Subject: Re: Q3: didn't seem so awful
I still think the basic model is intact, that being that it is a good company selling an essential product in a slightly better way than its competitors, with a fixed price representing a gross profit of about $2000 per car.


I think you're right that the business model is intact. They continue to execute their plan and deliver the consistent $2200-$2300 gross per unit on the retail side even in a very challenging current environment.

I listened to the call, took a few notes, and I'll share my main takeaways.

Overall the affordability in the used car market for the consumer is really challenged because of price increase and rate increases. No surprise there.

It was interesting to hear them say they saw steep price depreciation in the May-Jul timeframe. The comment on the call was $3,000 of price depreciation during that time and it caused some challenges for them sourcing inventory. I think that makes a lot of sense if you consider they are trying to gross $2,300/unit but trying to balance prices dropping that fast. They are still turning units about every 45 days so their exposure remains very short. They remain operationally excellent there.

What I find interesting is Aug 2023 inventory was $3.8B, down -$830M (-18%) from Aug 2022. If I had to guess I would say their unit inventories are down closer to -25% due to overall higher used car prices holding up the $ inventories. From the comments on the call I think they continue to have a hard time sourcing profitable inventory. They made the comment on the call that overall used auto availability was much worse during the 2008-2011 financial crisis era so that indicates the units are out there but they are not willing to pay up and take the risk, which I like operationally for them. R12 unit sales per store location are down to about 2950, an all time low for all my data back to 2002. Even at these extremely depressed volume levels they are pulling levers to maintain profitability. I still don't see any reason they can't get back to earning $7-$8/share when the car market normalizes and they are selling 4000 units/store, it's just a matter of how long that wait will be.

The comments on the share repurchases did not impress me all that much. They basically said they are going to buy back at a lower pace than they have historically and target to simply offset dilution. That isn't very inspiring compared to their aggressiveness on buy backs historically.

I have not added any yet to my small position. I'm still not certain how long it might be before the car market normalizes. In my day job I can see the products we sell into the consumer space are off over -30% from peak in 2021/22 and still dropping monthly.

Rates need to come down for the lower tier buyer I think before it can be affordable for them. During the call they mentioned the less than $3000/mo income household is off more than 50% for them. There was a time in my childhood where I may have known what that family experience was like but I'm far removed from that today. I can't fathom how a family can live on that level of income today.

Jeff