Christopher Bottiglieri

Chris Bottiglieri asked for the service profit for Q3, comparing it to the $4 million reported last quarter, and if it's a good run rate for Q4. He also asked for elaboration on credit penetration, specifically why the prime side is seeing less appraisal traffic despite a K-shaped economy.

Answer

Enrique Mayor-Mora, EVP and CFO, confirmed negative service margin in Q3 and expected pressure in Q4 due to annualizing cost coverage, but noted significant strides in service margin over the past couple of years. Jon Daniels, EVP of CarMax Auto Finance, identified an opportunity in the 650-750 credit space, attributing lower prime application volume to a combination of inventory, price, and availability, which CarMax aims to improve holistically.

Chris Bottiglieri asked about the service profit for Q3 and its expected run rate for Q4, given similar volumes. He also inquired about the credit penetration, specifically the weakness observed in the prime side of the market, and what might be causing it in a K-shaped economy.

Answer

Enrique Mayor-Mora (EVP and CFO) confirmed pressure on service margin in Q3, noting it was negative, but highlighted significant strides made by teams, expecting borderline profitability for the full year despite sales challenges. Jon Daniels (EVP, CarMax Auto Finance) discussed the opportunity in the 650-750 credit space, acknowledging it's hard to pinpoint causes but emphasizing the focus on improving the overall offering.

Chris Bottiglieri sought clarification on the $40 million-$45 million servicing fee from the 25B securitization, specifically regarding associated servicing costs and the breakdown of income sources. He also questioned CarMax's commitment to expanding into the subprime credit segment given the current macro environment and whether they would pull back if conditions worsened.

Answer

EVP of CarMax Auto Finance Jon Daniels clarified that the $40 million-$45 million includes income from servicing fees and retained beneficial interest, with associated costs embedded in business operations. President and CEO Bill Nash emphasized that CarMax is expanding into the 'top half of Tier 2' credit, not 'deep subprime,' and is committed to a prudent, profitable approach. Daniels added that the 25B transaction provides flexibility and insight, and they are pleased with its execution.

Chris Bottiglieri from BNP Paribas sought clarification on the 'held for sale' loan pool and asked about the drivers for the increased loan loss provision, specifically the impact of the macro environment and student loan repayments.

Answer

EVP of Auto Finance Jon Daniels clarified that the majority of the provision takedown was from receivables already in the reserve. He noted that while 2022 and 2023 vintages performed unfavorably, the company has not seen a material change in performance from customers with student loans. President & CEO Bill Nash added that these vintages remain highly profitable.

Christopher Bottiglieri asked if CarMax has sufficient levers to mitigate a high-teens EPS decline if the economy slows and sales turn negative, similar to the upside leverage it projects.

Answer

CFO Enrique Mayor-Mora stated that the company feels good about its position, noting that it still has room for efficiency improvements regardless of the macro environment. He emphasized that the management team has experience navigating economic downturns and is prepared to pull necessary levers to manage the business if required.

Christopher Bottiglieri asked for more detail on the loan loss allowance, seeking to understand if the reduction was driven by the existing portfolio's performance or lower expected losses on new originations.

Answer

SVP Jon Daniels explained that the Q3 provision of $73 million represented a return to a more normalized level. He clarified that the significant provision adjustment in Q2 had adequately accounted for future lifetime losses, so the Q3 figure was not a 'cut' but a reflection of that prior action's sufficiency.

Chris Bottiglieri asked about Petco's priorities for cash usage, given the improved free cash flow profile, specifically regarding continued debt paydown versus re-excelling in veterinary practices. He also inquired if the quarter-on-quarter decline in product line gross margins was primarily due to tariff headwinds or elasticity offsetting ticket increases.

Answer

Sabrina Simmons, Petco's Chief Financial Officer, stated the first priority is investing in the business to sustain growth, particularly by ramping up utilization of existing vet hospitals for better returns without large capital investments. The second priority is debt reduction, noting significant progress in bringing the net debt to EBITDA ratio from over 4x to below 3.5x. Simmons confirmed that the quarter-on-quarter product line gross margin decline was primarily due to tariff headwinds, while year-on-year merch margins expanded.

Chris Bottiglieri asked about Petco's priorities for cash usage given the improved free cash flow profile, specifically regarding debt paydown versus investing in veterinary practices. He also inquired if the quarter-on-quarter decline in product gross margins was primarily due to tariff headwinds.

Answer

Sabrina Simmons, Petco's Chief Financial Officer, stated the first priority is investing in the business, particularly ramping up utilization of existing vet hospitals without large new capital investments. The second priority is reducing leverage, with significant progress already made (from over 4x to below 3.5x net debt to EBITDA), and opportunistic debt paydown is possible. Simmons confirmed that the quarter-on-quarter product gross margin decline was primarily due to a 'little bit of tariff headwind.'

Christopher Bottiglieri of BNP Paribas inquired about the inflation assumptions embedded in the outlook and the company's strategy for promotions, specifically whether they would be down year-over-year.

Answer

CEO Joel Anderson described the promotional environment as rational and steady year-over-year. He clarified that the company's focus is on being more disciplined and avoiding 'empty calorie' sales rather than broadly cutting promotions. CFO Sabrina Simmons added that this includes operational clean-up, such as preventing the stacking of promotions, while still ensuring Petco offers good value to its customers.

Chris Bottiglieri inquired about the same-day delivery test in Phoenix, its performance versus a control market, and investment plans for 2026. He also asked about other GPU, specifically the impact of attach rates and rate cuts, and the strategy for reinvesting gains into lower consumer rates beyond 2026.

Answer

Ernie Garcia, Chief Executive Officer, confirmed a clear relationship between speed and conversion, emphasizing the strategic importance of same-day delivery as a differentiating offering. Mark Jenkins, Chief Financial Officer, noted that record other GPU was driven by fundamental gains in finance and ancillary products. He stated that in Q4, Carvana plans to pass these gains back to customers through lower interest rates, expecting Q4 other GPU to be similar to Q4 2024.

Chris Bottiglieri inquired about the same-day delivery test in Phoenix, its impact on logistics per unit, and performance compared to control markets, suggesting it might be a 2026 investment area. He also asked for confirmation on Carvana's plan to reinvest other GPU gains from lower rates into consumer offerings and how this strategy might evolve beyond 2026.

Answer

Ernie Garcia, Chief Executive Officer, confirmed a clear relationship between speed and conversion, emphasizing same-day delivery as a differentiating and strategically important capability that builds a qualitatively different machine. Mark Jenkins, Chief Financial Officer, confirmed that Carvana plans to pass fundamental gains in finance and ancillary products, including benefits from lower rates, back to customers in Q4, expecting other GPU to normalize closer to Q4 2024 levels.

Chris Bottiglieri of BNP Paribas questioned the drivers of the significant inventory build, asking if it was due to selection growth or an accounting change. He also inquired about the mix shift towards more expensive vehicles.

Answer

CFO Mark Jenkins identified three drivers for the inventory increase: sales growth, a contract change with a partner that moved inventory onto Carvana's balance sheet, and a higher average vehicle cost. He explained the ASP shift is driven by algorithms tracking market dynamics, not a specific strategy to target prime customers.

Chris Bottiglieri of BNP Paribas inquired about the drivers behind the large inventory build during the quarter and asked about the mix shift towards more expensive vehicles.

Answer

CFO Mark Jenkins identified three drivers for the inventory increase: sales and selection growth, a contract change with a partner that moved inventory to Carvana's balance sheet, and a higher average vehicle cost. He explained the shift to higher-priced vehicles is driven by algorithms tracking supply and demand, not a specific strategy to target a certain price point.

Christopher Bottiglieri asked about Carvana's strategy for the new vehicle market following a dealership acquisition and questioned what operational steps differ between hitting the 3 million unit target in 5 versus 10 years.

Answer

CEO Ernie Garcia stated that it is "very early" to discuss the new vehicle opportunity and that the company is currently experimenting. To reach the 3 million unit goal, he explained the required weekly production increase is manageable (from 80 units/week now to 90 for a 10-year path, or 180 for a 5-year path). He noted this ramp is achievable as the company expands its number of production facilities from ~23 to ~60, which makes the per-facility growth rate similar to what has been achieved in the past.

Christopher Bottiglieri of BNP Paribas inquired about the go-forward strategy for loan sales, specifically the preference between fixed loan sales and ABS transactions. He also sought clarification on a $9 million non-recurring item in SG&A.

Answer

CFO Mark Jenkins affirmed that Carvana will continue to use a diversified funding strategy, employing both whole loan sales and securitization markets, and expressed confidence in the finance platform's performance. Regarding the SG&A item, Jenkins explained it was primarily a 'thank you bonus' for employees that was not adjusted out of EBITDA, consistent with their policy for smaller non-recurring items.

Christopher Bottiglieri asked about the accounting treatment for 3P marketplace fee income and sought details on the marketplace's expansion, including partners and scale.

Answer

CFO Mark Jenkins clarified that for marketplace transactions, Carvana does not record the gross vehicle price as revenue, and the fee income is mostly recognized in retail revenue. He explained the program's expected Q4 growth is driven by leveraging newly efficient Carvana reconditioning capabilities at ADESA sites to offer a combined platform to large commercial sellers.

Christopher Bottiglieri asked for clarification on the 74% self-sourcing rate for used vehicles, comparing it to pre-COVID levels and inquiring about the contribution of private party procurement. He also questioned Driveway Finance Corporation's (DFC) net losses as a percentage of managed receivables and the allowance for the end of the quarter as a percentage of ending receivables, seeking insight into conservatism or concerns about the subprime market.

Answer

Bryan DeBoer, President and CEO, stated that pre-COVID self-sourcing was in the low 70th percentile, with private party procurement (buying directly from consumers without a trade-in) growing from 3-4% pre-COVID to 8-10% now, largely driven by Driveway's ability to procure thousands of cars monthly. Chuck Lietz, Senior Vice President of Driveway Finance, addressed DFC's performance, noting that first payment defaults are down year-over-year, delinquency rates are down sequentially, and default rates are at or below each credit segment year-over-year after seasonal adjustments. He expressed comfort with the current provision level, stating it's sufficient to cover future losses, and emphasized DFC's credit discipline despite a 33% increase in originations.

Chris Bottiglieri of BNP Paribas asked about the drivers behind the raised GPU guidance and how tariffs and inventory levels might affect it. He also sought details on credit performance, specifically differences between recent loan vintages and borrower profiles.

Answer

President & CEO Bryan DeBoer stated the company is insulated from tariff impacts due to its diversified model and expects manufacturers to respond with incentives. SVP of Finance Chuck Lietz noted that while 2021 loan vintages underperformed, the strategic shift to higher-quality credit is evident in the strong performance of 2023-2025 vintages, with CEO Bryan DeBoer adding the average FICO score was 746.

Christopher Bottiglieri asked why the 2025 service gross margin guidance is lower than recent performance and what is driving the expected snapback in used vehicle and F&I GPUs from Q4 levels.

Answer

President and CEO Bryan DeBoer explained the service margin guidance reflects an expected mix shift towards parts, which have lower margins than labor, as vehicles become more complex. Regarding GPUs, he stated the inclusion of the lower-margin U.K. business affects the consolidated numbers. He believes there is upside in F&I from performance improvements and in used GPUs from a market recovery, which will offset some normalization in new vehicle margins.

Christopher Bottiglieri inquired about the reasons for the increase in wholesale revenue and the long-term trajectory for used vehicle GPUs, which currently lag pre-COVID levels.

Answer

CEO Bryan DeBoer attributed the wholesale activity to normal seasonality. Regarding used GPUs, he stated that they have stabilized and expects them to normalize a couple of hundred dollars higher than historical levels once vehicle supply returns, driven by the company's improved geographic and luxury brand mix. He also noted that accounting differences can make peer comparisons difficult.

Chris Bottiglieri sought clarification on a 'low-diligence decline in assignments' figure, which was corrected to 'low single-digit.' He also questioned Copart's claim of growing ASPs five times faster than a similar service provider and inquired about RPU/GPU comparisons to peers and insurer returns.

Answer

CFO Leah Stearns clarified that the assignment decline was a 'low single-digit' percentage and that CAT units did not materially impact assignments. CEO Jeff Liaw affirmed Copart's belief in generating superior auction returns, noting their 5.7% increase in insurance returns for the quarter significantly outpaced other service providers.

Christopher Bottiglieri questioned current market share trends, asking for reasons a competitor might report higher growth, and also asked a broader question about what factors set prices in Copart's end markets, particularly for international buyers.

Answer

Executive Jeffrey Liaw attributed short-term market share fluctuations to the varying growth rates of individual insurance carrier clients and reporting period misalignments, asserting a long-term trend of share gains. CFO Leah Stearns and Liaw explained that vehicle prices are set by a global auction, driven by the significant arbitrage available to international buyers in emerging markets where affordable mobility is scarce, forcing them to compete with domestic buyers for inventory.

Christopher Bottiglieri from BNP Paribas asked about Copart's market share trends relative to peers and the primary factors that determine vehicle pricing in its auctions, especially concerning U.S. tariffs and international buyers.

Answer

Executive Jeffrey Liaw attributed short-term market share fluctuations to factors like carrier-specific growth rates but affirmed the long-term share gain trend is driven by superior client returns from investments in land and technology. CFO Leah Stearns and Liaw explained that pricing is set by global auction dynamics, where international buyers have significant arbitrage opportunities that make them less sensitive to U.S. price changes, ensuring the highest value is found for each vehicle.

Christopher Bottiglieri inquired about the impact of a strong U.S. dollar on Copart's business, including its effect on buyer fees and ASPs. He also asked for more details on the Title Express service, its adoption progress, its potential to serve non-Copart units, and any resulting knock-on effects.

Answer

Executive Jeffrey Liaw explained that Copart is 'more short to the dollar,' meaning a strong USD could theoretically suppress vehicle selling prices by making them more expensive for international buyers. However, he noted this risk is mitigated by a geographically diversified buyer base. Regarding Title Express, Liaw highlighted its key benefit of reducing cycle times, which builds significant trust with insurance carriers. He stated that adoption typically begins with a pilot and then expands to a carrier's entire total loss volume, strengthening the relationship and opening doors for additional services.

Christopher Bottiglieri asked about the historical impact of major catastrophe events on the rate of uninsured motorists and whether the Trump-era tariffs had any noticeable effect on Copart's business, such as on ASPs or total loss frequency.

Answer

Executive Jeffrey Liaw stated that available nationwide data does not show a clear, isolatable impact on uninsured motorist rates following specific regional catastrophes. Regarding tariffs, he explained that there was no meaningful disruption observed during the previous implementation and that future effects could be contradictory, potentially raising used car values but also suppressing total loss frequency.

Christopher Bottiglieri asked about the potential impact of consumers dropping auto insurance coverage due to rising premiums and sought clarification on the volume mix, specifically why the low-value vehicle segment was shrinking.

Answer

Executive Jeffrey Liaw stated that while consumers dropping insurance would be 'modestly negative,' historical data from the 2009 financial crisis showed an almost immeasurable effect. Regarding the volume mix, Executive Leah Stearns and Liaw explained that the decline in the low-value segment is a result of a deliberate strategic focus of company resources on more profitable areas, combined with competitive dynamics.

Christopher Bottiglieri asked for details on O'Reilly's experience and timeline for moving sourcing out of China and questioned how their sourcing position compares to that of private competitors.

Answer

President Brent Kirby explained that O'Reilly has been reducing its sourcing from China since the COVID era, building capabilities in countries like India, Vietnam, and Thailand. He noted their proprietary brand portfolio provides significant flexibility. CFO Jeremy Fletcher added that this is a deliberate, strategic process. Regarding competitors, Brent Kirby stated it's a "mixed bag," as they share some suppliers but not others, but expressed confidence in O'Reilly's ability to source better than anyone in the industry.