車美仕 (KMX) 2003 Q1 法說會逐字稿

Good morning and welcome to the CarMax Inc. conference call being held in conjunction with the company's release of first quarter sales.- This call is being recorded.

Following management's discussion this morning, the conference will be open for questions.

If you would like to ask a question, please press star-1 on your touch-tone phone.

Please state your name and firm name before asking your question.

Please indicate when your question has been answered so when they proceed to the question.

If you need assistance, please press star-0 for an operator.

At this time I would like to introduce Ms. Dandy Barrett, CarMax's Director of Investor Relations.

Ma'am, you may begin.

Good morning.

This morning we have on the call Austin Ligon, our President and Chief Executive Officer, and Keith Browning, our Executive Vice President and Chief Financial Officer.

Before we begin, I'd like to remind you that our discussions this morning will contain forward looking statement, which are subject to risks and uncertainties that could cause results to differ materially from management's projections, forecasts, estimates and expectations.

And I would refer you to our SEC filings for further details on these risk factors.

Austin?

Thanks, Dandy.

Obviously, we were pretty happy with this quarter.

Sales overall exceeded our expectations.

We had originally set an expectation of 7% to 9% used in a comp growth and we came in at 10%, a bit above the high end of that.

This was due, as we've said, to continuing store execution improvement.

And also due to a little bit of calendar help.

We had an extra Saturday in the quarter compared to last year, and we think the fact that memorial day came a little earlier in the month of May than is typical was also probably somewhat beneficial.

Total sales were up 17%.

And we saw continuing strong performance in the newly opened stores.

As far as earnings go, we had higher than expected earnings driven by the higher expected sales.

The earnings were up 21%, to $35m, or 34 cents a share.

Excluding one-time separation costs from last year, earnings would have been up 13%.

And the one-time separation costs in the same quarter last year basically were $1.9m and had a 2 cent impact.

The factors that were affecting earnings, first and foremost, as we always say, most important thing for us is unit comps.

And secondly, gross margin peruse cars sold in dollar terms.

The gross margin dollars perused car sold were in line with our expectations.

As far as the percentage margins, there was about a 50% improvement this year over last from 12-1 to 12-6.

Roughly 20 basis points of that was due to higher mix of new cars which are more profitable, another was lower average retail, which is just the random movement of the retails in the marketplace.

And the third, 10 basis points, a variety of other things, including a test that we're doing to increase the recovery we have on our appraisal process to cover some of our land costs, and we're testing various ways to do this.

Our finance income was at 2.2% of sales versus 2% in the prior year.

Variety of reasons for this including a higher used car mix.

Cap finance was 40% to 50% of CarMax cars, so we do have a little higher percentage of the used cars we finance and also just the leverage we're getting from an increasing size of portfolio.

Our SG&A was also up 60 basis points from 9.3 to 9.9.

The majority of this was due to the increased standalone expense which was about $5.5m this quarter.

And I will point out that that will affect us in the second quarter as well.

And then in the third quarter, we'll begin to cycle around on the separation from circuit city and therefore the increased expense that started last year.

Second quarter earnings expectations, we are expecting used unit comp growth of between 6% and 8%.

And currently our best guest is earnings in the range of 33 cents to 35 cents.

And so with that, I'd be glad to take your questions.

Thank you.

At this time I would like to remind everyone, in order to ask a question, please press star-1 on your telephone keypad.

Please state your name and firm name before asking your question.

We'll pause for just a moment to compile the Q & A roster.

Your first question comes from Gerry Marks.

Good morning.

Hello?

Yes.

We're here.

Sounds like you're just waking up, but go ahead.

No, losing my voice.

Just wanted to check, your gross profit dollar per unit, I know you guys probably look at it more on a used basis, I just kind of combine on a total new and used unit basis, was up slightly from the prior year period.

And it seems like you have the kind of averaging over $2300 for both new and used.

Or I'm sorry, yeah, $2300.

But as we go through the quarters, usually, that kind of declines.

What else seems to be holding in there in terms of that the new initiative you talked about?

Well, the key thing to focus on there is since you're combining new and used --

Gerry Marks Yep.

Austin Ligon -- we made significantly more money perused cars sold, and since the mix has shifted toward used, that's got to be the single shift there, just the shift toward more used cars.

And as far as the pattern through the months, what we generally find is gross margin is strongest in the first and second quarters of the year.

Maybe a little bit higher in the second quarter, maybe not.

It depends year to year.

Third quarter is typically our lowest.

And that's because that's when the model year changeover is.

And so you have rapid depreciation in used car values.

And so we always expect to have our lowest gross margin in the third quarter.

And then the fourth quarter recovers some, but that includes December in it, which is still pretty much a low gross margin month.

So that's pretty much the cycle, the best are one and two, worst is three, and four is somewhere in between.

Yeah.

When we head into the third quarter, I remember last year, you guys initially thought you were going to miss comps, and then you guys were able to adjust relatively quickly.

And Dandy's been kind of indicating you guys seem to get better and better with the process, every model changeover period.

What are you guys doing differently heading into this August period from the prior year period?

Quite Frankly, I don't think we're planning anything different.

You know, I think the way we get better is mainly that we just executed more sharply.

I mean, as we've explained before, when we go into the fall we begin in August to reduce the amount of inventory that we're adding to work in process, so that our target is to have the lowest inventory of the year the day after Labor Day because used cars go down approximately 18% a year in value, and about half of that late-model used cars, and about half of that decline comes during about a 45 to 60-day period in September and October.

So the key for us is to really try to time it so that we have plenty of inventory for August, which is one of the biggest selling months.

But we're adding inventory to the work in process queue at a slow enough rate that we actually bottom out on inventory right after Labor Day.

And, you know, there are a lot of factors there.

It's not really any strategic change, it is just getting better and better every year at executing it.

And that's the key.

Okay.

Then finally, just on the finance side, beyond, you know, lower cost of funds, are you guys also increasing your penetration rates of the number of customers you're penetrating besides that mix shift that you talked about?

Keith

Well, penetration rate has remained relatively high, and it's consistent with really what we saw for the fourth quarter.

The key really has been the mix shift there, because we penetrate much higher on used cars, we really benefit both in a gross margin perspective and in a finance contribution perspective as we shift to a higher mix of used cars.

Okay.

Thanks.

Thanks a lot.

Your next question comes from Scot Ciccarelli.

Hi, good morning, it's Rick Reinhart for Scott at GKM.

Hi.

How are you?

You'll tell them how to pronounce his name next time, right?

Scott Ciccarelli, actually.

First, your guidance for the rear had been previously, I believe, on the used unit comp line 5% to 9% and earnings per share of $1.00 to $1.10.

After the strong performance in the first quarter, which was, I believe, had a first-quarter guidance, and you know, it was easy comparisons coming up at the end of the year.

Is there any reason to believe that you won't be coming close to the high end of your previous guidance in those categories?

Keith

We're not shifting our comp guidance for the rest of the year.

I mean, we've given you second-quarter comp guidance.

But the third and fourth quarter are pretty far out.

And you know, we just -- so I you can take the over performance that we've had for the first quarter and the range of expectations that we're giving you for the second quarter.

And factor that in, it would move you towards the upper level but maybe not to the top level yet.

Okay.

Great.

And if you could give us an update on your activity with the new car front.

I believe you were looking to sell five of the franchises, the Mitsubishi franchises, looking to that by I think the end of the first half.

If you could give an update on the progress there?

And then I have a follow-up on that.

Yeah.

At this point, our intent is to keep our Nissan, Toyota, Chrysler and our one General Motors franchise.

We're in active negotiations on all of those.

Whether we'll be finished by the end of the first half, I'm not sure.

But we expect, you know, a pretty timely basis to be separated from all of the Mitsubishi franchises.

We also are in the process of selling the Ford franchise in Wisconsin.

So my guess is we'll be down hopefully by the end of the year to between 7 and 9 total franchises.

Really the core set we expect to keep for the long term.

Okay.

Great.

And then the last question, you haven't -- I haven't seen any announcements regarding sale leasebacks.

And I'm wondering if you have plans to be doing that the rest of the year for, you know, to fund your expansion?

Keith

Yeah, we actually currently are in the process of doing a sale leaseback on a handful of stores that we had on our balance sheet at the beginning of the year.

And we would anticipate -- you know, we continue to anticipate that we'll periodically do those as we assemble enough real estate to make it more attractive, to have a mix of our standard-size stores and our satellite stores.

So you could expect a transaction in the second quarter and perhaps another one before the end of the year.

So basically, our target is roughly every six months.

Depending on how the flow of store openings come.

And the sale leaseback market.

And sale leaseback market.

But things are pretty good right now.

Great.

Thanks very much.

Thank you.

Thank you.

Your next question comes from Sharon Zackfia.

Hi.

Hi.

Can you hear me?

Okay.

Quick question on the second quarter guidance.

Obviously, you had a good first quarter.

How high or how much higher is the second quarter guidance than what you had originally anticipated?

I don't think we've broke out the second quarter to anybody.

You didn't.

So you know, you actually are kind of free to guess that on your own.

It is a bit higher.

We didn't break it out for anybody.

So you're not going to update your full-year guidance?

No.

As Keith said, we think the best thing to do at this point is to simply say, take the over performance from the first quarter and look at the second quarter and make your own adjustment within that guidance.

And it will probably push you toward the higher end of that.

But we're not ready to change the overall guidance yet.

Okay.

I guess secondarily, you had talked some in prior quarters about perhaps exploring other sub prime lenders and other prime lenders can you give us an update on the finance end?

I'll let Keith do that.

I can tell you we're still in active negotiations with other lenders, and when we do it, it will clearly be a test, because we do have a pretty strong, ongoing relationships with our three nonprime lenders that we have online right now.

And seeing how they interrelate will help us determine whether we can add a fourth and basically increase the pie, so to speak.

Or whether there's enough overlap to where it actually becomes inefficient and whether we have to remain at three or not.

So we'll talk about it when we're ready to launch the test, but rest assured that we will continue to evaluate third-party lenders.

It sounds from your comments, Keith, you're talking more about the sub prime end than the prime end, is that fair?

Yeah, absolutely.

We currently aren't looking for any expansion at the prime end.

Okay.

Thanks.

Thank you.

Your next question comes from John Davenport.

Good morning.

Morning.

A couple of quick questions here.

One, Austin, on your opening comments, you quickly went over the improvement in gross margin and the attributes of that.

And I was wondering if you could just review that one more time.

Really, you mentioned something about better retail, and I wasn't sure what you meant by that.

Well, what I commented on is first and most important thing is the gross margin dollars per car were in line with what we expected.

And so most of the shifts on a percentage basis, quite frankly, as you know, that's not how we manage the business nor look at the business.

Nonetheless, since we report it that way, we do try to help you understand what caused it.

What I said was 20 basis points of that 50 basis point improvement, came primarily from the higher mix of used cars because we only make about $1,000 gross margin per new car.

Right.

So as we shift to more used cars, that's going to increase the percentage gross margin.

The second was 20 basis points due to lower average retails.

In other words, just so happened that the average retail of the used cars we sold was a little bit lower than it was last year.

Oh, I get it.

I understand.

What I'm saying is, that's, in our view, a relatively random event based on the cars that we happen to sell and the cars we happen to choose.

And some folks frequently ask me can it really be true?

The answer is yeah, absolutely.

We don't try to manage average retail because our experience is it's not really important to us.

And then the third, which was 10 basis points, was from a variety of other sources, including a test that we're doing to make sure that we recover the costs of all the land that we dedicate to holding these wholesale cars.

We've talked about it in our wholesale process, our goal is to recover after fully loaded costs, but one of the things we had never considered was all of the land we end up using for the wholesale cars.

Since we have to go out and buy a little bit of extra land to actually handle that wholesale overflow, we realized we need to start putting that into our costing.

So some of that is in that background, too.

We're doing several tests in that regard.

Okay.

That clears it up.

Okay?

On the SG&A, you -- if you take the new standalone costs, the incremental standalone costs that accounts for about 50 basis points, and the increase year over year in the ratio was about 80.

And I'm wondering if the rest of that is due almost entirely to higher expenditures to support the accelerated growth?

Didn't it increase about 60?

Do I have that right?

Well, I'm looking on the adjusted basis, I believe.

Okay.

Do you have any comment on that, Keith?

I'd say a half of the remainder is attributable to the higher ramp up of growth.

And the rest, quite honestly, is probably rounding.

Okay.

There's timing of, you know, other expenses that, you know, sometimes hit the first quarter and second quarter, like maintenance CAPEX.

You know.

Okay.

My final question is just regarding your inventory-- down 8% sequentially and up only 3% year over year.

And your inventory turnover is now at, I think, the highest it's been since I've been following the company, almost nine times on a total basis.

I'm a bit surprised that it continues to improve like that, and I guess it reflects the fact that your older stores really continue to drop higher turnover because you'd think there would be some dilution with the accelerated new store opening and I'm just curious if that's the case?

And to what degree you think that number can continue to go up, if it can be.

Well, that's one element.

Keith will tell you the most important is the increased mix of used cars.

Correct.

The new-car business requires you to hold almost institutionally, at least 60 days worth of inventory simply because the production in shipping systems of the new car manufacturers make it very difficult to go blow that.

And as anybody has heard from all of the new car retailers, manufacturers have been doing everything they can to push cars out of the factory onto the lot.

So I think all new car retailers have been complaining about the amount of inventory they have on their lots, and that's across virtually all manufacturers.

As we narrow down to the core set of new car stores that we're going to keep over the long term, we'll continue to see some improvement there just from that.

We do continue to see some improvement from our older stores on inventory turn, but at the same time, the newer stores, particularly the new satellite stores, typically have our slowest inventory turn because they will be relatively low volume, and we like to keep at least 250 cars in inventory.

So those will be somewhat offsetting.

It's the mix thing.

It's primarily the mix, yeah.

But our comp stores did Improve (inaudible) as you indicated.

Actually, one more quick one, and that is I notice this car motive has opened a second star and plan to open a few more.

I'm wondering if you have any comments on their operations and are there other similar competitors or potential competitors that are emerging?

Yeah.

And I actually -- you're probably talking about something in Fresno?

Yeah.

I haven't seen it.

Have you seen it?

No.

What I was told is that it's not actually a store, it's like a distant selling location.

Their one location is in Bakersfield.

And you know, everything I know so far is that the one location in Bakersfield hasn't exactly hit the ball out of the park yet but -- and they originally had plans to open a location in on the south side of Sacramento and a location in the East Bay area of San Francisco.

And I know they cancelled those plans.

I don't know exactly why they're trying what they're trying in Fresno.

I think what they're trying to do is see if they can't sell a few more cars by making something available in another market.

The answer is--I haven't been out to see them in probably 90 days or so, but we try to stay on top of anybody who's doing anything that looks like us.

And the one piece of credit I'll give the car motive (ph) guys is they are -- they have genuinely tried to imitate what we're doing on a very small scale.

I think one of the challenges is like a lot of people, they've tried to do it in a slim form.

They're trying to not do their own reconditioning, not do their own buying, etc.

And our experience is you're giving away the guts of the business if you do that.

And if you don't control those things, you can't really run this business.

So right now I don't expect them to blossom into a full-scale competitor, but if they progress and actually start building other stores, then, you know, we certainly -- we certainly have been to Bakersfield, know where the land is, and we've looked at the other markets out there.

If it looked like they were going to turn into a real competitor, we'd go head to head with them.

As far as other things, I think everybody knows about the price one effort down in Houston.

You know, we monitor that pretty closely and look at what their sales are each month.

Other than the fact that the Houston market overall is probably the strongest market in the U.S. right now because Houston is the major beneficiary of all of the contracts that are being let in Iraq, and we've certainly seen a little economic mini boom ourselves in Houston.

I think they may be getting some of that.

Other than that, everything we see says that that experiment doesn't make a lot of sense.

And there's no indication based on their most recent comments that they have any intention of expanding it.

The question is, are they going to shut it down?

Right now we don't see anything on the horizon, but we're continuously on the lookout.

We want to make sure if there's anything that pops up, we go look at it and respond appropriately.

Thanks a lot.

Thank you.

Your next question comes from Rick Fraden (ph).

Thanks.

Good morning.

Hi, Rick.

My main question was on inventories, and you addressed that.

As long as I'm on, let me ask about the comment in the press release about cap and funding costs for the second quarter.

You're expecting those to be about flat.

What about on the lending side?

Are you seeing pressure on lending rates, and should we expect to see the spread narrow?

I'll let Keith comment.

When we talked about spreads for the second quarter, we expect the spreads to be similar with the first quarter.

Our funding costs, actually, declined throughout the first quarter.

At the end of the first quarter, as we were looking at the competitive set, and, you know, monitoring our own three-day payoffs, which is a key measure for us, we did drop our rates considerably at the very end of the first quarter.

So that's what's going to lead us into basically the cost of funds remains stable, a stable spread for next quarter.

I mean, our best customers now get a 4.95% APR for 60 months on a used car which we think is very attractive in the marketplace.

And I think it's natural, as we said.

Over time, despite the stickiness downwards of retail prices, you know, over time there's just some continuing pressure to bring those down.

Okay.

Good.

And then with regard to the most recent securitization, I was wondering if you might talk a little about what sort of terms you're getting.

I think you did an uninsured piece for the first time and just give us a little color on that.

Yeah, we did a senior sub structure which basically, from all-end cost perspective or spread perspective was competitive with the market and very competitive, actually slightly attractive to the prior structure, which was a raft transaction that had an insurer guaranteeing the performance of the receivables.

The uniqueness of the senior substructure is that basically the investors are relying on the strength of the receivables and the strength of CarMax as a service or behind it.

So it really reflects additional confidence in our performance as both an issuer and a servicer, and as an entity to be there to support the ongoing receivables.

So we're real pleased with the outcome of that structure and plan on continuing doing those on a regular basis as long as that market is attractive or more attractive than the rep's market.

And I assume the overall economics with CarMax, is it better?

It's minor on this particular transaction since it was the first time out there, but we'd expect it to get better as we go forward.

Okay.

Thank you.

Your next question comes from Michael Novak.

Hi, Mike Novak, Frontier capital.

Hi.

Couple quick questions.

Accounts payable were up about 53%.

Could you explain what's driving that, please?

Most of that really is a matter of how the calendar fell.

If you look at both receivables were up quite a bit.

That's because the quarter ended on a Saturday.

And so we're not -- we don't get funded for those.

Same thing's true on payables.

We're not paying anyone at the end of the quarter.

And it's just really more coincidence with how the calendar fell and having more stores in our base overall from a payables percentage.

Thanks.

And then secondly, how and why is the deflation rate of used cars different at wholesale and retail, and how does that play into being able to keep your gross margin dollars per car flat to growing?

Yeah.

The most widely quoted statistic I think, is the Manheim index.

You know, I think it also puts out an index.

But in general, what those attempt to measure is a wholesale deflation rate.

I think the first thing you have to recognize is that those really measure the index of cars that go through those major auctions, which are heavily weighted toward domestic offlease and domestic rental cars, which are deflating more than the market as a whole.

It also is weighted towards, to some degree, newer cars.

So I think that there can often be a fair amount of difference between that index and what you would actually see if you could observe all of the one to six-year-old cars.

Although, as far as I'm aware, and I'm pretty aware, there's no index out there that covers all of the real sales of late-model cars.

Obviously, if you look more broadly at all used cars, the older a car gets, the less the car is affected by what's currently going on in the new-car market.

And the deflation driven in the used-car market is absolutely being driven by the real costs or real price deflation of new cars.

And I kind of analogize it to the effect of waves in the ocean.

That is, if the new car business is the wind, the top couple of layers of the used car business, the one-year-old cars, two-year-old cars are significantly affected.

By the impact of new-car deflation.

And you're going to see quite a bit of activity there because those are the cars that are nearest substitute for new cars and have to maintain an absolute head-to-head spread.

As you get into three, four, six eight-year-old cars, those cars are -- have so depreciated based on their age that they're much less affected by what's going on in the new-car business.

As you move deeper into that, there's virtually no impact other than the kind of the subtle impact of the overall shift in downward pressure.

But it's much more subtle because the spreads between those and new cars are enormous.

So there's a lot more variety there than is easily expressed by something like the Manheim index.

As far as being a retailer of used cars, the key there is how steady is the decline.

And in general, if you look over time, the decline -- remember, we're in a business where our prices of our newer model used cars go down 18% every year.

So the natural order of things in the used-car business is deflation.

The value of your product goes down about twice your margin or 1.5 times your margin every year.

So we're absolutely in the fruits and vegetables business anyway.

You have to turn inventory quickly.

Adding more deflation to that is really just making the business -- it's not changing the fundamental nature of the business, it's just changing the rate.

And as long as that's relatively smooth, our experience is, we've been able to manage very effectively there as long as we keep a good turn.

When it can be problematic for a used-car retailer is when you have step-function changes and incentives, particularly step-function changes at $1,000 or more.

And even when you do have those, they're typically only on one model or two models.

You virtually never have those across an entire line of a company or across the whole industry.

So usually what you're managing is kind of like little fires here and there, if Chrysler decides to put some money back on a particular, you know, a couple of thousand dollars back on a Pacifica or something, you know, then you would have to worry, except they're no used Pacificas out there.

But if Ford were to pull out money back on something like the Explorer, it is widely enough traded that the whole market, the reason they're going to put money back on it is because of excess inventory.

And the entire marketplace knows when they have excess inventory.

And I think the wholesale values even start to adjust a little in anticipation.

So the key is good information, rapid inventory turn, a good understanding of do you have the right inventory?

And then when you do get caught where you're going to take a loss, and a lot of folks in your business have told me, gee, it's the same in your business, go ahead and take your loss.

Go ahead and take your loss then.

Sell through the car.

Get back in the market at the new lower wholesale value.

And that will make -- let you make a profit on the next car.

And we found that -- this all started, as I've kind of commented before, it all started back in the fall of '97 and spring of '98, it's increased in intensity as the competitive war between the Japanese, the Koreans and domestic producers has increased in intensity.

And as the economy has slowed down a bit.

We don't see anything to change it.

I think "the Wall Street journal" had an interesting piece on the union negotiations yesterday.

And unless there's a significant withdrawal of capacity by the domestic manufacturers, which currently isn't anticipated, we expect this deflationary trend to keep going until we see a major upturn in the economy.

That would make natural demand enough that you didn't have to get this discounting.

So we expect this is the world that we live in for the foreseeable future.

Let me ask it maybe a little bit different.

So let's say a two-year-old Ford Explorer last year was selling for $20,000, and I'm just making these numbers up.

And you made $1500 gross profit on selling it.

Right.

This year it's selling for $18,000.

Is there any structural reason why you still can't make $1500 in gross profit or I guess the question is why are you still --

There's no structural reason that five years from now when it's selling for $10,000.

That we won't make $1500 other than how many miles does it have on it and is it still a car that we can certify?

And the reality is, the older the cars get, the more likely that the car that we're making that $1500 or $2,000 on is a Honda accord and a Toyota camera than a Ford Explorer.

Fundamentally, in fact, just the opposite is true.

When our lowest margins tend to come on the newest, most commodity-like cars.

So the very high-volume cars that you see a lot of in a rental fleet, like a Ford Taurus may actually have a lower margin early on.

And when they're four or five or six years old, we're selling from the now, more rare quality examples of that car, and, in fact, we expect to realize an average margin by that point.

Okay.

And then my last question is can you talk about any changes or trends you're seeing in the receivable portfolios, please?

We haven't seen any changes on the receivables are performing, you know, in line with our expectations.

We're real happy with their performance.

I would tell you that our underwriting for the quarter, the -- for new loans are average bureau score was up slightly.

And no changes in the portfolio assumptions?

No.

Thank you.

Sure.

Your next question comes from David Campbell.

Thank you.

Good morning.

Hi, David.

Congratulations on a good quarter.

Thank you.

I was wondering if you could update us on the status of the reconditioning rollout and if that affected the inventory growth at all.

And secondly, has there been any change in the trend in sub prime approval rates?

Well, the first question, when you say the reconditioning rollout, I think you're referring to the information system we rolled out during last year, the what we call ERO, electronic repair order system.

And, you know, I think we've begun to see potentially some reduction in work in process inventory, which is what we would expect.

But it's too early to put any numbers on what that will eventually end up being.

Probably equally or more important, we're starting to be able to have sets of reports that let us manage this business at an even more granular level on reconditioning.

Identify problems that we're having, tie those problems to a specific procedure, a speck tech specific type of car, and that's real important for us on the quality control process of eliminating errors.

So we are seeing benefits from both of those things, but it's too early to really put any quantity fiction on those.

For the sub prime approval mix basically approvals remained basically flat with where they ended the end of the fourth quarter.

So on a year-over-year basis, they are down versus where they were a year ago at this time.

But they've been basically consistent throughout the quarter.

And as you know, AmeriCredit that a lot of folks were worried about earlier in the year has been fairly successful as going out in the marketplace and raising funds to keep operating at the level that they've now set.

Okay.

Just going back to the reconditioning, has that been rolled out across all stores?

Austin Ligon Yeah, all stores have that and all new stores opened with it.

Okay.

And lastly, you mentioned there was some benefit to your sales of an additional Saturday as well as an earlier memorial day, can you quantify that impact on the sales?

I don't think we've estimated exactly what that is, but, you know, it's a small additional benefit.

But I don't think we'd put a specific number on it.

Was there any impact from the rain that we've had across the east?

You would think so.

And I don't know.

I know it's been pretty rainy in New York for anybody who's located here in the mid-Atlantic we're starting to think we live in Seattle.

You know, in theory, all things being equal, we'd rather see a sunny day than a rainy day.

Obviously, May was the rainiest month in the history of the mid-Atlantic, and it was a pretty good month for us.

So I don't know that I could say there's no impact.

Who knows.

Maybe sales would be better without it, but I would hate to speculate that that would necessarily be true.

Because we feel like we had a pretty good quarter.

So I think folks are -- folks make is it through a lot more rain easily than they make it through the snow.

And I wouldn't I wouldn't look one way or another at the rain right now as a significant impact.

Thank you.

Your next question comes from Aram Rubinson.

Hey, guys.

A couple questions, first on gross margin.

I think in prior reports you've given us kind of a used car gross margin percentage and a wholesale gross margin percentage.

Are those figures available?

Those will be things that will be in the 10-Q, and we'll go through and explain those in the 10-Q.

And just a follow-up on the wholesale gross margin, obviously that's going to show an increase.

I'm curious, since you realized that you need to account for some depreciation of land costs to be baked into that auction process, is that coming in the form of a fee to the dealers in attendance, is that coming in the form of pricing, and along those same lines, your comment that you've historically broken even in that business, would you now kind of readjust that?

Yeah.

The answer is that's why we call it had a test at this point.

I tell you, among the things we're testing are changing the way that we recover that from a fee that we directly charged the consumer to a simply a deduction on the price that we offer.

The net impact would be the same but it will actually shift where the margin appears from other income to wholesale.

So you know, we'll -- if we completely go down that path, we'll end up having to explain sort of the shift in income there.

And it will also increase some because if our tests go as expected, we expect to start to recover the costs of the land that we invest in this process.

Whether it will change in our net position of do we still net-net break-even after fully recovered costs or not, I'm not sure.

We'll have to look at where the tests come out because we're -- there are a variety of things that are more complicated than I want to explain in terms of how we're trying to adjust to do this in the most rational and efficient way.

And after we figured it out, we'll explain what the result was.

Second question's on the new stores, I think, Mariville (ph) dropped in and I know last time I met with you weren't sure whether strong new-store openings meant that those stores may not comp because you started at such high levels.

Now that you've seen at least some indication in probably Sacramento is pretty close, too, what you would think about that now that you have some data.

Yeah.

Now that we have some data, the answer is, at least for the brief period of time we have, which is very brief, the newly opened stores that are now turned comp are, in fact, comping at a higher than average rate.

Which is what you'd expect.

And it's too early to make any comment on what that rate would be.

But so far, you know, and it's only three stores, we're at the point where we would say that, you know, it looks like they're going to comp at a higher rate, which is what we'd expect.

We'll give you a little more information at the end of the next quarter as we start to have some more robust numbers.

So the model is planned, then at least the original model to comp, right?

Yeah, to comp at a higher rate.

One of the questions, if they were opening somewhat stronger, you know, might some of that just be that we're getting the business earlier?

And in the very short period that we have the estimate so far, it looks like we are, in fact, you know, continuing to get the benefit of that by comping it higher rate that we'd expect or so.

Okay.

Great.

Thanks.

Thank you.

Your next question comes from Sharon Zackfia (ph).

Hi.

Three quick questions.

The first is what's your F and I her car.

The second is what's your average spread on your captive finance customer versus what you outsourced to the third-party finance guys?

And the third is the comps of 6% to 8%, what does that assume for pricing and volumes?

F and I (ph)per car, as far as finance, if you take all sources of finance together, it's in the range of $500 a car right now.

Roughly, I believe.

Taking both third-party and cap together.

Yeah, so taking third-party and calf together for used cars, it's about $500 a car, and we make about $300 a car in commission on our intended service policies, per cars sold.

So right now, you know, roughly somewhere around $800 a car or so and we've said that we obviously expect it to be somewhat lower on finance, that this has been a barn a couple of years for finance.

So you shouldn't expect that it would be that high over the long term.

The third question was -- you asked about our comp expectation?

Yeah.

What goes into the 6 to 8?

How much is units versus price?

That's all units.

Those are used unit comps.

We don't even bother to forecast dollar comps because as we have said, continuously for the last several years, we don't care much one way or another about what the retail price comes out to be.

What we focus on is unit costs because that's what drives the business.

And then the spreads on what you're keeping in-house versus third-party.

I was going to say, we have never talked about specifically what the spreads on third-party on.

You can see in our annual reports and our 10-Q is what the amount of income is, but we never talked about the spread per car.

I'm just trying to figure out what customers you're keeping in-house versus third-party finance.

Okay.

I can explain it to you.

If you come to one of our stores and you're a prime finance candidate, when you apply for finance, your application goes to both Bank of America and to calf.

Both banks review you.

If both banks approve you, you see both loans.

And the customer actually decides which loan to take depending on the pricing and on the length of the loan.

If you fail to be approved by either of the two prime sources, you're automatically rerouted by the system to all three sub primes, TransSouth, AmeriCredit and Wells Fargo.

All three of them see you.

And all three of them have a chance to bid on your loan, and then the customer decides, once again, which -- if they get an approval from all three, which are the three to choose from.

So we don't really allocate, per se, what we do is set up effectively a competitive bid situation.

Now, obviously, being in charge of that situation, on the prime side, we have the ability to somewhat manage our volume versus Bank of America's.

Just as they (inaudible) if they lower their pricing.

But generally those have been pretty steady trends.

Okay.

Just a quick follow-up, you said you guys make $300 per car on extended service warranties?

Per cars sold.

You guys actually do any of the servicing?

How do you do that?

Do you have service base?

Sounds like you don't know much about CarMax, do you?

Let me send you an annual report.

Send us an address.

All right.

Thanks.

All of our stores have service bays.

We have a little over 1,000 certified ASC certified technicians.

And the customer has the choice of doing their extended warranty work with us or going to somebody else.

And they can also come to us for any of their other service work, as can any customer off the street, just like you might go to a Pep Boys or Goodyears.

It was tough for me to understand how our able to service all the different models and makes out there.

That's why I was just a little curious about it.

Well, most of the service in the world is done by broad line servicers like Firestone and Goodyear and Pep Boys.

What is it, 50% of new-car buyers never return to the dealer for service at all.

And after warranty is up, only a very small percentage return to the dealership for warranty.

So we're had in the situation that all other major market providers, you know, have been for years.

I mean, most service is done by broadline shops, and that's what we are.

All right.

Terrific.

Thanks.

Thanks.

Your next question comes from Bruce Babcock.

Can you hear me?

I can.

Thanks.

I think the annual report says it clearly, but comps at opening new stores at 15% to 20%, shouldn't we be seeing sales gains above 20% pretty soon?

Certainly we think as we -- as we get the business rolling, we get our, you know, full set of stores opening each year and they cycle around on each other, that, you know, obviously the new stores, whether we open at 15% or 20% of base, don't open at the -- at 100% of average volume.

So you take a little discount from that.

So but still, we would expect the gross from new stores to be somewhere in the midteens, you know, from low, mid teens to high mid teens depending on how they open and perform.

Those together, you ought to have growth, you know, in the high teens to the low 20s.

One other question.

Are you all thinking about having a meeting for analysts either at your headquarters or somewhere else?

Sure.

One of the things we're going to be doing is setting up some sort of field trip.

And at this point it will probably be in the fall.

We had earlier hoped maybe we'd get it done this summer, but I think it's unlikely that we've got time this summer.

But in the fall, we'll try to set up some sort of field trip for analysts to come visit with management as well as visit our stores and understand in a little more depth how CarMax works.

I think it would be a really good idea at this stage.

Thanks a lot.

Thank you.

This ends today CarMax Inc. conference call.

You may now disconnect.

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