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 Q3 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. I would now like to turn the call over to Stacy Frole, Vice President, Investor Relations.
Thank you, Carol. Good morning. Thank you for joining our fiscal 2021 Q3 Earnings Conference Call. I'm here today with Bill Nash, our President and CEO, Tom Reedy, our Executive Vice President, Finance, Enrique Mayor-Mora, our Senior Vice President and Chief Financial Officer, 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 29th, 2020, filed with the SEC. Should you have any follow-up questions after the call, please feel free to contact our Investor Relations department at 804-747-0422, extension 7865. Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow-ups. Bill?
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 28th. 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 in 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 begin reporting directly to me.
On today's call, we'll first discuss our Q3 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%. CAF and our partner lenders delivered strong conversion 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 Q3 appraisal buy rate.
The strength of our buyers, our algorithms, and extensive data sets enabled these results with only a slight year-over-year decrease in wholesale gross profit per unit to $906. This is despite sharp appreciation in the broader market. All auctions were 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 $2,151, comparable with last year's Q3 . However, this view doesn't really paint a full picture of how the macro environment impacted our retail business. For the first part of the quarter, we achieved mid-single-digit comp growth, continuing the positive momentum from the end of the Q2 .
However, as 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 Q4 and an added benefit of leap day. Looking ahead, we're confident the sales trends we experienced in the latter part of the Q3 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 Q3 financial performance, and then to Jon, who will provide additional detail around consumer financing. Enrique?
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 Q3 , 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 Q3 , 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 Q3 . These SG&A reductions were partially offset by the following notable SG&A expense drivers for the Q3 .
A 13% increase in advertising expense, the opening of 11 stores since the beginning of the Q3 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 on our last call, we are increasing our marketing spend in the second half of the year. For the Q3 , this spend included additional investments in SEM, content, and social as we look to drive customers to our digital properties. This spend on the quarter brings our year-to-date advertising expense to $144 million, up 2% or $3 million when compared with 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 Q4 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 Q3 , we resumed construction activity on new stores that we had paused in the Q1 due to the pandemic. We are currently planning to open eight to 10 new stores in FY 2022. Our unique business model generates a significant amount of cash. While our priority remains on investing in our growth, this strength allows us to also return capital back to our shareholders. In the Q3 , we resumed our share buyback program, repurchasing approximately 1.2 million shares for $109.2 million in the quarter. We have $1.4 billion remaining on the current authorization.
Finally, we ended the quarter modestly below our historical leverage target of 35%-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.
Thanks, Enrique. Good morning, everyone. As Bill mentioned, CarMax Auto Finance and our lending partners continue to deliver solid results. For the Q3 , 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, CAF's 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 Q2 . Regarding the portfolio, the overall interest margin increased to 6.3% versus 5.7% in the same period 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. CAF income was up 55% to $176 million in the quarter, reflecting a reduced loss provision, 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 Q3 . The total reserve is 3.17% of managed receivables, which is moderately lower than the 3.23% at the end of the Q2 .
While we recognize 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 payoff was never more apparent than in this past year and is yet another aspect of our business that sets us apart from others. Bill?
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 customer 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 a 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 a 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 and will deliver significant improvements over the next two quarters. For example, we've been testing instant appraisal offers on carmax.com. This feature gives 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 standalone appraisals nationwide by the end of the Q4 . We are on track for most of our customers to have the ability to buy a 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's 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 our CECs. Again, the advantage of our omnichannel model is that customers get to choose how they progress their experience. In the Q3 , 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 progress more of the transaction online, but still preferring to take ownership of their vehicle at one of our stores. For the Q3 , 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 in 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 Q3 and two-year stack comps of 20%. We're also very pleased with how our other markets are ramping as their 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 Q3 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 omnichannel experience to differentiate and elevate the CarMax brand and our position in this evolving marketplace.
Within the next week, we will introduce the next phase of our national multimedia 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 Q4 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 plan to host 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 the 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?
Thank you. At this time, we will be conducting our question- and- answer session. In order to ask a question, please press *1 on your telephone keypad. To allow for as many questions as possible, we ask that you please limit yourself to one question. You may then reenter the queue for any additional questions. Your first question this morning comes from Scot Ciccarelli from RBC Capital Markets. Please go ahead.
Good morning, guys, and happy holidays to you.
Good morning, Scot.
Good morning. Bill, can you help us better understand the correlation between the slowing sales trends in the quarter and how the occupancy restrictions ramped up? Just any kind of color you might be able to provide in terms of how big of an impact you think those occupancy restrictions had on the business?
Yeah. Scot, as I said 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 election is really when we saw a decrease, a step down. I think part of it was the election, but I also think that's when we started seeing these tighter restrictions. 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 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, the majority of those are at 20%.
It's hard to quantify exactly the restrictions versus the shelter in place. We absolutely have seen a step down in those markets. If you think about some of the larger markets that are under these restrictions, we've absolutely saw a step down once the restrictions went into effect.
That's really helpful. If I could, just a quick follow-up on something you've already said. You talked about higher marketing ramp in the Q4 , maybe a little less GPU. Is it fair to assume 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?
Yeah. Obviously, the Q3 , we stepped up a little bit. The Q4 , we're stepping up. We feel like we have a great opportunity in front of us, it takes a little while to build awareness. I would expect next year there would be a step up. We'll talk more about that at the end of the Q4 .
Very helpful. All right. Thanks, guys.
Thank you, Scot.
Your next question comes from Michael Montani from Evercore. Please go ahead.
Hey, good morning. Thanks for taking the question.
Good morning.
I'd like to dig in a little bit more, if I could, Bill, on the experience that you've seen in Atlanta. I thought that was some helpful color. I was hoping you can share a bit more, and then just confirming by the middle part of calendar 2021, if I was hearing you right earlier, it sounded like the experience would go basically frictionless for online. Consumers could decide to speak to a person live, but if they wanted to basically just click a button and do the transaction themselves, they could do that as well. I just wanted to make sure I understood that, and then some extra color on the multichannel would be great.
Thank you for your question, Michael. Like I said, in Atlanta was the first market that we rolled this to, 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 in that and some other markets right now that allows the customer to start building the order themselves. I think, the Atlanta performance is indicative as these markets mature longer because if we look at other markets, we have about 70 stores and then the corresponding markets that those stores are in that have been open for at least a year, and we see performance from that group better than the rest of the company, which just shows that as it matures, they continue to ramp.
In fact, some of those early waves are currently producing nice, strong comps. 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 other places, which is one of the reasons we want to extend some of the testing, which is the comments on the advertising and the pricing. On the second part of your question, the frictionless. Yes. Right now, a consumer can buy online from us. As I mentioned, there's parts of it where the customer experience consultant needs to get involved and work with the consumer. 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, the majority of our customers will have that option to progress self-serve without the CEC if they choose to do that. We think we'll be in good shape at Q2 , middle of next fiscal year.
Great. Thank you for that update.
Sure.
Your next question comes from John Murphy from Bank of America. Please go ahead.
Good morning, guys, and congrats, Tom and Jon, on the retirement and new roles. Just a question here, Bill. Obviously, there's a lot of concern about the same-store sales being down, I understand the regulatory regime or sort of the shelter-in-place requirements are driving some of this. When you look at wholesale sales, they're up 10.8%. There's some part of the market that's functioning really well even under these constraints. A skeptic would say, "Hey, listen, there's a big problem here because your wholesale sales are really strong.
Somebody's retailing some cars on the other side, and you're not." An optimist could say, "Hey, listen, that 10.8% is indication that X, these constraints, you'd really be crushing it." How do you interpret sort of that big gap there between the wholesale and the retail? I can't remember any gap quite that big ever before. Just trying to understand what's going on.
Sure, John. Look, I think there are a lot of factors going into the mix for the Q3 . Obviously, we talked about the COVID surge or the lockdowns and restrictions. We talked about the election. You bring up an interesting point, higher used prices for the Q3 . Keep in mind, a lot of the cars that are sold in the Q3 are bought earlier on in the month leading up into that. You know from the earlier months that there was very steep appreciation. What's happened is, the other factor that I hadn't really talked about in this quarter is you have a tightening of the gap between a late model used and a new. I think that's also a factor in there.
I think there's some external sources out there that would tell you that the used car industry has gotten softer, and we're seeing that. We've seen depreciation in the marketplace throughout the quarter. Now, value year-over-year is still above what it was a year ago, but we're certainly seeing the depreciation kick in.
Okay. It just doesn't seem like there's an indication. Lower prices does not necessarily mean lower unit sales and lower profits for you, and actually conversely means the same. Lower pricing, as long as you manage it well, means your volume goes up and your profits go up. It just seems like as the market normalizes, there's the potential for real volume increases, and that wholesale number is maybe a better harbinger of what's to come as opposed to what just happened with your same-store sales comp. That's just sort of our interpretation. It seems like where things are headed.
Well, keep in mind, the wholesale, we flip that wholesale inventory very quickly, and obviously, our wholesale inventory is dramatically different. What we're selling through our auctions is dramatically different than what we're selling on our retail lot. In the wholesale, you're getting cars real time and selling them real time. On the retail side, we've got inventory that we've been working through that we bought earlier leading up into the quarter.
I'm sorry. The wholesale restrictions are not the same, obviously, as what you have on the retail side, right? Wholesale is not hampered by any kind of restrictions. Is that correct?
No, the wholesale side, we chose to keep all of our sales virtual. There are actually some markets that we could have turned the physical sales back on. Just given the nature of bringing a bunch of folks into our store locations to keep our associates safe, we've decided for the quarter to keep everything virtual.
Great. Thank you very much.
Thank you, John.
Your next question comes from Sharon Zackfia from William Blair. Please go ahead.
Hi. Good morning.
Good morning, Sharon.
Hi. By the way, I suspect that Tom is going to spend all of his retirement surfing, congratulations to him. Wanted to delve a little bit deeper into what you're seeing in Atlanta, which sounds really encouraging, and I think you mentioned, Bill, some tests on pricing and marketing to maybe accelerate that dynamic for the rest of the country. I guess at the end of the day, my question is just, is there a way to increase awareness more quickly of the omnichannel offerings? It seems that it's happening, it seems that it's happening maybe more slowly than some of us had originally anticipated. 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.
Secondarily, on the pricing test, I didn't catch if any of that was related to pricing for delivery as opposed to actual unit pricing.
All right. There's a lot in that question, Sharon. Let me see if I can get it all. I may have to ask you to repeat part of the question. First of all, I think it's important, we worked really hard to get a common platform out there, which we got in the Q3 . That was a significant milestone for us because we wanted everybody to be on the same platform before we started to go out and educate the consumer. Like I said, in the Q3 , we planned, by the end of the year to kind of kick off this new multimedia marketing campaign, which we're really excited about.
I think it does a nice job of really differentiating us from whether it be traditional dealers or online dealers, and really highlights the capabilities and the flexibility that we have. We're excited it's going to be everything that you can think of, from broadcast to digital to social to out of home. You think about billboards, that kind of thing. It really is a broad, sweeping effort because we do think there's an opportunity to educate the consumer and drive that awareness. On any awareness advertising, it takes a little time because when you do awareness advertising, the majority of the folks that are hearing it aren't necessarily in the market.
The point is to make sure that when they are in the market, that we're top of mind. That's going to be the real focus. I think that will be a catalyst. We really haven't done that up to this point. We're excited to get that out there. I think the other part of your question was the pricing on delivery. Could you clarify that part?
Well, you talked about pricing tests 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.
Yeah. When I made the comments earlier, I was speaking more specifically to the GPU pricing or retail pricing. We're constantly doing tests on delivery to the consumers, and we'll continue doing that as well. We have been doing that, and I would expect as we go forward, you know we're very analytical when it comes to doing things like this and whether it's pricing, it's advertising, whether it's the transfer fees. We're going to do combinations. We're going to do them by themselves. There's going to be a whole bunch of different things that we're trying this quarter.
Sorry, can I just ask one follow-up? You're doing the pricing and marketing tests in some markets this quarter. How quickly can you pivot if you see something encouraging there?
I think we can pivot very quickly. First of all, we're going to have the awareness campaign going on everywhere, and then we're going to hit some of these markets with some additional marketing. Some of it may be awareness and may be more acquisition. I feel very confident that we can pivot quickly.
Thank you.
I think I'd just add that 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 rolled out our omni platform. We continue to enhance the capabilities of omni. We believe now is the right time to do that. We're excited, as Bill said, about our opportunities moving forward to grow the brand and to grow our market share.
Your next question comes from Seth Basham from Wedbush Securities. Please go ahead.
Thanks a lot, and good morning, and congrats, Tom. My question is around the pricing tests as well. You're signaling as much of a 9% decrease in retail GPU year-over-year in the Q4 , which would be unprecedented out of times of market shock. This presumably is a pretty widespread test that you plan, or it's a very deep test in terms of the price cuts that you're planning. Could you give some more color on exactly what you're thinking relative to prior price tests and how we should think about the go forward?
Yeah. Good morning, Seth. Thank you for your question. Yeah, the pricing test we'll be trying in several different markets, and I think the way you should think about it, if you look back historically for us on any given quarter, when you look at year-over-year GPU, we've probably been in a band somewhere on a given quarter, $30-$50 on year-over-year. That's kind of the range. On full years, it's probably a little bit tighter than that. I would say, my comments are saying you should expect it outside of that normal range. 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.
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. That's what we'll be checking.
Got it. All right. Presumably it's a little bit more widespread than normal in terms of your tests and the depth of the price cuts, it could be deeper than you've done in the past. Is that the right way to interpret it?
Yes.
Very good. Thank you very much.
Thank you, Seth.
Your next question comes from Rajat Gupta from JPMorgan. Please go ahead.
Hey, good morning. Thanks for taking my question. Just had one and a follow-up on CAF. Could you help break out what the benefits were in the quarter from just the economic factors versus the losses you took on the underlying reserve? I believe you provided the split during the last quarter. Is there something similar that you could provide for this quarter? How it should look moving into the Q4 ? Thanks.
Sure. Yeah. Thanks for your question, Rajat. Really the quarter, Q3, was fantastic for us from a losses perspective, no doubt. We saw $10 million of net losses, which really is much lower than our expectation going into the quarter. I can break that down. A number of things worked in our favor there. First, I think we had excellent execution at CAF. You had the consumer who was very willing to and able to make payments obviously when the unemployment rates are lower, 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. That was really a good quarter that is probably not something we'd expect in a go-forward basis.
Obviously, as we sold those vehicles in our auctions, they performed very well as well from a wholesale recovery rate. A lot of things working together to give us a really strong quarter that I wouldn't necessarily expect going forward. That being said, with the strong quarter, our provision was $8 million, and that really reflects the positivity that we saw in the quarter. We do believe there's some benefit going forward to realize net $8 million provision inherent in there. We had $1.8 billion of originations also, which included the restarting of the Tier 3 originations that we had a hiatus in over the summer. 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, there's a lot of uncertainty as we see in the upcoming quarter and quarters ahead. We feel good about the reserve. I would tell you all in that reserve, there's going to be the Tier 1, the Tier 3, and the recovery curves in there. We're probably a little higher than what we would normally expect under normal times from our cumulative loss factor. Overall, we feel like there's just uncertainty out there. The reserve is adequate. A great quarter, but we're cautious in what lies ahead.
Got it. That's helpful. Just on CAF, I noticed that the volume sold through the captive was up roughly 7% year-over-year, while the Tier 2 plus Tier 3 combined absolute volume go down year-over-year. Was that just a deliberate effort? Would that have an influence on your same-store comps in the quarter? Then, should we expect that mix going back to a more normal level in the Q4 and next year, or should CAF remain at this elevated level? Thanks.
Sure. Yeah, 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 amongst lenders, certainly CAF as well. I think that's really what drove it. Mix next quarter, hard to say. We'll see how it plays out.
Yeah, I think, Rajat, if CAF hadn't picked them up, they would've been picked up by somebody else to your part on your question on same-store sales.
The other piece on CAF that I would call out got a little bit overshadowed this quarter because of the loan loss reserve adjustment. It's 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. Again, considerable benefit this quarter and moving forward, just from the profitability of our CAF business.
Got it. Makes a ton of sense. Thanks for all the color and good luck.
Thank you.
Thank you.
Your next question comes from Brian Nagel from Oppenheimer. Please go ahead.
Hi. Good morning.
Good morning.
Thank you for taking my questions. First off, Tom and Jon, congratulations on retirement and the new role. Look, at the risk of kind of beating the dead horse here, just with regard to the sales trends, maybe I'll squish a couple of questions together. Clearly, the comparisons year-on-year comparisons got a little more difficult here in the fiscal Q3 . If you look at the stack it up, so to say, the business actually strengthened in Q3 versus Q2. 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 turning more difficult? The second question I have with that is, we talked a lot about the COVID restrictions in 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 restrictive or there weren't the restrictions in place?
Yeah, Brian. I'm not getting into specifics on particular stores or really markets. I will tell you on the COVID restrictions and the sheltering in place. Certainly there's states like California, Chicago area that have some of the strictest requirements. If you look at pre-restrictions versus post restrictions, like I said earlier, we absolutely saw a step down. 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?
Yeah. Just from a comparison standpoint, 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. The question I had is, as you were looking at the business intra-quarter, did the trend step down as comparisons got more difficult?
Yeah. If I look at year-over-year, certainly last year, Q3 and Q4 were both strong quarters, and it built kind of throughout the quarter. I think it's a combination of the comparisons got a little tougher, you also have a lot of these other external factors that are weighing in.
Got it. Okay. Thank you.
All right. Thank you, Brian.
Your next question comes from Craig Kennison from Baird. Please go ahead.
Hey. Thanks, and congratulations, Tom and Jon. I wanted to circle back on the wholesale business with your pivot online.
Sure.
You're 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's a ton of disruption happening in that space, too.
Yeah. 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. Both of them are equally important. We talk a lot about providing an omnichannel experience for our retail customers. Our wholesale is also an area that I've talked about in the past as one of our strategic initiatives to continue to invest in. We want the experience for our wholesale customers to match up with what the wholesale customers want. 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. We put ourselves in a position now that we'll be able to accommodate all of that.
When we turn physical sales back on, they'll actually be simulcast, so you can come in person or you can bid virtually. We think that 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. We think more dealers attending, more dealers buying, that's a good thing. It'll drive up prices, and it allows us to put more on vehicles. You're thinking about the same way. We're trying to put together the best experience for both customer sets.
Thank you.
Thank you, Craig.
Your next question comes from Adam Jonas from Morgan Stanley. Please go ahead.
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, 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?
Sure, Adam. Yeah. 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, it's very similar on 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 easily continue to focus on and move the needle. As far as GPU goes, 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. I don't see a difference in that.
Thanks, Bill.
Your next question comes from Rick Nelson from Stephens. Please go ahead.
Thanks. Good morning, and my congrats to Tom and Jon as well. Quick question regarding CAF. The contract rates jumped this quarter 8.6%. We were 8.2% last quarter. You're raising APRs and a decline in 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?
Sure. Yeah. Thanks for the question, Rick. 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. 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 in a lower interest rate environment? Obviously, given the overall interest rates, I think we've always said really we keep a very close eye on the market. It's 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 in the marketplace, and we feel like right now we're in a very good position. Yeah, that was not a rate increase driving that, purely a mix thing.
Yeah, I think the same on the question earlier, Rick, that if we hadn't picked up this customer, somebody else would have picked them up as far as the impact on same-store sales.
Okay. 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've talked about future loss rate expectations of 2%-2.5%. Would you expect that allowance proportion to come down here over time?
Sure. Yep. You got it, Rick, right on with those numbers. You have 3.17% for the quarter. I think a couple important things to point out with that number versus the 2%-2.5% we've quoted historically. Again, in that 3.17% is the Tier 3 business as well. We've historically said that's roughly 1% of the receivables, and it counts for 10% of the loss. Whereas the 2%-2.5% we reference is generally in our Tier 1 business. You'd 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%-2.5%. 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're in.
Obviously, we expect to hopefully trend back to normal as things get back to normal, but right now there's a level of uncertainty, and we would say that both with regard to our origination volume of the $1.8 billion and the existing portfolio. Again, a little higher than maybe our targeted range after you net those things out, but hopefully things go back to normal soon.
Okay. Thanks.
Thank you, Rick.
Your next question comes from Chris Bottiglieri from Exane BNP Paribas . Please go ahead.
Hi, thanks for taking the question. Just one quick clarifying question first, then I have a bigger question. On CAF, can you speak to what the provision was on new originations? I think you gave it the last couple of quarters. Just a lot of noise trying to understand what your provisionings were on new loans.
Sure. Yeah. Happy to give that. We said $1.8 billion of originations. $66 million of the reserve was attributed to that. A 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. That's going to be inherent in that $66 million and that recovery expense. Yeah, $66 on the $1.8.
Okay. That's really helpful. Then just kind of following up on the appraisal questioning. Really impressive buy rate, especially the used car pricing environment stabilizing. Just trying to understand, again, I apologize if you guys went through this.
Has something structurally changed in the appraisal rate that's allowing you to raise it so materially and sustain that GPU? Are you finding you're getting higher proceeds at auction that's keeping the GPU flat or keeping cost out? What's allowing you to raise the buy rate but still keep that GPU at any color there would be appreciated?
Chris, if you've noticed the last few calls, we've been continuing to have strong buy rates, and I really do think it's a testament to our buyers, the professional buyers, it's the algorithms, some of the technology we're using. I think we're just getting sharper and 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. 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 providing. I think it's a combination of factors, and I think our auctions are giving the attendance at the sales. I think they're commanding strong values, which helps as well.
Got you. Okay. Thank you.
Thank you, Chris.
Your next question comes from David Whiston from Morningstar. Please go ahead.
Thanks. Good morning. On the pricing cut pilot program coming up, was that something that was 100% our plan for a long time once you had the capabilities ready, or is some of this in response to more competition?
It's kind of evolved, just off the learnings that we've 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. I think it's really kind of an evolution on what we've been testing, and it's a continuation of that.
Okay. Longer term, as omnichannel rolls out, can we be more optimistic about some SG&A scaling?
Yeah. A couple of things. Coming out of the pandemic, 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 are doing is that we're reinvesting those savings into our growth. 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 of vehicles, and our growth. That's how we're thinking about the savings, is really we're a growth company, and we're going to continue to invest. We do expect to see some efficiencies in our CECs to answer your question specifically.
Yeah, David, I think the CEC is just one place that we can continue to get efficiency. I think there's still some store efficiencies with reconditioning and procurement. I think we've got some efficiencies just from a corporate overhead and on facilities, that kind of thing, where we've got some improvements we're making on logistics. I think there's a lot of efficiencies. I think to Enrique's point, we want to continue to invest in the business. As we're picking up efficiencies, we want to continue to move the business forward. Hopefully that provides you a little bit more color.
Yeah, I appreciate it. Thanks, guys.
Thank you.
Your next question comes from Chris Bottiglieri from Exane BNP Paribas. Please go ahead.
Hey, guys. Me again. Just a quick question on advertising. I guess two questions. One is, when you think of that, it looks like it's probably up 50% in Q4, if I did that math right quickly. Is this primarily just a brand investment in terms of raising awareness for your new capabilities and stuff like that? How do you think of the payback? Is that just a longer-term payback? Two, as more of the business shifts online, as you roll out your omnichannel initiatives, 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 the new norm and it just gradually creeps up as the business shifts online? Thank you.
Yeah. Chris, the step-up is primarily awareness or brand building. 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. When you do awareness advertising, you'll get some benefit from it, but it's really geared towards changing the consumer's awareness, which happens over time. It doesn't happen the minute that you turn it on. As I look forward, beyond the Q4 , and we'll certainly have more details after the Q4 , as I said earlier, 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 without some reinforcement.
Got you. That makes a lot of sense. Thanks for the answer.
Sure.
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.
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'll 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.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.