at $134 million, or 1.13% of ending managed receivables, up slightly sequentially from the fourth quarter but down from 1.18% in the first quarter of last year.

Moving to capital structure, during the first quarter, we repurchased 3.3 million shares for $207 million. And now, I'll turn the call back over to Bill.

Bill Nash -- President and Chief Executive Officer

Thanks. During the first quarter, we opened three stores, one in Greenville, North Carolina, which was a new market for us, and then two in existing markets, Dallas and Miami. In the second quarter of Fiscal 2019, we plan to open another three stores. Our second store in the Albuquerque market, which is in Santa Fe, opened earlier this month. The other stores will open in Macon, Georgia, which is a new market for CarMax, and in our existing Oklahoma City market. You will note that there has been a decrease in non-comp store contribution relative to recent quarters. This was due to a change in mix and the timing of store openings.

As I mentioned earlier, our website traffic continues to grow while we are improving the customer experience and growing leads through a variety of enhancements. This quarter, for example, we continue to make improvements to speed and technical performance of the site. In addition, we expanded and improved our personalized vehicle recommendations throughout the site. We also released the capability for customers to search based on their desired monthly payment.

We continue to leverage our new CRM system. We're testing new ways to communicate with customers, such as tech bots, text messaging, and appointment alert reminders. This allows us to improve the shopping experience and connect with the customers on their terms.

As you know, over the last couple of years, we've placed a great deal of focus on the development and testing of new customer experiences, such as finance preapproval, home delivery, online appraisals, and the new expedited pickup test. Many customers have now tested each of these products, both individually and in various combinations. These tests have allowed us to learn how to best build the features to meet their needs. In addition, we continue to improve the features as consumer behaviors and expectations change. Our next step is to combine all these pieces into a comprehensive e-commerce experience that is comparable to our in-store experience. Because customers are now able to do more digitally before they come to the store, we're also empowering our associates with new tools and training to leverage the customers' digital progress, making it simpler, easier, and faster for them to complete their purchase.

In the next few quarters, we plan to take this comprehensive experience to new markets and learn how to best operationalize it in a scalable way. We will provide more information on these tests in future quarters. Now, we will be happy to take your questions.

Questions and Answers:

Operator

If you would like to ask a question, please press * followed by the number 1 on your telephone keypad.

And our first question this morning comes from Matt Fassler from Goldman Sachs. Please go ahead.

Matt Fassler -- Goldman Sachs -- Analyst

Thanks so much and good morning. My question relates to credit. You spoke about the increase in the rates your charging for CAF at retail both year-over-year and sequentially. In addition to the fact that we've got, kind of, a firm underlying used car price, can you talk about what impact that might be having on demand to the extent that it raises the effective price of the car, but more than the underlying tight market would?

Bill Nash -- President and Chief Executive Officer

Good morning, Matt. You're talking about the impact that the interest rate rise may have on the demand for the used cars?

Matt Fassler -- Goldman Sachs -- Analyst

Yeah, exactly.

Bill Nash -- President and Chief Executive Officer

Yeah, so while I think it's a factor, I believe that the bigger factors -- the used car consume is interested in monthly payments. And bigger factors that drive the monthly payment are the purchase price, the down payment, and the term. The small movements in credit rate don't have as significant an impact as those other three items.

Matt Fassler -- Goldman Sachs -- Analyst

Are you seeing given that the average price seems like it's still rather firm, and the market's still tight, are you seeing any change in the other two, or is it potentially impacting mix in any way?

Bill Nash -- President and Chief Executive Officer

No, we're not seeing any market change in regards to that.

Matt Fassler -- Goldman Sachs -- Analyst

Got you, thank you so much.

Bill Nash -- President and Chief Executive Officer

Sure.

Operator

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

Brian Nagel -- Oppenheimer -- Analyst

Hi, good morning.

Bill Nash -- President and Chief Executive Officer

Good morning.

Brian Nagel -- Oppenheimer -- Analyst

Congratulations on this quarter.

Katherine Kenny -- Vice President Investor Relations

Thank you.

Bill Nash -- President and Chief Executive Officer

Thanks.

Brian Nagel -- Oppenheimer -- Analyst

My question, in regard to the used car business, so clearly there was a significant pickup, acceleration in Fiscal Q1 from Q4. Bill, in your prepared comments, you talked about, I guess, you mentioned less pricing pressure. So the question I have is, was that it? Whereas, you look at this quarter and going from a negative 8 to a negative 2, call it, was the absolute primary factor less pricing pressure? If not, what were the other factors? And then as we think about the pricing dynamic, I guess, as maybe somewhat of a follow-up to Matt's question, but how did that progress through the quarter and how should we think about it so far here in Fiscal Q2?

Bill Nash -- President and Chief Executive Officer

Okay, Brian, good question. So I think the best way to talk about this is to first start talking about what I talked about in the fourth quarter. So in the fourth quarter, we had higher acquisition prices. We talked about the spread was unfavorable between late model used and the new. We obviously had a tough comparison. We also talked about there was a post-election pop from the prior year. We also saw there was more supply than prior year on large SUVs, more affordable ones. So there was a litany of things. But certainly, the higher acquisition price and that spread was a major call-out. And what I'd tell you is, there's still a large spread year-over-year on acquisition, although it is trending in the right direction.

I also think that if you look at the consumer price index, it looks like new cars are holding their value -- have started to hold their value again better than used cars, which started in this quarter. So I think both of those help this quarter. And again, we're still continuing to work on a lot of our initiatives and make progress on them. So we have another quarter of that that I think helps benefit. And then there's other unknown things, like, what competitors are doing, how they're pricing. That kind of thing. So again, I think this quarter, there's a lot of noise, similar to last quarter, but some of the trends, some of the more macro trends, are trending in a favorable direction for us.

Brian Nagel -- Oppenheimer -- Analyst

Got it. Thanks for all the detail.

Bill Nash -- President and Chief Executive Officer

Sure.

Operator

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

Craig Kennison -- Baird -- Analyst

Hey, good morning. Thanks for taking my question. You mentioned lower traffic and better conversion as more activity moves online. That's been the trend. I'm curious about any updates to changes in your store staffing model that you're experimenting with and whether there's any opportunity to broaden any of those experiments to change your cost structure there.

Bill Nash -- President and Chief Executive Officer

Yeah, that's a good question, Craig. You know, in previous calls, I've talked about some of the waste initiatives that we've been looking at, and we've been focused on stuff that goes right into cost of goods sold, and we've also been focused on stuff with SGNA. And under SGNA, one of the things we've been focused on is better workforce utilization. And we've made changes over the last year on how better to leverage our workforce. And with technology advancements, we will continue to make sure that we're taking steps to better leverage our workforce.

So that's still work in progress, at this point.

Craig Kennison -- Baird -- Analyst

Thank you.

Bill Nash -- President and Chief Executive Officer

Sure.

Operator

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

Sharon Zakfia -- William Blair -- Analyst

Hi, good morning. I have one quick question and then a real question. So, Katherine, forgive me. The one quick question was just on the marketing spend. It looked relatively flat as year-over-year. I didn't know if that was timing or if marketing is just going to be more constrained this year, in general. And then secondarily, I'm just wondering if on the delivery pilots you're doing or anything related to e-commerce, if the credit characteristics of the customer are any different than your in-store customers.

Bill Nash -- President and Chief Executive Officer

Okay, Sharon, on the marketing spend, there was some timing there. So I think the way you should think about that is, it'll be similar when you look at it on a year-over-year basis, it should be similar on a per unit basis. So there was some timing at play there.

On the delivery pilot, you're asking have we seen any different mix in our credit customers?

Sharon Zakfia -- William Blair -- Analyst

I'm just wondering if the credit characteristics of that customer are materially different at all from your in-store customers.

Tom Reedy -- Executive Vice President and CFO

In general, we've looked at this over time, Sharon. There has tended to have been a little bit more skewed toward lower credit because, as you'd expect, people are less desiring to hear bad news face-to-face, but it's not a big enough break at this point to talk about anything in that pilot. It's too new because this is a different...

Bill Nash -- President and Chief Executive Officer

Yeah, and I think that what Tom's speaking too is more relevant to the pre-approval process, not necessarily the whole delivery experience. I mean, we're seeing where the customers that take us up on it are looking for convenience, and/or they just can't physically for whatever reason get to the stores. But as far as overall mix of customers that take that versus come into the stores, we haven't seen any big difference at this point.

Sharon Zakfia -- William Blair -- Analyst

Okay, thank you.

Bill Nash -- President and Chief Executive Officer

Sure.

Operator

Our next question comes from Scot Ciccarelli from RBC Capital Markets. Please go ahead.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Good morning, guys, hi. I know you guys don't do a whole lot on the forecast side, but based on everything you see, are there any logical reasons, in your view, why used vehicle values would not assume a more normalized depreciation curve now that we're closing in on a year away from all those lost vehicles from the flooding last year?

Bill Nash -- President and Chief Executive Officer

Yeah, Scott, all I can really speak to is in this first quarter, like I said in my opening remarks, we did see a more normalized depreciation curve. Albeit, it's starting at a much higher price point just given what happened at the end of last year with the hurricanes, that kind of thing. But as far as going forward, I would be speculation. I don't know. I just know that in the first quarter we've seen a return to more normalized depreciation.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

I understand that. Okay, thank you.

Bill Nash -- President and Chief Executive Officer

Hey, Scot, I do think that we would expect to continue to see the supply of vehicles -- from everything we understand -- the supply of vehicles will still continue to roll into the auction lanes, which obviously, will have an effect on acquisition prices.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

That makes sense. Okay, thanks, guys.

Bill Nash -- President and Chief Executive Officer

Sure.

Operator

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

Seth Basham -- Wedbush Securities -- Analyst

Thanks a lot and good morning. My question's around online lead growth, as I've asked about in recent quarters. Could you give us some commentary on whether or not you continue to have diligent lead growth online and the quality of those leads?

Bill Nash -- President and Chief Executive Officer

Yeah, so Seth, we do continue to have double-digit lead growth. Our website traffic right now, the majority of the growth is being driven by SEO, which we've, obviously, talked about for several quarters now, and the improvements that we're making there. As far as the lead quality, it's similar to last quarter. The mix is similar. So there was no real change in the mix of leads, and the leads, specific types are performing like they have in the past, whether they come online or whether they come through the store.

Seth Basham -- Wedbush Securities -- Analyst

Got it. And as a follow-up to that, then, if you're talking about a similar level of lead growth and a similar level of quality, what drove the improved conversion this quarter in your opinion?

Bill Nash -- President and Chief Executive Officer

Well, we did have more actual traffic, web traffic, this year. And then I think the stores continue -- I talked in our opening comments about the training and the tools that we're giving associates to better enable them to progress the customer. So I think it's a combination of store execution, but I do think it's also increased traffic coming to the website.

Seth Basham -- Wedbush Securities -- Analyst

Thank you.

Operator

Our next question comes from Mike Montani from MoffettNathanson. Please go ahead.

Unknown Analyst -- MoffettNathanson -- Analyst

Hi, thanks. This is [inaudible] on for Mike. I was wondering if you can please help us understand, maybe, how you think about getting the comps to accelerate with the multichannel initiative that you have in place, maybe, discuss the home delivery and appraisal, and what you learned from the pilot, and how feasible it is to roll that out further.

Bill Nash -- President and Chief Executive Officer

There's a lot in that question. Look, we're focused on driving comps. We're continuing to grow store base, so we'll grow the business that way. But we're really focused on continuing to leverage our existing footprint and reach customers in ways that we haven't previously been able to reach. So I think the initiatives that we've been working on will help us leverage our infrastructure in ways that we haven't and we should be able to continue to drive mid-single digit comp growth across the enterprise, so we feel good about that.

Unknown Analyst -- MoffettNathanson -- Analyst

Okay, thanks. And maybe, have you considered accelerating market penetration because there's still 40% of the country where you have no presence, while maybe some of your competitors are pretty rapid at growing their footprint nationwide?

Bill Nash -- President and Chief Executive Officer

Yeah, so it's going to be a combination. We are very comfortable at the pace at which we're opening new stores in this 13 to 16 range because it also allows us to focus on the execution of the business, but we also feel like we can increase market penetration just through our existing footprint for the reasons that I cited in the earlier question. So we're focused on both.

Unknown Analyst -- MoffettNathanson -- Analyst

Okay, thank you.

Bill Nash -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from John Murphy at Bank of America. Please go ahead.

John Murphy -- Bank of America -- Analyst

Hi, good morning, guys. Maybe just to follow-up that and just thinking about the install base of stores and the online efforts, just curious if you think that there may be markets above and beyond, sort of, the smaller markets that you're getting into, and the one that you're talking about, that might be much larger than the 600,000 MSA. And just curious, is there, kind of, a strategy here to go into smaller markets? Or is it just where the opportunity is right now and that as we go one, two, three years out, large MSAs might make sense. But also as we think about the store base, is there the potential over time to, maybe, call some inefficient stores and leverage your online efforts a lot more, greater productivity in markets.

Bill Nash -- President and Chief Executive Officer

Yeah, John. While this year, we're opening up more stores in the small MSAs, that's just a function of the property that we got. You'll see us still opening up stores in larger markets. To your point, we're only reaching about 70% of the population and there's a lot of large markets that we can continue to add additional stores. So while there have been more in small markets, will be more in small markets this fiscal year, it's more a factor of timing. And you'll see us going continue to put more stores in larger markets in the future, as well.

John Murphy -- Bank of America -- Analyst

And then just in the existing store base, as the base develops over time, would you ever consider in some markets shrinking the store base because you might be able to get a lot more efficient with your online efforts?

Bill Nash -- President and Chief Executive Officer

Yeah, at this point, I don't see the need to do that. And we, obviously, evaluate all our stores. We're pleased with all of our stores. You know, we've never had to shut one. The performance has been good. And keep in mind, we just opened up our 192nd store. So it's not like we have hundreds and hundreds and hundreds of stores or thousands or stores. I feel really good about where the stores are placed and being able to leverage those and that infrastructure, which I think is really important when you're looking to sell large volume vehicles, like we do.

John Murphy -- Bank of America -- Analyst

Great. That's very helpful. Thanks.

Operator

Our next question comes from John Healy from Northcoast Research. Please go ahead.

John Healy -- Northcoast Research -- Analyst

Thank you. Bill, I wanted to ask you a little bit about the wholesale business. The last few quarters, the business has done exceptionally well in terms of units. And I was just trying to understand -- I know you've mentioned the buy rates are up. But how are you guys growing that business as much as you are with the call of the traffic in the stores, kind of, down. Is there a decoupling there that's, kind of, more permanent? And how should we think of the wholesale business growing more long-term for you guys? I used to think it was more related to the constant measuring the traffic, but just trying to think about that business for the next couple years.

Bill Nash -- President and Chief Executive Officer

Yeah, John, the way I think about wholesale, over the long period of time, wholesale and retail should grow, I would say roughly similarly. Now, you've covered us long enough that you know that in certain quarters one may be up, one may be down, or over multiple quarters. Certainly, wholesale has been performing very nicely, which is a benefit to the diversified model. When retail sales may be down, wholesale may pick you up a little bit. And what I would tell you is that I think it's a factor of one -- one of the things I cited in the opening remarks is, obviously, with prices at an all-time high that certainly helps us because we can continue to put more money on the customers' vehicles, which bumps that buy rate up.

But I would also tell you it also goes to the execution and the improvements that we've made on making sure that we can react quickly to market, making sure that we understand the market factors quickly. So there is an execution piece at the store level where I think they're doing a better job than they've ever done. So I don't think you should think that, hey, this is always going to outgrow the retail. I think, I still have the long-term view that over the long-term both of them will grow about the same.

John Healy -- Northcoast Research -- Analyst

Fair enough. And just along those lines, when you look at that customer that's come in, is there any change in converting them into purchasing a car with you guys? Is it a similar ratio or has that evolved over the last year or two any different than we've seen in the past?

Bill Nash -- President and Chief Executive Officer

No, that's pretty similar.

John Healy -- Northcoast Research -- Analyst

Thank you so much and great quarter.

Bill Nash -- President and Chief Executive Officer

Thank you, John.

Operator

Our next question comes from James Albertine from Consumer Edge. Please go ahead.

James Albertine -- Consumer Edge -- Analyst

Good morning, thanks for taking my question and congratulations, as well. If I may, on the EPP comment that you had earlier, just want to unpack a little bit what you think is driving the lower provider costs? And if you can shed a little bit more detail or light on the accounting adjustment. I don't recall you mentioning the same adjustment in the fourth quarter. I just want to understand what's going on there in terms of the recognition of revenues in that business. Thanks.

Tom Reedy -- Executive Vice President and CFO

Yeah, sure, James. And as you might imagine, they are a bit intertwined. The reason that we are able to get cost reductions from our providers on the EPP revenue is that those plans have been exceeding their expected performance from a cost-benefit perspective for the last several vintages, I guess, is the way to describe it, which means that there is room to either decrease the pricing or take a little bit more margin. This quarter, we realized some cost-benefits. We believe we're able to take a little bit more margin for the shareholders and not impact penetration, which turned out to be the case. So that's where that growth arose from.

As far as the accounting, it is arising from the new revenue recognition standard, which has a very immaterial impact on our core business accounting, but it does have some impact on extended plan revenues. So our vendor agreements that I referenced before provide for payments to CarMax if the long-term performance of those plans exceed certain thresholds. And certain of those plans -- certain of those vintages -- are exceeding those thresholds. In the past, when those payments came to us, we just recorded them as when we received the check. But under the new accounting standard, we have to estimate the amount that we expect to received, record it as a receivable, and then true it up each quarter based on the circumstances at the time. So that $4 million dollars that you see represents the true-up of that receivable for what we learned during the quarter, during the first quarter.

Also, we added a minor receivable of about $13 million dollars, after tax, on the balance sheet for recognition of this phenomenon, if you will. So the $4 million, like our loan loss reserves, we will have to evaluate just on a go-forward basis, and we'll plan to disclose any material adjustments to that expected receivable so investors can discern which revenue relates to activity in the current period versus payments that we're getting from prior vintages. I think that'll just make it a little bit more clear.

But it is real dollars. It's money that we expect to collect on a cash basis, just relates to plans that are already out there and in place.

James Albertine -- Consumer Edge -- Analyst

Thank you for that detail. If I may, just a clarification on the performance that you noted, it was even a little bit better than the providers and yourselves, perhaps, were expecting. Is there a mix-related driver to that? I'm just trying to get a sense of -- yeah.

Tom Reedy -- Executive Vice President and CFO

I don't think it's a mix-related thing. I think it's just that overall performance was better than they had priced to.

James Albertine -- Consumer Edge -- Analyst

Got it, understood. Thank you again.

Tom Reedy -- Executive Vice President and CFO

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 call. The recent performance for Carvana has been pretty incredible. I know you've invested quite a bit in the customer experience capabilities. So just curious if you could compare and contrast their approach versus the capabilities you have and if you decided to go down a similar path that they have gone down, what are some steps that you would have to do to adjust the business model, or tweaks. Because it seems like you have many of those capabilities already in house.

Bill Nash -- President and Chief Executive Officer

Yeah, like I've said in my opening remarks, we've been testing different pieces of the capability, whether it's online finance, online appraisals, and we've been doing it somewhat in isolation, somewhat in combination. And now, our focus is really bringing all that together and in a comprehensive e-commerce package that we can roll-out and continue to adapt as the customer's expectations continue to change. So we feel really good about all that. And I think it complements our existing base and our infrastructure.

It allows us to provide -- certainly, it gives us an advantage to deliver exceptional customer service, whether it's online, whether they want to do a mix of the online versus in-store, or if they want to come all into the store. I don't want somebody to have hit our website, and they immediately have to decide right then I either want home delivery, or I don't want home delivery. I want the customer to progress on their terms, and if partway through they decide, "You know what? I want home delivery," I want it to be an easy, smooth transaction. So we're going to let the customer drive the process by however they want to drive it, versus, OK, we've got one solution for one type of customer. And that's what we're focused on.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Got it. And what has been your experience with regards to the transportation of vehicles, as far as the cost-benefits there?

Bill Nash -- President and Chief Executive Officer

Well, I would tell you, we're probably one of the biggest transporters of vehicles. We probably move close to 2 million cars a year. So we're very familiar with transportation. I think we have an excellent logistics system, which we are heavily focused on continuing to make that even better through investments. And I think that it has been, and will continue to be, a big differentiator for us.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Thank you.

Bill Nash -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Rick Nelson from Stephens. Please go ahead.

Rick Nelson -- Stephens -- Analyst

Hi, good morning. I'm curious if you're seeing any difference in website traffic or store traffic in markets where you're competing with these online, home-delivery concepts?

Bill Nash -- President and Chief Executive Officer

Yeah, Rick, so what I can tell you is if I look at the large markets where competitors are making headway, I would tell you, we're also making headway. So there's no direct correlation to any type of impact. We just don't see it. So again, we feel good about where we are in those markets.

Rick Nelson -- Stephens -- Analyst

Thanks and good luck.

Bill Nash -- President and Chief Executive Officer

Thanks, Rick.

Operator

Our next question comes from David Whiston from Morningstar. Please go ahead.

David Whiston -- Morningstar -- Analyst

Thanks, good morning. I just want to get a little more understanding on the big picture of what went on this quarter because you're saying your counts are down due to macro pricing factors, which I assume means heavy new vehicle incentives, but used pricing was also up. So can you help me reconcile that and then, kind of, related, maybe, is there a high used demand on certain vehicle segments that's skewing used pricing upward?

Bill Nash -- President and Chief Executive Officer

No, I think we have a bit of a carryover from the spike in prices from last fall. So you have a starting higher price. We saw normal depreciation, but you're starting from that higher price. And when I say normal depreciation cycle, the year actually starts off with some appreciation because of sales that generally happen in the tax time. So that's different than what we saw last year's first quarter where it was more of a flat environment. You didn't really see any appreciation. So you have a little bit of a double hit on the acquisition cost, in that you still have the residual left over from what we experienced in the fall. Added to that, you have some appreciation that we saw from the normal seasonal appreciation/depreciation.

So that acquisition price, if you mix-adjust it, it is a little bit more favorable than it was the first quarter. So that's trending in the right direction. The other thing that I cited was the spread between new and used -- that had gotten smaller. New cars last quarter with their incentives had actually lost more value than used cars, which is, kind of, atypical. During this quarter, we started to see where it looks like that's trending back to normal where new cars hold their value a little bit more. So there's a lot of noise going on with this for the quarter.

David Whiston -- Morningstar -- Analyst

Is it fair to say you're expecting a pretty sharp fall-off as soon as this quarter is over due to the hurricane tailwind going away?

Bill Nash -- President and Chief Executive Officer

Well, it's hard to say. I mean, I would've thought it would've happened a little bit quicker, but considering that we had a normalized appreciation and depreciation cycle, it's really hard to say. I would say that to my comment earlier, we think supply is going to continue to increase. If supply continues to increase, then that will continue to lower the prices of used vehicles.

David Whiston -- Morningstar -- Analyst

Okay, thank you.

Bill Nash -- President and Chief Executive Officer

Thank you.

Operator

As a reminder, it's *1 on your telephone keypad in order to ask a question. Our next question comes from Brian Nagel from Oppenheimer. Please go ahead.

Brian Nagel -- Oppenheimer -- Analyst

Hi, good morning, again. So my follow-up question, also on the used car business, we noticed continue decline in that Tier 2 penetration. Recognizing that -- and some of this is out of your hands -- I'm just reflecting about market conditions. But you have recently made changes to your lending group within that pocket. So how should we think about that cohort of sales, going forward?

Tom Reedy -- Executive Vice President and CFO

Are you referring to Tier 2?

Brian Nagel -- Oppenheimer -- Analyst

That's correct.

Tom Reedy -- Executive Vice President and CFO

Yeah, I think we're all looking at that group. And we believe that there is a value in having a portfolio of lenders. And some of the experience we had last year and into the first quarter of last year is evidence of why it's important to have a group of lenders. But as I mentioned in my prepared comments, we did see a deterioration in performance. We define performance as sales volume to the applications that that group sees, or those lenders see. And so we do see a deterioration in performance after the first quarter of last year. Since that time, it's been pretty consistent. In fact, modestly better than it was in recent quarters.

So on a go-forward basis, I can't tell you how our partners are going to behave. It's going to be dependent on the marketplace and what they're seeing in their portfolios. Obviously, we'll continue to pay attention to it. We'll continue to try to manage and optimize it. But things have been pretty stable in the last three quarters.

Brian, are you still there? Oh, I think we lost Brian. Operator, are there any more questions?

Operator

With no one in queue at this time, I'll turn the call back over for any closing remarks.

Bill Nash -- President and Chief Executive Officer

Alright, well, listen, before I close, I do want to take a moment to recognize Cliff Wood who's been our Chief Operations Officer. He is retiring next month. He has been with CarMax for more than 24 years. I've had the privilege to work with him for 21 of those years. He's been instrumental in building our industry-leading operations. He's been a key champion for our associate-focused culture. And we all wish him the best in the future. As always, I also want to thank our 25,000 associates that are out there for what they do every single day, how they take care of each other, our customers, and their communities. And I want to thank you all for joining the call today and for your interest in CarMax. And we will talk again next quarter. Thank you.

Operator

This concludes today's conference. You may now disconnect.

Duration: 38 minutes

Call participants:

Katherine Kenny -- Vice President Investor Relations

Bill Nash -- President and Chief Executive Officer

Tom Reedy -- Executive Vice President and CFO

Matt Fassler -- Goldman Sachs -- Analyst

Brian Nagel -- Oppenheimer -- Analyst

Craig Kennison -- Baird -- Analyst

Sharon Zakfia -- William Blair -- Analyst

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Seth Basham -- Wedbush Securities -- Analyst

Unknown Analyst -- MoffettNathanson -- Analyst

John Murphy -- Bank of America -- Analyst

John Healy -- Northcoast Research -- Analyst

James Albertine -- Consumer Edge -- Analyst

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Rick Nelson -- Stephens -- Analyst

David Whiston -- Morningstar -- Analyst

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