車美仕 (KMX) 2007 Q3 法說會逐字稿

At this time I would like to welcome everyone to the third-quarter earnings conference call. [OPERATOR INSTRUCTIONS] Thank you. I will now turn the call over to Ms. Kenny. Ma'am, you may begin your conference.

Thank you. Good morning. Thank you all for joining us. My name is Katharine Kenny, and I joined CarMax in late October to replace Dandy Barrett who, as you all know, recently retired. While no one can truly replace Dandy, I am very pleased to be here and look forward to meeting all of you. On the call today are Tom Folliard, our President and Chief Executive Officer; and Keith Browning, our Executive Vice President and Chief Financial Officer.

Before we begin, please let me remind you that our statements today regarding the Company's future business plans, prospects, and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current knowledge and assumptions about future events. They involve risks and uncertainties that could cause actual results to differ materially from our expectation. 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 annual report on Form 10-K for the fiscal year ended February 28, 2006, filed with the SEC and our subsequent filings. Now I will turn the call over to Tom.

Thanks, Katharine. Good morning, everyone. Thank you for joining us. We're very pleased to report our third-quarter earnings, unexpectedly strong as you saw. Mostly unexpected because this is historically our toughest quarter of the year and because we're coming up against such a strong wholesale and CAF comparison from a year ago. As you read in the press release our earnings increased 98% to $45.4 million or $0.42 per share compared with 22.9 million or $0.22 per share in last year's third quarter. Total sales increased 24% to 1.77 billion and comp store used units increased 13%.

I will start with sales. First, our used vehicle sales benefited from a combination of factors beginning with, of course, solid, steady improvement in execution in the stores and robust traffic growth at both our stores and on our website. Used vehicle sales increased 27% which included an 18% increase in total used units sold, and the fact that average used car selling prices were up 7%. This increase was primarily a reflection of a higher mix of SUVs as we saw in the first and second quarter this year. Also, truck and luxury vehicles compared with a year ago. We also attribute some of the increase in traffic to our web enhancements and the expansion of our Internet advertising.

Onto wholesale. Wholesale sales are up 30%. This increase was primarily driven by first, the growth in our store base and then particularly strong appraisal traffic in the third quarter. Gross profit compared with last year's third quarter, our gross profit increased in all vehicle categories. Gross profit for both our used and wholesale units benefited from the ongoing car buying refinements. In addition, our used vehicle margins continued to be supported by our strong sales performance and fewer pricing reductions which resulted in an increase of $140 per unit to $1898. Our wholesale vehicle gross profit dollars also increased slightly, a pleasant surprise after the unusually strong levels we recorded after Hurricane Katrina last year.

Onto CAF, CarMax Auto Finance income increased 14% last quarter. Another solid performance, especially when you compare it to last year which included favorable items totaling $6.1 million, or $0.03 per share. CAF continues to benefit from our sales growth, expansion in the average amount financed and an increase in the gains on loans originated and sold. The gain spread for the quarter was 4.3% this year compared with 3.6% last year. This experience was, again, better than we had projected and resulted from lower funding costs during the quarter. As we do every quarter, we reviewed our loss experience relative to expectations, losses were modestly higher on our most recent securitizations as you've seen in our notes, some of which was anticipated. Loss experience on our older pools continued to track better than expected. The net impact for the quarter was immaterial. We will continue to carefully monitor our loss and delinquency experience.

Onto SG&A. Our results were also positively impacted by better SG&A leverage, our ratio fell 120 basis points to 10.6% this year compared to 11.8% last year. Our stock-based compensation costs totaled approximately $0.03 in both this third quarter and last year's third quarter as restated. We did benefit this quarter from the timing of roughly 2 to $3 million of projected relocation costs which we now expect to record in the fourth quarter.

Also remember the SG&A in the fourth quarter compared with last year will be further impacted by two additional items. First, preopening expenses related to three new super stores that we have yet to open compared to no new openings in the fourth quarter of last year, and last year included lower than normal health care costs and property taxes. Onto our expectations, the continuation of our strong performance throughout the first nine months of fiscal '07 has convinced us to once again increase our full year expectations. For the year we now expect comp store used unit growth in the range of 8 to 9% and earnings per share in the range of $1.75 to $1.85 per share. This represents an increase of 39 to 47% versus last year's restated EPS of $1.26 per share.

We continue to expect that stock-based compensation expense will be $0.19 or $0.20 per share this year compared with $0.13 per share last year. Included in our projections are the $0.07 per share of favorable CAF items that we have already reported compared to $0.09 of favorable CAF items recorded in fiscal '06's full year. As Keith always reminds me our assumptions always include any unusual weather events in the fourth quarter. I mean exclude. I am sorry.

Onto our growth plan. We continue to be very excited about the sustainable long-term growth plan. We have abundant opportunities for geographic expansion in both -- in new large markets as well as mid-sized markets, and opportunities to expand our presence in our current markets. We now expect to open a total of four new stores in the fourth quarter including the Charlottesville store, our small market format which we opened earlier this month. This will bring our total store openings for the year to 10, representing a 15% increase in our store base for the year. For fiscal '08 we expect a total of 13 store openings, an increase of 17% in our store base, well within our long-term annual store growth plan of 15 to 20%. In terms of timing we currently project we'll open five stores in the first half of the fiscal year and eight in the second half, but as you know construction and other delays occur, and that could impact the exact timing of these openings, so we'll keep you updated each quarter. Let me take a moment to thank you again, for joining us today, and for your continuing support of CarMax. I want to thank all of CarMax's associates for their continued hard work and dedication which have allowed us to be so successful. And I'll now open the line up to your questions.

[OPERATOR INSTRUCTIONS] Your first question is from the line of Scot Ciccarelli from RBC Capital Market.

That would be Markets. They usually mess up Ciccarelli. A couple questions here for you guys. First is has there been any change or do you get any sense from any of your financing vendors on financing approvals? We just see kind of what the banks are doing, they're starting to tighten up credit a little bit. Has that been your experience or is that something that concerns you at all?

So far, Scott, basically in good times and bad times CarMax outperforms the rest of our lender portfolios, and so quite honestly this is the bread and butter for them, and we haven't seen any impact, and in fact I think layering on the additional competition has actually helped our performance, and they continue to buy as strongly as they ever have and approve as strongly as they ever have.

Have you guys ever disclosed what percentage of your sales come from subprime or is financed by some of your subprime vendors or help us quantify that in some way, shape, form?

We have. Really we only have one subprime vendor. What we're talking about is our non-prime vendors which are roughly a range of 15 to 20% depending on the time of year.

Okay. Thank you. Then the last one is you mentioned there was some cost deferred from third quarter to fourth quarter. Is there anything outside of that 2 to 3 million in relos, any change in advertising or is that really the only change that we saw in terms of a timing shift?

That's really if.

Thanks a lot, guys.

Your next question comes from the line of Matthew Fassler with Goldman Sachs.

Thanks a lot. Congratulations on a really nice quarter. I have a couple questions I would like to ask you. First of all, as you think about wholesale, can you talk about any metrics you can share about the growth that you're seeing in either hit rate on appraisals or the proportion of cars that you're now sourcing through your own buy side as opposed to auctions that would also help us understand the growth in the wholesale business?

Well, I think, in terms of what we talked about before, we always said that roughly a little more than half of what we retail we buy through the appraisaling, and we ultimately buy more cars than we sell. As you know, everything that we buy through the appraisal end that doesn't meet our retail parameters is what goes to wholesale. You see a big increase in wholesale units this year. 30% wholesale unit increase over last year, if you look at it for the whole nine months, it is a 20% increase compared with a 16% increase in sales. We're going to grow wholesale units along with sales, and then we get some additional growth as appraisal traffic grows. We had a particularly strong appraisal growth number here in the third quarter which contributed to that.

Is that needle of penetration of the proportion of cars that you sell that you actually buy through your own appraisal process growing, you've kind of said roughly half or slightly more. Is that needle moving meaningfully higher at this stage?

It has been moving up pretty steady at a small amount. We've stuck to more than half. I think when we hit a significant threshold we'll let you know. There is some seasonality in that, too. It takes really a full year to see where that comes out and obviously that number move throughout the year.

Out of curiosity, are you more comfortable now buying cars even though you know they're not going to be CarMax quality cars given the success you've seen in wholesaling them back out?

Absolutely.

If I could follow up on that, Tom, secondly, to your point the wholesale gross profit dollars per vehicle wholesaled held up exceptionally well against a pretty tough compare and they actually made the high number for the year, so aside from the penetration and the volumes, anything in particular helping to support the profitability of that business?

We see a seasonal movement in wholesale pricing externally that we see every year. We've been at this for 13 years. I was in the wholesale business for three or four years before. Every fall wholesale prices drop. Last year we said we saw a more moderate drop which makes it an easier inventory management situation for us, and I think we saw similar moderation this year in terms of the drop from second quarter to third quarter. That's an external factor I think that was somewhat similar to last year and different than what it normally is that maybe helped us a little bit this third quarter. I think it is largely driven by the refinements in how we buy and how we sell and the attendance that we generate in our auctions and the customer service that we provide in our auctions. I would attribute more of our strong performance to those factors.

And then finally on CAF you yourself made reference to the fact that a couple of the more recent securitizations are showing kind of month to month metrics that are a little bit off where their predecessors had been, understanding that you're kind of watching those really closely, curious if you have a sense as to what it is about those credits that is causing that to happen and whether that relates at all to, I guess this is the first time in some time you haven't had a few of the one-time gain from CAF as you've adjusted some of your assumptions upward for gain on sale. Is there a linkage between that and just a little more color if you would on why you think those delinquencies are rising.

Much of that is actually planned, Matt. We are always constantly trying to figure out how to drive more sales and we're trying to figure out how to drive more sales through incremental approvals and CAF. Some of tha is we changed our CAF scorecard which we have talked about a number of times and we got some additional approvals out of that. Some of the change in delinquencies and some of those other metrics are actually planned. Each quarter we true up the whole portfolio and make our best projection going forward. I think the fact that we didn't have anything in either direction this quarter is an indication that things this quarter went about like we thought they would when we trued it up last quarter.

You would rather get the incremental top line than book that penny for CAF, you would rather get the sales. Understood. Thanks so much, Tom.

All right.

Your next question comes from the line of Rex Henderson with Raymond James.

Good morning. My congratulations as well, on a really spectacular quarter. A follow-up question on CAF and the CAF income. We are seeing some slight deterioration of the delinquency rates, but the spread gain was really very strong this quarter. I am just wondering about where you see that going in the future in light of the credit quality trends?

I will let Keith answer that one.

Well, it really kind of depends on two factors. One, first, what does the Fed do. Because our cost of funds really actually is geared to what the Fed does and actually tries to guess what the Fed is going to do. What happened in the third quarter is where we had made some rate increases at the end of the second quarter anticipating the Fed might make a couple more moves upward. The Fed didn't. In fact, our cost of funds softened through the quarter which allowed us to over achieve our expectations.

From a quality of earnings as Tom indicated, we've made some conscious decisions that, in fact if you were at our Hartford meeting a year ago, we basically said in hindsight we were too conservative and felt like we should be buying deeper, so we put in a new scorecard, and our goal is really achieve losses in the range of 2 to 2.5% which we think is very marketable prime portfolio, and we're very comfortable with where we're underwriting.

The other factor that can affect us is what happens from a competitive perspective. If competitive rates decline, then obviously when you look at the gain spread, we may have to react to those, and we monitor that regularly based on pay off percentages that our customers tell us how effective we are in setting our rates, so it could be changes in cost of funds, changes in competitive situation, but quite honestly, I don't see any change in the way we're buying or underwriting because we're very comfortable where we're writing right now. I will state that the overall industry has seen an increase in both delinquencies and loss rates, and our partners are seeing it. We're seeing it, but we're very comfortable where we're at right now.

Okay. Second question on the unit sales. I thought I heard you say that SUVs were a good category for you. I am just wondering what you're seeing in that. Is that a big part of why the unit same-store sales comp was so strong, did you see -- is it pricing in SUVs that is making them more affordable and therefore helping your comp or can you give me some color on that?

Well, I think that actually that's more of a reflection of how nimble we are in terms of being able to manage our overall inventory along with consumer demand, and when you look at -- when I mentioned that earlier on the call, it is really in the comparison to last year, the mix of SUV's and luxury vehicles and trucks compared to last year because there was another consumer reaction to gas prices that impacted us in the third quarter last year, so we're really just coming around on that, and it is really the comparison of mix this year compared to the mix last year. I wouldn't say -- that probably contributes a little bit more to ASP than it does to comp sales.

Okay. Thank you very much.

You're welcome.

Your next question comes from the line of Sharon Zackfia with William Blair.

Good morning.

Hi, Sharon.

How are you?

Good. How are you?

Good. Over the last year it definitely seems like there has been a major inflection point in the consistency of your business, and certainly in the traffic that you're generating at the stores. Can you talk and maybe let us understand kind of in order of importance where you think that inflection point has come from, whether it is something you're doing in the stores on an execution standpoint and whether it is the maturing of the immature stores, whether it is the shift to more Internet ad spend, help us figure out what's going on.

You mentioned a few different things there, Sharon, and it is probably a combination of all. I think from an outside perspective looking at our performance this year, it looks like an inflection point but here at CarMax it doesn't feel like an inflection point. It feels like just continuous improvement in each of those areas. As we mentioned in the first two quarters and was also true in the third quarter, the combination of external factors that normally can kind of be all over the board, interest rates, gas prices, new car incentives have been relatively stable this year, relatively uneventful for the whole nine months. That just makes it easier for us to manage through our inventory and manage through the way we deliver the consumer offer, so I wouldn't really say there is any one particular thing. I feel like we've gotten a little bit better every year at just about everything we do, and I think what you see in the first nine months is all of those things coming together in what has turned out to be a somewhat favorable external environment for us. There really isn't any one thing there.

Last year in the second half we talked a lot about the hurricane, impact on wholesale sales and how we shouldn't expect that to be replicated again. Is there anything happening in the first nine months of this year that you would caution us is kind of unsustainable and we shouldn't expect to benefit you on an ongoing basis?

I am not sure I would caution that anything is unsustainable but what I would remind you of is that we're managing the business in total and we're managing it for the long haul. We're not looking at wholesale profit in a vacuum. We don't look at CAF profit in a vacuum. We don't look at gross profit or SG&A in a vacuum. We look at the entire business as a whole. We look at where we're trying to go for the next five to ten years. We're trying to build a national retailer. We're trying to grow our comp store sales every year, and we're trying to continue to invest in the business to continuously improve every area of it, so each year when we sit down and we try to decide what we're going to do the next year, it is a combination of all of those factors and we never look at any one of them and say let's go drive wholesale profit regardless of the impact it has on something else or let's go drive CAF profit regardless of the impact it has on sales. It has been great and terrific for us this year that all of those things have gone exceptionally well, but I would just -- the only caution I would give you is we look at it as a total business and where are we trying to go for the next five to ten years.

Then my last question, if you parse out mature versus immature stores, are you seeing the mature stores also accelerate and their comp sales or are we mainly seeing an immature benefit kick in to the comps.

I am not ure what your definition of mature and immature is.

I think your definition had been over four years according to the white paper several years ago. However you want to define it is fine.

Yes. Well, for the fir nine months I would say it has been pretty consistently strong across the whole chain.

You have seen an acceleration across the board.

I am sorry?

You have seen an acceleration in the comp stores as well.

Well, it is a little bit of an acceleration from a couple years prior and this quarter was particularly strong, but we said 8 to 9% for the year and we said our long-term growth plan is 4 to 8%. We're -- looks like we'll come out at the high-end of that range this year. But again, we're looking at what are we going to do over the next 5 to 10 years. This year has been terrific, and I think it has been relatively somewhat evenly spread, I think, across the different types of stores that we have.

Okay. Thanks.

Your next question comes from the line of Hardy Bowen with Arnhold & Bleichroeder.

Hey, Hardy, that was as close as they usually get.

That is fantastic. We ought to record that one and repeat it. Do you plan to spend more on the Internet in next year or can you really not spend any more? Is it not profitable to do so? Do you see this as something that's very successful?

If you have ever worked with a marketing department, Hardy, you can always spend more. I think that's true on the Internet as well, but we talked about the shift in spend this year away from newspaper towards the Internet. We're pleased so far with the results, but it has only been nine months. I know that feels like a long time, but in terms of really reading the results, it will take a little longer, so we're heading into the fourth quarter this year. We'll start evaluating all of our different advertising options for next year and certainly the Internet will be a big part of it. I wouldn't be able to say right now what are we going to do for spending, how much is it going to go up but we're certainly pleased with the results thus far.

I presume we have more customers coming through the door that are coming off of CarMax.com at this point in time. Does this improve the close rates? Do you find that happening?

Well, again, before we made the shift to Internet spending, each year more customers who walked through the door had been on CarMax.com. That is not like a new -- that is not a big shift in terms of the customer flow. The customer flow has moved every year more and more towards being Internet savvy, more and more towards having done some research before they showed up at the store, and we've seen that continue along. That was one of the main reasons we shifted our advertising in terms of whether or not that improves the close rate, we have a number of different things that we're always working on. I think that's one of the factors that helps.

Do you think as we spread units out across the country and have more of the customers coming off the Internet that the locations are -- the volume is less sensitive to a great location than it was three years ago or do you think that's not the case?

I wish that was the case. Then we could go buy cheaper sites. I am not sure that will ever be the case. I think location is always important when you're a retailer. I think it will continue to be, but if we -- it is not always easy to go and build a big huge used car store. It is not easy to get zoning. We have some locations that are less than ideal because that was the only thing we were able to get so one of the things we're able to do is try to kind of assess what we think would be A plus locations and what we think are kind of B and C locations that we already have in the chain and look at the results there and see if that shifts with movement towards the Internet, and maybe that will help us with site selection going forward. I think if we had our choice we would take a great site ten times out of ten.

Do you think about acquiring property farther ahead of time at this point in time and try to move the expansion rate up some over the next couple of years?

I think we have to buy property ahead of our expansion plan because it is such a long process to get a store open between finding a site, making sure the zoning is in place, getting a store built. That is a two-to three-year process for us. We don't have any plans right now to increase the speed at which we expand but in terms of being out in front of it, we have got to be 3 to 5 years out in front anyway just to deliver the plan that we have.

Right. Okay. That's great results.

Thank you.

Your next question is from the line of Brian Nagel with UBS.

Good morning. Congratulations on a very good quarter. My question pertains to sales trends. If you could just comment upon maybe the comp trend through the quarter as well as give some highlights geographically how you may have performed in different regions of the country. Thank you.

we're not going to give any flavor to the quarter. We're going to talk about the quarter in totality and not month to month. We've never discussed our regional performance.

I will try my second question. Any -- how would you, as you look at the competitive environment, how would you characterize it right now versus prior years, particularly with respect to some of the traditional new car dealers that are selling used cars.

I would say that it is not really that much different. If you look at our comp performance again for the first three quarters of this year, if you look at our comp performance compared to the average of the publicly traded five or six public, new car guys, we've continued to gain share regardless of the environment. I think we've built a business that performs well regardless of the external factors that we face, and I think that's been true again this year. Competitively I don't think we have seen a huge difference out there. If we do, it is regional or it is on a location by location basis, and it is not consistent across any one competitor nationally.

Okay. Congratulations again and good luck with the coming quarters.

Your next question comes from the line of Bill Armstrong with C.L. King & Associates.

Good morning. I will also add my congratulations. I guess one surprising metric was your wholesale -- your gross profit per wholesale vehicle being up from a big quarter a year ago. How do you think you were able to do that?

As I mentioned earlier I think the external wholesale environment was somewhat favorable this year for the second year in a row. I think that's one piece. But again, I would just attribute it to we continue to get a better understanding of how to buy better in the appraisal lane and we continue to refine our in-store auction process, and I have talked about this before. The auction business is a customer service business. It is a different set of customers than what we see in retail, but those customers have choice, and I think we're the best choice out there for the customers that look for the type of product tha we sell. We survey our customers every year, and we try to see how we're doing from a customer service perspective.

Our attendance is the highest ratio in the industry with one dealer roughly for every two cars that we run compared to around one for every six. Our flow of units has been extremely consistent. If you go to one of our sales, whether it is a biweekly auction or a weekly auction, we have a consistent flow of inventory through there. We run a 98.5% sales rate through our auction, so if you're the top bidder, you get the car. All of those things together over a very long consistent period of time I think have contributed to us getting better and better and better at that business. We talked a bunch about this quarter being a tough comparison and we talked about it at the beginning of the year and said we didn't think we would be able to comp it so we're very pleased we were able to do that, and I think it is just a reflection of the, again, the refinements in our business and how good we've gotten at it.

Your fourth quarter gross profit per use of wholesale vehicle comparison is even more difficult. Are you expecting a year-over-year decline in that figure?

The fourth quarter actually historically is usually our best quarter in wholesale. One of the reasons we were so nervous about the third quarter this year is because generally the third quarter is our worst quarter in wholesale and we bucked the trend last year with a good quarter and are pleased to do it again this year. But the comparison in the fourth quarter is actually less -- makes us less nervous than the comparison did in the third quarter because that has historically been our best quarter.

Right. Got it. Did you do any step-up in marketing in order to drive appraisal traffic during the quarter?

No. We ran the same marketing program. We're always testing different things in marketing. When I say no, we're always running different types of things on the Internet, different things in terms of points of TV and how much radio we run, and we're always dividing stores into different categories and running them for lengths of time to see what the impact is. This quarter was no different than any other in terms of running all of those tests. In terms of a specific up test in appraisals, no.

Okay. As far as subprime and non-prime customers, was there any material increase in sales to those customers that might have accounted for some portion of that 13% comp that you generated?

Did you say subprime and non-prime.

Yes.

Subprime as we said earlier is--.

--business generated from those kind of customers that helped contribute to that big comp store increase that you had?

No. It is a spread across prime and non-prime. As Keith mentioned earlier, we virtually do no subprime whatsoever.

In fact, subprime was down 2% for the quarter. We think that was largely offset by our non-prime lenders that we added during the year, so the truth is that it is fairly consistent.

That's a good point. If you remember, we talked about drive a bunch over the last two years. The drive comparison which is really the only subprime offering that we have in the store this year's third quarter compared to last year's third quarter we were down 2% on drive. But as Keith mentioned we think we largely made that up in the other non-primes.

Are you looking to replace drive and try to get some more of that subprime business?

We're still testing with drive, but we haven't identified any other subprime lenders at this point?

The only other thing I would add is we're always looking to add to the offering for our consumer, and so we're looking at any alternative available to us to add an additional lender that can add incremental approvals for the consumer.

How many non-prime lenders do you have now?

Six.

Six. Okay. Last question. Gas prices look like they're starting to creep up again. Do you have a lot of SUVs and trucks in the inventory and do you have any concerns regarding those high gas guzzler type of vehicle sales going forward?

Well, we always have a lot of SUVs and trucks. We kind of have a lot of everything. I think what's been great is I think we've proven that we can manage our inventory through almost any environment, and it would take a awfully big spike in gas prices for us to think that it would have an impact on inventory mix the way it has in the past. I think what we saw after Katrina the first time when we had a really big spike in gas prices and we saw a dramatic impact on our mix, since then the fluctuations in gas prices have been far less impactful on our actual mix of sales, so even if they creep up just a little bit, I don't feel like the consumer is going to respond as dramatically as they did in the past.

Okay. Thanks. Good luck for the fourth quarter.

Thank you.

Your next question comes from the line of Matt Nemer with Thomas Weisel Partners.

Good morning. A couple of questions. First, can you -- the change in Internet traffic, is that attributable to Auto Trader and cars.com or is that more paid search or can you help break that out for us?

We don't attribute it -- we haven't broken down the increase specifically to those different categories. Before we shifted at the beginning of the year, we had pretty good traffic increases on our website. Our website now gets over 4 million hits a month, and that has increased during the year, and I am sure some of it is attributed to AutoTrader.com and Cars.com, but some of it is also Google and Yahoo!. I think it is a combination of all of those factors. I would like to point out the number one source of traffic on our website is people going on and typing CarMax directly in. Far and away that's the biggest source of traffic, and we have seen that piece increase as well.

Then just a follow-up to that, I am sure you track your marketing costs per vehicle retail. I am just wondering how that's trended and maybe give us some context of how that compares to what you're spending at your new vehicle stores?

We don't -- I don't think we talked about cost per vehicle. We didn't -- when we talked about the shift this year, it was more of a shift in spend, not an increase in spend. What we had planned for the year was to run our cost per car sold roughly flat for the year. We're probably -- I mean I haven't actually looked at it, but I think we might be just a tad ahead of that because of the big comp number this quarter. In terms of what did we expect for the year, we expect it to run flat.

Got it. Moving onto the wholesale business, have there been any change in buyer fees in that business?

I don't recall if we made a change this year, but I will just tell you that we run a bi-fee program that's very similar to any other auction, so it is graduated based on the price of the car, and as the external competitive environment has moved, we have moved along with it. Every year we evaluate that fee and we make some subtle adjustments on different categories of car and I think we had a slight increase this year but it is nothing dramatic.

Have you been adding any ancillary services there or is it still pretty basic sell the car, there is not transportation or other add-on fees, are there?

The one thing we have added, Matt, is we have a finance source available for wholesalers. It is called AFC, and it is an arm of ADESA Corporation. And they're available in almost every one -- I think they're available in every one of our auctions. Dealers can sign up and get financing on wholesale product lines. It is not that they didn't have those sources available to them before, they just weren't available onsite. We didn't have the funding set up as easily between us and AFC, and we've made a lot of refinements in that over the last two years, and AFC is a great partner for us and they have done a great job, and so that's one change, but that's been slowly coming over the last two years. It is not a dramatic thing that changed this year. That's the only other offering we have other than the great service and the 98.5% sales rate that I mentioned earlier. And we've always given free doughnuts.

Is it fair to say that the price stability has been driven somewhat by the change in the way the model year changeover happens? It seems like it is less pronounced in the back half of the year that OEMs are now introducing new vehicles all year long. It is not as seasonal.

You mean for wholesale pricing?

Yes.

Yes. I think that might be a factor. But I wouldn't plan on it again next year. I feel like every fall price has dropped and I think they will again next year. It is not that they didn't prop this year. It was just a little more -- a little less precipitous than it normally is. I think that has kind of offset it somewhat, but I still expect the fall to be a drop-off in wholesale pricing as we see every year.

Got it. My last question is with regards to the Atlanta Buying Center now that that's been open about half a year, can you give us any flavor as to how that's doing, whether you will open more, maybe the impact it is having on the other stores in that market?

Yes. Six months still isn't a very long time for us to really reap incrementality of the appraisals and purchases we're getting through the store, because -- largely because we have such a big presence in Atlanta with our other four stores. But on the last call I said we are going to open two or three more of these things before we really make a decision about the long-term viability of the concept. My guess is we'll get a couple more open next year. We haven't announced it yet, we haven't announced where they will be because we're still working on a number of different options. But in terms of making a long-term decision about the car-buying center, we're a ways away from that, but we're pleased with the results of Atlanta so far.

Great. Thanks very much and happy holidays.

Same to you.

[OPERATOR INSTRUCTIONS] Your next question is from the line of Edward Yruma with JP Morgan Chase.

Congratulations on a great quarter. I wanted to know if you'd give us a quick update, I believe you're testing a new hybrid production system. Have you been able to ring costs out of the system and do you expect to roll that out in other stores?

What do you mean by that?

I believe where you're making, I guess certain service staff specialized in specific areas. You were testing at Laurel, I believe.

Well, actually not at Laurel. We're doing a number of different things in continuing to improve efficiency through our reconditioning process, and again that's a continuous process for us. We'll be working on it for the rest of our life trying to improve quality, reduce costs, and do it faster, and do all of those three things at the same time which don't always go very well together, so we don't have any specific results to report out of that. I will just tell you that in terms of those three things, speed, quality, and cost reduction we'll always be working on those three things. I think we have made significant improvement since we started, and I expect to continue to make improvements over time.

Thank you very much.

You're welcome.

Your next question comes from the line of Brad Thomas with Lehman Brothers.

Thank you. First of all, I would like to add my congratulations as well. It has really been a great year for you all.

Thanks, Brad.

Just wanted to get maybe some initial thoughts on 2007, in particular if you could talk a little bit about the possibility for more SG&A leverage and then what kind of opportunities you think you still have on the gross profit per vehicle front.

We'll talk about 2007 at the end of this year.

Okay. Fair enough. Maybe one last question on 2007 if it is possible. In terms of the store openings, can you give us a sense if you think it will be skewed or more of a balanced opening schedule?

I think I said in the -- did I say eight in the first half and five in the second half? Or five in the--? Five in the first half and eight in the second half? I would caution you we tell you what we expect for the year. We expect 15 to 20% store growth. I will reiterate what I said about the business in total. We're looking for 15 to 20% store growth for the next ten years. If things move around during the year or they move from one quarter to the next, that's not as important to us as it is to deliver the consistent, sustainable growth that we talked about. So we told you what we think is going to happen next year. I fully expect there to be some movement within the year as there always is with construction and delays and weather and all the other challenges that we face.

Great. All my other questions have been answered, and congrats again.

Thank you.

Your next question comes from the line of [Willis Taylor] with [Gagman Securities].

Hi. I was wondering if you could talk about how you're bringing together all the different types of ads that you're doing to build your brand over the long-term and how your ability to do that will change as you grow in size?

Well, one of the things that I think you try to do as a retailer is have a consistent theme throughout all the different mediums of advertising, and I think we've tried to make some progress there, so if you look at the messages that we deliver, so if we're trying to deliver a we buy cars message or a money back guarantee or a big selection or guaranteed quality, you will see that theme kind of woven throughout. If we're running radio, and we're running a little bit of TV, and if we have the Internet going and we have some -- if we have print in some markets you'll see a consistent theme throughout that. We'll also try to carry that theme into the store with our store signage, so over the course of a three-month period you may see that theme match up in the store. In terms of bringing it all together, we have a consistent set of messages that we try to deliver and we try to match them up across the different mediums. I don't know if that answers your question.

That's helpful. You're doing regional advertising in some areas now?

Well, all of our advertising is regional. We're not a national advertiser yet. Everything that we -- every type of program that we run is specific to the market that it is in. Richmond could be running a different program than Raleigh is. What we'll do is kind of lump together a set of stores, not necessarily by region, but by a number of different factors and run a similar program. So we may be running in terms of a broad program a number of different programs divided amongst the 74 stores, and we'll do that consistently for several months so that we can read the results and see if some combination of factors helps drive traffic and sales.

Okay. Thank you.

At this time there are no further questions. Are there any closing remarks?

Just happy holidays to everyone. I want to once again, I know we have lots of CarMax associates on the call. I want to thank all of you for your hard work and dedication, and we'll talk to you next quarter. Thanks again