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CarMax (NYSE:KMX)
Q3 2021 Earnings Call
Dec 22, 2020, 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 the CarMax fiscal 2021 third-quarter earnings conference call. [Operator instructions] 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 third-quarter earnings conference call. I'm here today with Bill Nash, our president and CEO; Tom Reedy, our executive vice president of finance; Enrique Mayor-Mora, our senior vice president and CFO; and Jon Daniels, our senior vice president, CAF operations.

Let me remind you, our statements today regarding the company's future business plans, prospects, and financial performance are forward-looking statements we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on the management's current knowledge and assumptions about future events that involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see the company's Form 8-K issued this morning and its annual report on Form 10-K for the fiscal year ended February 29, 2020, filed with the SEC.

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

Bill Nash -- President and Chief Executive Officer

Great. Thank you, Stacy. Good morning, everyone, and thanks for joining us. You may have seen in our announcement in this morning's 8-K that Tom will retire on February 28.

Before we get started, I want to take a moment to congratulate and thank him for his tremendous contributions to CarMax. Tom's expertise, strategic focus, and leadership have helped us build a best-in-class finance organization and he has been instrumental in guiding us through the largest transformation on our company's history. Tom, thank you for all that you've done. We wish you the very best in your well-earned retirement.

Jon Daniels, who many of you already know, will continue leading our CarMax Auto Finance team and will be -- and reporting directly to me. On today's call, we'll first discuss our third-quarter financial performance and then turn to an update on our omnichannel experience and other strategic initiatives before opening it up for questions. Our diversified business model spanning retail, wholesale, and auto finance, combined with strong execution by our teams and disciplined cost management delivered another great quarter of strong EPS growth even as retail sales were hampered in the back part of the quarter due to macro factors. CarMax Auto Finance or CAF continued to deliver solid results this quarter with income up 55%.

In addition, CAF and our partner lenders delivered strong conversions in all credit tiers. Jon will provide more details on customer financing and CAF contribution shortly. Our wholesale business also delivered strong results with volumes up 10.8% which was driven by a record third-quarter appraisal buyer rate. The strength of our buyers, our algorithms, and extensive datasets enabled these results with only a slight year-over-year decrease in wholesale gross profit per unit to $906.

This is despite sharp depreciation in the broader market. All auctions will run virtually throughout the quarter. Total retail used unit sales were up 1% compared with the same period a year ago while used unit comps were down less than 1%. Gross profit per retail used unit for the quarter was $21.51 comparable with last year's third quarter.

However, this feud doesn't really paint a full picture of how the macroenvironment impacted our retail business. For the first part in the quarter, we achieved mid-single-digit comp growth continuing the positive momentum from the end of the second quarter. However, the election approached and there was another surge in COVID-19 cases which tightened occupancy restrictions and shelter-in-place orders, we saw demand soften. As a result, sales trended down in the back part of the quarter.

This trend has continued into the first two weeks of December with sales down approximately 4% year over year. As a reminder, last year, we had a strong fourth quarter and an added benefit of Leap Day. Looking ahead, we're confident the sales trends we experienced in the latter part of the third quarter and into December are shorter term in nature. Today, approximately half of our stores have occupancy restrictions in place due to state and local government mandates.

Of these, more than 40 stores have mandates limiting capacity to 25% or less. Even with these restrictions, our omnichannel experience is allowing customers to connect and transact with us in more ways than ever. As we continue investing in our systems, our people, and our offerings, we're confident the experience we offer will continue to attract more customers to CarMax and better serve all their needs whether that's online, through our CECs, in-store, or through whatever combination they choose. I'll speak to the ongoing enhancements to our omnichannel experience later.

But first, I'd like to turn the call over to Enrique to provide more information on our third-quarter financial performance, and then to Jon who will provide additional detail around consumer financing. Enrique?

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

Thanks, Bill, and good morning, everyone. For the quarter, other gross profit increased $4.7 million or 5%. EPP profits grew by $4.6 million or 4.8% due primarily to favorable adjustments to cancellation reserves and profit-sharing revenue recognized in the quarter. In the third quarter, we maintained our ESP penetration rate at 60% comparable with the prior-year quarter.

On the SG&A front, we continue to do an excellent job in maintaining cost discipline while supporting the growth of our omnichannel experience and pursuing other investment opportunities. For the third quarter, expenses decreased 1.2% or approximately $6 million to $479 million. SG&A per unit was $2,461, a year-over-year leverage of $57 per unit on the quarter. The decrease in SG&A was driven by a $16 million decrease in stock-based compensation expense and a $15 million decrease in other overhead costs.

The decrease in other overhead costs was due primarily to pandemic-related reductions and year-over-year favorability due to lower litigation expenses in the third quarter. These SG&A reductions were partially offset by the following notable SG&A expense drivers for the third quarter: a 13% increase in advertising expense, the opening of 11 stores since the beginning of the third quarter of last year which represents a 5% growth in our store base, and continued spending to advance our technology platforms and strategic initiatives. As we discussed in our last call, we are increasing our marketing spend in the second half of the year. For the third quarter, this spend included additional investments in SEM, content, and social as we look to drive customers to our digital properties.

This spend on other quarter brings our year-to-date advertising expense to $144 million, up 2% or $3 million when compared to the same nine-month period last year. On a full-year basis for fiscal-year 2021, we anticipate advertising spend will be up roughly $25 million when compared with the prior fiscal year. The vast majority of this increase will occur in the fourth quarter and will be driven by heavier broadcasting in support of the next evolution of our brand campaign. This campaign will focus on clearly differentiating our brand and demonstrating the benefits of our omnichannel experience.

We will also continue spending on ROI-based digital investments. From a capital-allocation perspective, our priority is to fund growth initiatives. We continue to be focused on aggressively investing in the digital capabilities required to enhance our omnichannel experience, the expansion of vehicle and customer acquisition, and the strategic expansion of our store footprint. In the third quarter, we resumed construction activity on new stores that we had passed in the first quarter due to the pandemic.

We are currently planning to open 8 to 10 new stores in FY '22. Our unique business model generates a significant amount of cash. So, while our priority remains on investing in our growth, this strength allows us to also return capital back to our shareholders. In the third quarter, we resumed our share buyback program repurchasing approximately 1.2 million shares for $109.2 million in the quarter.

We have $1.4 million remaining -- $1.4 billion remaining on the current authorization. Finally, we ended the quarter modestly below our historical leverage target of 35% to 45% adjusted debt to capital. As you can see, our diversified business model, operating excellence, and strong cash generation position us extremely well as we manage through a dynamic environment. I'll now turn the call over to Jon.

Jon Daniels -- Senior Vice President, CAF Operations

Thanks, Enrique, and good morning everyone. As Bill mentioned, CarMax Auto Finance and our lending partners continue to deliver solid results. For the third quarter, net of three-day payoffs, CAF's penetration was 45.7%, compared with 43.3% a year ago. Tier 2 accounted for 19.5% of used unit sales compared with 20.4% last year.

Tier 3 was up slightly to 9.7%, compared with 9.5% a year ago. Recall that the distribution realized across the tiers is a function of both lender behavior, as well as the credit mix of applicants. Year over year, cast net loans originated grew by 7% to $1.8 billion. The weighted average contract rate charged to new customers was 8.6%, up from 8.1% a year ago and 8.2% in the second quarter.

Regarding the portfolio, the overall interest margin increased to 6.3% versus 5.7% in the same party last year as we realized significant benefit from lower funding costs. We continue to efficiently fund our business through the ABS market. Our most recent transaction in October was very well received by investors. Cash income was up 55% to $176 million in the quarter, reflecting reduced loss provisions plus an increase in both interest margin and average managed receivables.

The provision for loan losses was $8 million resulting in an ending reserve balance of $432 million for the third quarter. The total reserve at 3.17% of managed receivables which is moderately lower than the 3.23% at the end of the second quarter. While we recognized significant favorability from losses relative to the expectations at the end of Q2, we believe the reserve adequately reflects the unpredictability of the current environment and the uncertain consumer situation. Before turning the call back over to Bill, I'd really like to take this opportunity to recognize the outstanding performance of our many associates dedicated to serving the credit needs of our customers.

Our ability to consistently provide exceptional customer service from purchase to pay off was never more apparent than in this past year and is yet another aspect of our business that sets us apart from others. Bill?

Bill Nash -- President and Chief Executive Officer

Great. Thank you, Jon, and Enrique. Our teams continue to execute in this dynamic environment. Despite the near-term market challenges that follow the trajectory of the pandemic, our fundamentals remain strong.

We have an agile business model that generates a significant amount of cash and we are in the best position within the used car industry to further expand our market share and deliver shareholder value over the longer term. The CarMax experience is about putting the customer in the driver's seat and providing them with a great service regardless of how they choose to interact with us. To do that, we have been transforming every aspect of our business from supporting systems to how we operate the physical stores in order to create an efficient, seamless process for the customers and our associates. Last quarter, we announced that we had completed the national rollout of our omnichannel experience.

We now have a common platform in place across all of CarMax that leverages our scale, nationwide footprint, and infrastructure, and empowers our customers to buy vehicle on their terms whether that's online, in-person, or a seamless combination of the two. While the current platform enables customers to buy vehicle online, some parts of the transaction such as appraisals, transfers, and appointment scheduling require assistance from customer experience consultants. We are now focused on enabling self-service for all components of the sale that will deliver significant improvements over the next two quarters. For example, we've been testing instant appraisal offers on carmax.com.

This feature gives customer -- give customers an offer on their vehicle in five minutes or less. Based on these initial tests, we are rolling out this offering more broadly and expect it to be available for stand-alone appraisals nationwide by the end of the fourth quarter. We are on track from most of our customers to have the ability to buy vehicle online independently if they choose by the middle of next fiscal year. Even with the ability to transact online, customers appreciate having real-time support available to them should they choose.

And we believe there is untapped value in focusing resources on supporting the online sales process just as we know there's greater value in having friendly, helpful associates in-store to assist in the in-person sales process. This is why we developed centralized customer experience centers or CECs. Again, the advantage of our omnichannel model is that customers get to choose how they progress their experience. In the third quarter, approximately 70% of our customers who bought a car from us interacted with our CECs and more than 50% of our customers chose to advance their transaction online.

In addition, we are seeing those customers progressed more of the transaction online but still preferring to take ownership of the vehicle in one of our stores. For the third quarter, alternative deliveries chosen by customers including home delivery and curbside pickup were less than 10% of sales. Having just completed the initial rollout of our omnichannel platform last year, it's too early to quantify its impact across CarMax as a whole but we already have evidence that supports the benefits of a seamlessly integrated, in-store, and online experience. It was just two years ago that we launched our first omnichannel experience in Atlanta.

Now, after two years and continued testing on pricing and advertising, we can see that our omnichannel experience is delivering sustained growth in this very competitive market. During this time, the Atlanta market has outperformed the company with high-single-digit comps in the third quarter and two-year stock comps of 20%. We're also very pleased with how our other markets are ramping as our omnichannel offerings mature. In addition, the number of alternative deliveries in the Atlanta market including curbside pickup and home delivery has increased by 45% when compared with the third quarter of last year, although this remains a relatively small piece of overall sales.

As we continue enhancing our online experience and offerings, it's important to educate our customers on our omni -- omnichannel experience to differentiate and elevate the CarMax brand and our position in this evolving marketplace. Within the next weeks, we will introduce the next phase of our national multi-media marketing campaign that began last year to increase awareness of our core omnichannel capabilities. We want customers to understand that CarMax offers the ultimate flexibility to shop and buy on their terms their way. In combination with the improvements and enhancements we are making to our omnichannel experience, we are also implementing additional pricing and marketing tests beyond the national campaign I just mentioned in select markets.

We expect to continue reporting attractive gross profit per retail unit in the fourth quarter above $2,000, however, we anticipate the year-over-year change in this metric will be larger than what we've experienced in recent years. Finally, before we take your questions, I'd like to let you know that we planned out a large, virtual Analyst Day event following our year-end earnings call. There's a lot going on at CarMax and we're excited to share it. And we think that this forum will provide us the opportunity to go into greater detail on strategy and metrics behind our continued progress and the innovations we are delivering to our valued customers.

We are finalizing the dates and logistics and plan to email invitations in early 2021. In the meantime, please feel free to reach out to our Investor Relations department should you have any questions regarding this event. Now, we'll be happy to take your questions. Operator?

Questions & Answers:


Operator

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

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Good morning guys and happy holidays to you. Bill, can you -- good morning. Bill, can you help us better understand the -- the correlation between the -- the slowing sales trends in the quarter and how the occupancy restrictions ramped up? Like, you know, just -- just any kind of color you might be able to provide in terms of, you know, how big of an impact you think those occupancy restrictions had on the business.

Bill Nash -- President and Chief Executive Officer

Yeah. So, Scott, as I said in the -- in the opening remarks, we saw continued good growth in the beginning of the quarter and really up until a week or so before the elections, really, when we saw a decrease -- a step down. And I think part of it was the election but I also think that's when we started seeing these -- these tighter restrictions. You know, I noted that we had more than 40 stores that are 25% or less.

If I go back to June, we didn't have that many stores. I think there's almost -- it was about half of that that actually had that type of restriction. And of those -- the more than 40 that are at that 25% or less, most of those -- the majority of those are at 20%. So, you know, it's hard to quantify exactly the restrictions versus the shelter-in-place, but we absolutely have seen a step down in those markets.

You know, if you think about some of the larger markets that are under these restrictions, we've absolutely saw a -- a step down once the restrictions went in -- in -- into -- into effect.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

That's -- that's really helpful. If I -- I could just add a quick follow-up on something very sad. You know, you talked about, you know, higher marketing ramp in the fourth quarter and maybe a little less GPU. Is it fair to assume those -- those similar trends would kind of roll forward to the next year as you guys try and get people to understand the changes in the business?

Bill Nash -- President and Chief Executive Officer

Yeah. So, -- and obviously, the third quarter is we -- we stepped up a little bit. The fourth quarter, we're stepping up. You know, we feel like we have a great opportunity in front of us.

And so, you know, it takes a little while to be able to build awareness. So, I would expect next year there would be a step up. But, you know, we'll talk more about that at the end of the -- the fourth quarter.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Very helpful. All right. Thanks, guys.

Bill Nash -- President and Chief Executive Officer

Thank you, Scott.

Operator

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

Michael Montani -- Evercore ISI -- Analyst

Hey, good morning. Thanks for taking the question.

Bill Nash -- President and Chief Executive Officer

Good morning.

Michael Montani -- Evercore ISI -- Analyst

I want to dig in -- dig in a little bit more if I could, Bill, on the experience that you've seen -- the Atlanta. I thought that some helpful color, so I was hoping you can share a bit more. And then just confirming, you know, by the middle part of calendar '21, if I was hearing you right earlier, it sounded like the experience would go basically frictionless for online so consumers could decide to speak to a person live. But if they wanted to basically just, you know, click a button and do the transaction themselves, you know, they could do that as well.

So, I just wanted to make sure I understood that, and then some extra color in the multi-channel would be great.

Bill Nash -- President and Chief Executive Officer

Yeah. And thank you for your question, Michael. Yeah. So, like I said, Atlanta, you know, Atlanta was the first market that we rolled this to and -- and we've been testing Atlanta as kind of the first market that we roll new things.

In fact, we actually have a new user experience out there and that in some other markets right now that allows the customer to build the order, you know, start on the order themselves. So, I think, you know, the Atlanta performance is indicative of -- as -- as these markets mature longer. Because if we look at other markets, you know, we have about 70 stores and then the corresponding markets at those stores ran. They have been open for at least a year and we see performance from that group better than the -- the -- the rest of the company which, you know, just shows that as it matures, they -- they -- they continue to ramp.

And in fact, we have, you know, some of those early waves are -- are -- are currently producing nice, strong comps. So, we're encouraged by all that. I think some of the things we've been doing in Atlanta and a few other markets, we haven't rolled out to other places which is one of the reasons we want to extend some of the -- the testing which is the comments on the advertising and the -- and the pricing. On the -- the second part of your question, the frictionless.

Yes, I mean, you know, right now, a consumer can buy online from us. But as I mentioned, there's parts of it where the customer experience consultant needs to -- to get involved and -- and work with the consumer. And we'll make great strides. The focus right now is on self-serve, so we'll make great strides in the next two quarters.

And I think, you know, the majority of our customers will have that option to progress self-serve without the fee -- fee if they choose to do that. And -- and we think we'll be in good shape at, you know, second quarter, middle of -- of next fiscal year.

Michael Montani -- Evercore ISI -- Analyst

Thank you for that update.

Bill Nash -- President and Chief Executive Officer

Sure.

Operator

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

John Murphy -- Bank of America Merrill Lynch -- Analyst

Good morning, guys, and congrats Tom and Jon on the retirement and new roles. Just a -- a -- a question here, Bill. You know, obviously, there's a lot of concern about the -- the same-store sales being down. And I -- and I understand the, you know, the -- the regulatory regime or shelter-in-place requirements are -- are dragging some of this.

But when you look at wholesale sales, they're up 10.8%. So, there's some part in the market that's functioning really well even under these, you know, constraints. And, you know, a skeptic would say, hey listen, you know, there's a big problem here because your, you know, your -- your wholesale sales are -- are really strong. Somebody is retailing some cars on the other side and you're not.

And an optimist, you know, could say, hey, listen, that 10.8% of indication that, you know, ax these, you know, these constraints could really be, you know, crushing it. I mean, how do you -- how do you interpret sort of that big gap there between the wholesale and retail? And I can't remember any that -- quite that big as of before. So, just trying to understand what's going on.

Bill Nash -- President and Chief Executive Officer

Sure, John. Yeah. Look, I think there are a lot of factors going into -- into the next -- for the -- the third quarter, I mean. Obviously, we talked about the -- the COVID surge with the lockdowns and restrictions.

We talked about the election. You know, you bring up an interesting point. You know, higher used prices for the third quarter. Keep in mind, you know, a lot of the cars that are sold in the third quarter are -- are -- are bought earlier on in the months leading up in that.

And you know from the earlier months that there was -- there was a very steep appreciation. And so, what's happened is, you know, the other factor that -- that I hadn't really talked about in this quarter is you have a -- a tightening of the gap between, you know, a late model used and a -- a -- a new. So, I think that's also a -- a-- a factor in there. And I think the external -- there's some external sources out there that would tell you that used car industry has gotten faster.

And, you know, we're seeing that. We've seen depreciations in the marketplace throughout the -- the quarter. Now, value year over year is still above what it was a year ago. But, you know, we're -- we're certainly seeing the depreciation -- the depreciation kick in.

John Murphy -- Bank of America Merrill Lynch -- Analyst

OK. But I mean, it just seems like there's -- there's an indication and lower prices does not necessarily mean lower unit sales and -- and lower procs for you. It actually kind of converts to what you're used to seeing in lower pricing as long as you manage your wealth, major volume goes up and your profits go up. So, I mean, it just -- it just seems like, you know, at a -- as the market normalizes, there's the potential for real buying increases and that -- that wholesale number is maybe a better harbinger of what's to come as opposed to what just happened with your same-store sales comps.

I -- that's just sort of our interpretation it seems like where things are headed.

Bill Nash -- President and Chief Executive Officer

Well, keep in mind the wholesale, you know, when you're -- we've flipped that wholesale inventory very quickly. And -- and obviously, that our wholesale inventory is dramatically different. What we're selling through our auctions is dramatically different than -- than what we're selling on our retail lot. But, you know, in the wholesale, you're getting cars real-time and -- and -- and selling them real-time.

On the retail side, you know, we've -- we've got inventory that we've been working through that we bought earlier leading up into the quarter.

John Murphy -- Bank of America Merrill Lynch -- Analyst

And just -- I'm sorry, just what -- the -- the wholesale restrictions are not the same obviously as what you have on the retail side, right? So, wholesale is not hampered by any kind of restrictions. Is that correct?

Bill Nash -- President and Chief Executive Officer

No, the wholesale side -- I mean, we chose to -- to keep all of our sales virtual. There are actually some markets that we could have turned the physical sales back on. But just given the nature of, you know, bringing a bunch of folks into our store locations, you know, to keep our associates safe, we've decided, you know, for the quarter to keep everything virtual.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Great. Thank you very much.

Bill Nash -- President and Chief Executive Officer

Thank you, John.

Operator

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

Sharon Zackfia -- William Blair & Company -- Analyst

Hi. Good morning. I was hoping --

Bill Nash -- President and Chief Executive Officer

Good morning, Sharon.

Sharon Zackfia -- William Blair & Company -- Analyst

Hi. I was hoping -- oh, by the way, I suspect that Tom is going to spend all of his retirement surfing. So, congratulations to him. But wanted to delve a little bit deeper into kind of what you're seeing at Atlanta which sounds really encouraging.

And I think you mentioned, Bill, some -- some test on pricing and marketing to maybe accelerate that -- that dynamic for the rest of the country. So, I guess at the end of the day, my question is just, you know, is there a way to -- to increase awareness more quickly of the omnichannel offerings, because it seems that it's happening but it seems that it's happening maybe more slowly than -- than some of us had originally anticipated. So, I'd love to hear more about the effectiveness of different kinds of marketing and/or programs that you can do to accelerate national awareness. And then, secondarily on the pricing test, I didn't catch if any of that was related to pricing for delivery as opposed to actually unit pricing.

Bill Nash -- President and Chief Executive Officer

All right. There are a lot in that question, Sharon. Let's see if I can get it all. I may have to ask you to repeat part of the question.

But first of all, I think it's important, you know, we worked really hard to get a common platform out there which we got in the -- in the third quarter and that was a significant milestone for us because we really needed -- we wanted everybody to be on the same platform before we started to go out and -- and educate the consumer. And like I said, in the third quarter we planned, you know, by the end of the year to kind of kick off this new multimedia marketing campaign which we're really excited about. And then, I think it does a nice job of really differentiating us from whether it be traditional dealers or online dealers. And it really highlights the capabilities and the flexibility that we have.

And so, we're excited it's going to be, you know, everything that you can think of from broadcast to digital, to social, to out of home. So, you think about billboards, that kind of thing. So, it really is a broad sweeping effort because, you know, we do think there's an opportunity to educate the consumer and drive that awareness. Now, you know, on any awareness advertising, it doesn't -- you know, takes a little time because when you do awareness advertising, the majority of folks that are hearing it aren't necessarily in the market, but the point is to make sure that when they are in the market that we're top of mind.

So, that's going to be the real -- the real focus. And I think that will be a -- a catalyst. I mean, we really haven't done -- done that up to -- up to this point to where we're excited to get that out there. I think the other part of your question was the pricing on delivery is that -- could you clarify that part?

Sharon Zackfia -- William Blair & Company -- Analyst

Well, you talk about pricing test, you know, in the current quarter and that impact on GPU. I just didn't know if that was going to include some sort of price elasticity dynamic around the cost of delivery to the consumer.

Bill Nash -- President and Chief Executive Officer

Yeah. So, we're constantly -- when I made the comments earlier, I was speaking more specifically to the GPU pricing -- or, you know, retail pricing. We're constantly doing test on delivery to the consumers and we'll continue doing that as well. You know, we have been doing that and I would expect as we go forward, you know, the -- you know, we're very analytical when it comes to doing things like this and whether it's, you know, pricing, it's advertising, whether it's the transfer fees.

We're going to do combinations. We're going to do them by themselves. I mean, there's going to be a whole bunch of different things that we're trying this quarter.

Sharon Zackfia -- William Blair & Company -- Analyst

Sorry, can I just ask one follow-up? So, you're giving the pricing and marketing test in some markets this quarter, how quickly can you pivot if you see something encouraging there?

Bill Nash -- President and Chief Executive Officer

I think we can pivot -- can pivot very quickly. You know, first of all, we're going to have the awareness campaign going on everywhere, and then we're going to get some of these markets with some additional marketing. Some of it may be awareness, some may be at more acquisitions. So, you know, I feel very confident that, you know, we can -- we can pivot quickly.

Sharon Zackfia -- William Blair & Company -- Analyst

Thank you.

Jon Daniels -- Senior Vice President, CAF Operations

I think I'd just add that, you know, now really is the right opportunity and it's the right time for us to invest through the increase in marketing, through testing lower pricing. We've ruled out our omni platform. We continue to enhance the capabilities of omni. So, we believe now is the right time to do that.

And, you know, we're excited, as Bill said, about our opportunities moving forward to grow the brand and to grow our market share.

Operator

Your next question comes from the ocean from Seth Basham from Wedbush Securities. Please go ahead.

Seth Basham -- Wedbush Securities -- Analyst

Thanks a lot. And good morning and congrats. My question is around the pricing test as well. You're signaling as much about a 9% decrease in retail GPU year over year in the fourth quarter, which should be unprecedented at a times of market shock.

So, this presumably is a pretty widespread test than you plan or it's a very deep test in terms of the price cuts that you're planning. Could you give us some more color on exactly what you're thinking relative to prior price test and how we should think about the go forward?

Bill Nash -- President and Chief Executive Officer

Yeah. And good morning, Seth. Thank you for your question. Yeah, this is going to be in the -- the pricing tests, we'll be trying in several different markets.

And I think the way you should think about, if you look back historically for us on -- on any given quarter, we probably -- when you look at year-over-year GPU, we've probably been in a band somewhere in the -- on a given quarter of $30 to $50 on year over year. That's kind of the range. On full year, it's just probably a little bit tighter than that. And I would say, you would -- you know, more comments are saying, you should expect it outside of that normal range.

And that will allow us to do some -- you know that we always do testing throughout the quarter, but this will give us more flexibility to do some different things. So, again, we're excited about some of the combinations of things. And we also know that not every market is going to respond the same way to different levers. So, that's what we'll be checking.

Seth Basham -- Wedbush Securities -- Analyst

Got it. All right. So, presumably, it's a little bit more widespread than normal in terms of your test and the depth of the price cuts could be deeper than you've done in the past. Is that the right way to interpret it?

Bill Nash -- President and Chief Executive Officer

Yes.

Seth Basham -- Wedbush Securities -- Analyst

Very good. Thank you very much.

Bill Nash -- President and Chief Executive Officer

Thank you, Seth.

Operator

Your next question comes from Rajat Gupta from J.P. Morgan. Please go ahead.

Rajat Gupta -- J.P. Morgan -- Analyst

Hey, good morning. Thanks for taking my question. I just had one and a follow-up on CAF. Could you help break out, you know, what the benefits were in the quarter, you know, from, you know, just the economic factors versus, you know, the losses you took on the underlying growth? I believe you provided the split during the last quarter.

Is there something similar that you could provide for this quarter? And then, how we should look moving into the fourth quarter. Thanks.

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

Sure. Yeah, thanks for your question, Rajat. Yes. So, really, the quarter -- Q3 was fantastic for us from a losses perspective, no doubt.

And we saw $10 million of net losses which really is much lower than our expectation going into the quarter. And you know, I can break that down. A number of things worked in our favor there. First, I think we had excellent execution at CAF.

You have the consumer who was very willing to and able to make payments. And obviously, when the units are lower, then losses are going to be good in a quarter. We also had an inventory of charge-offs that had hit us in previous quarters that we were able to liquidate within the quarter. So, that was really a good guy that, you know, is probably not something we'd expect on a go-forward basis.

And obviously, as we -- as we sold those vehicles in the -- in our auctions, they performed very well as well from a wholesale recovery rate. So, a lot of things are working together to give us a really strong quarter that I would necessarily expect going forward. But that being said, with a strong quarter, our provision was $8 million and that really reflects the positivity that we saw in the quarter, you know. And we do believe there's some benefit going forward.

A realized net $8 million provision inherent in there, we had $1.8 billion of originations also which included the re -- restarting of the Tier 3 originations that we had a hiatus in over the summer. So, a number of things that we feel relatively positive that drove our provision. That being said, when we look at our model and our economic adjustment factor, all in, and we set our reserve, you know, there's a lot of uncertainty as we see in the upcoming quarter and quarters ahead. So, we feel good about the reserve.

I would tell you all-in and, in that reserve, there's going to be the Tier 1, the Tier 3 and the recovery CAF volume in there. We're probably a little higher than what we would normally expect under normal times from our cumulative loss factor. But overall, we feel like there's just uncertainty out there. The reserve is adequate, great quarter, but we're cautious in what lies ahead.

So --

Rajat Gupta -- J.P. Morgan -- Analyst

Got it. That's helpful color. And just on CAF, you know, noticed that the volumes sold through the captive was up, you know, roughly 7% year over year, while the Tier 2 plus Tier 3 combined absolute volumes were down year over year. Was that just a deliberate effort? And would that have an influence on your same-store comps in the quarter? And then, you know, should we expect like that mix going back to more normal levels in the fourth quarter and next year or should CAF remain at this aggregated level? Thanks.

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

Hey, sure. Yeah, a fair question. As I mentioned in my comments, really ultimately, you're going to see that penetration or the distribution across the tiers is going to be a function generally of two things, lender behavior and mix. In this quarter, it really was a mix thing.

I don't think there was much change among lenders, certainly CAF as well. So, I think that's really what -- what drove it. And so, mix -- next quarter, hard to say. So, we'll see how it plays out.

Jon Daniels -- Senior Vice President, CAF Operations

Yeah. And I think, Rajat, if CAF hadn't picked them up, they would have been picked up by somebody else, to your part on -- on your question on, you know, same-store sales.

Bill Nash -- President and Chief Executive Officer

I think, Rajat, the other piece --

Rajat Gupta -- J.P. Morgan -- Analyst

Got it. So -- yeah. Sorry. Go ahead.

Bill Nash -- President and Chief Executive Officer

The other piece on CAF that I would call out got a little bit overshadowed this quarter because the loan loss reserve adjustment is really just the underlying profitability of the CAF business. When you take a look at the net interest margin on the quarter and you consider that this is profitability that we're going to continue to see over the life of the loans, that's a considerable tailwind for us moving forward. Since we do not employ gain on sale for our financing, you're going to continue to see that benefit for the life of the loan again. So, again, considerable benefit this quarter and moving forward just from the profitability of our CAF business.

Rajat Gupta -- J.P. Morgan -- Analyst

Got it. Makes a ton of sense and thanks for all the color and good luck.

Bill Nash -- President and Chief Executive Officer

Thank you.

Jon Daniels -- Senior Vice President, CAF Operations

Thank you.

Operator

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

Brian Nagel -- Oppenheimer & Co. -- Analyst

Hi. Good morning.

Bill Nash -- President and Chief Executive Officer

Good morning.

Brian Nagel -- Oppenheimer & Co. -- Analyst

Thank you for taking my questions. First off, Tom and Jon, congratulations for the retirement and the new role. So, look, if the -- if the risk of, you know, kind of beating the dead horse here. Just with regard to the sales trends, maybe I'll squeeze a couple of questions together.

But you know, clearly, the comparisons -- year-on-year comparisons got -- were more difficult here in the fiscal third quarter. And if you look at the -- the stack it up, so to say, the business actually strengthened in Q3 versus Q2. So, the question I have is, as you look at the trend in the quarter, where you called out that slowing, did that coincide with comparisons getting -- turning more difficult? And then, the second question I have with that is -- and we talked a lot about the COVID restrictions in the stores. Could you discuss any spread in the business between stores where there were more significant COVID restrictions and maybe stores where there were less restricted -- there weren't the restrictions in place?

Bill Nash -- President and Chief Executive Officer

Yeah, Brian. So, I'm not going into specifics on, you know, particular stores or really markets. I will tell you on the -- the COVID restrictions in the shelter-in-place. I mean, certainly there are states like California, Chicago area that have some of the strictest requirements.

And if you look at pre-restrictions versus post-restrictions, you know, like I said earlier, we absolutely saw a step-down. And you know, obviously, we can compare it to the rest of the country, and especially the ones that don't have any restrictions. On the -- I think, the first part of your question, can you repeat that part?

Brian Nagel -- Oppenheimer & Co. -- Analyst

Yes. That was just -- just from a comparison standpoint. So, if you look at -- your comparisons turned more difficult in Q3. In aggregate, used car unit comps actually improved on a two-year basis Q3 from Q2.

So, the question I had is, as you were looking at the business intra-quarter, did the trends step down as comparisons got more difficult?

Bill Nash -- President and Chief Executive Officer

Yes. So, if I look at year over year, certainly last year, third quarter and fourth quarter were both strong quarters and it built kind of throughout the quarter. So, I think it's a combination of -- the comparisons got a little tougher, but then you also have a lot of these other external factors that are – are -- are weighing in.

Brian Nagel -- Oppenheimer & Co. -- Analyst

Got it. OK. Thank you.

Bill Nash -- President and Chief Executive Officer

Alright. Thank you, Brian.

Operator

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

Craig Kennison -- Baird -- Analyst

Hey, thanks and congratulations, Tom and Jon. I wanted to circle back on the wholesale business with your pivot online. You are perfecting -- you are perfecting this omnichannel experience in retail. What does an omnichannel experience look like in wholesale, if that's the right analogy? It feels like there is a ton of disruption happening in that space too.

Jon Daniels -- Senior Vice President, CAF Operations

Yes. No, Craig, I think you're thinking about it the way that we're thinking about it. We have two customer sets. We have our retail customers and our wholesale customers.

And both of them are equally important. And we talk a lot about providing an omnichannel experience for our retail customers. But our wholesale is also an area that I've talked about in the past as one of our strategic initiatives is continuing invest. And we want the experience for our wholesale customers to match up with what the wholesale customers want.

So, just like with the retail customers, there's different needs. Some dealers like coming to physical sales, some like doing a combination, some like just the virtual. And you know, we put ourselves in a position now that we'll be able to accommodate all of that. So, when we turn physical sales back on, there'll actually be simulcast.

And you can come in person or you can bid virtually. And we think that this is -- this will be great, as we move the business forward, it allows more dealers to be able to attend our sales without physically having to be there. And we think more dealers attending, more dealers buying, that's a good thing. It will drive up prices and it allows us to put more on the -- on vehicles.

So, you're thinking about it the same way, we're trying to put together the best experience for both customer sets.

Craig Kennison -- Baird -- Analyst

Thank you.

Jon Daniels -- Senior Vice President, CAF Operations

Thank you, Craig.

Operator

Your next question comes from Adam Jonas from Morgan Stanley. Please go ahead.

Adam Jonas -- Morgan Stanley -- Analyst

Hey, thanks, everybody. Bill, really appreciate the extra color on the KPIs and on the omni, that's going to be incredibly helpful, especially going forward. Can you give us some color on the attach rate of products like F&I and other things on the front end for -- specifically for the alternative distribution units and color on the GPU of vehicles through alternative distribution versus non-alternative distribution, if I could describe it that way?

Bill Nash -- President and Chief Executive Officer

Sure, Adam. Yes. So, on products like the finance, the MaxCare, when you look at alternative delivery, finance is pretty consistent to the in-store experience. I think, on the MaxCare, there's -- it's very similar on the -- one of alternative deliveries like an express pickup or a curbside, that's fairly consistent with what the store process is.

It's down a little bit on the home delivery, but that's an area that I think that we can usually continue to focus on and move the needle. As far as GPU goes, you know, the way we manage our business, the GPU isn't different on a vehicle that's delivered to someone's home or alternative delivery if it's done at the store, curbside or express pickup as it is on our lot. So, I don't see a difference in that.

Adam Jonas -- Morgan Stanley -- Analyst

Thanks, Bill.

Operator

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

Rick Nelson -- Stephens Inc. -- Analyst

Hi, guys. Good morning. And my congrats to Tom and Jon as well. So, a question regarding CAF, the contract rates jumped this quarter at 8.6%.

We were 8.2% on last quarter. You're raising APRs in a declining funding cost environment. I'm curious why that is taking place and could you use CAF, take lower spreads, I guess, to drive more same-store sales?

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

Sure. Yeah, thanks for the question, Rick. So, as mentioned before with kind of the penetration across Tier 1, Tier 2, Tier 3, mix was a big play there. Similarly, within CAF, really there wasn't an increase in interest rates for those people coming through the door.

It's really the mix of those coming through the door. So, it was a higher interest rate customer coming through as opposed to a rate change. With regard to what rates should CAF set and can we run at a lower interest rate environment, obviously given the overall interest rates, I think we have always said really, we keep a very close eye on the market, its CAF's job to provide a very competitive offer out there as a sole Tier 1 lender, and we always do that. We'll keep an eye on key metrics like three-day payoffs and obviously what we see out there from competitors and marketplace.

And we feel like right now, we are in a very good -- very good position, but yeah, there wasn't not a rate increase driving that, purely a mix thing.

Jon Daniels -- Senior Vice President, CAF Operations

Yeah. I think the same, the question earlier, Rick, that those -- if we hadn't picked up this customer, somebody else would have picked them up as far as the impact on same-store sales.

Rick Nelson -- Stephens Inc. -- Analyst

OK, thanks for that. If I could do a follow-up on CAF as it relates to provisioning on a go-forward basis, the allowance account is now 3.2% of receivables managed. I think in the past, you have talked about future loss rate expectations of 2% to 2.5%. Would you expect that allowance proportion to come down here over time?

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

Sure. Yes, Rick, right on with those numbers. Yeah, 3.17% for the quarter. I think a couple of important things to point out with that number versus the 2% to 2.5% reported historically.

And in that 3.17% is the Tier 3 business as well. We've historically said that's roughly 1% of the receivables and accounts for 10% of the loss, whereas the 2% to 2.5% that we referenced is generally in our Tier 1 business. So, you really want to net that out. Also, with the adoption of CECL in our reserve, we also have to put money in for the actual cost to recover, which again not contemplated in the 2% to 2.5%.

So, when you note -- when you net those items out, we're still probably a little above that range. But I think that's reasonable given the environment we are in. Obviously, we expect to hopefully trend back to normal as things get back to normal. But right now, there is a level of uncertainty both -- and we would say that both with regard to our origination volume of the $1.8 billion and the existing portfolio.

So, again, little higher than maybe our targeted range after you net those things out, but hopefully things go back to normal soon.

Rick Nelson -- Stephens Inc. -- Analyst

OK, got it. Thanks for the color.

Bill Nash -- President and Chief Executive Officer

Thank you, Rick.

Operator

Your next question comes from Chris Bottiglieri from Exane BNP Paribas. Please go ahead.

Chris Bottiglieri -- Exane BNP Paribas -- Analyst

Hi, thanks for taking the question. Just one quick clarifying question first, and then I have a bigger question. On CAF, can you speak to what the provision was on new originations? I think you gave at the last couple of quarters just a lot of noise trying to understand what you're provisioning for on new loans?

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

Sure. Yeah, happy to give that. We said $1.8 billion of originations. $66 million of the reserve was attributed to that.

Couple of things again to remember, based on the last question, just as a reminder, in there is Tier 3 volume. As a reminder, we had hiatus over the summer, but we added back and started that back up in September. So, that's going to be inherent in the $66 million and net recovery expense. But yes, $66 million on the $1.8 billion.

Chris Bottiglieri -- Exane BNP Paribas -- Analyst

That's really helpful. And then, just kind of following up on the appraisal questioning, so really impressive buyer rate especially the used car pricing environment stabilizing, just trying to understand, is it, like -- again, I apologize if you guys went through this, but has something structurally changed in the appraisal rate that's allowed you to raise it so materially and to stay in that GPU? Like, are you finding you're getting higher proceeds at auction that's keeping the GPU flat or keeping cost out? Like, what's allowing you to raise the buy rate, but still keep that GPU? Any color there would be appreciated.

Bill Nash -- President and Chief Executive Officer

Yeah. And so, Chris, I mean, if you have noticed the last few calls, we have been continuing to have strong buy rates. And I really do think it's a testament to our buyers, the professional buyers, its algorithms, some of the technology we're using. So, I think we're just getting sharper on being able to respond quicker to market dynamics.

I noted in some of the remarks earlier, we saw depreciation throughout the quarter. And depreciation generally is a headwind for buy rate. And so, while the buy rate came down a little bit from quarter over quarter, we're still real pleased with where we are. It also tells us that the consumers like the offer that we're -- that we're -- that we're providing.

So, I think it's a combination of factors. And I think our auctions are -- you know, given the attendance of the sales, I think they are -- they are -- they are commanding strong values which helps as well.

Chris Bottiglieri -- Exane BNP Paribas -- Analyst

Got you. OK, thank you.

Bill Nash -- President and Chief Executive Officer

Thank you, Chris.

Operator

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

David Whiston -- Morningstar -- Analyst

Thanks. Good morning. On the pricing cut pilot program coming up, was that something that was 100% planned for a long time once you have the capabilities ready or is some of this in response to more competition?

Jon Daniels -- Senior Vice President, CAF Operations

This is -- it's kind of evolved just off the learnings that we have been discovering. And it's one of those things that we feel like now is the right opportunity and the right time and based off some of the results we've seen in some of the other tests that we're doing. So, I think it's really kind of an evolution on what we've been testing and it's a continuation of that.

David Whiston -- Morningstar -- Analyst

OK. And longer term, is there -- as omnichannel rolls out, can we be more optimistic about some SG&A scaling?

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

Yeah, you know, certainly, coming out of the -- a couple of things, coming out of the pandemic, you know, we have a very strong and disciplined approach to cost management. There are some structural savings that we do expect coming out of the pandemic, specifically in corporate overhead, CEC efficiency, maybe to address some of your question, and also in vehicle reconditioning. Now that being said, what we -- what we are doing is that we're reinvesting those savings into our growth. So now, as I mentioned earlier, it's the right time for us to invest.

We're going to continue to invest and grow our omni functionality, the acquisition of customers and vehicles and our new store growth. So, that's how we're thinking about the savings, is really we're a growth company and we're going to continue to invest, but we do expect to see some efficiencies in our CECs to answer your question specifically.

Bill Nash -- President and Chief Executive Officer

Yeah. David, and I think the CECs is just one place that we can continue to get efficiency. I think there is still some store efficiencies with reconditioning and procurement. I think we are even -- I think we have got some efficiencies just from a corporate overheads -- overhead and on facilities, that kind of thing, where we've -- we've got some improvements we're making in logistics.

So, I think there is a lot of efficiencies. I think to Enrique's point, we want to continue to invest in the business. So, as we're picking up efficiencies, we want to continue to move the business forward. So, hopefully that provides you little bit more color.

David Whiston -- Morningstar -- Analyst

Yeah. I appreciate it. Thanks, guys.

Bill Nash -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Chris Bottiglieri from Exane BNP Paribas. Please go ahead.

Chris Bottiglieri -- Exane BNP Paribas -- Analyst

Hey, guys. It's me again. Just quick question on advertising, I guess like two questions. One is when you think about -- it looks like it's probably up like 50% in Q4, if I did that math right quickly.

But is this primarily just like operating investment in terms of raising awareness for your new capabilities and stuff like that? And then, how do you like think of the payback, is that just a longer-term payback? And then, two, kind of as more of the business shifts online as you roll out your omnichannel initiatives, like how do you think about the go-forward level investment in advertising? Do we step back from these levels or do you think this is like the new norm and it just gradually creeps up as the business shifts online? Thank you.

Bill Nash -- President and Chief Executive Officer

Yeah. So, Chris, the step-up is primarily awareness or, you know, brand building. And as I said earlier, it's going to be kind of a multimedia campaign, a lot of different components to it. It really is about educating the consumer on our new capabilities and how we have a differentiated experience.

And when you do awareness advertising, yeah, you'll get some benefit from it, but it's really geared toward changing the consumers' awareness, which happens over time. So, it doesn't happen the minute that you turn it on. And so, as I look forward beyond the fourth quarter, and we'll certainly have more details after the fourth quarter, as I said earlier, I would -- I would -- I think it's safe to say that we'll continue to have a step-up in advertising year over year because, again, awareness just doesn't happen overnight nor does it just sustain itself, you know, without some reinforcement.

Chris Bottiglieri -- Exane BNP Paribas -- Analyst

Got you. That makes a lot of sense. Thanks for the answer.

Bill Nash -- President and Chief Executive Officer

Sure.

Operator

This concludes the Q&A portion of today's call. I would now like to turn it back over to Bill Nash for closing remarks.

Bill Nash -- President and Chief Executive Officer

Great. Thank you. As always, I want to thank you for joining the call today. I want to thank you for your questions and your support.

Our future success continues to be focused on providing an exceptional experience and that's not only for our customers but also for our associates. We are going to remain committed to our purpose and our values and we will continue to grow and create value for our shareholders. I want to thank all of our associates for everything that you do on a daily basis, taking care of each other, taking care of our customers. You are the reason that we offer the most compelling customer-centric experience within the industry.

I wish all the associates and I wish all of you all a happy holiday and we will talk again next quarter. Thank you.

Duration: 53 minutes

Call participants:

Stacy Frole -- Vice President, Investor Relations

Bill Nash -- President and Chief Executive Officer

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

Jon Daniels -- Senior Vice President, CAF Operations

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Michael Montani -- Evercore ISI -- Analyst

John Murphy -- Bank of America Merrill Lynch -- Analyst

Sharon Zackfia -- William Blair & Company -- Analyst

Seth Basham -- Wedbush Securities -- Analyst

Rajat Gupta -- J.P. Morgan -- Analyst

Brian Nagel -- Oppenheimer & Co. -- Analyst

Craig Kennison -- Baird -- Analyst

Adam Jonas -- Morgan Stanley -- Analyst

Rick Nelson -- Stephens Inc. -- Analyst

Chris Bottiglieri -- Exane BNP Paribas -- Analyst

David Whiston -- Morningstar -- Analyst

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