車美仕 (KMX) 2008 Q1 法說會逐字稿

Good morning, my name is April and I will be your conference operator, today.

At this time, I would like to welcome everyone to the first quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer session.

(OPERATOR INSTRUCTIONS)

Thank you, Ms.

Kenny, you may begin your conference.

Good morning.

It's very gray and very hot here in Richmond, Virginia, today.

On the call with me 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 about the company's future business plans, prospects and financial performance are forward-looking statements that we may relying on 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 expectations.

For additional information on important factors that could affect these expectations, please see the company's annual report on Form 10K for the fiscal year ended February 28th, 2007, and our quarterly and current reports on file with the SEC.

Also for your information, CarMax will be presenting at an industry conference in Chicago tomorrow morning at 11:10 AM.

If you are unable to attend in person, the presentation's being webcast and we invite you to listen.

You can check CarMax's website for details.

As always, if you have any questions after today's conference call or Tom's presentation tomorrow, please feel free to contact me or my colleague, Celeste Gunter.

Tom, turn it over to you.

Thank you, Katharine.

Good morning, everyone.

We're glad you could join us today.

We're very pleased to announce that fiscal 2008 is off to a good start.

Traffic in the first quarter continues to grow both on CarMax.com and in the stores.

Total sales for the first quarter increased 14% to $2.15 billion compared with $1.89 billion in the first quarter of fiscal '07.

We are also pleased to report 6% used unit comps, which comes on top of 6% comps in the first quarters of the last two fiscal years.

This continued comp strength is particularly meaningful given what we believe has been a relatively weak retail environment.

We also believe we continue to gain market share.

Total used unit sales grew by 15% for the first quarter, 1 percentage point higher than last year's first quarter growth of 14%.

Performance is also strong at CAF where income climbed 14% despite approximately $6 million or $0.02 per share of favorable items in last year's first quarter.

Net earnings for the first quarter increased 15% to $65.4 million or $0.30 per diluted share compared with $56.8 million or $0.27 per diluted share in the first quarter of fiscal '07.

As anticipated, our diluted weighted average outstanding shares increased by 3% compared with last year.

Also in the first quarter, we opened three stores and two new markets for CarMax compared with four new stores in the first -- in fiscal '07's first quarter.

We opened one full production store in Tucson, Arizona, and two new satellite stores in Milwaukee, Wisconsin.

Total used unit revenue increased by 17% in the first quarter largely reflecting the 15% increase in used unit sales.

Wholesale unit rate -- wholesale unit growth moderated to a 7% level after an unusually high increase of 21% a year ago.

On to gross profit.

Total gross profit per unit increased somewhat to $2,801 reflecting an increase in wholesale margins, offset by a decrease in new vehicle margin.

Used vehicle gross profit per unit increased slightly as compared with a year ago and grew more significantly as compared with the fourth quarter due to normal seasonal patterns.

Wholesale gross profit per unit increased 11% to $800 compared with the first quarter of last year and showed unusual strength as compared with the fourth quarter, normally the seasonally strongest wholesale quarter for us.

We are very pleased to see that our improvements in buying and auction processes continue to support these enhanced wholesale margin levels.

On to CarMax auto finance, we had another strong quarter at CAF, due primarily to our sales growth, expansion of the gain spread to 4.2% from 3.4% in the first quarter of last year and the increase in total managed receivables.

We recorded an immaterial favorable valuation adjustment related to several of our oldest securitizations.

As we have previously discussed, we continually strive to refine CAF's origination strategy in order to optimize profitability and sales while controlling risk.

We target cumulative net losses in the range of 2% to 2.5% and the loans originated since late 2005 incorporate higher loss rate assumptions than those originated in '03 and '04.

These earlier loans generally had losses significantly below our target range and below prior historical averages.

The delinquency rates on these newer loans has been trending higher, although this increase has not so far been translating into correspondingly higher losses.

We are pleased with the performance of our overall portfolio.

On to SG&A as expected our SG&A ratio of 10% did not result in leverage due to increased spending to support our operational, strategic, and internet growth initiatives.

Now store growth at this time will remain on target to grow our store base by 17% this fiscal year, opening a total of 13 stores.

I mentioned the three openings in the early part of the first quarter.

We won't open another store until August, when we plan to open Torrence, our seventh store in the Los Angeles market.

In the third quarter we plan to open stores in Atlanta, Georgia, Newport News, Virginia, and Charlotte, North Carolina.

In addition, we plan to open our 8th store in Los Angeles and our first store in the San Diego market, along with our third car-buying center in Tampa, Florida.

The remaining four stores and a fourth car-buying center are projected to open in our fourth fiscal quarter.

As for expectations for fiscal '08, we continue to project used unit comp growth in the range of 3% to 9%, total revenue growth is still expected to be between 14% and 20% for the full year.

This expectation incorporates our used unit comp assumption and a modest increase in our used vehicle average selling price offset somewhat by lower new car sales.

We continue to anticipate a good year for CAF, despite the $13 million in favorable adjustments recorded in '07, which we don't expect in fiscal '08.

We are maintaining our earnings per share guidance for the full fiscal year of $1.03 to $1.14, an increase of 12% to 24% compared with last year.

At this time I'll open it up for your questions.

(OPERATOR INSTRUCTIONS) And we'll pause for just a moment to compile the Q&A roster.

And your first question comes from the line of Seth Basham with Credit Suisse.

Good morning.

Couple questions for you.

First, you mentioned, Tom, the tough retail environment.

Could you maybe give a little more color behind that?

Are you seeing more volatility, are you seeing customers trade down?

What exactly are you referring to there?

I was referencing more the retail environment in general and some of the announcements we've seen from lots -- from many of the big box retailers and from the other auto retailers, as well.

So not necessarily, what we've seen, but the environment outside of CarMax.

Okay.

As it relates to CarMax and ASPs, I think your ASP in the used car side was up 1.8% in the quarter year-over-year.

How should we look at that going forward?

Are you seeing a mix effect pressure ASPs?

And should we see continued deceleration in that metric?

Well -- for us, ASP is not a big driver of any of our profits other than the average loan that we put out at CAF.

So this is right in line with what we expected.

I think what you saw last year was an unusually high increase in ASP because of a mix shift.

But as far as this quarter, we're right in line with where we expected.

Okay, great.

Going forward, I'd rather see ASPs go down than up.

And finally on the wholesale side.

Anymore color on what's driving the profitability in that sector?

As I mentioned, I think it's really just continued refinement of our processes from really start to finish, from how we buy cars and how we evaluate what we should be offering consumers.

And then how we run our wholesale auction.

I said before, I think we run the best auction in the business.

We have outstanding attendance.

We run very consistent sales, and I think we continue to refine that process.

So we're very pleased that we've been able to keep profitability where it's at and at the same time not sacrifice any other areas of the business.

The other piece I've talked about there is that wholesale does not sit by itself.

It's a lever of the other pieces of our business.

So it's nice to see all aspects continue to perform well.

Great.

Thank you.

Thank you.

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

Hi, good morning.

Hi, Sharon.

On the SG&A, I would have expected, I guess, on a 6% comp to keep that a little bit more flattish and maybe even favorable.

And I know you have a lot of initiatives going on.

Maybe if you could give us insight to kind of what was incremental this quarter and how we think about that line item going through the rest of the year where you start to leverage it again?

There are so many different parts obviously that go into that.

What we've said before on SG&A leverage is we might start to see some leverage around 6% comps.

We didn't get it this quarter.

But we also said at the beginning of the year we're going to be investing in some strategic initiatives.

We continue to invest in CarMax.com, we continue to invest in store growth, obviously.

But we're also continuing to invest in developing our people internally to make sure we can fuel our growth for the long haul.

So this is actually right in line with what we expected for this quarter, taken into account all those additional investments, and continued focus really on growing this business for the long haul.

But it sounds as if none of those initiatives are kind of one-time initiatives, so they're kind of recurring.

And as we get into the lower volume quarters, should we look for even more deleveraging then in the back half of the year?

Well, that would obviously depend on how -- largely depend on how comps go in the second half of the year.

We're up against a pretty tough comparison in the third and fourth quarter.

So I'm not really sure.

Okay.

And then I guess on the wholesale sales, the gap versus used cars sales was a little wider than I would have expected, in terms of the growth.

Yes.

And I know you're up against a difficult comparison.

So do you expect that gap to narrow?

I think when you gave guidance you were looking for wholesale sales to grow roughly in line with used car sales, retail sales.

I don't think that's changed.

I expect wholesale sales to grow in line with sales over the long haul.

Again, you -- as you mentioned the first quarter of last year was exceptionally strong in terms of unit growth.

I think we were still seeing some residual impact from the wholesale market after Katrina and some of the other things that went on in the wholesale market.

So this is less than what our sales growth was, but I think if you look at it over a long period of time, we expect it to track exactly with sales.

Okay.

So are we on a more normalized comparison then here in the August quarter?

I'm mean I'm just wondering --

We haven't given any guidance on the August quarter.

So we'll let you know when the quarter ends.

I was just talking about last year.

Can you remind me when the Katrina benefit ended?

Was it pretty much over by the May quarter?

Yes, I think generally it was over about now.

And we went into the summer and I'd say we were a little bit more normal, yes.

And then I have a really boring question, probably for Keith.

What kind of tax rate should we be using this year?

That is boring, I'll let Keith take it.

Well, the tax rate for the first quarter will be close to what the year will turn out.

It might vary by .1% or .2% depending on how much money we make and where we make it.

What you saw in the first quarter is pretty close to where we expect in the year.

And I'm happy to tell you the weather sounds better here in Chicago than there.

So we're looking forward to seeing you.

Thank you, Sharon.

Take care.

And your next question comes from the line of Stacey Widlitz with Pali Research.

Morning, thanks.

We keep hearing about SUV markdowns and pressure there, but that doesn't seem to be showing up in the numbers.

Just curious, how have you managed the SUV inventory with the (rising) gas prices differently this time around?

And also if you could give us a sense of how much of a drag SUVs really were on gross profit per used unit cars.

Thanks.

Well, as we've talked about before, we are managing our inventory on a weekly basis.

And I think the question is how did we manage it through the first quarter with rising gas prices?

I think the question is more that -- I think the answer is really that consumers didn't respond as dramatically as they have in the past.

So the requirement to manage it as aggressively really just wasn't there in the first quarter for us, anyway.

So we didn't see a really big impact in our mix through the quarter because of the change in gas prices.

Whereas, if you go back to the summer before last, we really saw a dramatic change in consumer behavior, which we then had to respond to with our inventory.

We just really didn't see that this first quarter.

We actually sold more big SUVs in this first -- this year's first quarter than we did last year's first quarter.

So it hasn't been a drag on us at all and it's never been a drag on profitability.

Because we don't manage -- our profits don't come on segment like that.

They're driven by a number of other factors.

It's not like we make more or less money on sport utility vehicles in and of themselves.

Okay, great.

Thanks.

Thank you.

And your next question comes from the line of Bill Armstrong with CL King & Associates.

Good morning.

Just a couple questions.

Maybe a follow up on an earlier one.

Given your SG&A spending plans for the remainder of the year, what sort of same store sales would you need to leverage those expenses?

Well, we've always said we think it's somewhere at or above 6% when we think we'll start to get a little bit of leverage.

But SG&A, there's a lot of timing in SG&A going from quarter to quarter also.

So, as you know, we're on annual guidance.

We don't talk about individual quarters other than the one that just ended.

So our expectation is that we set for the year hasn't changed at all.

Got it.

Okay.

On the wholesale side, your gross profit per vehicle was up despite a decline in the average selling price.

Are you just continuing to get better prices that you're paying to consumers for trade-ins, or appraisal offers, I should say?

Is there maybe more efficiency that you're getting out of your process?

I think it's honestly, a combination of those two things.

It's refining how we buy cars and then continuing to run an outstanding auction and provide great service to our wholesale customers that has allowed us to get that increase.

The drop off in the average selling price -- did we have a drop off?

A little bit.

That's really more random than anything else.

That's not planned, that's just what happened to come through in the quarter.

Okay.

About $70 per vehicle drop.

So it wasn't a mix shift or anything else?

Nope, that would be -- that's just how they happened to flow through.

Okay, and then just moving to CAF briefly.

Over the last few quarters, your average loan term has been creeping up, I guess by a couple of months.

What's causing that?

Are you seeing a mix shift towards newer cars, maybe?

Or are people just looking to lower their monthly payment?

Last year we did extend the terms for our lower grade customers across the board.

So what you're seeing is really just a continuation of what we did last year.

Quite honestly, I thought it shortened slightly in this first quarter.

And that really reflected the mix of customers coming in that the customers with higher credit scores generally won't take longer terms if they don't need them.

So really in line with exactly what we expected.

And it's certainly not a mix shift towards new cars at all.

As Keith mentioned, a year, 1.5 years ago, we were actually a little behind on the term.

And we extended term at CAF really to keep up with some of the other lenders.

Any extension in term is really just a continuation of that.

I see.

And then just a matter of policy.

Do you restrict how long the term can be depending on how old the car is?

In other words, obviously a car that's only one year old has a longer life expectancy than a car that's five years old.

Do you adjust for that?

We do have a few breaks where we won't go extended terms on our value mix vehicles that are older and higher mileage.

Yes.

Okay.

But that's not something that's influencing the average loan term that you're seeing?

Nope, not at all.

Okay.

Thanks.

Thank you.

And your next question comes from the line of Scott Ciccarelli with RBC Capital Markets.

Hi, guys, how are you?

Hi, Scott.

Couple questions.

First of all another follow up regarding the unit growth in wholesale.

Trying to -- I'm just trying to figure out or reconcile the difference between the unit growth there and the unit growth in retail.

Is that a function of buying fewer cars?

Is it a function of buying more cars that are going to retail?

I'm just wondering why you would have that large of a delta?

Scott, I really look at it over a much longer haul.

And we had a 21% increase last year, a 7% increase this year.

So, I look at the first quarter wholesale performance over the last two years is up 28% on units.

I think at the end of the year, hopefully, we'll be around sales growth.

I really don't have an answer for the 7%.

I feel like we're going to -- you're going to see these numbers come in roughly with sales growth over the long haul.

I don't think you can really make much out of the one quarter shift other than we were unusually strong in last year's first quarter.

Okay.

Alright.

So -- right, I'll follow up on that later.

Okay.

Now the gross profit, obviously (inaudible).

The gross profit on the wholesale side was up despite that slight decline in ASP.

Where -- you obviously have a lot of experience in the wholesale business, where do you think that number can go, if we're trying to break it out in unit economic model?

Yes, I would tell you, I think, again, we cannot manage that part of our business separately.

And it's always integrated with car sales, with CAF, with all the other things that we do.

And I don't really know where it can go long term.

We would give up wholesale in a second to drive comp used unit growth.

So we're very pleased we've been able to manage it effectively and continue to drive some increased profits.

But we're looking at this business over the long haul.

And I wouldn't tell you to model a continued increase there, but if we can do it, we would do it.

But if it's at the expense of sales, our comp sales, we'd go in the other direction in a second.

Okay.

And then --

Very fortunate we've been able to drive those profit increases and continue to deliver used unit comps at such a good level last year and another great start this year at 6%.

Okay.

Okay.

Thanks.

And then the last question is just about the retail business.

I know what you've stated before.

A steady sales pace tends to help your gross profit dollars per unit, because it translates to fewer markdowns.

Could you give us some sort of color or characterization regarding the sales pace during the course of the quarter?

I'm not going to talk about the quarter, different parts of the quarter.

I'll just tell you this quarter came out to be pretty strong, 6% comps, good margin.

So you would imagine that it was a fairly smooth inventory management quarter for us.

It was.

Okay.

Great.

Thanks a lot.

And your next question comes from the line of Rex Henderson with Raymond James & Associates.

Thanks, good morning.

Thanks for taking my call.

Questions on a couple of different areas.

First of all on the securitizations and the car -- CarMax auto finance piece.

Have -- since the recent adjustments in the credit markets, have you seen any change in the appetite for risk for your securities, particularly the B&C tranches, the higher risk tranches of your securities?

Have you seen any shift in the appetite for those?

I know that the recent securitization got out before all this happened.

But I was just wondering if you've seen any changes in the credit market.

We've seen none whatsoever.

If anything, we're getting a little bit better pricing.

Okay.

And secondly, on conversion and traffic.

You said that traffic trends were okay.

Can you give us any idea of how conversion has been going on both -- on the web and in the stores in terms of how those -- how the traffic turns into sales?

Conversion on our web front is really do we turn a web visitor into a store visitor.

We haven't talked specifically about that conversion number.

I've said before generally when we're looking at a comp like this, 6% something like that, generally we get a portion of that from traffic increase and we get a portion of that from store execution.

And I'd say that that was true again this quarter.

We had solid execution and we saw increased store traffic through the door.

And we also saw increased web traffic year-over-year as I said in the beginning.

And do you have any idea -- any way to measure how many -- what percentage of the web visitors end up in the store?

We do, but it's not as -- we don't -- customers can visit our store any time they want and they don't have to give us any information.

They don't have to give us their name, they don't have to give us their zip code, their e-mail address.

So it's not as accurate as we might like it to be because of the consumer-friendly shopping environment that we provide at CarMax.

But we can track pretty well if they contact us in advance on the web and then they ultimately show up at the store.

We can track through consumer surveys if they've been on the web before they got to the store.

And as we've seen that number increase every year for the last several years, where a larger and larger percentage of our customers that show up at the store have said that they've been on the web before they came to the store.

So when you're saying that's up, it's a percentage of visitors to the store that have been on the web.

Can you track what percentage of the web visitors end up in the store?

And is that number up, as well?

Again, like I said, that's just a little bit more difficult to track.

But I would tell you that traffic on the web is up and traffic in the stores is up, and I feel like some of that has to be a higher conversion of web visitors to store visitors.

It's not as accurate a measure as we'd like to have.

But it's nice that they're both up.

And so I'd say that one clearly has something to do with the other.

Okay.

Thank you very much.

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

Hey, that was very good.

Very good, excellent.

It's the best.

Keith, I wondered about the delinquencies on the new pools whether it's fair to say that those are higher than we might have anticipated, the loss ratios apparently are less than we might have anticipated.

And is there a thing where you have a 31-day delinquency, but if the car keeps running, the person's not going to convert to a loss very fast.

Do you think something's happening there?

I think I would agree with all of those.

I think we've seen delinquencies just modestly ahead of what we expected.

And the good news is that we aren't seeing them translate into losses.

And we really do believe we have a piece of collateral that we're serious about repossessing.

And we let customers know that so that we don't expect those to ultimately translate into losses either.

I think all those statements are true, Hardy.

Okay.

On the website, did we get anything out of having customer views?

What do we think this does for us?

It's still too early on customer reviews.

That's another one of the many initiatives that our web team is working on.

But it's a little too early to gauge anything from customer views.

But we're pretty optimistic that it could have a positive impact.

Anything else that we're thinking about in the near term?

Or you don't want to talk about it?

Yes, there's nothing really to talk about.

There's no big thing coming in the near term.

Again we are really putting a lot of emphasis and a lot of resources behind all of our web initiatives.

And I think we've made many improvements to our website.

We've talked about pictures enough.

But I feel like that's another area we could continue to drive for more improvements.

And the web team is intensely focused on staying ahead of the curve.

Tom, I guess in my experience in talking to your customers, the one part of your offering that they don't seem to grasp very well is the reconditioning part.

And we now have, I think, a perspective competitor, or an actual competitor, who was going to duplicate pretty much everything that you have without the reconditioning.

Is there anything to do about that in that competition?

I don't know what you're referring to there.

I don't know of anybody who is not planning on doing reconditioning.

That's my understanding.

As far as we can tell -- we have competition everywhere.

And there's certified new programs out there, there are lots of reconditioning programs out there, there are lots of certified used cars out there.

I think we were one of the originators of really certifying cars and doing a full reconditioning process and bringing cars up to a similar quality standard.

I think we've gotten better at that every year.

And when I talked about those initiatives earlier on Sharon's question, that's one of the big initiatives that we're continuing to spend resources on, is figuring out how to continuously improve quality and drive our costs down.

You have to obviously spend some money and resources in order to do that.

I feel like we're ahead of the game their, but I think we have lots of room to improve, as well.

So I don't think there'll ever be a case where quality is not an area where we need to be really sharp in order to compete with whoever the competition is.

Yes, it seems like the customers don't get this part of the equation.

Don't -- that I've talked to that bought cars from you, they don't understand what you do in reconditioning.

And I don't think the people that have not bought cars from you, obviously, understand what you do in reconditioning versus everybody else.

Well, Hardy, I -- we don't get that from when we talk to customers.

And I think customers view us as an extremely high-quality retailer.

And I think it shows up in our numbers.

Our average store sells 420 cars a month.

We continue to grow share.

We've grown share for five consecutive years.

I think it shows up in our results that consumers believe we're putting out a very high-quality product.

Okay.

Sounds good.

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

Hi, this is actually [Kate Messmore] for Matt Nemer.

First, I just wanted to get an update a update now on your Charlottesville market test now that you've been there for a few more months if you can share on how that's performing?

We don't.

It's still been less than a year.

The store hasn't even really comped yet.

The one thing that we have said about the small market format is we will not make a decision off the performance of one of those and we will build a few more.

We don't have any on the books for this year, but we will get a few more of those small market stores up and read the results for a while before we make any long-term decision.

Okay.

Thanks.

And then another question.

What is your current philosophy on competition?

And how do you view the balance between going after real estate that would produce the highest returns for CarMax versus going after a competitor in less attractive markets?

Well, I think it's a case by case decision.

Depends on the competition, depends on how serious the competitive threat they are, depends on the market, it depends on what the actual return is when we look at it.

So each time we hear about somebody who's going to do what we do like we do it, we take it very seriously, we gather up as much information as we can, we try to figure out what they're doing and where they're going, and then we evaluate our competitive response.

Okay.

But do you believe there's room in the market for more than one player?

Or are you just trying to be the single player?

Well, I'd rather be the single player.

I think there's enough business out there that there are -- We're never the single player in any market we're in because there's all the other new car dealers out there and the used car dealers out there.

And even our share numbers that we've reported to date are not what you'd see out of home improvement or something like that.

So, I think there's plenty of room out there for lots of different players to sell used cars, obviously.

Okay.

Great.

Thank you.

Our next question comes from the line of Edward Yruma with JPMorgan.

Hi, thanks, guys.

Most of my questions have been answered.

But wanted to know if you could give us a quick update and I know it's been early on your second car buying center.

And if it's performed kind of in line with some of the things you've noticed in Atlanta?

Yes, that really is way too early, Ed.

We just got -- we haven't been open there a couple of months.

I will tell you it's a different market than Atlanta.

We've been in Atlanta for 11 years.

We have four stores there, already.

We're getting ready to build our fifth store.

More of a metro market.

Raleigh right now, we only have one store.

Our car-buying center is on Capital Boulevard, where we haven't been able to get a satellite, but it looks like it makes sense for the car-buying center.

So we -- it's too early to have learned anything, but our expectation is that we will learn something.

And that we'll learn something different than we're learning in Atlanta because it's a different market for us.

And as I also said at the beginning of the year, getting four of these open this year and then reading the results is -- then we'll have something to work off of going forward.

And again, the markets that we're opening in Tampa, Raleigh, Atlanta and Dallas are all different markets for us and I think, as a whole, we'll really learn something about the car-buying centers in the next year or so.

Great.

And if you had to tier kind of qualitatively some of the investments that you're making, how does the entry into the San Diego market tier in that?

It's just one of the new markets for us.

We're only going to open one store there.

It'll actually be a satellite of our southernmost Los Angeles store, our Irvine store.

I think San Diego's clearly a multi-store market for us.

We've got ourselves a great site there.

I think we'll do well with the one store.

But we'll continue to look at San Diego.

I think we'll build -- we'll ultimately get a couple more stores open in San Diego.

So, I don't know if I answered your question there.

Great.

Thank you very much.

And your next question comes from the line of Deron Kennedy with Goldman Sachs.

Hi there.

I'm here with Matt Fassler.

How are you?

Good, how are you?

Wondering if this wouldn't necessarily fall in the realm of forward-looking statements, but it may give us some perspective on the disclosures we've been seeing at a credit.

Some of the pools that haven't been securitized yet that we haven't seen, are you running at -- I'm just wondering if you found your level?

Are you lending at the same average FICO score that we saw in the 2000-7-1 series?

Or can you give any color on that?

Let me try to address that.

I think -- generally what I'd say is that looking at our average FICO scores may be misleading.

I think what you want to do is understand are we making any adjustments in our underwriting.

Because average FICO score can reflect the mix of customers through the door, which is generally stronger in the spring and summer, because some more affluent customers decide to buy cars on want, not necessarily need.

And then secondly, it's our pricing.

So our average FICO score can actually reflect the competitiveness of our pricing and whether people take advantage of our three-day payoffs, or not.

Generally, I tell you we haven't made any substantiative changes.

We did a little tweaking in the fourth quarter last year that, if you looked at our penetration and our actual overall approval rates, you couldn't see it.

We just happen to know we did it.

And we're constantly evaluating our underwriting whether we need to buy deeper, or buy customers that we're not buying today or vice versa and will continually do that.

But we don't expect any substantive changes going forward.

So you saw -- you made some tweaking in the first quarter that is reflected in the 672.

Any changes we see to FICO you are saying may be more about the mix of customer than any subsequent changes, right?

Right.

And also, though, how about the average term of the loans that you've been underwriting?

I think that's the same thing.

If you have a more affluent customer is more interested in lower rates.

We do charge for the longer terms.

And so to the extent we have the customers that can afford a 60-month term instead of a 66, they'll go with the lower rate generally.

So term's going to be influenced also based on that mix of customers more than anything else we're doing.

Okay, and the last question also relates to credit.

I'm just trying to get a full picture.

The average term has been going up and I know that you've been responding to competitive pressures in this regard.

But what is the threshold for let's say a pool of secure -- of loans going to be securitized that will be tolerated by the market?

Is there a certain point where they don't accept something that's like maybe average terms -- 70?

Our average term has been hovering between around 63 months.

Bank of America for our pool of business has been significantly greater than that.

And all of our nonprimes are hovering around 70 months.

So the market doesn't seem to have a threshold on the average term.

Okay.

Thanks very much.

Thank you.

And your next question comes from the line of Brian Nagel with UBS.

Hi, good morning.

Morning.

A quick question with respect to the competitive environment.

You've alluded to the more challenging environment and clearly some results we've seen by other retailers would suggest that the environment's more challenging.

Have you seen anything out of any of your more direct competitors?

Responses more challenging environment whether it be from the new car dealers or some of the new car dealers which also sell used cars?

We haven't seen any sharp change in anyone's behavior here in the first quarter.

So I'd say no.

And then what about any changes you've made whether it be in your advertising lately to sort of offset the impacts of a more challenging environment?

There's no real big substantive change in our advertising strategy other than what we had talked about from last year which is the rather large shift away from newspaper and towards the internet.

And if anything we continue to move in that direction.

Continue to trend more towards the internet.

But in terms of our advertising strategy, we have a very consistent spending strategy in terms of the amount of points and reach we want do get from our TV spending.

And we have not really adjusted that very much at all.

So our expectation is to run our advertising program this year.

We kind of set it at the beginning of the year.

We're pretty heavy advertiser in every single market.

We spike up a little in some of our grand opening markets.

But in terms of the first quarter, no significant change.

We have an outside agency that put out some new TV commercials for us, which we're pretty happy with.

And we're going to make a few more of those ads, but other than that, nothing -- nothing real big.

Okay, great.

Good luck for next quarters.

Thank you.

And your next question comes from the line of Rod Lache with Deutsche Bank.

Good morning, everybody.

Most of my questions have been answered, but I was hoping to go back to just a few things.

First of all, just, do you have a sense of how the broader used car market is doing?

Is there anything you could take away from how the wholesale business is doing that kind of tells you how the competition is doing?

Yes, the only thing we could really tell you from what the competition is doing is look at everyone's announcement.

And as you know we don't match up on quarters.

The rest of the public new car dealers are on a calendar quarter and we're on a fiscal quarter.

So we can match it up obviously internally because we can match our months up.

I look at it more over the long haul, over the last five years, our average comps have been 6% and the average of the public new car dealers on used cars has been negative 3%.

Last year, the spread was, they were up slightly and we were up 9%.

So they're up about 1%.

So I just -- we're just very pleased that we continue to see a spread.

It fluctuates a little bit quarter by quarter, but over the long haul, I think there's some real evidence that we continue to gain share every year.

Did you say what the comp wholesale unit growth did?

Well, for the quarter, yes, up 7% over last year used unit, I mean wholesale units.

That's the comp store sales for the wholesale units?

Or is that absolute?

No, that's not comp store sales, that's total wholesale unit sales.

Right.

Do you have the comp store sales for that?

We don't.

Okay.

Are all the regions performing similarly?

Or do you see any differences regionally in areas where there's maybe a little bit more of a real estate effect like in the Southeast?

We don't talk about individual regions.

Okay.

Do you have any data you can share on what the delinquency data is showing at this point?

You said it's a modest increase.

But is there any way to put any parameters around that?

The delinquency data for all of our portfolios is available every month on our web -- you can get it on our website.

And it just came out Monday, I think, most recently.

Okay.

I'll take a look at that.

And then lastly, you went through the cadence of the new store openings really quickly.

Would you mind just going through that again?

Sure.

We -- I mentioned we opened up 3% in the first quarter of this year.

We won't open another one until August when we'll open our seventh store in Los Angeles.

In the third quarter we'll open up Atlanta, Georgia, Newport News, Virginia, and Charlotte, North Carolina.

Also our eighth store in Los Angeles and our first store in San Diego, in addition to our third car-buying center in Tampa.

And then the remaining four stores will open in the fourth quarter in addition to a fourth car-buying center.

Great.

Thank you.

You're welcome.

And your next question comes from the line of John [Bouts] with WaterStreet Capital.

Hi, guys.

Quick -- two quick questions.

One is, can you tell me, when you measure your customers and you measure loyalty, customers have bought from you before.

What percentage of those, when they're making another new car purchase, come back to CarMax and are loyal?

Do you have a feel for that?

We have a little bit of a feel, but I would tell you that even at our age with 83 stores and having been in business for 13 and 14 years, the car-buying cycle is between three and five years.

So you really don't get your second shot at a customer until then.

And more than half of our stores are less than five years old.

So I don't have any specific loyalty data to share with you.

I think we do pretty well there.

But it's still difficult to measure despite the fact that it seems like we've been around for a while.

Because of the length of the just the cycle of when people buy, many of our stores haven't had a chance at that second customer yet.

I just didn't know with your D.C.

base, Maryland, and that kind of core group of stores there if you had any kind of anecdotal information that was coming out that I might could think about that way.

Well, anecdotally, we think we do pretty well.

A lot of our best sales consultants talk about getting repeat customers all the time.

And for us, too, if somebody comes and buys a car and later on they come and buy a car for their son or daughter, that's also a repeat customer even though they maybe didn't buy another car.

Anecdotally, we think we do exceptionally well with customers coming back second, third, and fourth time.

But it's difficult to put some real accurate statistics on it with the age of our stores.

Great.

Last question is, what percent of the cars that you purchased from customers who are coming in and they either sell it to you or are buying a new one and traded in, do you end up reselling through your wholesale channel as opposed to reconditioning to put on your lot?

Do you have any feel for what that percentage looks like?

More than half of what we buy from customers goes to wholesale.

And is that like 75% or more like 65% or 55%?

Can you --

It's not 75%, it's more like 55% or 60%.

Perfect.

Thanks very -- thanks for

Of what we buy -- of what we buy goes to wholesale.

I understand.

So about 55% or so, 55% to 60%, of what you buy goes to wholesale and the remainder --

And what's left, we retail.

But that represents more than half of what we retail.

We buy a lot more cars than we retail, obviously.

I understand that for sure.

Thanks for taking my call.

Alright.

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

Thank, good morning.

Morning.

Hi, Brad.

Just a follow up on the comp guidance.

Obviously for the first quarter you've come in in the middle of the range that you've given for the year.

Now we're going to be up against tougher comparisons, what would it take to see comps up at the upper end year range?

Higher comps.

As I said, we give annual guidance, our guidance range is 3% to 9%.

We're pleased with the first quarter and we feel like we -- there's no need to change our guidance for the year.

Okay.

Anything in particular that you feel that you all can do better to get the comps up, towards the upper end of the range?

If we knew something specifically we could do better, we'd do it.

That's all I can tell you.

We're trying really hard to do the job we can to drive comps every quarter and over the long haul.

Okay, and just a quick follow up on the impact of gasoline prices.

When we think back to the post-Katrina period where gasoline prices really spiked out.

That seemed to be an environment where you all executed very well.

Do you think there's been any situations over the last quarter where the rise in gasoline prices has led to some opportunities for you all in

No, as I said earlier, not really.

It's really -- that question is more how has the consumer responded?

And from our book of business, the consumer has not responded anywhere near as dramatically as they did the last time around.

And more recently here, we've seen gas prices come back down again.

Okay.

Great.

Thanks so much.

Initial shock from the gas price spike, it doesn't have the same impact the second time around.

Okay.

Alright.

Thanks.

And your next question comes from the line of Elliot Choi with [Bella Capital].

Hello.

Hello.

Hello.

Hi.

Good morning, congratulations on the quarter.

Just a couple of questions.

Do you have any expectations for CapEx for the year as well as D&A?

And also can you comment on the inventory levels on a per store basis and kind of your feelings coming out of the quarter on that side?

Thanks.

I can tell you inventory levels were exactly in line with our sales growth and our new store growth.

So right about what we expected.

CapEx we said is going to be around $300 million this year.

I'd say as of right now we have no reason to change that.

And, I'm sorry, I didn't hear your other question.

D&A expectations, depreciation.

Keith.

We haven't shared the expectation.

Yes.

We haven't shared that.

Okay.

Thank you.

You're welcome.

And your last -- next question comes from the line of Sharon Zackfia with William Blair.

Hi, just a quick follow up.

I think there was some speculation leading into your quarter that maybe the housing market and California and Florida was penalizing those regions.

Would you care to comment?

Nope, we're not going to talk about individual regions.

Alright.

Thanks.

But thank you for the question.

And your next question comes from the line of James [Elman] with [SeaCliff].

Hi, there, good morning.

Great quarter, guys.

I had a couple of quick questions just about basically rates, or one rate and one on financing.

First of all, with interest rates backing up about 50 basis points recently, are you able to pass on some of that rate increase to your borrowers?

That's exactly what we're trying to do.

As we saw rates increase throughout the quarter, we've made some adjustments.

And that may affect payoffs, but we don't think it'll impact sales.

Do you think you can increase rates by the full 50 basis points that we've seen the backup in the yield curve?

That remains to be seen.

In general, have you been able to match those numbers over time?

Generally, there's a lag.

Quite honestly, historically, what we've talked about is there's a lag between rate increases and our ability to adjust to customers.

And that moves in both directions.

If rates were to go down, we get a little bit of a windfall and we don't need to adjust as quickly.

But consumer expectations lag, and so therefore it's difficult to keep pace with rate increases.

Now the rate increases we're seeing aren't coinciding right now with any fed increases, they're just expectations that the fed might move the other direction.

So I think it's even going to be more challenging.

And for us it's largely driven by the other lenders that are available to our customers in the store and us being able to compete with them.

It's one of the great things about having the lenders in the store and (inaudible) almost.

competing directly with CAF is it keeps us honest in each market.

And we're able to move along with the competition.

But as Keith mentioned in a rising interest rate environment, you're going to generally see a little bit of tightening of the spread because of the lag.

And if it's -- if the interest rates are going down, you'll see a pick up in the spread for us because of the -- for the same reason in the opposite direction.

Alright.

So after a while, of course, in a few quarters we should see everything normalize if the rate curve stayed exactly where it was now.

But for better or for worse, there's a bit of a compression short term.

Well, again, we'll see whether adjustments will stick or not with consumers and what the impact is with their payoffs with us.

We happen to get a quick benchmark because we have the three-day payoff option.

Customers split with their checks if they think we're not competitive.

And so we feel pretty good about where we're at right now.

Alright.

My second question just has to do with chargeoffs right now on more -- the more recent vintage.

In the '07 pool, ,it looks like the delinquencies trends are a bit worse than the monthly trends than even the 2001 pool, which had accumulative loss at about 2.5%.

And it looks like the '07 pool is running about double that right now.

Can you give us any idea what you expect the chargeoff rates to be on current lending?

I can tell you that the charge-off rates, the range we have, the top of that range is 2.45%.

So we don't have any expectations of going north of 2.5% which we've talked -- said all along.

That is our targeted range.

And quite honestly, there's a different base -- set of customers in those two pools.

We believe we have a much higher proportion of what we'd call sloppy payers, which isn't necessarily bad.

And then the other aspect is there's a difference between bankruptcy laws between the '01 pools and the current environment.

It's much harder to file bankruptcy.

And so we have to fight a little bit harder in order to get payments.

But at the end of the day, we don't believe that the higher delinquencies is going to translate into the same level of losses.

Alright.

And just in terms of the new bankruptcy laws, I believe it's only really harder, or it's more difficult to file for bankruptcy if you're above the medium income in your state where you're borrowing and where you reside.

Have the customers really changed that the people buying cars from you are in that top half of the medium of the income per state?

I haven't looked at it in that level of detail.

I can tell you that generally bankruptcies are still down significantly.

And from the benefit of the bankruptcy law to us was that they could discharge their credit card debts and then they'd reaffirm their car loan with us.

We're still the same position.

We have a piece of collateral that we're very serious about getting.

It's just that they're not going to -- it's not as easy for some segment of our customers to go discharge those credit card debts.

And therefore we have to compete a little bit more in contacting them.

But at the end of the day, we're very serious about that collateral.

And that's very important for them to get to work.

Alright.

Well, we'll look forward to seeing the positive improvement versus the '01 vintages over time.

Thanks a lot for the time.

And your next question comes from the line of Jordan Hymowitz with Philadelphia Financial.

All my questions have been answered.

Thank you.

Alright.

Thank you.

And there are no further questions at this time.

Okay.

That's it.

Thank you very much.

We'll talk to you after the next quarter.

And this concludes today's first quarter earnings conference call.

You may all now disconnect.