Loan Loss Provisions
Q: Why did you increase loan loss provisions this quarter?
A: The $52 million adjustment to our loan loss provisions this quarter was due to observed performance in our portfolio, particularly higher delinquencies converting into write-offs. This adjustment was outsized compared to previous quarters (typically $10–$30 million) but we believe it captures where losses are headed. We feel good about our tightened underwriting and hope these measures will minimize future adjustments.

Credit Tightening and Full Spectrum Lending
Q: Are you tightening underwriting standards further amid credit headwinds?
A: We have tightened our underwriting standards in April '23 and April '24 but have not made significant changes this quarter. We feel good about where we are and the profitable loans we're originating. We're excited to expand into Tier 2 lending, deployed in the latter part of Q2, and plan to enter Tier 3 in Q3, proceeding prudently.

CAF Profitability
Q: How is CAF profitability impacted by higher losses and changing funding costs?
A: Despite higher losses, we've maintained our net interest margin around 6%, even amid tightening. As rates trend down, there's opportunity to capture more margin. The $52 million provision adjustment affected profitability this quarter, but we consider it outsized and not indicative of future quarters.

Used Car Sales Comps Improvement
Q: What underpinned the improvement in used car sales comps?
A: The strengthening comps were driven by internal execution and some macro benefits. Internally, we improved efficiencies, better conversion in our customer experience centers and stores, and enhanced the customer experience with our new order processing system now rolled out everywhere. Macro factors included declining vehicle prices for seven consecutive quarters, improved sourcing of cars under $25,000, and a more stable pricing environment.

Vehicle Sourcing and Inventory
Q: How did you effectively source vehicles despite industry shortages?
A: Our diversified buying channels, including increased instant appraisal offers and the Max Offer program, have enabled us to maintain supply. The Edmunds team has done a great job, with 50% more dealers active year-over-year. We have better access to off-lease vehicles through our offerings, and overall, supply hasn't been an issue for us.

Digital Initiatives
Q: What progress have you made with digital sales and tools?
A: We've rolled out our new order processing system across all stores, making the experience seamless whether customers start in-store or online. This integration improves transparency and assists both customers and associates. While online sales increased to 15%, we're more excited about the 2-point increase in omni-channel sales, as most customers engage with both online and in-store channels.

Operating Efficiencies
Q: Are you seeing benefits from cost efficiencies in SG&A and reconditioning?
A: Yes, we've made progress in improving efficiencies, becoming more efficient on key metrics on a per-unit basis compared to pre-omni times. In reconditioning, we're finding efficiencies through better part utilization, bringing more work in-house, and improving capacity utilization. We're targeting a couple of hundred dollars in savings between reconditioning and logistics.

Advertising Spend
Q: Why did advertising expenses decrease this quarter?
A: The decrease was due to timing variations within the quarter. For the first half of the year, our advertising spend is in line with our targets, and we expect similar levels in the back half.

Other Gross Margins
Q: What drove improvements in other gross margins?
A: Other gross margin rose by $36 million, a 33% year-over-year increase, driven by improvements in service and Extended Protection Plan (EPP) performance. We expect continued year-over-year improvements in service margins and EPP in the coming quarters.

Credit Penetration
Q: Can you increase credit penetration further?
A: We're committed to providing credit offers across the full spectrum to all customers. While we have an opportunity to increase penetration, we aim to do so thoughtfully, ensuring we offer competitive credit options without restricting partners or limiting customer choices.