車美仕 (KMX) 2008 Q2 法說會逐字稿

Good morning.

My name is Carmen, and I will be your conference operator.

At this time, I would like to welcome everyone to the second 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).

I would now like to turn the call over to Ms.

Katharine Kenny.

Please go

Good morning.

My name is Katharine Kenny.

I'm Assistant Vice President of Investor Relations at CarMax.

It is a beautiful day, anyway, in Richmond today.

We appreciate your joining us.

And 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, 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 expectations and 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.

After the call, as always, my associate Celeste Gunter and I will be available to take your calls.

Tom.

Thank you, Katharine.

Good morning, everyone.

Thank you for joining us.

Let me first begin by saying we're obviously disappointed with both our first half results and our revised outlook.

We are, however, pleased to report we were able to achieve positive comps of 3%, a sales increase of 10% and an increase in net earnings of 20% despite the challenging conditions in the current marketplace.

I'll give you a brief overview of our results, and then we'll take your questions.

Total sales for the second quarter increased 10% to $2.12 billion compared with $1.93 billion in the second quarter of fiscal '07.

Also in the second quarter net earnings increased 20% to $65 million or $0.29 per diluted share compared with $54.3 million, or $0.25 per diluted share in the second quarter '07.

Our diluted weighted average outstanding shares increased by 2.5% compared with last year.

Used unit comps grew by 3% in the second quarter compared to 7% in last year's second quarter.

This represents slower growth than we've seen in our most recent several quarters.

The macroeconomic environment has clearly affected sales in the new car market, which are now projected to be the lowest run rate in nine years.

We believe this has had a negative impact on the used car market as well but our data indicates that we continue to take market share through the first half of the year.

Total used unit sales grew by 11% for the second quarter, somewhat lower than the growth of 15% in last year's second quarter due to our lower comp sales.

During the quarter we opened one new store in Torrance, California, our seventh store in the L.A.

market.

We also opened a new store in Roswell, Georgia, representing our fifth store in the Atlanta market.

Total used unit revenue grew by 11% in the second quarter, reflecting the increase in used unit sales.

Wholesale revenue increased by 19% in the second quarter due to a 4% expansion in average per unit selling price and a 15% increase in units sold at our auctions.

For gross profit, an increase of 4% and total gross profit per unit to $28.69 was primarily due to the expansion in wholesale gross profit per unit at $796, up $97 compared with last year's second quarter but consistent with the $800 per unit reported in the first quarter.

The continued strength in wholesale margins reflects our superior buying practices and continued strong view in attendance at our auctions.

Used vehicle gross profit per unit increased slightly as compared with a year ago and other grease profit also increased due to growth in both third-party finance fees and extended service plan revenues.

On to CAF, CarMax Auto Finance Income decreased by approximately 8% in the second quarter.

However excluding the $6 million or $0.02 per share favorable valuation adjustments recorded in last year's second quarter , CAF income climbed 9% in the second quarter due primarily to our sales growth, the increase in total managed receivables and the slight improvement in the CAF gain from 3.9% to 4% in the current quarter.

We recently revised the cumulative loss rate assumptions on our outstanding securitizations from the previous range of 1.2% to 2.45% to a new range of 1.2 to 2.7%.

This reflects a 25 basis point increase in the loss rate assumption for our 071 deal.

We made no other loss rate assumption changes.

The net result of all retained interest adjustments was slightly favorable but an immaterial adjustment for the second quarter.

Due to our lower comps the SG&A ratio of approximately 10.1% was flat compared to last year net of share-based compensation expenses for our retiring CEO.

At this time we remain on target to grow our store base by 17% this fiscal year by opening a total of 13 stores.

As of today we opened five stores and are scheduled to open eight more by fiscal year-end as well as two more car buying centers.

You'll note in our press release we also announced eight stores were currently planning to open in the first half of fiscal '09.

It's our goal to provide investors and associates with as much information as possible about our future plans but we caution you the schedule of openings could change based on normal and frequent construction permitting and other delays.

On to our expectations for the rest of the year.

While our long-term growth plans remain unchanged, current market conditions and our disappointing first half results convinced us to lower expectations for fiscal '08.

We now expect annual comp store used unit sales growth in the range of 1 to 3% although we do continue to project that our comps will average between 4 to 8% over the long term.

We believe our softer first half performance is a large reflection of the industry-wide slow down in consumer demand for cars but since we cannot predict how long this slow down will continue we believe it is prudent to adjust our expectations for the rest of this '84 and base our second half assumptions on what we are currently experiencing.

We therefore now project fiscal '08 earnings per share in the range of $0.92 to $0.98 compared with $0.92 per share we reported in '07.

Previously, our '08 earnings per share guidance was $1.03 to $1.14.

Before I close, let me reiterate our confidence in the strength of the CarMax Consumer Offer and in our business model.

We will continue to open stores at a rate of 15 to 20% per year.

We will also continue to invest in the strategic and operational initiatives necessary to achieve long-term goals.

I'd also like to take this opportunity to thank all of the approximately 15,000 CarMax Associates for their dedication and continued hard work.

I'd like to thank all of you for your support and continued interest in CarMax.

At this time I'll open it up for

(OPERATOR INSTRUCTION).

Your first question comes from Edward Yruma with JPMorgan.

Thanks very much.

As we look and think about CAF longer-term, is it fair to assume that CAF income will grow in line with sales growth, kind of excluding these one-time issues?

Yes, that is roughly -- that's exactly how we (technical difficulties) thinking about.

Got it..

As you think about the competitive environment, I know you cited a weakness in new car sales.

Have you seen any change in terms of the pricing from some of the new owner dealers on used cars and has that changed the competitive dynamic?

Thank you.

One thing to keep note of on the new car deals, of the six publics that are out there, their used car sales represent less than 2% of one- to six-year-old used cars so it's very difficult to use them as the only comparison so we have to look at a number of other data to consider that.

We haven't really seen a big shift in pricing.

We kind of feel like it's more of just less overall demand for used cars.

Again, one of the things I mentioned in the opening statements was all of the evidence we have says that we have continued to gain share through the first half of the year.

Great.

Thank you very much.

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

Hi, good morning.

Tom, since we don't have access to your quarterly plans, can you give us some insight as to whether the biggest factor in the guidance change for the full year was the first half, or your outlook for the second half?

Sharon, it was probably -- I mean, it was a little bit at the end of the first quarter but nothing where we felt like we couldn't make it back up.

As the second quarter trended on and we started to look at our run rates we started to feel like as you project that forward, unless we felt a compelling reason to feel like there will be a significant change in our performance, then when we projected that forward, assuming that the environment doesn't change very much that's where it all came from.

I'd say most of it is in the second half of the year as we project forward.

Is that partially a function of the difficult comparisons you have on the second half as well?

You know, with the difficult comparisons we knew about when the year started so we factored that into the budget but when we project forward what we saw towards the end of the second quarter, it makes the second half look worse than what we originally expected than what we saw in the first half.

So a little bit more than negative is going to come in the second half but it really doesn't have anything to do with the difficult comparison because we knew that at the beginning of the year.

Sounds as if you're implying that volatility as well [in] trends may have accelerated as the August quarter progressed.

Is that a fair assumption?

It's more that we didn't really see it pick up.

We didn't really see it turn around.

It wasn't a dramatic decline.

It was more of a continued slow decline through the quarter.

So it wasn't anything that really spiked at us during the quarter.

It's just we were kind of hoping for a pickup in August.

We didn't get it.

We just -- in the difficult environment we're operating in right now, we didn't see any reason for optimism for a pickup in the second half.

Was it a pretty consistent slow down across geographies?

Yes.

And then I guess we're going into the model year changeover.

Are you seeing anything unusual in the tenor of the new car dealers and what they might be doing to get rid of their inventory?

Not really.

Again, I feel like it's more of an industry-wide slowdown.

We are fairly experienced at the model year changeover, and it occurs around the same time every year.

We manage our inventory around it.

I think we've done a pretty decent job of.

that.

I've always talked about managing our inventory to our sales run rate.

We have done that through this first half of the year.

Some of the model, some of the shifting of our inventory happens every year at this time, and some of it has to do with the model year changeover.

Then I may have missed this but did Keith talk about where he expects CAF spreads to be in the back half of the year?

No, Keith didn't, but, quite honestly there's a lot of turmoil in the market, so all I can really say is that right now I'd expect it to be within our normal range of 3.5 to 4.5.

Obviously there's a lot of short-term noise that makes it really challenging to predict.

As you would expect we kind of baked that into possibilities on both ends of the earnings forecast for the rest of the year.

Okay.

Thank you.

Thank you, Sharon.

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

Thanks a lot and good morning.

I want to start out by asking a question about credit.

Sounds like you raised the high-end of the loss assumptions for the '07-1s.

How much of deterioration, relative to what you've seen in delinquencies, have you baked in there, and as you look across the more recent securitizations where the delinquencies have also been trending a bit higher, to what degree in those securitizations do you think there might be some risk of further adjustments here?

Matt, at the end of each quarter we look at every securitization and we put our best guess on where we think it's going to end up ultimately.

That's what we did this quarter.

We made the one change on the one securitization of 25 basis points, which I pointed out.

We made no other changes to our loss rate assumptions in the other securitizations that we currently manage.

Fair enough.

And you said adjustments in the aggregate for the quarter had a slight positive impact, so were there still some trueing ups from older securitizations where your bad debt experience continued to beat initial assumption?

Those true-ups didn't have anything to do with bad debt assumptions.

Those true-ups really get into the trueing up of cash flows over the life of deals and so when you think about us having $3.5 billion in managed receivables out there and take -- think about the current environment, our finance income, our fees for late fees and prepayment speed assumptions are obviously all slightly favorable in the current environment.

Got it.

That's helpful.

Important thing, Matt, is there's a number of different true-ups that happen every quarter on all of the deals.

We look at every element of that.

We look at all of it, and this is the summation of all of that.

In terms of changing the loss rate assumption we made only one change.

Okay.

Second question, just to make sure I understand the implication for second half comp guidance.

To get to your 1 to 3 guidance for the years given the numbers that you've done year-to-date, it sounds like you'd need to be somewhere between a +1 and a -3 in the second half.

Is that to correct arithmetic?

That's just straight math.

You look at the second half of the year for us, and this is where the difficult comparisons absolutely come into play.

We had 13% comps and 12% comps for the third and fourth quarter last year.

Again, we expected that at the beginning of the year but the comp performance that we achieved in the first half we don't think is going to allow to us hit our original guidance, So that's why we've gone ahead and changed it.

So it's not necessarily that you ran at that level at the end of the quarter but with the compares that you see ahead you thought it was prudent to project to those levels?

It's not just the comps at the quarter.

For us it's a sales run rate.

We look at it over a much longer period of time.

We had a 98% earnings increase on a 13% comp store growth rate in the third quarter last year.

We don't look at that as something we're going to do every year.

We obviously smooth it out over a much longer period of time.

Our expectations in the third quarter were negative comps.

Okay.

And final question from us.

On the used vehicle pricing side, you had, for most of the past several quarters, if not all, shown some inflationary increases in the average price per used vehicle sold.

This quarter you were nominally down, essentially flat.

I know you like to think about your business in unit terms, but if you could clarify for us what the implications are for earnings if any, as you see that ASP kind of flatten out.

We don't -- that doesn't have any material impact on our earnings, the ASP flattening out.

I think that's actually more a reflection of the somewhat exceptionally high ASP increase we had last year and kind of lapping over that.

If you look at it over two years it's a little more normalized.

Great, thanks so much.

Let me clarify one thing I mentioned on the third quarter conference.

What we had budgeted in the third quarter was negative earnings.

We had a slight positive comp budget.

Originally.

Originally.

Not now.

Your next question comes from the line of Brian Nagle with UBS.

Good morning.

Few questions here.

First off, just want to dig a little deeper into what's happening on the used car sales at your stores.

Is the slower sales we've seen lately more a function of traffic or is it consumers coming to your stores and not buying a car, are they not getting the financing they need?

How would you characterize that in general?

Just as we've talked about on the up side, generally it's about half traffic and half our execution in the stores.

I think there's little bits of everything here.

One thing I really want to make sure to point out is our sales grew by 3% in the second quarter.

There aren't a lot of people that are comping their sales in this environment so we're actually pretty pleased with that.

We had much higher expectations than that.

As far as our stores are concerned, they didn't really feel a big slow down.

You knock a few points off one of our stores, they're so big it's not all that noticeable for the individuals in the stores.

We're actually pretty pleased that we were able to grow our sales, grow our revenue and grow our earnings in this difficult environment.

Is it fair to say that some consumers are not getting credit they once would have gotten to purchase the car?

We don't see that at all.

One of the biggest things we focus on is the availability of credit when a customer walks through the door.

We have not seen that change at all.

When a customer walks through the door they have multiple options at CarMax.

One of them is CarMax Auto Finance.

We have several other partner lenders.

Our non prime lenders have been more than willing to continue to take on our customers if not be a little bit more aggressive with them, despite the environment, so we don't feel like that's an issue.

I would say it's more just less expected traffic and a little less on execution than we would have hoped for in the quarter.

And another question, with respect to the guidance for the year, just so I understand it.

Are you assuming that the new numbers you put out there for sales and for earnings, does that assume the environment stays as it is right now?

Do you assume a deterioration improvement, whatever?

We assume the environment stays similar to what it is, and we put a range around it, so if it deteriorates a little or goes up a little we feel like we're comfortable with that range.

As far as the new sales and new bottom line guidance is the bottom line guidance simply a function of the lower sales guidance, or is there something else in there?

It's absolutely a function of the lower sales.

Thank you very much.

And lower comps, specifically.

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

Good morning.

Just another clarification on the guidance.

The guidance for the year, does that include any revaluation of the residuals due to the pricing on the recent securitization?

Is there any impact there at all?

Yes, it includes $4 million related to the recent securitization, but as I indicated before, the balance of the year really just has a normal gain for the balance, with the range around it.

Secondly, with some of the loan loss experience you've been having and the change in the assumptions on the 07-1 securitization, have you changed any of your metrics on who you will finance and who you won't finance and any change on policy on what CAF is or is not doing?

Nope, no changes at all yet.

Okay.

Is CAF still getting the same percentage of financings as did it in the year-ago period, or is that up or down or sideways?

It's pretty much the same.

The only difference is we added another lender, which changes the overall metric, but in aggregate they're approving and buying similarly as they were a year ago.

Okay.

The other thing was, your retail growth had been growing pretty nicely this quarter.

They were relatively flat year-over-year.

Are you -- does your guidance include that they will continue to be flat year-over-year?

Slightly up.

Slightly up.

Slightly, kind of similar to what you saw in the second quarter, very similar expectations.

Just slightly up.

Okay.

Thank you very much.

You're welcome.

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

Good morning, everyone.

Hi, Matt.

My first question is can you give us any more color on the progression of comps in the quarter?

I know you said that August didn't come in the way you had hoped.

Also, any additional detail on the performance in California and Florida?

Yes, I think in terms of what I already said about the first half is about all the detail we'll give on the comp performance.

It deteriorated towards the end of the second quarter.

Not dramatically, but enough that when we look at trying to spec out the rest of the year we just don't see a lot of optimism that it will turn back around so not much more than what I already said there.

In terms of California and Florida, I think the entire market has been down.

It's been down for all of our stores.

Again, it doesn't take a big drop for us to have an impact on earnings, especially when you start subtracting out comp sales.

As far as California goes, it is one of our highest growth investment states.

We're opening -- we just opened up our seventh store in Los Angeles, we will open up our eighth.

We're opening up a store in Kearney Mesa.

We'll open a store in Modesto.

It's probably one of the biggest capital investment states that we have.

That gives you an indication of how we feel about our long-term prospects in California.

With this market being down the way it is in the short-term it doesn't change our feelings about our long-term prospects for success.

Okay.

Then my second question is, given the lower expectation for comp for units, is there anything that you're doing at the store level -- how do your store labor models adjust?

Do they adjust automatically?

Are there changes you can make to reduce or do you plan on keeping stores fully staffed?

Most of the movement in our stores on labor is all variable labor, and we're moving that all the time, some through attrition, some through increased hiring.

When we're budgeting our stores on the sales side, or all of our variable labor, we're budgeting off of a run rate of sales not in expectation, and that number can move pretty quickly.

I think we're pretty nimble with being able to adjust our variable labor accordingly, and I feel like we did a good job of that in the second quarter.

I think some of that is reflected in our earnings.

I think we'll be able to continue to do that through the second half.

Okay.

Then my last question is a little bit more of a big picture question.

But what are your thoughts on the reduction of churn in program cars at auction, and what impact -- is that accretive or dilutive to your margin per unit, having less of those cars available to purchase?

First of all, that's not a big percentage of our inventory to begin with, so the movement would have to be dramatic to have any impact.

Program cars in general, which are the one-year-old cars with 20,000 to 30,000 miles on them are not real high-margin cars for us, as we've talked about before.

If we can replace those with two- or three-year-old cars with reasonably good miles on them, it would help.

The only thing I would say, it's just not a big enough move to have much of an impact on us.

Got it.

Thanks very much.

You're welcome.

Your next question comes from the line of Michael Novak with Frontier Capital.

Hi.

Could you please review for us what happened to your CAF spread last time interest rates started coming down?

And same thing, I think they got pretty compressed when they were going up, but if you could just review how that correlated with the interest rate cycle, I'd appreciate it.

In general, we're going to get a little compressed on the way up and we're going to get some extra spread on the way down.

I'll let Keith give a little more flavor.

I think that's fair.

What's challenging in this environment is that, I think it will even be more confusing to the consumer to understand what that means to me on what I should expect for rates given the current environment.

So whether we can gain more spread or, and in this environment, may be different than what we've experienced in the past.

And in 2001 when the rates started coming down, I believe the -- you actually went above the range.

I think your finance revenue was up 55% that year.

We actually had gain spreads north of 6% as consumer expectations lagged significantly.

And that's generally the rule of thumb is that consumer expectations don't keep pace with what the market is actually doing.

So in an upward environment as Tom said, we're going to get compressed.

In a downward environment we usually get a little bit of a (inaudible) -- it's just that it's not clear how quickly they'll adjust in this current market.

And in your guidance for this year you're assuming the normal spread range?

Correct.

Thank you.

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

Thanks.

Just wanted to follow up on the finance offering to customers that you experienced during the quarter.

If I understand you right, there wasn't a significant change in the offering from CAF or from your partners?

Correct.

And I know in the past you've broken out any impact to comps from change in finance offerings.

Is there anything we're anniversarying from last year, or any changes that impacted your comp for this quarter?

No.

Okay.

I mean, the only other thing I'd mention is we added a lender.

It's very difficult to discern whether it added any value overall in the current environment.

One thing, last year we talked about CAF and we talked about the expansion in CAF adding 1% of comps.

That would be baked in there.

We haven't changed our lending practices there so that would just be baked in again this year.

Okay.

In the wholesale segment, Tom, you mentioned that you had strong dealer attendance at your auction, but in the current environment, do you see any signs that these dealers are changing their buying habits or how they're showing up at auction or what kind of cars they're buying?

You know, we are very consistent with the types of cars we put through our auction, so it's not like we're changing the mix on a regular basis.

It's general a 10-year-old car, average price around $4400 with a little over 100,000 miles.

That has been pretty consistent throughout the year.

We've had great attendance, strong performance for the whole first half.

So we haven't seen any real change there.

Great.

Thanks so much.

Your next question comes from the line of Seth Basham with Credit Suisse.

Good morning.

Good morning.

Couple quick questions for you.

First, Tom, you mentioned that macro is clearly a big driver of the used car weakness in the period.

But you also mentioned execution might have slipped a little bit.

What issues do you think you're having on the execution side?

I don't think it's any one big thing.

Whenever you have a quarter or a stretch of time when you're not doing quite as well as you thought, you always feel like you could do a little better in the stores.

I feel like we could have done a little better.

Like we could have done a little bit better on traffic.

But there isn't any one thing to point to across 82 stores.

Every store has a little bit of a different challenge.

I would have liked to have done a little bit better but I don't have one thing to point to and say, "Had we done that thing better we would have executed significantly better."

So in this environment does that suggest that you might want to get more aggressive with advertising or you might want to give more of your margin back to customers and lower prices?

How are you going to react giving the slowing trends?

It's very difficult to figure out what response you should have in an environment like this.

Our feeling has been in this first half, particularly in the second quarter, that what's going on from a macro level has suppressed to us some extent and we don't feel like if we threw margin or cut prices that it would have been able to make a significant impact.

So we made the decision not to do that during the quarter.

That's why we were able to achieve a solid earnings number.

I've always talked about us feeling like we have a lever there to push in terms of margin but we talked about it, didn't feel like it was going to make much of a difference in this environment.

We're not planning on ramping up our spending in the second half of the year as it relates to advertising.

We're going to try to manage our margins as efficiently as we possibly can.

We'll make some tweaks and adjustments as you would imagine through the second half to do the best job we can.

As you think about the ability to afford a car and where your average price is going, does that suggest that you might tone down the mix of the vehicles that you're trying to sell or you might get a little bit more aggressive on pricing to try to drive sales?

Again, the only way to get aggressive on pricing is to give up margin.

We'll have to see how the second half progresses and how we do that.

In terms of our mix, we have a pretty structured program heading into the fall in terms of how we manage our mix around the model year changeover, to Sharon's question earlier.

But I also feel like we do -- we have the ability to manage our inventory to shifts in the marketplace.

We didn't see real big dramatic shifts here.

We're up slightly on compact cars in this year's second quarter compared to last year's second quarter.

So maybe a little bit of shift because of the gas prices but it's not anything real dramatic.

Okay, great.

Then just on the wholesale side, can you give us a little more color why gross profit per unit is so strong there and what kind of trends we should expect going forward?

Yes, it's not easy to tell you what kind of trends to project going forward.

We've talked about wholesale being a kind of a continued improvement business that we've made enhancements both on the buy side, on the delivery side for the customer and then our customer service to our wholesale customers in the auction; and I feel like we've continued to benefit from that.

If you look at the first quarter compared to the second quarter, our margins were roughly flat.

This comparison is mostly the strong comparison in wholesale gross is to last year's second quarter but we feel like the fact that it's in line with the first quarter we didn't really manage the business that much differently in the second quarter.

In terms of the trends, again, it it's one piece of the puzzle for us in terms of managing total gross profit, and we feel like we have the ability to move it around if we want to try to drive sales.

We didn't feel like that would have done us much good here in the second quarter and we'll see how it goes for the second half.

Great.

Last question, on credit.

If you think about the ability to get financing, you said that it's still very much available, are you seeing customers however being priced out of certain tiers of credit?

Prime customers going to non prime, non prime going to sub prime, etc.?

No, we don't see much of that at all.

A lot of what's happened in the marketplace has happened in the subprime market.

We don't see a lot of behavioral change out of our prime customers.

The other thing you have to remember in the car business, when a customer walks in the store to buy a car, maybe they get a little excited over seeing the Fed rate cut.

But their comparison is their loan from three years ago.

Most customers aren't in the market for a used car -- customers in general aren't in the market for a used car on an ongoing basis.

They're in the market when they need a car, and that's the only time they're really concerned about their interest rate.

They don't have this weekly point of comparison that the rest of us do generally when they come in the store.

They're looking at what was my monthly payment three years ago, what was my interest rate three years ago when I bought this car and what kind of rate is available for me today?

Thank you very much.

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

Most of my questions have been answered.

But I just wanted to follow up on two things.

Just wanted to clarify, you're not expecting less overall demand for used cars in the market to drive your wholesale margins down?

Is that correct?

I guess is that largely because of buying practices?

Yes, I mean, other than some seasonality in margins we're not expecting to have to do that.

We'll see what happens.

But so far at that kind of lower end of the market, it's a combination of two things for us to drive those grosses.

It's what do we do on the acquisition side, then how strong in attendance do we get at our sales?

And the attendance has been very strong and we've been able to manage the acquisition price so that we're able to deliver these margins.

Okay.

My second one is, could you tell us what the cost of funding was on this September deal, and where the retail rates are?

The funding basically priced 40 to 50 bips wider than our prior deal, which is why we highlighted that we expect as part of the gain calculation going into that deal, it will cost us approximately $4 million.

Okay.

But do you have like an absolute rate, and you -- just to give us a comparison of where average retail rates are versus your costs?

Are you referring to APR to the customer?

APR to the customer versus your cost of funds.

The spreads on that deal, when they were originated were, basically the 4% range we've experienced in the first half of the year.

That $4 million, obviously had we known it was going to be a higher cost to fund when we originated them in the quarters, we would have had a gain slightly less than 4%.

But our retail rates to consumers haven't changed dramatically over the year.

Okay.

All right, thank you.

Your next question comes from the line of Justin Hughes with Philadelphia Capital.

Hello.

Your next question comes from the line of John Mock with RBC.

Hi.

Most of my questions have been answered.

I just want to ask perhaps maybe one more.

Does CarMax Auto Finance have any exposure to subprime customers?

Could you repeat the question?

Do you have any exposure to subprime customers?

Part of CarMax Auto Finance has always written, if you use the industry definition of FICO scores, less than 620.

A small percentage of our portfolio does include what would be classified as subprime portfolios.

Customers, anyway.

But our portfolio overall has always included those and we don't believe that's a measurable risk in jeopardizing our prime portfolio or our loss estimates.

Can you give me an idea about the percentage, in terms of range?

I don't think we've disclosed that prior.

Okay.

But if you look at our public securitizations, you can see the detail by FICO bands, I believe.

Thank you.

Your next question comes from the line of Thomas Paulson with Cornerstone.

Good morning, all.

Good morning.

Two quick questions.

One is, your prior guidance had assumed that to show SG&A leverage you would need to do a 7% or better comp or that your SG&A rate perhaps in the second half would be growing in the teens-ish range with the lower sales run rate for the second half then.

Are you at this time projecting a little bit of a slower SG&A run rate?

Then the second question I had was, just given the higher loss assumption for the 2007, does that have an implication on 2000 -- or this year's earnings?

As far as SG&A goes, we would expect that given the lower comps that we're going to actually experience de-leveraging in the second half, and one thing we mentioned earlier is, since this is a broader economic impact on our sales, we continue to invest in the business.

So we're not going to make any radical cutbacks in the long-term strategic initiatives that we continue to invest in.

And your second question was on 2007 -- ?

Your higher loss assumption.

And what was the --

Is that flowing through this year's earnings?

It's already included in our earnings year-to-date.

So that doesn't have any impact on the second half.

The loss assumption is what we reported in total with all the other adjustments on the securitizations and the net impact was immaterial and slightly positive.

Got you.

Thank you.

Your next question is a follow-up from Sharon Zackfla with William Blair.

Tom, question.

I guess the current environment, could you compare and contrast it versus calendar '04, which is the last time we saw a pretty significant downturn in your business?

I don't know if I have that long a memory, Sharon.

I know you were around then.

I was.

But I think this one is a little bit different.

We didn't have all the credit concerns out there that we have right now, if my memory serves me right, for '04.

And the other piece that I think is different in this environment is the project run rate on new cars of 16 million is the lowest we've seen since 1998 when it was 15.5.

So I think just that big ticket item, the second most expensive thing that a customer buys almost always requires financing.

In general I just think there's a suppression out there in the consumer's mindset of going out there and committing to a loan of that size.

Maybe this rate cut will help some, but I just think -- I don't remember as much detail about '04, but I do think it was different than what we're experiencing now.

And I guess lastly, on your inventory levels, they looked pretty lean exiting the quarter.

Do you feel like they're in good shape given the lower guidance going forward?

We feel like we've managed our inventory -- we're exactly where we want to be on inventory, based on our run rate of sales.

Thanks.

Your final question comes from the line of Justin Hughes with Philadelphia Capital.

Sorry, guys, about before.

Can you say the amount of loans originated and sold in the quarter?

For CAF or in total?

No, for CAF.

You put it in the Q.

I don't have it with me.

If you want to call Katharine or Celeste after where we can get that number for you -- .

Thank you.

All right.

You have no further questions at this time.

Okay.

Thank you once again.

Appreciate everybody calling and listening in.

Once again I want to thank all of our associates for all their hard work and dedication.

You're the reason for our success.

Thanks again.

We'll talk to you next quarter.

This concludes today's conference call.

You may now disconnect.